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Attorney’s fees and expenses incurred by a debtor during a Chapter 11 bankruptcy proceeding are dischargeable debts following an involuntary conversion to Chapter 7, a federal appeals court has ruled. Upholding a lower court, the U.S. Court of Appeals for the Second Circuit rejected a claim for $120,095 in fees and expenses by a law firm that argued the amount should have been recoverable as administrative expenses. The decision will be published March 17. John Fickling had paid Flower, Medalie & Markowitz (FMM) a $38,000 retainer when he filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the Eastern District of New York in October 1992. Four years later, over the objection of Mr. Fickling and Flower, Medalie & Markowitz, the bankruptcy court converted his case to a Chapter 7 involuntary bankruptcy. Flower, Medalie & Markowitz, saying that it “did not wish to incur further losses in the legal representation” of Mr. Fickling, and doubting whether it would “ever be compensated for its time and effort,” had its motion to withdraw from the case granted in March 1997. In 2001, the firm filed a motion to recoup $120,095 in fees and expenses from Mr. Fickling for work performed before the conversion to a Chapter 7 liquidation. While the firm argued the fees amounted to a non-dischargeable debt under the bankruptcy code, the bankruptcy court denied the motion, and its ruling was upheld by Eastern District Judge Joanna Seybert. On appeal in Fickling v. Flower, Medalie & Markowitz, 03-5018, the firm agreed both that the debt arose before the conversion, and that claims for attorneys’ fees and expenses incurred after the filing of the Chapter 11 petition but before the conversion were not exempt from discharge. However, they argued that the debt was an “administrative expense” under 11 U.S.C. �503(b), and therefore within the exemption from discharge outlined in �348(d). The firm also said that allowing the debt to be discharged would run counter to the intent of �329 � the provision allowing bankruptcy judges to review claims for attorney’s fees. Finally, Flower, Medalie & Markowitz said that, even if the debt was properly discharged under �727(b), equity and public policy supported an award of fees. Writing for the court, Chief Judge John M. Walker first addressed Flower, Medalie & Markowitz ‘s argument that the fees should be treated as an administrative expense. “FMM reads �348(d) as exempting pre-conversion administrative expenses from pre-petition treatment for all purposes,” he said. “FMM further reasons that because �727(b) only applied to those debts that are deemed to have arisen pre-petition, �727(b) cannot apply to discharge a pre-conversion debt for attorneys fees.” But the court disagreed. “Just because �348(d) does not require that pre-conversion administrative expense claims be treated ‘for all purposes’ as if they had arisen pre-petition does not mean that such claims may never be treated as if they had arisen pre-petition,” he said. “That is especially true where, as here, other provisions of the Bankruptcy Code mandate pre-petition treatment for a particular purpose, i.e., discharge, without exception for pre-conversion administrative expense claims.” Second Argument Rejected Judge Walker then rejected the firm’s second argument, saying �329′s grant of power to bankruptcy judges to review fees does not conflict with �727(b)’s treatment of the fees as dischargeable. “FMM urges that this conclusion will leave the poorest of debtors without legal representation,” Judge Walker said. “It asserts that no cautious attorney will agree to represent a Chapter 7 petitioner without full payment up front if the attorney knows that any fees incurred after the filing of the petition for services rendered pre-petition will be subject to discharge.” And while some commentators agree with this argument, Judge Walker said, “the statute is clear.” Judges Guido Calabresi and Chester J. Straub joined in the opinion. Jeffrey Herzberg of Zinker, Gelfand & Herzberg of Smithtown represented Flower, Medalie & Markowitz. Jeffrey K. Cymbler and Rick A. Steinberg of Angel & Frankel represented Mr. Fickling.

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