National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

§ 1326 – Payments

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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 Holding A Chapter 13 Trustee May Not Collect A Percentage Fee If A Chapter 13 Case Is Dismissed Before 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. Before confirmation, a trustee does not “collect” or “collect and hold” fees under § 586, but instead “retains” payments “proposed by the plan” under § 1326(a)(2). If a plan is not confirmed, then § 1326(a)(2) requires a 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. 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

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Laches Forecloses Trustee’s Motion to Dismiss

Where the Trustee slept on her right to challenge the debtor’s method of calculating her plan payments until shortly before the debtor completed her plan, the doctrine of laches compelled denial of the trustee’s motion to dismiss. In re Melcher, No. 16-21536 (Bankr. E.D. Ky. Aug. 30, 2022).

The debtor and the chapter 13 Trustee negotiated a 60-month plan in which the debtor agreed to commit one third of her annual gross income over $120,000 to the plan (“excess income payments”). The debtor calculated her first excess income payment by taking the income from Box 1 of her W-2 form, subtracting $120,000 and multiplying the result by .33. After discussion with the Trustee and one of her creditors, the debtor’s payment was accepted as correct. The debtor used the same method of calculation for the following years’ excess income payments. [Read more…] about Laches Forecloses Trustee’s Motion to Dismiss