In re: Angel T. Nales Perez and Zulma E. Guadarrama Ayala

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: January 17, 2014
• Docket: 11-01282
• Status: Unknown

Opinion

IN THE UNITED STATES BANKRUPTCY COURT 1 FOR THE DISTRICT OF PUERTO RICO

2 IN RE: CASE NO. 11-01282 (ESL) 3 ANGEL T. NALES PEREZ 4 ZULMA E. GUADARRAMA AYALA CHAPTER 13

5 Debtors 6 7 OPINION AND ORDER 8 This case is before the court upon the Application for Compensation filed by Attorneys 9 Edgardo Manugal González and José L. Jiménez Quiñones on behalf of the law firm of EMG 10 Despacho Legal, CRL. (“Attorneys Mangual and Jiménez”) in the amount of $13,426.00 11 (Docket No. 116) and the opposition thereto filed by the Debtors pro se (Docket No. 121 in 12 Spanish, Docket No. 131 in English). 13 Procedural Background 14 The procedural background surrounding the instant case is simple. The case was 15 dismissed on March 27, 2013 (Docket No. 111) upon the Chapter 13 Trustee’s motion to that 16 effect (Docket No. 104). Thereafter, on April 25, 2013, the Debtors’ attorneys filed the 17 Application for Compensation (Docket No. 116). On May 1, 2013, the Chapter 13 Trustee 18 expressed no objection to the Application but alerted that the balance on hand for that case was 19 only $12,000.00. See Docket No. 117. On May 24, 2013, the court entered an Order approving 20 the Application for Compensation in the amount of $10,500 (Docket No. 118). On May 29, 21 2013, the Debtors filed an opposition in Spanish averring that their attorneys did not duly 22 represent them nor informed them of the status of their case and therefore are not entitled to any 23 compensation. See Docket No. 121. On May 30, 2013, Attorneys Mangual and Jiménez filed a 24 Motion to Set Aside Order Approving Attorneys[’] Fees and Request to Schedule a Hearing to 25 Entertain[] Debtors’ Objection to Attorney’s Fees (Docket No. 120) and proceeded to file 26 several motions submitting a series of documents (Docket Nos. 122, 123, 124 and 127). On 27 June 28, 2013, the court entered an Order and Notice scheduling a hearing for September 4, 1 2013 (Docket No. 125). At the September 4, 2013 hearing, the Debtors were unable to present 2 their case in English and hence the court explained all procedures in Spanish and granted them 3 30 days to reply in English to the motions and documents presented by Attorneys Edgardo 4 Manugal González and José L. Jiménez Quiñones in English. See Docket Nos. 128 (Minute 5 Entry) and 129 (Audio File). The Debtors did so on October 4, 2013 (Docket No. 131) and 6 Attorneys Edgardo Manugal González and José L. Jiménez Quiñones replied on October 9, 7 2013 (Docket No. 133). 8 Applicable Law and Analysis 9 Professionals employed in a bankruptcy case, such as attorneys, must apply to be 10 compensated and/or reimbursed under Fed. R. Bankr. P. 2016, which states that “[a]n entity 11 seeking interim or final compensation for services, or reimbursement of necessary expenses, 12 from the estate shall file an application setting forth a detailed statement of (1) the services 13 rendered, time expended and expenses incurred, and (2) the amounts requested.” An attorney 14 seeking compensation under that rule shall include “a statement as to what payments have 15 theretofore been made or promised to the applicant for services rendered or to be rendered in 16 any capacity whatsoever in connection with the case, the source of the compensation so paid or 17 promised, whether any compensation previously received has been shared and whether an 18 agreement or understanding exists between the applicant and any other entity for the sharing of 19 compensation received or to be received for services rendered in or in connection with the case, 20 and the particulars of any sharing of compensation or agreement or understanding therefor, 21 except that details of any agreement by the applicant for the sharing of compensation as a 22 member or regular associate of a firm of lawyers or accountants shall not be required.” Fed. R. 23 Bankr. P. 2016(a). In addition, LBR 2016-1 supplements the allowable charges by 24 professionals in Puerto Rico and establishes the procedure to apply to be compensated. 25 In the instant case, the Application for Compensation complies with the procedural 26 requirements established in Fed. R. Bankr. P. 2016 and LBR 2016-1. But “[Fed. R. Bankr. P.] 27 2016 must be read together with [Fed. Rs. Banrk. P.] 2014 and 2017 and Sections 326 through 1 331, 503(b) and 504 of the Bankruptcy Code.” Alan N. Resnick & Henry J. Sommer, 9 Collier 2 on Bankruptcy ¶ 2016.01 (16th ed. 2014). 3 Section 329 of the Bankruptcy Code governs the debtors’ transactions with attorneys. It 4 requires that an attorney submit a statement of compensation to be paid to enable the court to 5 determine if the fees are reasonable, for the court has an independent judicial responsibility to 6 review the fees of professionals sua sponte, even in the absence of objections. See Tri-State 7 Fin., LLC v. Lovald, 525 F.3d 649, 655 (8th Cir. 2008), cert. denied 129 S. Ct. 630, 172 L. Ed. 8 2d 610 (2008); In re Claudio, 459 B.R. 500, 512 (Bankr. D. Mass. 2011); In re First Software 9 Corp., 79 B.R. 108, 111 (Bankr. D. Mass. 1987); In re LaFrance, 311 B.R. 1, 20-21 (Bankr. 10 D.Ma. 2004) (“The court has an independent judicial responsibility to review the fees of 11 professionals, even in the absence of an objection by a party in interest.”) In the instant case, 12 such statement was properly disclosed at Docket No. 1, p. 23, and Docket No. 116. 13 Section 330 of the Bankruptcy Code provides the statutory authority for awarding final 14 attorney fees and reimbursement of expenses out of the bankruptcy estate created under 15 Sections 541(a) and 1306(a), and prescribes the standards according to what amount of 16 reasonable compensation is to be considered and eventually awarded by the court. Section 17 330(a)(4)(B) provides for the allowance of compensation for the debtor’s attorney in Chapter 13 18 cases even though the debtor’s counsel is not a professional appointed to represent the trustee. 19 See 11 U.S.C. § 330(a)(4)(B); In re Lewis, 346 B.R. 89, 97 (Bankr. E.D.Pa. 2006). Section 330 20 authorizes the bankruptcy court to hear and determine the amount of reasonable compensation 21 allowable based on whether the attorney’s services are: (1) likely to benefit the debtor (or the 22 bankruptcy estate), and (2) reasonable and necessary to the administration of the bankruptcy 23 case and estate. See 11 U.S.C. § 330(a)(4)(A)(ii)-(B). If a court awards compensation and/or 24 reimbursement of expenses under Section 330(a) to any entity described in that section, the 25 amount of such compensation or reimbursement of expenses is entitled to priority status as an 26 administrative expense under Section 503 of the Bankruptcy Code. Section 503(b)(2) provides 27 that after notice and hearing, the court may allow as an administrative expense any 1 compensation and reimbursement awarded under Section 330(a). Hence, “compensation 2 allowed to the debtor’s counsel in a Chapter 13 bankruptcy case is an administrative expense 3 allowable under 11 U.S.C. § 503(b), even though counsel is not appointed by the court and 4 represents the interests of the debtor, rather than the interests of the bankruptcy estate.” In re 5 Lewis, 346 B.R. at 97-98. Also compare with Lamie v. United States Tr., 540 U.S. 526 (2004) 6 (counsel for chapter 7 debtor not entitled to compensation under 11 U.S.C. § 330 unless counsel 7 is employed pursuant to 11 U.S.C. § 327). 8 Because the Chapter 13 petition was dismissed pre-confirmation, the court must 9 examine the applicability of both Sections 349 and 1326 of the Bankruptcy Code to determine 10 whether or not to authorize the payment of attorney’s fees from the bankruptcy estate. 11 Section 349(b)(3) establishes that:

