Cynthia J Nevels

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UN TED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXI CO

In re:
CYNTH A J. NEVELS,
aka Cynthia J. EHhvrum
Debt or. No. 13-07- 11513 SA

MEMORANDUM OPT NON ON ATTORNEY SCHUCHARDI’ S
OB] ECIT ON ‘TO CEAPTER 13 TRUSTEE’ S
FINAL AQCOOUNT AND PEITTION FOR FINAL DECREE

This matter cane before the Court on the Standing Chapter 13
Trustee’s Final Account of Trustee and Petition for Final Decree
(doc 74), and the Obj ection to Chapter 13 Trustee’s Final
Accounting (“Obj ection”) (doc 75) filed by Elliott Schuchardt,
the Debtor’s forner counsel (sonetines “Counsel”). For the
reasons set forth below the Court finds that the Objection is
not well taken and should be overruled. !

Background

Debtor Cynthia Nevels filed a Chapter 13 petition and plan
through Counsel on June 26, 2007. The Statenent of Financial
Affairs disclosed a $50, 000 transfer to Debtor’s son sone four
nonths before the bankruptcy to cover his college expenses. M.
Nevel’s largest creditor by far was her ex-husband Ronald Nevels,

whose claimultinately turned out to be a little under $50, 000.

1 The Court has jurisdiction of the subject matter and of
the persons herein pursuant to 28 US.C. §§ 1334 and 157(a); this
is a core proceeding pursuant to 28 US.C. § 157(b)(2)(A); and
these are findings of fact and conclusions of as nay be required
by F.R BP. 7052. The Court is making this decision based on the
presentations of the parties, a procedure agreed to by the
parties at the hearing conducted by the Court on Novenber 18,
2008.

Us, GOVERN 07-11513-s13_ Doc 78 Filed 10/09/09 Entered 10/09/09 14:43:17 Page 1 of 12

