In two cases involving the courts’ practice of permitting the Chapter 13 trustee to distribute undisbursed funds to creditors upon conversion to Chapter 7, the courts found that Harris v. Viegelahn, 575 U.S. ___, 135 S.Ct. 1829 (2015), dictated a different result, even concerning the debtor’s Chapter 13 attorney fees and without regard to whether the case was converted before confirmation of the plan. In re Beauregard, No. 11-13069, consolidated with, In re Rule-Osburn, No. 14-13624, In re Montano, No. 14-12950 (Bankr. N. M. July 10, 2015); In re Sowell, No. 14-44130 (Bankr. D. Minn. Aug. 7, 2015). [Read more…] about Harris Precludes Attorney Fee Payments Out of Undisbursed Funds
Undisbursed Funds Returned to Debtor Upon Conversion
In a unanimous decision, the Supreme Court today found that funds paid into a confirmed chapter 13 plan that are undisbursed when the case is converted to chapter 7 should be returned to the debtor. Harris v. Viegelahn, 575 U.S. ___, No. 14-400 (May 18, 2015).
[Read more…] about Undisbursed Funds Returned to Debtor Upon Conversion
Viegelahn v. Harris, No. 14-400 (U.S. S.Ct.)
Type: Amicus
Date: February 2, 2015
Description: Whether chapter 13 trustee required to return funds to debtor received under plan prior to conversion but distributed to creditors post-conversion.
Result: Reversed, debtor won.
Supreme Court Doubleheader
NACBA filed amicus briefs on Monday in two Supreme Court cases: Harris v. Viegelahn, 14-400, and Bullard v. Blue Hills Bank, 14-116.
Harris asks whether funds paid into a confirmed chapter 13 plan that are still in the trustee’s possession when the bankruptcy is converted to chapter 7 should be refunded to the debtor or paid to creditors. At the time of conversion, the trustee was holding funds originally designated for the debtor’s mortgagee, but more than $4,300 in funds were not disbursed because the mortgagee obtained relief from stay and foreclosed on the debtor’s home. Neither the trustee nor the debtor sought to modify the plan. Instead, the debtor converted the case to Chapter 7. Several days after debtor filed his notice of conversion, the trustee distributed the funds she had on hand to unsecured creditors. Harris moved to compel a refund of the money. The bankruptcy court granted the motion, and the district court affirmed. The Fifth Circuit reversed and found that the monies were properly distributed to creditors. Harris, No. 13-50374 (July 7, 2014) (disagreeing with In re Michael, 699 F.3d 305 (3rd Cir. 2012)).
NACBA’s brief in Harris argues that the Code’s plain text as well as the policies that animate the Code require that undisbursed funds be returned to the debtor.
Bullard asks whether denial of confirmation is a final appealable order. In Bullard, confirmation of the plan depended solely on the resolution of a disputed legal issue that has divided the bankruptcy courts. The bankruptcy court denied confirmation of debtor’s proposed plan, and after granting leave to appeal, the bankruptcy appellate panel affirmed. The First Circuit held that because the debtor could theoretically, though not realistically, submit a new plan, the decision of the bankruptcy appellate panel was not final. By contrast, if the bankruptcy appellate panel had ruled in the debtor’s favor and reversed the bankruptcy court, then its order would indisputably be final, and the First Circuit could conclusively determine the issue and resolve the split among the lower courts.
NACBA’s brief in Bullard argues that giving creditors, but not debtors, the ability to appeal decisions relating to plan confirmation is unjustified, that the alternatives proposed by the court—dismissal or refile and object to debtor’s plan—are problematic, and that allowing such appeals is unlikely to overburden the courts.
Bullard Amicus Brief of Bank of America
Viegelahn v. Harris, No. 13-50374 (5th Cir.)
Type: Amicus
Date: August 20, 2013
Description: Whether undistributed post-petition wages belong to the debtor upon conversion from chapter 13 to chapter 7.
Result: Reversed and Remanded, July 7, 2014 – Appeal to USSCt. No. 14-400
NACBA Files Amicus in Conversion Case
The NACBA membership has filed an amicus brief in the case of Viegelahn v. Harris (In re Harris), No. 13-50374 (5th Cir. August 20, 2013) seeking affirmance of the lower courts’ opinions. There, the debtor filed a chapter 13 petition, but after a good faith attempt to fulfill his obligations under the plan, he converted to chapter 7. The trustee sought to distribute debtor’s wages collected pursuant to the plan but not yet distributed at the time of conversion. [Read more…] about NACBA Files Amicus in Conversion Case
Post-Confirmation Funds Returned to Debtor after Conversion to Chapter 7
What happens to funds paid into a confirmed chapter 13 plan that are still in the trustee’s possession when the bankruptcy is converted to chapter 7? That is the question recently answered by the district court for the Western District of Texas. The trustee had distributed the funds to creditors post-conversion and upon motion by the debtor, the bankruptcy ordered turnover to the debtor. Relying in large part on the Third Circuit case of In re Michael, 699 F.3d 305 (2012) in which NACBA participated as amicus, the district court affirmed. Veigelahn v. Harris (In re Harris), No. 12-540 (W.D. Tex. March 22, 2013).
