In re Toms

Citation229 BR 646
Decision Date28 January 1999
Docket NumberBankruptcy No. 97-30177F.
PartiesIn re Bradly R. TOMS and Pamela Toms, Debtors.
CourtUnited States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

COPYRIGHT MATERIAL OMITTED

Jonathan Krinick, Sagot, Jennings & Sigmond, Philadelphia, PA, for Debtors.

Marvin Krasny, Philadelphia, PA, trustee.

MEMORANDUM

BRUCE I. FOX, Bankruptcy Judge.

The law firm of Koresko & Associates, P.C., filed an application for approval of counsel fees in the amount of $9,018.75 and reimbursement of expenses in the amount of $306.27, based upon 11 U.S.C. § 330(a). The services rendered and costs incurred arose during the debtors' chapter 13 case, prior to its conversion to chapter 7. The debtors have filed a timely objection thereto, arguing that the services rendered were unnecessary.1 In addition to objecting to counsel's application, the debtors seek relief under 11 U.S.C. § 329(b) contending that all but $500.00 (plus the $160.00 filing fee) of their retainer is excessive and should be returned to them.

While a considerable evidentiary record has been made, I need not detail all of the facts presented, in light of my holding that only a portion of the dispute raised by the parties is now properly before me.

I.

On August 20, 1997, the debtors, Pamela and Bradley Toms, filed a voluntary petition in bankruptcy under chapter 13. Before this filing, they had retained the services of Koresko & Associates.2 Mrs. Toms testified that they sought representation for a bankruptcy filing because they were having problems paying their credit card and utility bills.

They met with attorney John J. Koresko, V, who reviewed certain financial information with them. At the time of this interview in June 1997, the debtors had two mortgages on their home as well as a secured automobile loan, were obligated on a car lease, and had various unsecured debts. Based upon information they provided, Mr. Koresko determined that their income was insufficient to meet all of their expenses. The debtors were, however, current with both mortgage obligations and with their two automobile debts.

Mr. Koresko suggested at this initial interview that the debtors have their home appraised. He explained to them that if the value of their home was approximately $125,000.00 (or less), he was prepared to recommend to them that they file for chapter 13 relief, rather than a chapter 7 liquidation. This recommendation was based upon his belief that the debtors could "cram down," or bifurcate, the second mortgage obligation if the value of the debtors' home did not exceed the above-mentioned figure.

The debtors understood that if they were to engage Koresko & Associates for chapter 7 representation, the fee for such service would be $750.00. If they engaged counsel for chapter 13 representation, the fee would be greater. After they obtained an appraisal of the value of their home, they signed a fee agreement for chapter 13 representation on July 15, 1997. Exs. A-2, A-6.

The fee agreement called for the debtors to pay counsel for services rendered at an hourly rate from $185.00 to $225.00 per hour, depending upon which attorney provided the service. The debtors were to be "billed periodically" and were to pay all bills within 30 days of receipt or interest would accrue at 18% per annum. Ex. A-1, at 1. The debtors paid a retainer of $1,500.00 plus the $160.00 filing fee which was to "be deemed earned when paid" and not subject to refund. Ex. A-2, at 1.

Appended to the fee agreement, Ex. A-2, was a "list of standard services." Underneath the heading of the list was the phrase "Chapter 13 case — $1,500.00," followed by a list of eight types of services.

After filing their chapter 13 petition, the debtors proposed a chapter 13 plan which treated the claim of the second mortgagee as partially unsecured. Ex. A-3. They also filed an objection to that creditor's secured proof of claim, which objection sought to avoid a portion of the mortgage lien based upon section 506(d) of the Bankruptcy Code. After a trial on that objection, I concluded that section 1322(b)(2) precluded these debtors from bifurcating the secured claim of the second mortgagee. Ex. A-10 (Memorandum and Order dated April 7, 1998); see Nobelman v. American Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993).

Prior to my issuance of the memorandum and order of April 7, 1998, and during oral argument on the debtors' objection to the allowance of the secured claim of the second mortgagee, I notified the parties that the mortgagee's position was more persuasive. Mr. Koresko thereupon sent a letter dated April 1, 1998 to his clients informing them of my intent to overrule their attempt to bifurcate the secured claim of the second mortgagee. Ex. A-8. This letter, inter alia, set out the various bankruptcy options for these debtors in light of this ruling as follows:

If you want to stay in the house you must do one of the following:
1. File a revised Chapter 13 plan immediately showing current payments to the second mortgagee and satisfaction of the past due payments; or
2. Dismiss your present Chapter 13 case and re-file at a later date; or
3. Convert your case to Chapter 7 or refile under Chapter 7 and try to deal with the second mortgagee outside of a plan.

