Unclaimed distributions go to the U.S. Treasury, not to remaining creditors with allowed claims, according to Bankruptcy Judge Charles M. Walker of Nashville, Tenn.
In a pair of opinions on Oct. 3, Judge Walker changed the practice in his court that had been established in 1995 by former Bankruptcy Judge George C. Paine, II in In re Lee, 189 B.R. 692 (M.D. Tenn. 1995).
In both chapter 13 cases, checks sent to creditors with allowed claims were returned uncashed, evidently because the creditors went out of business or moved and left no forwarding addresses. In both cases, the trustee attempted without success to locate the creditors.
The chapter 13 trustee filed motions to reconsider and disallow the remainder of the claims, on the theory that the creditors had abandoned their claims. Had Judge Walker disallowed the claims at that juncture, further distributions on those claims would have gone to the remaining creditors under the practice in effect since 1995.
Judge Walker said that the reasoning of Lee was “flawed.” In that case, Judge Paine distinguished distributions made during the course of the case from those made at the conclusion of the case, to conclude that the U.S. Treasury was only entitled to unclaimed funds remaining at the conclusion of the case. Judge Paine’s theory thus allowed distributions to be redirected in mid-case.
In Judge Walker’s opinion, the outcome was governed entirely by Section 347(a), which, he said, “is as straightforward as it gets.” “Ninety days after final distribution,” that section provides that “the trustee shall stop payment on any check remaining unpaid and any remaining property of the estate shall be paid into the court . . . .”
Judge Walker interpreted Section 347(a) to show the “unambiguous and clearly” expressed intent of Congress that “unclaimed funds are to be paid into the court to be held in trust for the claimant, and not redistributed to other creditors.” Even if Section 502(j) applied, he found no basis for reconsidering the claims “for cause.”
In his view, stripping a creditor of an allowed claim without notice “evidences a substantial prejudice to a property right, and the weight of that prejudice is far superior to” other considerations, such as efficiency of court administration.
Since trustees make distributions, not the court, Judge Walker said that the “efficiency of court administration would not be affected at all if this claim were to remain as allowed. It would be business as usual.”
The opinions are In re Cunningham and In re McDowell, 13-02021 and 15-06523 (Bankr. M.D. Tenn. Oct. 3, 2017).