12 Unless the court, for cause, orders otherwise, a dismissal of a case other than under section 742 of this title- 13

14 (3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title. 11 15 U.S.C. § 349. 16 In other words, “Section 349(b)(3) provides that if a bankruptcy case is dismissed, the property 17 of the estate revests in the entity in which such property was vested immediately before the 18 commencement of the case (which usually but not always, will be the debtor) but that the court 19 may modify the presumptive revesting by operation of law by ‘order[ing] otherwise, for 20 cause’”. In re Lewis, 346 B.R. at 104, citing 11 U.S.C. § 349(b)(3). The purpose Section 21 349(b)(3) is to undo the bankruptcy case, as far as practicable, and to restore all property rights 22 to the position in which they were found at the commencement of the case. Id. 23 Section 1326(a)(2) of the Bankruptcy Code addresses the disposition of the plan 24 payments held by the Chapter 13 Trustee prior to confirmation of the plan and provides for the 25 distribution of said funds when a plan is not confirmed as follows:

26 A payment made under this paragraph 1(A) shall be retained by the trustee until confirmation or denial of confirmation of a plan. If a plan is confirmed, the 27 trustee shall distribute any such payment in accordance with the plan as soon as 1 practicable. If a plan is not confirmed, the trustee shall return any such payments no previously paid and not yet due and owing to creditors pursuant to paragraph 2 (3) to the debtor, after deducting any unpaid claim allowed under Section 503(b). 3 11 U.S.C. § 1326(a)(2).

