Trustee Fees

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The Seventh Circuit Rules That a Chapter 13 Trustee May Not Take A Fee If the Case is Dismissed Pre-Confirmation

On May 3, 2024, the Seventh Circuit Court agreed with the Ninth and Tenth Circuits that the Bankruptcy Code requires the Chapter 13 trustee to return her fee when the debtor’s plan is not confirmed.  See Evans v. McCallister (In re Evans), 69 F.4th 1101 (9th Cir. 2023) and Goodman v. Doll (In re Doll), 57 F.4th 1129 (10th Cir. 2023).

The debtor filed a Chapter 13 bankruptcy and made approximately $3,800 in payments.  The trustee distributed about $750 in pre-confirmation adequate protection payments.  The court never confirmed the debtor’s plan, and the case was dismissed.  The trustee charged her fee of about $260.  The debtor filed a motion to turn over all remaining funds including the trustee’s fee and the bankruptcy court agreed.  The bankruptcy court certified the case for a direct appeal to the Seventh Circuit.

The court held:

“If the plan is confirmed, the trustee must distribute the remaining payments in accordance with the plan. Id. § 1326(a)(2). But where, as here, a plan is not confirmed, “the trustee shall return any such payments not previously paid and not yet due and owing to creditors pursuant to paragraph (3) to the debtor, after deducting any unpaid claim allowed under section 503(b).” Id. This requires “the standing trustee [to] return all of the pre-confirmation payments [she] receives, without first deducting [her] fee.” In re Doll, 57 F.4th 1129, 1141 (10th Cir. 2023) (emphasis in original). While § 1326(a)(2) has two exceptions, neither covers the trustee’s fee. As to the first, “[t]he Chapter 13 trustee’s fee is not an administrative expense under Section 503(b),” In re Evans, 69 F.4th 1101, 1104 n.2 (9th Cir. 2023), and the trustee has not argued that it is. As for the second, the trustee’s fee is not a payment “previously paid”—because only certain adequate protection payments are permitted pre-confirmation—nor is it a payment “due and owing to creditors.” 11 U.S.C. § 1326(a)(2). Because neither exception applies to the Chapter 13 trustee’s fee, she must return her fee to the debtor.”

Marshall v. Johnson, No. 23-2212, 2024 U.S. App. LEXIS 10852, at *3-4 (7th Cir. May 3, 2024).  The court held that the trustee may not keep her fee under Section 1326(b) because that provision applies only to payments after a plan is confirmed.  Further, the trustee has no right to keep her fee under 28 U.S.C. § 586(e)(2). 

“And § 586(e)(2) is irrelevant, as it “only addresses the source of funds that may be accessed to pay standing trustee fees.” In re Doll, 57 F.4th at 1140; see also id. at 1144 (“‘[C]ollect’ in 28 U.S.C. § 586(e)(2) cannot mean … that the act of ‘collection’ of funds irrevocably constitutes a payment to the Trustee of his fees.”); In re Evans, 69 F.4th at 1108 (“Section 586 only provides that when a trustee does collect her fee pursuant to 1326(b), she does so by collecting her fee from all payments received under confirmed plans.”) (cleaned up). Rather, § 1326(a) governs “what happens to such [collected] payments if a Chapter 13 plan is not confirmed.” In re Doll, 57 F.4th at 1140. Section 1326(a)(2) mandates that the trustee return all payments, including her fee, to the debtor. Sections 1326(b) and 586(e)(2) do not compel a different result.”

Marshall v. Johnson, No. 23-2212, 2024 U.S. App. LEXIS 10852, at *5-6 (7th Cir. May 3, 2024).  

The Second Circuit is still considering this issue in the case of in In re Soussis, Case No. 22-155 (2nd Cir. 2023).

NACBA member Mike Miller from the Semrad Law Firm, LLC in Chicago, Illinois, successfully represented this debtor.

NACBA and NCBRC supported the debtor by filing an amicus brief in support and by providing Mr. Miller a moot court prior to oral argument.

