Three circuits now hold that chapter 13 trustees are not paid their fees when cases are dismissed before confirmation. In an opinion on May 3, the Seventh Circuit joined the Ninth and Tenth Circuits. In February, the Supreme Court denied certiorari in the cases from the Ninth and Tenth Circuits.

The possibility of a circuit split remains because the identical issue was argued in the Second Circuit on February 15, 2023. In the case before the Second Circuit, both the bankruptcy court and the district court held that the chapter 13 trustee was entitled to payment despite dismissal before confirmation.

In the case on direct appeal to the Seventh Circuit, the chapter 13 debtor had made plan payments of $3,800 to the chapter 13 trustee. The debtor never confirmed a plan, and the case was dismissed. Before confirmation, the chapter 13 trustee had made $750 in adequate protection payments to a secured creditor. The trustee had also deducted $260 as compensation under 28 U.S.C. § 586(e)(2).

After dismissal, the trustee sent the debtor the $3,800 less the $750 and the $260. The debtor filed a motion asking the bankruptcy court to direct the chapter 13 trustee to disgorge the trustee’s fee by turning the $260 over to the debtor. Bankruptcy Judge Timothy A. Barnes of Chicago granted the motion and directed the trustee to turn over the fees to the debtor. See In re Johnson, 650 B.R. 904 (Bankr. N.D. Ill. May 12, 2023). To read ABI’s report, click here.

The Seventh Circuit accepted a direct appeal and affirmed in a May 3 opinion by Circuit Judge Thomas L. Kirsch, II.

In the first paragraph of his six-page opinion, Judge Kirsch said, “we agree with the Ninth and Tenth Circuits that the United States Bankruptcy Code requires the Chapter 13 trustee to return her fee when the debtor’s plan is not confirmed.” He found the answer in the words of the statutes, 28 U.S.C. § 586(e)(2) and Section 1326(a)(2) of the Bankruptcy Code.

“If a plan is not confirmed,” Section 1326(a)(2) says that “the trustee shall return any such payments not previously paid and not yet due and owing to creditors . . . to the debtor, after deducting any unpaid [administrative] claim allowed under section 503(b).”

Section 586(e)(2) provides that a chapter 13 trustee “shall collect such percentage fee from all payments received by such individual under plans in the cases under . . . chapter . . . 13 of title 11.”

Quoting the Tenth Circuit, Judge Kirsch said that Section 1326(a)(2) “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).”

There are two exceptions in the subsection, but neither one applies, Judge Kirsch said. First, the chapter 13 trustee’s fee is not an administrative expense. Second, the trustee’s fee was not “previously paid,” because “only certain adequate protection payments are permitted pre-confirmation.” Likewise, he said that the trustee fee is not “a payment ‘due and owing to creditors.’”

“Because neither exception applies to the Chapter 13 trustee’s fee,” Judge Kirsch held that the trustee “must return her fee to the debtor.”

Judge Kirsch rejected the trustee’s arguments based on other provisions in Section 1326(b). “Before or at the time of each payment to creditors under the plan,” the subsection provides that “there shall be paid — (1) any unpaid claim of the kind specified in section 507(a)(2) of this title; (2) if a standing trustee appointed under section 586(b) of title 28 is serving in the case, the percentage fee fixed for such standing trustee under section 586(e)(1)(B) of title 28.” 

Because a plan was never confirmed, Judge Kirsch said that “§ 1326(b) is inapplicable.” He likewise said that “the trustee also has no right to keep her fee under 28 U.S.C. § 586(e)(2), which states that the trustee ‘shall collect such percentage fee from all payments received by such individual under plans . . . .’”

Judge Kirsch said that “§ 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.”

Judge Kirsch buttressed his conclusion by allusion to the “treatment of the trustee’s fee in . . . cases brought under Chapter 12 and Subchapter V of Chapter 11.” In both instances, he quoted the Tenth Circuit for saying that “‘Congress provided explicitly that the standing trustee should first deduct his or her fee before returning pre-confirmation payments to the debtor.’ Id. at 1141 (emphasis in original).”

Joining the Ninth and Tenth Circuits, Judge Kirsch held “that the Chapter 13 trustee must return her fee when, as here, the debtor’s plan is not confirmed.”

Other Authorities

The opinion from the Ninth Circuit disallowing a chapter 13 trustee’s fees if dismissal precedes confirmation is Evans v. McCallister (In re Evans), 69 F.4th 1101 (9th Cir. June 12, 2023) (cert. den. Feb. 20, 2024). To read ABI’s report, click here. To read ABI’s report on Doll from the Tenth Circuit, click here. The Supreme Court denied certiorari in Doll on Feb. 20, 2024.

There being no circuit split, the denial of certiorari in Doll and Evans was not surprising.

In the Eastern District of New York, Bankruptcy Judge Robert E. Grossman ruled that a chapter 13 trustee is entitled to compensation if the case is dismissed before confirmation. See In re Soussis, 624 B.R. 559 (Bankr. E.D.N.Y. Nov. 12, 2020). To read ABI’s report, click here. Judge Grossman was affirmed in district court. See Soussis v. Macco, 20-05673, 2022 WL 203751 (E.D.N.Y. Jan. 24, 2022). To read ABI’s report on the district court opinion in Soussis, click here.

Soussis remains sub judice in the Second Circuit, having been argued on Feb. 15, 2023. The Second Circuit was made aware of both Doll and Evans. One wonders whether the delay in issuing the opinion means that the Second Circuit is considering making a circuit split.