Trustee Power

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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 8th Circuit Rules That Post-Petition Pre-Conversion Increase In Equity in Real Estate Is Part of the Converted Chapter 7 Estate

The rise in equity in the appellant’s residence after filing for bankruptcy but before conversion became part of her bankruptcy estate after conversion, as outlined in 11 U.S.C.S § 348(f)(1)(A). This occurred because the residence was already part of the appellant’s estate, and she maintained possession and control over it at the time of filing for bankruptcy.

FACTS

“On August 19, 2020, Machele Goetz filed a chapter 13 bankruptcy petition and plan. She owned a residence worth $130,000 and claimed a $15,000 homestead exemption under Missouri law. Freedom Mortgage held a $107,460.54 lien against the residence. It is undisputed that had the trustee liquidated the residence on the date of the petition, the estate would have received nothing net of the exemption, the lien, and the sale expenses.

“Later, on April 5, 2022, the bankruptcy court granted Goetz’s motion to convert her case from chapter 13 to chapter 7. Between the chapter 13 filing and the date of the conversion order, Goetz’s residence had increased in value by $75,000, and she had paid down a further $960.54 on the mortgage. Had the trustee liquidated the residence on the date of conversion, more than $62,000 net of the exemption, the lien, and the sale expenses would have been produced.

“After realizing that the trustee might sell the residence given the change in value, Goetz moved for the bankruptcy court to compel the trustee to abandon it. Goetz argued that the residence was of “inconsequential value and benefit to the estate” under 11 U.S.C. § 554(b), asserting that the post-petition, pre-conversion increase in equity must be excluded from the calculation of her residence’s value to the estate. The trustee resisted Goetz’s motion, arguing that, under 11 U.S.C. § 348(f), the bankruptcy estate in a converted case includes post-petition, pre-conversion increase in equity, meaning Goetz’s residence was still of value to the estate.”

ANALYSIS

Under 11 U.S.C. § 348(f)(1)(A),” the property of the estate in Goetz’s converted chapter 7 case consists of the property of the estate as of the date she filed her chapter 13 bankruptcy petition (August 19, 2020) that remained in her possession as of the date of conversion from chapter 13 to chapter 7 (April 5, 2022). …

“Goetz’s residence is property of the converted estate because she held “legal or equitable interest[]” in it as of August 19, 2020, id. § 541(a)(1), and because it remained in her possession when she converted her case to chapter 7 on April 5, 2022, id. § 348(f)(1)(A). The question is whether the post-petition, pre-conversion increase in equity in that residence is also part of the converted estate. … We start with the first half of the definition of property of the converted estate: whether the property in question was “property of the estate, as of the date of filing of the petition.” 11 U.S.C. § 348(f)(1)(A). …

Property of the Estate

“Property of the estate at “[t]he commencement of a case” includes “[p]roceeds . . . of or from property of the estate.” Id. § 541(a)(6). A voluntary case in bankruptcy commences when the petition is filed. Id. § 301(a); see also id. § 348(a) (“Conversion of a case from a case under one chapter of this title to a case under another chapter of this title . . . does not effect a change in the date of the filing of the petition [or] the commencement of the case . . . .”).”

Proceeds

“But the Code does not define “proceeds” or “equity,” so “we may look to dictionaries . . . to determine the meaning.” Schwab v. Reilly, 560 U.S. 770, 783, 130 S. Ct. 2652, 177 L. Ed. 2d 234 (2010); see also Franklin Cal. Tax-Free Tr., 579 U.S. at 126 (looking to Black’s Law Dictionary and the Oxford English Dictionary for the meaning of “define”). Proceeds are “[t]he value [*6] of land, goods, or investments when converted into money; the amount of money received from a sale.” Proceeds, Black’s Law Dictionary (11th ed. 2019). HN6 Equity is “[t]he amount by which the value of or an interest in property exceeds secured claims or liens; the difference between the value of the property and all encumbrances on it.” Equity, Black’s Law Dictionary (11th ed. 2019). An encumbrance is “[a] claim or liability that is attached to property or some other right . . . that may lessen its value, such as a lien or mortgage.” Encumbrance, Black’s Law Dictionary (11th ed. 2019).

