The broad language in Harris v. Viegelahn, 575 U.S. 510 (2015), does not obviate a chapter 13 trustee’s obligation duty to pay administrative expenses when a chapter 13 case is converted to chapter 7 before confirmation of a chapter 13 plan, for reasons explained by Chief Bankruptcy Judge Mildred Cabán Flores of San Juan, Puerto Rico.

Before the debtor’s chapter 13 case converted to chapter 7, the homeowners’ association had an allowed administrative claim for about $9,000. After conversion, the former chapter 13 trustee cited broad language in Harris in filing a motion asking Judge Cabán to relieve him of the responsibility for paying the HOA. The chapter 13 trustee wanted to return undistributed funds to the debtor without paying the HOA.

Judge Cabán disagreed with the chapter 13 trustee in her October 15 opinion. The governing statute is Section 1326(a)(2). In pertinent part, it reads,

If 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 pursuant to paragraph (3) to the debtor, after deducting any unpaid [administrative] claim allowed under section 503(b).

Harris dealt with circumstances not covered in Section 1326(a)(2). The chapter 13 plan in Harris had been confirmed before the case converted to chapter 7. Judge Cabán described the Supreme Court as holding “that in a chapter 13 case where the plan was confirmed and then converted to chapter 7, the debtor is entitled to the return of post-petition wages that are not yet distributed by the chapter 13 trustee.”

When a debtor converts a case to chapter 7, the former chapter 13 trustee latched onto the broad language in Harris, where the Court said,

When a debtor exercises his statutory right to convert, the case is placed under Chapter 7’s governance, and no Chapter 13 provision holds sway. § 103(i) (“Chapter 13 . . . applies only in a case under [that] chapter.”).

To the chapter 13 trustee’s way of thinking, the broad language ousted the chapter 13 trustee and meant that the debtor was entitled to receive the $9,000. Judge Cabán conceded that “[c]ourts are divided on the issue of whether the Harris case applies to pre-confirmation chapter 13 cases that convert to chapter 7.”

Judge Cabán said that courts withholding payments to administrative claimants read Harris to mean “that chapter 13 provisions cease to apply upon conversion to chapter 7 and that nothing in Harris reflects an intent to limit its reach to confirmed chapter 13 cases only.” “These cases,” Judge Cabán said, “find that a chapter 13 trustee’s services are immediately terminated upon conversion and all monies must be returned to the debtor.”

“Other courts,” Judge Cabán said, “hold that Harris does not apply to pre-confirmation chapter 13 cases because the statute, 11 U.S.C. § 1326(a)(2), is clear and unambiguous in a pre-confirmation situation as opposed to the postconfirmation situation, as resolved in the Harris case, where the statute failed to provide guidance.”

Judge Cabán sided with bankruptcy courts from Michigan and Maryland, which have held that Harris did not override the plain language in Section 1326(a)(2) and that Harris is not applicable when a plan has not been confirmed. She agreed “that Harris is distinguishable because the Supreme Court case applies only to post-confirmation plans in chapter 13 cases.”

Finding that Harris did not apply, Judge Cabán directed the former chapter 13 trustee to pay the HOA and held,

[T]he Trustee is mandated by the statute to return monies to the Debtor upon dismissal or conversion, but only after the deduction of administrative expenses. Harris was clearly resolving a chapter 13 dispute in a later stage (post-confirmation) in which there is an absence of guidance from the bankruptcy statute.