By: Brian Lacoff
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In a decision of importance to Chapter 13 debtors’ attorneys, the Bankruptcy Court for the District of New Jersey ruled that an undersecured creditor, Ford Motor Credit Co., was entitled not only to adequate protection payments, but that the section 507(b)[1] “super-priority” status of the inadequate adequate protection provided during the case meant that the Chapter 13 plan had to pay those amounts before paying any of the debtor’s attorneys fees.[2] Ford Motor Credit objected to the debtor’s Chapter 13 plan for failure to provide adequate protection payments, violating 11 U.S.C. §§ 361, 1325 and 1326.[3]  The debtor modified the plan to include adequate protection payments, but objected to the creditor’s contention that those payments had super-priority over debtor’s attorney fees.[4]  The court agreed with Ford Motor Credit, reasoning that the creditor, having a lien on the debtor’s property, must be afforded protection against the daily depreciation of its property.[5]

By: David Bloom
St. John’s Law Student
American Bankruptcy Institute Law Review Staff

Although a “hedging” arrangement between attorneys retained by a Chapter 7 Trustee and a lender did not appear to offend policy considerations underlying 11 U.S.C. §504, such an agreement could not be approved as a means to obtain downside protection against risks associated with an appeal.  In the case of In re Winstar Communications, Inc.,[1] the Trustee’s special litigation counsel and a consultant sought permission to assign part of their anticipated contingency fees to their lender.[2]  Under the proposed agreement, the lender agreed to pay an undisclosed fixed price to Trustee’s counsel and consultant.[3]  In exchange, the lender would receive the actual amount of contingency fees awarded, up to $10,000,000.00.[4]  If the contingency fees were to exceed $10,000,000.00, the counsel and consultant would share the fees in excess of that amount.[5]  Moreover, the lender agreed to waive any right to object to the Trustee’s settlement or other disposition of the adversary proceeding.[6]  The Court concluded that this arrangement constituted impermissible “sharing” of fees within the meaning of §504, and denied the motion to approve the transaction.[7]