In re Gilliam

• Decision Date: 28 March 2018
• Docket Number: Case No. 17bk18368
• Citation: 582 B.R. 459
• Parties: IN RE: Talecia GILLIAM, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

582 B.R. 459

IN RE: Talecia GILLIAM, Debtor.

Case No. 17bk18368

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Date of Issuance: March 28, 2018

Attorneys for The Semrad Law Firm, LLC: Robert W. Glantz and Gordon E. Gouveia, Shaw Fishman Glantz & Towbin LLC, Chicago, IL

Attorney for Chapter 13 Trustee: Lauren L. Tobiason, Office of the Chapter 13 Trustee, Marilyn O. Marshall, Chicago, IL

MEMORANDUM DECISION

TIMOTHY A. BARNES, Judge.

The matter arises out of numerous applications for compensation in chapter 13 cases brought by The Semrad Law Firm, LLC ("Semrad"). In the above-captioned chapter 13 case, the application is the Attorney's Application for Chapter 13 Compensation Under the Court–Approved Retention Agreement [Dkt. No. 15]. As explained below, for the purposes of this determination, the court renders this Memorandum Decision in the above-captioned case only. All related applications for compensation set forth on Exhibit A hereto (together with the application in this case, the "Applications") will receive minute orders based on and referencing this Memorandum Decision.

JURISDICTION

The federal district courts have "original and exclusive jurisdiction" of all cases under title 11 of the United States Code, 11 U.S.C. § 101, et seq. (the "Bankruptcy Code"). 28 U.S.C. § 1334(a). The federal district courts also have "original but not exclusive jurisdiction" of all civil proceedings arising under the Bankruptcy Code or arising in or related to cases under the Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).

A bankruptcy judge to whom a case has been referred may enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Bankruptcy judges must therefore determine, on motion or sua sponte , whether a proceeding is a core proceeding or is otherwise related to a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(3). As to the former, the court may hear and determine such matters. 28 U.S.C. § 157(b)(1). As to the latter, the bankruptcy court may hear the matters, but may not decide them without the consent of the parties. 28 U.S.C. §§ 157(b)(1) & (c) ; Wellness Int'l Network, Ltd. v. Sharif , ––– U.S. ––––, 135 S.Ct. 1932, 1939, 191 L.Ed.2d 911 (2015) ; Richer v. Morehead , 798 F.3d 487, 490 (7th Cir. 2015) (noting that "implied consent is good enough"). Instead, the bankruptcy court must "submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c)(1).

Matters involving the compensation of a debtor's attorney concern the administration of the estate and are, thus, within the court's core jurisdiction. 28 U.S.C. § 157(a). Requests for compensation under section 330 of the Bankruptcy Code arise in title 11 and are also within the court's core jurisdiction. In re Brent , 458 B.R. 444, 449 (Bankr. N.D. Ill. 2011) (Goldgar, J.). Further, all parties have consented to this court's entry of a final order adjudicating the Applications.

Accordingly, determination of the Applications is within the scope of the court's jurisdiction and constitutional authority.

DISCUSSION

The matter before the court arises out of a request for compensation in a chapter 13 case. Here, the chapter 13 trustee (the "Chapter 13 Trustee") objects to counsel's application for compensation. The dispute has its nexus in a practice that debtor attorneys have recently begun to employ in chapter 13 consumer cases in this District. The practice involves modifying the local form chapter 13 plan (the "Model Plan")¹ to change the priority of payments to creditors set forth therein.

This was done initially via a clear modification of the priority payment structure in chapter 13 cases. For example, in the case at bar, the debtor, Talecia Gilliam (the "Debtor"), presented a chapter 13 plan dated June 20, 2017 [Dkt. No. 9] (the "Plan") wherein the following language was added: "The allowed priority fees of Debtor's attorney shall be paid at the same priority level as payments provided for under Section E(2) of the plan." Plan, at ¶ G(1).

In some instances, once the Chapter 13 Trustee voiced a concern regarding the priority modification, counsel filed a modified plan, such as was done in the above-captioned case. Here, Semrad filed a modified plan for the Debtor, see chapter 13 plan dated November 8, 2017 [Dkt. No. 29] (the "Modified Plan"), that removed the priority modification but lowered the set payment to a secured creditor for an initial period under the Modified Plan. Such lowered payments appear in some cases to be no more than minimal, adequate protection payments. Plans such as these, so-called "step plans" are proposed to allow counsel accelerated payments at the expense of the affected secured creditors, and only thereafter step up the set payment to secured creditors to a more fulsome amount.

