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Attorney 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 2nd U.S. Circuit Court of Appeals 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 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 Fickling and Flower Medalie, 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 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 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, the firm agreed both that the debt arose before the conversion and that claims for attorney 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. Code Section 503(b) and therefore within the exemption from discharge outlined in Section 348(d). The firm also said that allowing the debt to be discharged would run counter to the intent of Section 329 — the provision allowing bankruptcy judges to review claims for attorney fees. Finally, Flower Medalie & Markowitz said that even if the debt was properly discharged under Section 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 Section 348(d) as exempting pre-conversion administrative expenses from pre-petition treatment for all purposes,” he said. “FMM further reasons that because Section 727(b) only applied to those debts that are deemed to have arisen pre-petition, Section 727(b) cannot apply to discharge a pre-conversion debt for attorneys fees.” But the court disagreed. “Just because Section 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 Walker then rejected the firm’s second argument, saying Section 329′s grant of power to bankruptcy judges to review fees does not conflict with Section 727(b)’s treatment of the fees as dischargeable. “FMM urges that this conclusion will leave the poorest of debtors without legal representation,” 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, Walker said, “the statute is clear.” Judges Guido Calabresi and Chester J. Straub joined in the opinion. Jeffrey Herzberg of Zinker Gelfand & Herzberg represented Flower Medalie & Markowitz. Jeffrey K. Cymbler and Rick A. Steinberg of Angel & Frankel represented Fickling. This article originally appeared in the New York Law Journal , a publication of American Lawyer Media.

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