Key to the decision was section 348(f) which provides that when a case is converted in good faith from chapter 13 to chapter 7 the property of the estate is determined as of the original petition date. Because the funds at issue had been garnished from debtor’s wages post-confirmation, they were not part of the debtor’s estate upon the original filing of the chapter 13 petition and, therefore, under section 348 would not be part of the chapter 7 estate upon conversion.
The trustee distinguished Stamm v. Morton (In re Stamm), 222 F.3d 216 (5th Cir. 2000), in which funds collected prior to confirmation of the chapter 13 plan were returned to the debtor upon conversion. Here, the trustee argued, the funds were collected post-confirmation thereby giving the creditors a vested interest in them even though the case was later converted. The trustee relied on section 1326(a)(2) which provides that “[i]f a plan is confirmed, the trustee shall distribute any such payment in accordance with the plan as soon as is practicable. If a plan is not confirmed, the trustee shall return any such payments not previously paid and not yet due and owing to creditors . . . to the debtor.” The trustee argued that because Congress specifically provided for the return of funds collected pursuant to a plan that was not confirmed it could be inferred that different treatment should be accorded funds collected after confirmation.
Acknowledging the superficial appeal of the trustee’s position, the court found that the Code sections at issue created an ambiguity that necessitated looking beyond the text. The court found that the legislative history indicated Congress’s intention to encourage debtors to file chapter 13 wherever possible without the inhibiting fear of penalty in the event that the chapter 13 failed and the debtor had to resort to chapter 7. H.R. Rep. No. 95-595 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 5966, 1977 WL 9628. In enacting section 348(f) Congress specifically addressed and sought to minimize the potential loss of property that a debtor could face upon conversion from chapter 13 to chapter 7 that would not have been at risk had the debtor filed directly in chapter 7.
The court also rejected the trustee’s argument that there is an inherent unfairness in returning the funds to the debtor upon conversion reasoning that the creditors lost nothing while reaping the benefits of payments made in accordance with the plan up to the time of conversion. Quoting Michael, the court found that the duties of the trustee delineated in section 1326 did not vest any rights in the creditors:
When the debtor transfers funds to the Chapter 13 trustee . . . under a confirmed plan . . . the funds become part of the estate, and the debtor retains a vested interest in them. Though creditors have a right to those payments based on the confirmed plan, the debtor does not lose his vested interest until the trustee affirmatively transfers the funds to creditors. Also, § 1326(a)(2) and (c) only address the obligation of the trustee to distribute payments in accordance with a confirmed plan; they do not vest creditors with any property rights.
Michael,699 F.3d at 313.
Furthermore, section 348(f)(2) protects creditors from unfair manipulation by debtors by including a provision that in the event of a bad faith conversion the estate would consist of property as of the conversion date rather than as of the petition date. As the court in Michael pointed out, the specific expansion of the chapter 7 estate in the event of bad faith, indicates that when the conversion is in good faith, the chapter 7 estate would be as of the petition date.
This is a case that illustrates the power of NACBA’s members to create good law around the country by getting involved in select cases on appeal.
In re Taylor, No. 11-1879 (C.D. Cal.)
Type: Debtor’s brief
Date: February 7, 2012
Description: Whether Bankruptcy Court erred in dismissing chapter 13 case, sua sponte, after notice of conversion to chapter 7 had been filed.
Result: Judgment reversed and remanded (April 13, 2012)
NACBA files Amicus in Conversion Case
NACBA filed an Amicus brief in the case of DeHart v. Michael, No. 11-1992 (3d Cir.). The case involves a debtor who converted his chapter 13 case to a chapter 7 after paying into his plan for several years. At the time of the conversion, the estate held some undistributed post-petition wages and the trustee argued that the creditors had a vested right to those funds. The lower courts rejected this argument and the trustee brought this appeal. NACBA’s brief argues that, under section 348(f) a chapter 7 estate that has been converted from chapter 13 consists of the property owned by the debtor at the time of the original chapter 13 petition, and, therefore, the debtor is entitled to return of his post-petition wages.
NACBA member, Irv Ackelsberg, filed the brief on behalf of NACBA.
Brief
DeHart v. Michael, No. 11-1992 (3d Cir.)
Type: Amicus
Date: October 25, 2011
Description: Whether creditors have a vested right to undistributed post-petition funds paid into confirmed chapter 13 plan prior to conversion to chapter 7.
Result: Judgment affirmed, October 26, 2012