In all the cases underlying the Applications but one,² a plan was at some point proposed that contained either or both a priority modification or a step.

As discussed in further detail below, the net effect of such additions is not immediately obvious and is beyond the scope of this Memorandum Decision.³ There is no question, however, that the additions are asserted for the benefit of the attorneys alone, not the debtors in whose plans they are contained, and are, therefore, an act of self-dealing. Regarding the compensation related to such plan modifications, Semrad alone has over 50 cases under advisement, another 25 where compensation requests have been deferred pending a resolution of the matters under advisement⁴ and countless others which have not yet come on for consideration. In all of these cases where compensation is under advisement or where compensation is deferred for later consideration, the Chapter 13 Trustee has objected to compensation on the grounds discussed below.⁵

In its objection, the Chapter 13 Trustee raises two issues. First, the Chapter 13 Trustee challenges Semrad's right to compensation given the self-dealing that has allegedly occurred. Second, the Chapter 13 Trustee argues that Semrad did not adequately disclose its agreements with affected debtors regarding the plan modification.

On January 11, 2018, after the parties concluded initial briefing on the matter, the court conducted a combined hearing (the "Hearing") on the Chapter 13 Trustee's objection to compensation in both Semrad's and Geraci's cases. Because counsel for Semrad and Geraci expressed some surprise at the court's focus on the disclosure aspects of the Chapter 13 Trustee's objection, both Semrad and Geraci were allowed the opportunity to further address that narrow issue after the Hearing in further briefing, and the Chapter 13 Trustee was permitted a sur-reply. The last of those filings was submitted on January 30, 2018 and the matter is now fully briefed and under advisement. This Memorandum Decision concludes this and all of the other Semrad and Geraci matters under advisement with respect to the Applications, except as expressly continued herein.

A. Chapter 13 Compensation Generally

As noted above, the Chapter 13 Trustee challenges Semrad's compliance with the disclosure requirements applicable to counsel in bankruptcy matters. Semrad, it argues, must have entered into agreements with the debtors regarding the plan modifications. Such an agreement, the Chapter 13 Trustee argues, must be in writing and disclosed to the court under the Local Rules for the United States Bankruptcy Court of the Northern District of Illinois (the "Local Rules").

"Section 327(a) of the Bankruptcy Code allows bankruptcy trustees to hire attorneys, accountants, and other professionals to assist them in carrying out their statutory duties. 11 U.S.C. § 327(a). Another provision, § 330(a)(1), states that a bankruptcy court ‘may award ... reasonable compensation for actual, necessary services rendered by’ those professionals." Baker Botts L.L.P. v. ASARCO LLC , ––– U.S. ––––, 135 S.Ct. 2158, 2162, 192 L.Ed.2d 208(2015). With respect to priority of such compensation, however, "[i]n bankruptcy, law firms that represent the estate (or the trustee) can be compensated ahead of other creditors, but only if they receive the court's approval for their hiring and demonstrate that their activities are necessary and benefit the estate." Fed. Trade Comm'n v. Trudeau , 845 F.3d 272, 274–75 (7th Cir. 2016) (citing to 11 U.S.C. §§ 327 & 330; ASARCO , 135 S.Ct. at 2158 ).

In order for such a professional to receive compensation, it must comply with the requirements of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") and the Local Rules. It is generally accepted that those requirements do not include obtaining orders of retention in chapter 13 matters, under the theory that section 327(a) applies to trustees alone. As there is in chapter 13 no provision equivalent to section 1107 whereby a debtor in chapter 11 must comply with the duties of a trustee generally, it follows that chapter 13 debtors need not retain their own counsel. See, e.g. , In re Maldonado , 483 B.R. 326, 337 (Bankr. N.D. Ill. 2012) (Schmetterer, J.) (" Section 327 does not apply in Chapter 13 cases."); In re Jones , 505 B.R. 229, 231 (Bankr. E.D. Wis. 2014) ("[A]n individual chapter 13 debtor ... is not a ‘trustee’ for purposes of § 327."). As a result, the disinterestedness standard set...