“The post-petition, pre-conversion increase in equity in Goetz’s residence—i.e. the difference between its value and the homestead exemption and lien—is therefore proceeds “from property of the estate,” 11 U.S.C. § 541(a) (emphasis added), because it is the amount of money that the estate would receive from a sale of the residence before sale expenses. Cf. In re Potter, 228 B.R. 422, 424 (B.A.P. 8th Cir. 1999) (“Nothing in Section 541 suggests that the estate’s interest is anything less than the entire asset, including any changes in its value which might occur after the date of filing.”). Accordingly, the post-petition, pre-conversion increase in equity in Goetz’s residence was property [*7] of the estate at “[t]he commencement of [the] case.” 11 U.S.C. § 541(a).”

NCBRC and NACBA submitted amicus briefs in support of the debtor both at the 8th Circuit and the 8th Circuit B.A.P.

In re Goetz

NCBRC-NACBA Amicus Brief – Goetz

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The 8th Circuit Considers Whether Post-Petition Equity Increases During a Chapter 13 Are Part of The Bankruptcy Estate in a Converted Chapter 7

UPDATE: This 8th Circuit has since issued a decision on this case. Click here to view our article discussing their ruling.

The 8th Circuit Court of Appeals is considering the issue whether the increased value of the debtor’s residence during a chapter 13 bankruptcy is part of the chapter 7 estate upon conversion.  This is an appeal from the 8th Circuit Bankruptcy Appellate Panel affirming the bankruptcy court’s ruling that an increase in equity in real estate during a chapter 13 is part of the bankruptcy estate in a converted chapter 7 case.  Goetz v. Weber (In re Goetz), 651 B.R. 292 (B.A.P. 8th Cir. 2023).

The Debtor originally filed a chapter 13 bankruptcy. At filing the debtor there was no excess equity in her residence over her exemption and the mortgage. At confirmation property of the estate vested in the Debtor. Two years later Debtor converted her case to a chapter 7 bankruptcy. The value of her property appreciated during her chapter 13 so that approximately $62,000 could be liquidated by the trustee. The Debtor filed a motion to abandon property. The bankruptcy court denied the motion finding the increased equity part of the chapter 7 estate.

“Section 541 of the Bankruptcy Code defines property of the bankruptcy estate to include all of a debtor’s interests both equitable and legal, except those specifically excluded. 11 U.S.C. § 541. Estate property includes “[p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case,” and “[a]ny interest in property that the estate acquires after the commencement of the case.” 11 U.S.C. § 541(a)(6) and (7).

“Upon conversion from one chapter to another, this definition is [*5] adjusted. Section 348 qualifies the scope of bankruptcy estate property by clarifying that “property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion[.]” 11 U.S.C. § 348(f)(1)(A). If a debtor converts a case under Chapter 13 to a case under another chapter, the property the debtor acquired between the petition date and the conversion date is not property of the converted case, unless the debtor sought to convert the case in bad faith. 11 U.S.C. § 348(f)(2). …

“As the bankruptcy court observed, courts are split on the question of whether postpetition preconversion market appreciation or an increase in equity resulting from payments toward a lien inures to a debtor’s benefit upon conversion to a Chapter 7 case. …

“Goetz and the Amici Curiae insist that section 348(f) is ambiguous. They urge the Court to consider legislative history, which they maintain supports their argument that postpetition preconversion equity increases should benefit debtors. We detect no ambiguity in sections 348(f) and 541. Even if we were to conclude that section 348(f)(1)(A) is ambiguous, the legislative history of this statute does not mandate a different outcome.7 HN5 Section 348(f)(1)(A), as enacted, accomplished the purpose of the legislation as articulated in the legislative history: it eliminated a “serious disincentive to [C]hapter 13 filings” by adopting the reasoning of In re Bobroff and specifying that property a debtor acquires postpetition is not property of the converted bankruptcy estate. H.R. Rep. No. 103-835, at 57 (1994), as reprinted in [*9] 1994 U.S.C.C.A.N. 3340, 3366; see 11 U.S.C. § 348(f)(1)(A); Bobroff v. Continental Bank (In re Bobroff), 766 F.2d 797 (3d Cir. 1985). Section 348(f) does not specify that debtors are entitled to retain equity resulting from payments during the Chapter 13 case—the scenario referenced in the House Report. Likewise, the statute does not address whether debtors are entitled to retain postpetition preconversion equity resulting from market appreciation, asset improvements or repairs. To accept Goetz’s argument, one must read this clarification into the statute.