INFORMATION

2 Due to the poor visual quality of the order that was
entered, the Court subsequently “refiled” the text of the order
so that it is readable. 	Doc 36.
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Mr. Nevels was the only non-priority, non-administrative
unsecured creditor to receive a distribution.
The plan called for monthly payments of $300 for 36 months.
The confirmation order (doc 28) 2, entered March 4, 2008, ordered
Debtor to make these payments and also provided for the turnover
to the estate of the $50,000. 	Since the $50,000 had been
deposited in a certificate of deposit with New Mexico Educators
Federal Credit Union and had been held pending entry of the
confirmation order, those funds were delivered to the Trustee
shortly after the entry of the confirmation order.
On February 21, 2008, Counsel withdrew from representing
Debtor and attorney William R. Brummett substituted in, doc 27,
although Counsel had signed off on the confirmation order.
Following confirmation, Counsel filed an application for approval
of attorney fees of $5,527.58 and costs of $297.23 (doc 38),
which Debtor contested. 	Ultimately the Court granted the
application in the full amount of $5,824.81, having found that
Counsel represented Debtor well at a very reasonable cost. 	Doc
65. 	Taking into account Debtor’s prepetition payment of $776 and
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3 Counsel asserts that the amount he is still owed is
$3,100.81. 	Objection, ¶12, at 3. 	Given the Court’s approval of
the Final Account, the difference is irrelevant.
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the Trustee’s initial (and only) post petition payment to Counsel
of $1,524, Counsel is still owed $3,524.81. 3
On August 19, 2008, the Trustee filed a Motion to Dismiss
for failure to make plan payments in the amount of $1200, doc 68,
which the Court granted on October 3, 2008. 	Doc 70. 	Trustee
filed the Final Account of Trustee and Petition of [sic - should
be “for”?] Final Decree (“Final Account”) on October 23, 2008,
which drew Counsel’s objection.
In the meantime, the events which led to this dispute
occurred. 	Plan section III(b) discusses the treatment of
Debtor’s attorney’s fees as an administrative claim:
Debtor’s Attorney’s Fees. The debtor’s attorney’s fees
shall be paid as follows: (a) counsel for the debtor
anticipates total attorney’s fees in an amount of at
least $2,300 including gross receipts tax, and not
including the filing fee ("Pre-Application Fees"); (b)
counsel for the debtor shall be permitted to apply a
pre-petition retainer (the "Retainer") for fees and
costs received by counsel in the amount of $776 (not
including the filing fee) to the Pre-Application Fees;
(c) upon confirmation, to the extent such funds exist
and are available for this purpose, the trustee shall
distribute the difference between the Pre-Application
Fees and the Retainer to counsel for the debtor pending
the filing and allowance of a fee application; (d)
within fifteen (15) days after confirmation of the
plan, counsel for the debtor shall file a fee
application for all services rendered and costs
incurred up to and including confirmation; (e) any fees
requested in addition to the Pre-Application Fees shall
only be paid by the trustee after approval by the
Court; and (f) in the event that the fees approved by
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4 In fact, the $1,524.00 was the payment to Counsel, and
therefore the Final Account is in error when it categorizes this
payment as Priority rather than Administrative. 	The error is
harmless.
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the Court are less than the Pre-Application Fees paid
to counsel by the debtor, trustee or otherwise, then
counsel for the debtor shall refund to the trustee the
difference between the Pre-Application Fees and the
amount awarded. If debtor’s attorney fails to file its
fee application within fifteen (15) days after entry of
an order confirming this plan (or within such
additional time as the Court may allow upon motion for
extension filed within said time), counsel shall refund
to the trustee the Pre-Application Fees and funds
distributed by the trustee, and the trustee shall be
entitled to an order requiring such turnover. Nothing
herein shall preclude counsel from filing a fee
application after the time allowed hereunder, and being
paid pursuant to this paragraph upon entry of an order
allowing such fees, but counsel’s entitlement to
payment at the time of the first distribution of funds
from the trustee after confirmation of this plan shall
depend on the timely filing of the initial fee
application.
The confirmation order repeated in decretal paragraph 3 the
substance of the first sentence of the above-quoted plan
provision.
The Final Report states that the case was dismissed after
confirmation, and accounted for total receipts of $54,575.72, no
administrative payments, a priority payment of $1,524.00 4, no
secured payments, $49,231.42 unsecured payments, and $3,820.30 in
Trustee fees, for total disbursements of $54,575.72. 	Counsel
received from the estate only the $1,524.00 which, combined with
the $776 that Counsel received from Debtor prepetition, totaled
the $2,300 figure in the plan and confirmation order.
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5 To be clear, the disgorgement discussed in the
