Although insurance proceeds from damage to a debtor’s auto ran through the chapter 13 trustee’s account, the trustee was properly barred from exacting a fee on the money that went to the lienholder, according to a decision by District Judge S. Maurice Hicks Jr. of Shreveport, La., directing the bankruptcy court in his district to implement a written policy for dealing with cases of the sort.
After the debtor confirmed a chapter 13 plan, she “totaled” her car. Following an unwritten local rule in the district, the insurance proceeds of about $13,200 went to the trustee.
The trustee in turn disbursed some $2,400 to the lender, enough to pay off the loan on the car. She paid $7,500 to the debtor as exempt funds and kept about $3,300 for distribution to unsecured creditors.
The debtor agreed that the trustee was entitled to a fee on the $3,300 earmarked for unsecured creditors, and the trustee conceded that she could not impose a fee on the $7,500 exemption. The bone of contention was the trustee’s right to a fee for the money disbursed to the lender.
In support of a fee on money she paid to the lender, the trustee cited an unwritten practice in the district calling for the trustee to receive and disburse all insurance proceeds.
In his Sept. 28 opinion, Judge Hicks said the policy was contrary to the plain language of the statute, 28 U.S.C. Section 586(e)(2), which calculates trustees’ fees based on “all payments” that trustees receive “under plans.”
Judge Hicks then quoted from the debtor’s plan, which required the debtor to maintain insurance, with the lienholders shown as loss payees. Therefore, he said, funneling insurance proceeds through the trustee was a result of local practice, not a payment “under” a plan in accordance with Section 586(e)(2).
If the plan did not require initial disbursement to the trustee, then what about the Bankruptcy Code? Judge Hicks said there was no provision in the Code mandating the local practice of paying insurance proceeds first to a trustee before turnover to a secured creditor. The best-reasoned opinions from around the country, he said, have found no requirement that insurance proceeds go to a trustee before payout to a lender on account of destroyed collateral.
Besides upholding the bankruptcy court’s decision that the trustee was not entitled to a fee on insurance proceeds earmarked for a lender, Judge Hicks directed the bankruptcy court to implement a written policy consistent with his decision.
Although insurance proceeds from damage to a debtor’s auto ran through the chapter 13 trustee’s account, the trustee was properly barred from exacting a fee on the money that went to the lienholder, according to a decision by District Judge S. Maurice Hicks Jr. of Shreveport, La., directing the bankruptcy court in his district to implement a written policy for dealing with cases of the sort.