MUST DOMESTIC SUPPORT OBLIGATIONS BE PAID PRIOR TO DEBTOR’S ATTORNEY FEES AND SECURED CLAIMS IN A CHAPTER 13 PLAN?

By Charles J. Schneider

It was widely assumed by the enactment of BAPCPA that domestic support orders would enjoy a priority in the distribution of payments under a Chapter 13 Plan. This priority would be ahead of the payment of debtor’s attorney fees thereby making it less likely that debtor’s counsel would represent debtors with considerable domestic support arrears. This assumption is challenged in the post-BAPCPA decision of In re Sanders, 341 BR 47 (Bankr. N.D. Ala. 2006).

The assumption arises out of the change in the scheduled priorities under 11 U.S.C. 507(a). Prior to BAPCPA, domestic support orders were given a seventh place priority under 11 U.S.C. 507(a)(7). After BAPCPA, the priority for domestic support orders were elevated to 11 U.S.C. 507(1). The priority of attorney fees was lowered from 11 U.S.C. 507(a)(1) to 11 U.S.C. 507(a)(2); thereby giving rise to the assumption.

The Sanders court began its analysis of the priority of required distributions to be made from a chapter 13 plan with pre-BAPCPA cases. The court focused on the cases, In re Aldridge, 335 B.R. 889 (Bankr. S.D. Ala. 2005), and In re Ferguson, 134 B.R. 689 (Bankr. S.D. Fla. 1991). These decisions held that nothing in 11 U.S.C. 1322 required a chapter 13 plan to provide for full payment of higher priority claims before distributions made to lower priority claims. Sanders at 50. The Sanders court noted that 11 U.S.C. 1322(a)(2) indicates that priority claims under Section 507 are required to be paid in full but there were no requirements amongst priority claims which was the equivalent of the required distributions in chapter 7 cases under 11 U.S.C. 726. This section requires that priority claims are entitled to be paid first from the property of the estate in the order specified in Section 507. 11 U.S.C. 726(a)(1).

The Sanders court further focused on the BAPCPA amendment to 11 USC 1326(b)(1). The court noted that attorney fees still enjoyed a payment priority inasmuch as the BAPCPA amended statute still required that:

         (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;

The amendment did not change the priority of payment to attorney fees as it substituted the former referenced attorney fees under Section 507(a)(1) to the new section under Section 507(a)(2). Congress thereby intended no change in the pre-BAPCPA payment priority of attorney fees. The court concluded that section 507(a)(2) grants priority to administrative expenses allowed under section 503(b)(2). Section 503(b)(2) provides that administrative expenses includes compensation under section 330(a)(4)(b). The debtor’s attorney fees as administrative expenses must be paid either before or contemporaneously with other claim holders, including domestic support claim holders, of a higher priority.

The court then addressed the payment of secured claims prior to the payment of domestic support obligations. It concluded that inasmuch as 11 U.S.C. 1322(b)(4) states that a chapter 13 plan may “provide for payments on any unsecured claim to be made concurrently with payments on any secured claim or any other unsecured claim”, a domestic support claim holder as an unsecured creditor could be paid concurrently with secured creditors. The court stated that there was nothing in the code that required secured creditors should receive reduced post-confirmation adequate protection payments while domestic support orders were being paid in full. Such a payment scheme would violate the equal monthly distribution payments required by Section1325(a)(5)(B)(iii).

The Sanders case was approvingly cited in another Alabama case, In re Vinnie, No. 06-80058-WRS, 2006 Bankr. LEXIS 1209, at *11 (Bankr. M.D. Ala. 2006).