“The plain meaning of a statute is conclusive, except in the “‘rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.’” (Citations omitted.) …

“Congress’s failure to address the example included in the legislative history does not mean this omission was inadvertent. Recognizing that statutes are often the result of compromise, we decline to accept Goetz’s invitation to assume that Congress intended that debtors may retain postpetition preconversion market appreciation and equity resulting from debt payments without language articulating this intent.

“We also reject Goetz’s claim that interpreting section 348(f) to allow the bankruptcy estate to benefit from postpetition preconversion estate property value increases treats Goetz as though she converted her case in bad faith. To the extent Goetz acquired new property after she petitioned for bankruptcy relief under Chapter 13, this property remains her property. In enacting section 348(f), Congress distinguished between property of the estate at the time of conversion that remains in the possession or control of the debtor from property acquired after petition. The former is property of the estate (Goetz’s residence), the latter is property of debtor unless she converted in bad faith. The bad faith provision neither hinders nor advances Goetz’s claim to the equity increase in her residence. It simply does not apply. Accordingly, the bankruptcy court correctly concluded that postpetition preconversion nonexempt equity accrues for the benefit of the converted Chapter 7 estate.”

No date has yet been set for oral argument.

Appellant Goetz’ Brief

NCBRC-NACBA Amicus Brief – Goetz

Appellee Trustee Webers Appellee Brief

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Trustee Entitled to Attorney’s Fees for Exemption Dispute

Where the debtor’s original exemption claim was for bodily injury, the trustee had a reasonable argument that the actual post-petition settlements of her personal injury case, which specified that they were for non-bodily-injury damages, did not fall under that exemption. Because the trustee’s objection related to the post-settlement exemption claim, it was timely. Biondo v. Gold, Lange, Majoros & Smalarz, P.C., No. 22-1666 (6th Cir. Feb. 8, 2023).

Prior to filing for chapter 7 bankruptcy, the debtor was in a car accident. In her bankruptcy filings she listed the personal injury claim with an unknown value. She claimed an exemption in potential recovery, tracking the text of section 522(d)(11)(D), for “payment[s]” she received “on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss.”

The trustee did not object to the exemption. He hired a law firm to litigate the debtor’s claims against the driver of the other vehicle and the debtor’s insurance company. The insurance company settled for $48,500 specifically covering “medical expenses, attorney’s fees, ‘lost wages,’ and all ‘other forms of economic or non-economic loss.’” The driver of the other car settled for $70,000, covering “pain and suffering.”

The debtor moved to compel the trustee to turn over $23,675 from the settlement recovery arguing that the funds were exempt under section 522(d)(11)(D). She and the trustee settled the exemption claim, and the trustee moved to recover $2,880 in attorney’s fees he incurred in litigating the motion to compel. The debtor objected, arguing that the attorney’s services did not fulfill the requirement under section 330(a)(1)(A) that they be either reasonably likely to benefit the estate, or necessary to the administration of the case. The bankruptcy court granted the trustee’s request for fees, and the district dismissed the appeal as equitably moot.

The debtor appealed to the Sixth Circuit.

The court began with the parameters of section 522(d)(11)(D)’s exemption, finding that while funds resulting from personal bodily injury are exempt, the exemption does not include “payments for pain and suffering and for pecuniary losses.” The exemption is also typically interpreted to exclude payments for medical bills. Here, the two settlements specified that they were for damages other than personal bodily injury. For that reason, the circuit court found the trustee’s objection to the exemption was reasonable and for the benefit of the estate.

The debtor argued that the trustee forfeited his opportunity to object to the exemption because he failed to do so when she filed the exemption claim in her original bankruptcy schedules.

Under section 522(l), in the absence of a timely objection, an exemption is automatically allowed. Citing Mercer v. Monzack, 53 F.3d 1 (1st Cir. 1995), the court found that “exemptions should be unambiguous and should be read to conform with the law.” The debtor must therefore unambiguously identify particular property as exempt before the clock begins to run.

