Court: United States Bankruptcy Court, W.D. Michigan; December 18, 2017; Us Bankruptcy; United States Bankruptcy Court
A Chapter 13 bankruptcy case often ends in dismissal, resulting in the trustee sometimes holding the debtor's plan payments. The law requires the trustee to return these funds to the debtor after deducting allowed administrative claims if dismissal occurs before confirmation. However, the statute is ambiguous regarding post-confirmation dismissals. The key issue is whether the trustee must return these post-confirmation payments to the debtor or distribute them according to the confirmed plan. The court concludes that the trustee must return the funds to the debtor unless directed otherwise by a court order.
Jurisdiction over the case lies with the United States District Court for the Western District of Michigan, which has referred it to the Bankruptcy Court. The contested matter concerning the Motion to Compel Trustee to Recoup Funds and Disburse to Debtor’s Counsel is deemed a "core proceeding." Even though the bankruptcy estate ceases to exist upon dismissal, the court retains jurisdiction over the trustee to determine the disposition of the funds held. The court affirms its authority to resolve the Motion and issue a final order, as no objections to this jurisdiction have been raised by the parties involved.
On July 15, 2014, the Debtor initiated a chapter 13 bankruptcy case, which the court confirmed on October 3, 2014. After nearly three years of payments, the Debtor moved to voluntarily dismiss the case under 11 U.S.C. § 1307(b), which the court granted on May 9, 2017. The Dismissal Order indicated that all provisions of 11 U.S.C. § 349 would apply, but did not specify the handling of funds held by the chapter 13 trustee, Barbara P. Foley. At dismissal, the Trustee held $525.40 from the Debtor's post-petition wages. This amount was deposited before the Dismissal Order and was posted to the Trustee's account on the same day the order was entered. Subsequently, on May 15, 2017, the Trustee disbursed these funds to the Debtor’s creditors under the Plan, despite the Plan's inapplicability post-dismissal.
The Debtor's attorney filed a fee application requesting $2,419.23 in compensation and sought an order for the Trustee to recoup the disbursed funds, arguing that under 11 U.S.C. § 349(b)(3), the funds should be returned to the Debtor rather than the creditors. The Trustee objected, asserting that the Bankruptcy Code mandates remitting funds to creditors even after dismissal. The court set a briefing schedule, and after reviewing submissions, held a hearing on November 30, 2017. The parties agreed that the Trustee had recouped the $525.40, rendering the motion for recovery moot. No evidentiary hearing was requested, as the dispute was deemed a legal issue rather than factual.
Both parties reference different sections of the Bankruptcy Code to support their arguments, but the court finds that neither section provides a clear resolution to the issue at hand. The court acknowledges the need to select the more suitable of two flawed options or potentially seek an alternative source for guidance. Specifically, Debtor’s counsel cites § 349(b), which governs case dismissal and applies to all chapters under the Bankruptcy Code. This section states that, unless otherwise ordered by the court, dismissal of a case returns property of the estate to the entity that held it prior to the case's commencement. However, while this provision has logical appeal, it does not fully support the Debtor's position without additional judicial interpretation. Notably, post-petition wages, such as those included in the Funds, did not exist before the case began and thus were not vested in any party at the relevant time, as they were generated through the Debtor's efforts after the case commenced.
The Trustee cites § 1326(a) and (c) of the Bankruptcy Code to support her position regarding the distribution of funds following the confirmation of a Chapter 13 plan. Section 1326(a)(1)(A) mandates that a debtor must begin payments to the trustee no later than 30 days after the filing of the plan or relief order, with these funds retained by the trustee until confirmation or denial, as outlined in § 1326(a)(2). If the plan is confirmed, the trustee is required to distribute the payments according to the plan. Conversely, if the plan is not confirmed, the trustee must return any unallocated funds to the debtor after deducting allowed administrative expenses. The Trustee contends that since the plan was confirmed, she is obliged to distribute the funds despite any dismissal, but courts have clarified that "such payment" pertains exclusively to pre-confirmation payments proposed under the plan.
Furthermore, the excerpt highlights that § 1326(a)(2) does not provide guidance on the handling of funds received after confirmation and before dismissal. The Trustee also references § 1326(c), which designates the trustee as the disbursing agent for payments to creditors, but this section does not address fund distribution upon dismissal. Consequently, the court concludes that neither § 1326(a) nor § 1326(c) clarifies the distribution of post-confirmation funds held by the trustee at the time of dismissal, necessitating a search for additional guidance outside these provisions.