presentations to the Court referred only to potential
disgorgement by Counsel of unapproved fees ($2,300). 	There was
never any suggestion to the Court that Trustee agreed to pursue
disgorgement from the single unsecured creditor or that the
Trustee agreed to disgorge any of her commissions.
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The deadline for filing the fee application was March 19,
2008. 	It got filed on April 22. 	On March 31, almost two weeks
after the application was due, Counsel e-mailed the Trustee
asking her for an extension of time because he would be out of
the country until mid-April. 	However, Counsel did not, as some
other counsel do, file a motion asking for an extension of time
to file the application, which he could have done at any time
before he left the country or indeed even before confirmation.
Counsel and Trustee agree that Counsel told Trustee on March
31 that the application was going to be filed, and they both
agree that Trustee agreed that she would not seek disgorgement of
any of his fees pursuant to the plan and confirmation order prior
to April 30, 2008. 5 	Counsel understood Trustee’s commitment not
to seek disgorgement until April 30 as an agreement, de facto or
explicit, to allow him up to April 30 to file a fee application
and to withhold distribution, or withhold sufficient funds from
the distribution, until then. 	Trustee understood no such thing,
but merely that she would not file a disgorgement motion against
Counsel.
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6 Trustee disburses plan payments on a monthly basis. 	There
is no suggestion that Trustee did not disburse according to her
normal monthly disbursement schedule.
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The standard chapter 13 procedure in this District is that
upon the filing of a fee application, Trustee reserves from
distribution sufficient funds to cover the maximum amount
requested by the application (to the extent of the funds
available), and holds the funds until a ruling on the fee
application. 	Trustee then pays according to the court order on
the next disbursement date. 	In this instance, Trustee made s
small disbursement in late March (including the $1,524) and then
disbursed the bulk of the funds on April 22, the same day the fee
application was filed. 6 	Thus, she did not have on file nor, as
explained below, was she, practically speaking, on notice on that
day (April 22) that she should reserve any amount for Counsel’s
fee application. 	And since as it turned out Debtor had made her
last monthly payment to Trustee almost a month earlier, on March
28, there turned out to be no funds to be reserved for payment of
Counsel’s fees.
Analysis
Counsel objects to the Final Report 1) as violative of the
“absolute priority rule” [sic] of 11 U.S.C. § 507(a)(2); 2) as
violative of the Trustee’s fiduciary duties; 3) as violative of
the rule that administrative expenses should be paid pro rata.
He seeks to hold the Trustee personally responsible for the
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alleged mispayments, or alternatively to require her to seek
disgorgement from the unsecured creditor who received the bulk of
the distributions, and seeks punitive damages.
ABSOLUTE PRIORITY RULE
The “absolute priority rule” is a term of art in chapter 11
bankruptcies. 	It is of no relevance to Chapter 13 administrative
expenses.
[T]he absolute priority rule “provides that a
dissenting class of unsecured creditors must be
provided for in full before any junior class can
receive or retain any property [under a reorganization]
plan.” [Ahlers v. Norwest Bank Worthington]794 F.2d
[388], at 401 [(8 th Cir. 1986)]. 	The rule had its
genesis in judicial construction of the undefined
requirement of the early bankruptcy statute that
reorganization plans be “fair and equitable.” 	See
Northern Pacific R. Co. v. Boyd, 228 U.S. 482, 504-505,
33 S.Ct. 554, 560, 57 L.Ed. 931 (1913); Louisville
Trust Co. v. Louisville, N.A. & C.R. Co., 174 U.S. 674,
684, 19 S.Ct. 827, 830, 43 L.Ed. 1130 (1899). 	The rule
has since gained express statutory force, and was
incorporated into Chapter 11 of the Bankruptcy Code
adopted in 1978. See 11 U.S.C. § 1129(b)(2)(B)(ii)
(1982 ed., Supp. IV). Under current law, no Chapter 11
reorganization plan can be confirmed over the
creditors' legitimate objections (absent certain
conditions not relevant here) if it fails to comply
with the absolute priority rule.
Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202 (1988).
Counsel appears to argue that administrative expenses must
be paid in full before lower priority (i.e., non-priority
unsecured) claims may be paid. 	However, this is not the rule in
Chapter 13. 	First, Section 1322(b)(4) states that a plan may
provide for payments on any unsecured claim to be made
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7 In contrast, 11 U.S.C. § 1326(a)(2) requires that if a
plan is confirmed, the Trustee “shall” distribute the
preconfirmation payments in accordance with the plan “as soon as
is practicable.”
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concurrently with payments on any secured claim or any other
unsecured claim. 	Administrative claims are unsecured, so this
suggests that administrative claims can be paid at the same time
as priority or secured claims. 	This concept is reinforced by
Section 1326(b) which provides, in relevant part:
(b) Before or at the time of each payment to creditors
under the plan, there shall be paid--
(1) any unpaid claim of the kind specified in section
507(a)(2) of this title; [and]
(2) if a standing trustee appointed under section
586(b) of title 28 is serving in the case, the
percentage fee fixed for such standing trustee under
section 586(e)(1)(B) of title 28....
This section states that, at the time of each individual payment,
the Trustee should first pay both 507(a)(2) claims (i.e.,
administrative expense claims allowed under § 503(b) including
attorneys fees) and the standing trustee’s commission. 	This
suggests that if there are no unpaid 507(a)(2) claims at the time
of an individual distribution, the Trustee, by statute, takes her
fees and pays the balance of the funds according to the plan.
There is no language that the Trustee is to reserve funds for
future payment of unfiled 	507(a)(2) expenses 7. 	There is no
requirement that all approved 507(a)(2) claims and all future but
yet unapproved 507(a)(2) claims be paid in full before any
payments to non-priority unsecured creditors could be made
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8 In the course of a chapter 13 case there may well be two
or more fee applications, depending on the length of the case and
how well a debtor is progressing through the case.
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according to the plan. 	If this were the case, a trustee could
only disburse after many if not all payments by the debtor were
received and all administrative expenses were finally approved; 8
in other words, the trustee might be able to make only one
payment: the last one. 	In short, there is no priority of payment
rule in Chapter 13 of the sort that Counsel suggests. 	Compare 11
U.S.C. 726(a) (In Chapter 7 cases, trustee must distribute to
Section 507 claims “in the order specified in section 507".)
There is no parallel statute in Chapter 13. 	Alabama v. Brown (In
re Brown), 2008 WL 205578 at *3 (M.D. Ala. 2008). 	See also 3
Keith M. Lundin, Chapter 13 Bankruptcy §204.2 n.29 (3 rd Ed.
2007)(“The order of distribution of property in 11 U.S.C. §
726(a) does not apply in a Chapter 13 case.”)
TRUSTEE’S FIDUCIARY DUTIES
One reason for the deadline to file a fee application is to
assure that the Trustee is on notice of what amounts are claimed
and are authorized by the Court (through an order approving a fee
application) to pay the fees. 	But the Court will not impose the
duty on the Chapter 13 Trustee to ensure that fee applications
are filed before distributions are made. 	The Code requires a
trustee to distribute as soon as practicable. 	The plan
explicitly spells out the consequences of not filing a fee
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application within a very short period of time: the debtor’s
attorney forfeits the right to share in the initial
distributions. 	That is especially true in this case, where
Debtor’s attorney knew from the confirmation Order that a $50,000
certificate of deposit was likely to be distributed early in the
case. 	Debtor’s attorney cannot blame the Trustee for his own
failure to file a timely fee application. 	Furthermore, the
Trustee was expecting years more of payments from which the
attorney fees could have been paid. 	The Trustee had no control
over the fact that Debtor stopped making payments and was
dismissed before the attorneys fees were paid.
PRO RATA ADMINISTRATIVE EXPENSES
Counsel argues that it is inequitable and a violation of the
absolute priority rule [sic] that the Trustee has received all of
her Chapter 13 commissions from the estate yet he has received
none. 	As discussed above, there is no priority rule for payment
of administrative expenses in a chapter 13 as there is in a
chapter 7 case. 	It may be unfair that Mr. Schuchardt did not get
paid, but it is purely a timing issue. 	Debtor elected to stop
making payments before the attorneys fees were paid. 	“Given
Chapter 13's voluntary nature, an unsecured creditor must accept
the risk that a case will not be commenced in the first place or
that it will never complete.” 	In re Baines, 263 B.R. 868, 873
(Bankr. S.D. Ill. 2001).
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9 Because of the disposition of this matter, the Court need
not consider In re Vigil, Case No. 07-10413-s13 (Bankr. D.N.M.)
(see docs 61, 68 and 69, in which funds paid to a secured
creditor were returned to the estate to pay Counsel’s fees in
that case).
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Conclusion
The Trustee has done nothing wrong and is not liable to Mr.
Schuchardt for any of his attorney fees. 9 	Punitive damages are
not appropriate. 	Explicitly, the Court finds no basis whatever
to conclude that Trustee was “gaming” the system, intending to
cheat Counsel, or engaging in any unethical conduct in any
manner, in this case or any other case.
The Trustee shall submit an Order approving the Trustee’s
Final Account and overruling Mr. Schuchardt’s objection.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	October 9, 2009
Copies to:
Elliott J. Schuchardt
Schuchardt Law Firm
9111 Cross Park Drive
Suite D-200
Knoxville, TN 37923
William R Brummett
113 6th St NW Ste E
Albuquerque, NM 87102-3103
Kelley L. Skehen
625 Silver Avenue SW
Suite 350
Albuquerque, NM 87102-3111
United States Trustee
PO Box 608
Albuquerque, NM 87103-0608
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