Here, the debtor’s claimed exemption related only to recovery for bodily injury, as contemplated by section 522(d)(11)(D). It was not until the actual settlements were reached that the debtor at least arguably attempted to apply the exemption to non-bodily injury recovery. The trustee’s post-settlement objection was related to the debtor’s recovery based on medical expenses and other pecuniary losses, as well as pain and suffering. Because the actual funds the debtor sought to exempt differed from the description in her claimed exemption, the court found her original exemption claim did not trigger section 522(l)’s clock and the trustee’s objection was not time-barred. While the trustee could have lodged a prophylactic objection to the debtor’s exemption from the outset, he was not obligated to do so.

Because the district court’s finding that the appeal was equitably moot was not jurisdictional, the circuit court declined to address that issue.

The court affirmed.

Biondo 6th Cir Feb 2023

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Chapter 7 Trustee Bound by Pre-Conversion Agreement

The Chapter 7 trustee was bound by the Chapter 13 trustee’s pre-conversion concession that the creditor’s liens were valid. Therefore the Chapter 7 trustee could not prevent the creditor from receiving the proceeds from the sale of the property securing the liens. In re Hillis, No. 20-70372 (Bankr. M.D. Ga. Jan. 11, 2023).

When the debtors filed for Chapter 13 bankruptcy they listed Southern Pine Credit Union as a creditor with security interests in a lawn mower, two John Deere loaders, and a Nissan Armada. During the pendency of the bankruptcy, the debtors sought and received an order approving the sale of the lawn mower and the two loaders with the proceeds going to Southern Pine in satisfaction of the loans secured by all the vehicles including the Nissan Armada. The Trustee consented to the sale, and Southern Pine offered no opposition. The court approved the sale and ordered the creditor to release the lien on the Nissan Armada upon receipt of the proceeds.

The debtors completed the sale but converted to Chapter 7 before they had received the proceeds. Southern Pine moved for relief from stay because it had not yet received the proceeds from the sale. Soon after it filed the motion, the debtors transferred the proceeds to Southern Pine. The chapter 7 trustee, believing the underlying liens might be avoidable, objected to the motion for relief from stay and made a verbal demand at the meeting of creditors for turnover of the funds. Southern Pine responded that the trustee was barred by res judicata from reneging on the pre-conversion agreement. The debtors filed a turnover motion seeking an order requiring the creditor to release the lien on the Nissan as required by the court’s order approving the sale.

The court began by finding that the Chapter 7 trustee had standing in the case because, under section 348(f)(1)(A), the proceeds from the sale of the vehicles became part of the converted estate. Under that provision property in an estate converted from chapter 13 to chapter 7 consists of property the debtors held at the time of their chapter 13 petition which they continue to hold at the time of conversion. The court found that the sale agreement gave the debtor a contractual right to the proceeds which became property of the new estate.

The court agreed with Southern Pine, however, that the Chapter 7 trustee was barred by res judicata from challenging the pre-conversion agreement to transfer the proceeds to the creditor in satisfaction of its liens. The only issue in that regard was whether the Chapter 7 trustee was in privity with the Chapter 13 trustee such that the Chapter 7 trustee should be bound by an agreement entered into by his predecessor. The court found the elements for res judicata as outlined in Griswold v. County of Hillsborough, 598 F.3d 1289, 1292 (11th Cir. 2010), were satisfied. Specifically, where section 704(a)(5) empowers the Chapter 7 trustee to oppose the allowance of an improper claim, section 1302(b)(1) empowers the Chapter 13 trustee to exercise the powers granted in section 704(a)(5). The court observed that when the two trustees have corresponding duties, the performance of those duties by the first binds the second.

Here, the Chapter 13 trustee did not object to the debtor’s motion to sell the property, including the understanding in the motion that Southern Pine had valid liens. Nor was the motion contingent upon the debtors’ staying in chapter 13. The court also rejected the trustee’s argument that because section 348(f) permits him to reevaluate the property of the estate, he is entitled to challenge the validity of the liens. The court found the trustee’s reading of the statute to be too broad. Valuation of property does not include lien validity.

The court concluded that Southern Pine’s motion was moot by reason of its having received the proceeds from the sale. It ordered Southern Pine to release the lien as requested by the debtors and overruled the trustee’s objections.

Hillis Bankr MD Ga Jan 2023