4 Simply put, “the text of Section 1326(a)(2) imposes a mandatory obligation on the trustee, 5 apparently not subject to the modification of the court, to deduct any unpaid administrative 6 expense allowed under Section 503(b) from the undistributed planpayments before returning the 7 balance of the funds to the debtor if a chapter 13 plan is not confirmed. One purpose of this 8 provision is to encourage the use of Chapter 13 by returning to the debtor post-petition assets 9 that were devoted to the ultimately unsuccessful, unconfirmed chapter 13 plan, since those 10 assets would not have been part of a Chapter 7 bankruptcy estate on the date of filing.” In re 11 Lewis, 349 B.R. at 104. 12 Upon analyzing Sections 349(b)(3) and 1326(a)(2), the court adopts and follows the 13 reasoning in In re Lewis: “Section 349(b)(3) is the controlling provision in determining the 14 disposition of all estate property upon dismissal of a bankruptcy case; [and] (2) the purpose of 15 Section 1326(a)(2) --to surcharge the debtor for the allowed costs of administration if a Chapter 16 13 plan is not confirmed-- is a sufficient basis for the court to exercise its discretion under 17 Section 349(b)(3) to override the presumptive revesting of the undistributed plan payments “for 18 cause” upon dismissal of a Chapter 13 case”. 346 B.R. at 105. Therefore, “Section 349(b)(3) is 19 the Code provision that governs the disposition of all estate property upon dismissal of a 20 Chapter 13 case and that the policies expressed by Congress in Section 1326(a)(2) are best 21 implemented through the exercise of the court’s discretion under Section 349(b)(3)”. Id. at 111. 22 Thus, as observed in In re Phillips, 291 B.R. 72, 82 (Bankr. S.D. Tex. 2003): 23 When a Chapter 13 plan is confirmed, there is an obvious and demonstrated benefit 24 to the debtor and, presumably, counsel’s services contributed to completion of the 25 case. In most cases, additional proof will not be needed. But when cases are dismissed prior to plan confirmation, Counsel must provide an explanation in the 26 fee application and evidence that counsel provided substantial, valuable professional services including investigation, evaluation, and counseling that was 27 intended and designed to achieve an objective appropriate for Chapter 13 cases. 1 After reviewing Attorneys Mangual and Jimenez’s Application for Compensation, the 2 detailed legal fees described in the documents attached thereto (Docket No. 116) and the docket 3 of the instant case, the court finds that the work performed is reasonable and that it benefited the 4 debtors, especially when the record shows approved stipulations (Docket Nos. 98 and 99), 5 negotiations to settle (Docket Nos. 70, 74, 78), pre-trial reports and hearings (Docket Nos. 65 6 and 69), and approved loan modifications (Docket Nos. 105 and 108). 7 Section 503(b) requires “notice and a hearing” prior to the allowance of administrative 8 expenses. The phrase “notice and a hearing” is defined as “after such notice is appropriate in 9 the particular circumstances, and such opportunity for a hearing is appropriate in the particular 10 circumstances”. 11 U.S.C. § 102(A). The statute’s wording indicates that Congress required 11 actual “notice” but gave courts discretion on whether to hold hearings. See North American 12 Printing Ink Co. v. Regensteiner Printing Co., 140 B.R. 474, 476 (N.D. Ill. 1992); Alan N. 13 Resnick & Henry J. Sommer, 4 Collier on Bankruptcy ¶ 503.04[1] (16th ed. 2014). 14 In the instant case, the court afforded the Debtors with both appropriate notice and an 15 actual hearing held on September 4, 2013 (Docket Nos. 128 and 129). The Application for 16 Compensation filed on April 25, 2013 (Docket No. 116) was notified to all parties in interest, 17 including the Debtors. No objections were filed and the court approved the same in the amount 18 of $10,500.00 (Docket No. 118). Because Attorneys Mangual and Jiménez, the movants in the 19 Application for Compensation, requested that the order be vacated to entertain the Debtors’ 20 Objection, the court ordered to consider the matter and scheduled a hearing (Docket No. 125). 21 Because the Debtors were not prepared at the September 4, 2013 hearing, the court afforded 22 them the opportunity to file their position in English and in writing. See Docket No. 128. They 23 proceeded accordingly. See Docket No. 132. The court is not moved by the Debtors’ 24 allegations or by the supporting documentation they provided. The record shows that the 25 services were provided and that the same are reasonable. 26 27 1 Conclusion 2 In view of the foregoing, the court hereby grants the Application for Compensation filed 3 || by Attorneys Manugal and Jiménez on behalf of the law firm of EMG Despacho Legal, CRL. in 4 || the amount of $10,500 (Docket No. 116). 5 In San Juan, Puerto Rico, this 16" day of January, 2014. 6

8 cetdh seates Denicroptoy Judge 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 -7-