Ex. A-8, at 2 (emphasis added).

Thereafter, Koresko & Associates sent the debtors the instant fee application. Counsel also filed an amended chapter 13 plan (not signed by the debtors) which provided for payment of this fee in full. Ex. T-1. Before filing this fee request, counsel did not send any billings to the debtors. Further, counsel had estimated that it would charge the debtors "at least an additional $2,500 to litigate" the section 506(d) bifurcation issue with the second mortgagee. Ex. A-8.

The debtors responded to their receipt of this fee application and proposed amended plan by firing Koresko & Associates and engaging new counsel. New counsel later advised them to convert their bankruptcy case to one proceeding under chapter 7, which they did.

II.

Before I can address the merits of this application and the debtors' objection thereto, I must consider the debtors' standing in this dispute. Although the applicant does not raise this issue, questions of standing must be considered sua sponte, as it is akin to subject matter jurisdiction. See, e.g., In re Weaver, 632 F.2d 461, 462 n. 6 (5th Cir.1980) (the issue of standing may be raised sua sponte); see generally FW/PBS, Inc. v. City of Dallas, 493 U.S. 215, 110 S.Ct. 596, 107 L.Ed.2d 603 (1990).

A.

There are two components to this dispute. First, Koresko & Associates requests that I fix reasonable compensation (and reimbursement of expenses) under 11 U.S.C. § 330(a) for those services it rendered to the debtors during the chapter 13 portion of this case. Second, the debtors request that I determine that they made an "excessive" payment to former counsel and direct the return of such excessive payment to them, by virtue of section 329(b).

As to the second issue, the debtors clearly have standing to seek the return of funds to themselves, and former counsel has standing to oppose such a return. Such a dispute directly affects the pecuniary rights of these two parties. See In re Schutte, 112 B.R. 973 (Bankr.E.D.Mo.1990); see generally Travelers Insurance Co. v. H.K. Porter Co., Inc., 45 F.3d 737 (3d Cir.1995). A more detailed analysis applies, however, to the debtors' standing in opposition to former counsel's request that I fix its reasonable compensation under section 330(a).

B.

Shortly after this fee application was filed, the debtors terminated their engagement of Koresko & Associates and retained new counsel. On August 20, 1998, the debtors converted their bankruptcy case to one under chapter 7, pursuant to 11 U.S.C. § 1307(a). Generally, in a chapter 7 case, only a chapter 7 trustee may object to proofs of claim filed. See, e.g., Willemain v. Kivitz, 764 F.2d 1019, 1022 (4th Cir.1985); Kapp v. Naturelle, Inc., 611 F.2d 703, 706-07 (8th Cir.1979); In re Nefferdorf, 71 B.R. 217, 219 (E.D.Pa.1984). The allowance or disallowance of a claim affects the pecuniary rights of creditors, in that the outcome may affect the distributions made to creditors. Therefore, typically, standing to object to claims in a chapter 7 case is reserved to the chapter 7 trustee, who has the statutory duty to review and object to claims "if a purpose would be served." 11 U.S.C. § 704(5); see Advisory Committee Note, Fed.R.Bankr.P. 3007 (1983).3 As recently discussed by the Seventh Circuit Court of Appeals in In re Cult Awareness Network, Inc., 151 F.3d 605 (7th Cir.1998):

Bankruptcy standing is narrower than Article III standing . . . To have standing to object to a bankruptcy order, a person must have a pecuniary interest in the outcome of the bankruptcy proceedings. Only those persons affected pecuniarily by a bankruptcy order have standing to appeal that order. . . . Debtors, particularly Chapter 7 debtors, rarely have such a pecuniary interest because no matter how the estate\'s assets are disbursed by the trustee, no assets will revert to the debtor.

Id., at 607.

Before I discuss the two exceptions to the general principle that a chapter 7 debtor has no standing to object to a proof of claim filed by a creditor, I recognize that Koresko & Associates have filed an "application for approval of counsel fee" rather than a document identified as a "proof of claim." Nevertheless (as will be addressed in more detail below), Fed.R.Bankr.P. 1019(5) provides that a chapter 13 debtor shall "file a schedule of unpaid debts incurred after the commencement of a chapter 13 case. . . ." Rule 1019(6) further directs the clerk of court to notify those "entities" listed on the schedule of unpaid debts so that they may file timely proofs of claim. Therefore, it is appropriate to view the instant application in the context of a claim being asserted in this chapter 7 case. See...

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