In re Johnson – 7th Circuit Decision

NACBA-NCBRC File stamped brief

Trustee’s brief in Johnson appeal

In re Johnson – Appellee-Debtors brief

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The Seventh Circuit Considers Whether a Chapter 13 Trustee May Take A Fee If the Case is Dismissed Pre-Confirmation

The Seventh Circuit, in the case of In re Johnson, Case No. 23-2212 (7th Cir. 2023), accepted a direct appeal from the Bankruptcy Court for the Northern District of Illinois.  The bankruptcy court held that a chapter 13 trustee may not deduct her fee if a chapter 13 case is dismissed without having a plan confirmed. The court adopted the reasoning in Goodman v. Doll (In re Doll), 57 F.4th 1129 (10th Cir. 2023).

At present, two courts have affirmed that a trustee may not deduct a fee if the chapter 13 case is dismissed prior to confirmation. In addition to the Doll opinion, the Ninth Circuit agreed in Evans v. McCallister (In re Evans), 69 F.4th 1101 (9th Cir. 2023).  The Doll decision is currently being considered for certiorari by the Supreme Court.  Another case is pending on this issue in In re Soussis, Case No. 22-155 (2nd Cir. 2023).

NCBRC and NACBA filed an amicus brief in support of the Debtor/Appellee.  NCBRC NACBA Filed Amicus Brief – In re Johnson

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The 9th Circuit Adopts NCBRC and NACBA’s Amici Argument and Holds A Chapter 13 Trustee May Not Collect Her Percentage Fee If The Chapter 13 Is Dismissed Prior To Confirmation

On June 12, 2023 the Ninth Circuit Court of Appeals held that 11 U.S.C. § 1326(b) requires a chapter 13 trustee to turnover all plan payments to the Debtor upon dismissal before confirmation, without deducting her statutory fee. See Steedman v. McCallister (In re Evans), No. 22-35216, 2023 U.S. App. LEXIS 14571 (9th Cir. June 12, 2023).

The court agreed with the interpretation of the law submitted by the National Consumer Bankruptcy Rights Center and the National Association of Consumer Bankruptcy Attorneys.

“The better approach, as proposed by amicus National Consumer Bankruptcy Rights Center and National Association of Consumer Bankruptcy Attorneys (NCBRC), is to read 28 U.S.C. § 586 and 11 U.S.C. § 1326 together. … We generally agree with NCBRC’s construction of the relevant statutes, which renders harmonious an otherwise fragmented scheme.”

Joining the Tenth Circuit, the Ninth Circuit held that the trustee was not entitled to a percentage fee of plan payments as compensation for her work in the Chapter 13 case. 28 U.S.C. § 586(e)(2) provides that the trustee shall “collect” the percentage fee from “payments . . . under plans” that she receives. 11 U.S.C. § 1326(a)(1) provides for the debtor to make payments in the amount “proposed by the plan to the trustee.” Section 1326(a)(2) provides that the trustee shall retain these payments “until confirmation or denial of confirmation.” This section further provides that if a plan is not confirmed, the trustee shall return to the debtor any payments not previously paid to creditors and not yet due and owing to them. Section 1326(b) provides that, before or at the time of each payment to creditors under the plan, the trustee shall be paid the percentage fee under § 586(e)(2).

The court held that, reading these statutes together, “payments . . . under plans” in § 586 refers only to payments under confirmed plans. Prior to confirmation a trustee does not “collect” or “collect and hold” fees under § 586, but instead “retains” payments “proposed by the plan” pursuant to § 1326(a)(2). If a plan is not confirmed, then § 1326(a)(2) requires return to the debtor of payments “proposed by the plan.” If a plan is confirmed, then § 1326(b) provides for payment of the percentage fee to the trustee. Thus, under the plain meaning of the statutory text, a trustee is not paid her percentage fee if a plan is not confirmed. The court concluded that statutory canons of construction, such as the rule against superfluities, and the provisions’ amendment history confirmed its reading of the statutes. And policy arguments made by the trustee were not enough to overcome the plain language and context of the relevant statutory provisions.

The Second Circuit has this issue under consideration in Soussis v. Macco, Case No. 22-155 (2nd Circuit).  Also, the 7th Circuit has been asked to take up this issue on a direct appeal from In re Johnson, Case No. 22-04449 (Bankr. N.D. IL, May 12, 2023).

In re Evans – 9th CircuitEvans 

9th Cir NCBRC amicus July 2022