In the space of one week, two courts in different parts of the country declined debtors’ invitations to expand Harris v. Viegelahn, 135 S. Ct. 1829, 191 L. Ed. 2d 783 (2015), beyond its facts to benefit them at the expense of their creditors.
One of the judges, however, insinuated that a debtor whose chapter 13 case was dismissed might prevail without relying on Harris, where the Supreme Court held that a chapter 13 debtor whose case was converted to chapter 7 is entitled to the return of any post-petition wages that the trustee had not distributed.
Bankruptcy Judge Thad J. Collins of Cedar Rapids, Iowa, dealt with a debtor whose $40,000 account receivable for rent had been garnished before he filed a chapter 13 petition. The judge of the state court directed the clerk to turn the $40,000 over to the chapter 13 trustee. Later, the case converted to chapter 7, and the debtor claimed he was entitled to the $40,000, citing Harris.
Judge Collins held in his April 25 opinion that the chapter 7 trustee was entitled to the $40,000, because, unlike Harris, the money represented rent, not wages, and arose before the chapter 13 filing, not after. The rent, he said, would have come into the estate under Section 541(a) if the debtor had initially filed under chapter 7 rather than chapter 13.
District Judge Michael Vazquez of Newark, N.J., presided over an appeal involving a $40 distribution check in a chapter 13 case that a creditor had not cashed. When the chapter 13 case was slated for dismissal, the chapter 13 trustee proposed depositing the $40 with the clerk of the bankruptcy court.
Mounting a test case, the debtor claimed the $40. Relying on Harris, the debtor argued that undistributed funds should go to the debtor regardless of whether the chapter 13 case was converted to chapter 7, dismissed or closed. The bankruptcy judge ruled against the debtor, who appealed to Judge Vazquez.
In an opinion on April 21, Judge Vazquez held that Harris did not apply because that case turned in large part on Section 348(f), which provides that property of the estate in a converted case consists of property of the estate as of the initial filing date that is still in the possession or control of the debtor on conversion.
Judge Vazquez said that Section 348(f) was not applicable because the appeal involved dismissal, not conversion.
Despite ruling against the debtor on the appeal before him, Judge Vazquez included a footnote at the end of the opinion that gives hope to debtors in similar circumstances.
Judge Vazquez said that the debtor based his appeal only on Harris. From independent research, the judge uncovered analogous authorities not cited by the debtor, suggesting that the debtor might have won had he relied on other theories.
Without indicating how he might have ruled had the arguments been made, Judge Vazquez cited a Third Circuit case decided before Harris suggesting, in dicta, that unclaimed funds go to the debtor on dismissal. He also cited a decision by a Chicago bankruptcy judge issued soon after Harris where the debtor got undistributed post-petition wages in the hands of the trustee at the time of dismissal.