A chapter 13 bankruptcy case is fundamentally voluntary, allowing a debtor to dismiss their case at any time without prior conversion, as articulated in 11 U.S.C. § 1307(b). Upon dismissal, the policy aims to restore the status quo ante, effectively unwinding the case as if it never occurred, as noted in Bateson and supported by the Supreme Court in Harris. This dismissal policy favors returning funds to the debtor rather than allowing creditors to claim under a non-binding plan. Congressional intent, as discussed by Judge Shefferly in Bateson, indicates a preference for reverting to prepetition financial conditions. However, the Sixth Circuit emphasizes that courts cannot speculate on Congressional intent or alter statutory text, as seen in Nestlé Waters North America, Inc. v. Mountain Glacier LLC. The debate continues on whether post-confirmation payments should return to the debtor or go to creditors, with strong arguments on both sides. Ultimately, the principles of comity between state and federal court systems and the limited jurisdiction of federal courts underscore that after a bankruptcy dismissal, the effects of the case should be minimized, returning parties to their prior positions, governed by state law.
The Rules of Decision Act stipulates that state laws serve as rules of decision in U.S. civil actions, unless overridden by federal law. Bankruptcy proceedings, while generally viewed as federal, involve civil actions in federal court and are thus subject to this Act. Federal trustees are required to adhere to state law when federal law does not provide guidance. The court examines specific sections of the Bankruptcy Code which do not clarify the issue of entitlement to post-petition wages held by the Trustee after dismissal of a case. Consequently, the court turns to Michigan state law to resolve this matter.
In Michigan, an escrow arrangement arises when one person transfers property to another for delivery to a third party upon certain conditions being met. The Trustee functions as an escrow agent for both the creditors and the Debtor, and the transfer to creditors does not occur until the conditions are satisfied. If these conditions fail, the property is returned to the original transferor. In the Debtor’s case, her post-confirmation payments to the Trustee were contingent upon the Trustee paying creditors according to the Plan. With the dismissal of the case rendering the Plan ineffective, the condition for payment failed, necessitating the return of the funds to the Debtor according to Michigan law.
The Trustee, positioned similarly to an escrow agent, must return funds received for distribution under a now-defunct arrangement to the Debtor, not the creditors. This aligns with state law and previous rulings, emphasizing that the Debtor holds a stronger claim to the funds. The court declines a request from the Debtor’s counsel to have the Trustee return the funds directly to counsel, citing that the funds did not exist at the case's commencement, making the relevant statute inapplicable. The court insists that directing the Trustee to favor Debtor’s counsel over other creditors contradicts the intention of Congress for the race of creditors to resume post-dismissal, as indicated by the termination of the automatic stay. The court emphasizes that while it does not prevent the Debtor from paying her counsel after receiving the funds, it will not endorse a preferential treatment that could disrupt future proceedings. In conclusion, regardless of the confusion surrounding end-of-case issues in Chapter 13 cases, the Trustee is ordered to return the funds to the Debtor. The court advocates for clearer procedures to avoid surprises regarding dismissals and fund distributions, suggesting that counsel should proactively address unpaid fees and fund handling in dismissal motions.
Counsel may request the court to address key issues prior to dismissing a bankruptcy case, allowing the court to provide guidance on the distribution of funds and other closing matters. This proactive approach prevents delays that could lead to conflicts after the bankruptcy estate has closed and the stay has ended. The excerpt emphasizes that trustees should identify and raise end-of-case issues before dismissal, particularly regarding any post-confirmation funds. The court could enhance clarity in dismissal orders by including provisions that direct trustees to return any funds remaining at dismissal to the debtor, unless specified otherwise. Additionally, the court should consider temporarily postponing the revesting of prepetition estate property to allow parties to raise concerns. A brief delay in dismissing a debtor's motion could also facilitate addressing other significant issues. Any modifications to practices must balance the need for an orderly case conclusion with the voluntary nature of Chapter 13 proceedings. The court has decided to partially grant and partially deny the Motion, ruling that the Debtor has a stronger claim to the Funds than her creditors, with the Trustee instructed to return the Funds to the Debtor.
The court has issued an order granting part of the Motion while denying another part. The Trustee is instructed to promptly transfer the Funds to the Debtor. The Clerk is directed to serve copies of the Memorandum of Decision and Order to specified parties via First Class U.S. Mail. The opinion references applicable sections of the Bankruptcy Code and discusses a stipulation resolving an objection made by the Trustee to a Fee Application, with the court deeming the counsel’s fees reasonable as an administrative cost under § 330(a)(4). The excerpt cites the Supreme Court case Harris v. Viegelahn, highlighting that reliance on Chapter 13 provisions is ineffective post-dismissal, a point further supported by legislative history that emphasizes the court's authority to protect rights acquired during bankruptcy proceedings. The Debtor has requested that the Funds be returned to her counsel. Additionally, the text references post-dismissal activities involving bankruptcy trustees and the applicability of the Barton doctrine, illustrating its impact on such cases. It concludes by noting that the confirmation order retains relevance beyond the provisions of Chapter 13, as supported by the Harris decision.
