On dismissal, a chapter 13 debtor can consent to having undistributed funds paid to a creditor in a manner otherwise impermissible under Section 1326(a)(2), according to Chief District Judge Glenn T. Suddaby of Syracuse, N.Y.
Before the debtor filed a chapter 13 petition, a creditor obtained a judgment followed by a garnishment order. On dismissal, the chapter 13 trustee filed a motion for authority to turn over undistributed funds to the county sheriff, to be forwarded to the creditor. The undistributed funds represented post-petition wages.
The bankruptcy judge denied the trustee’s motion in light of the plain language of Section 1326(a)(2), which provides that if a plan is not confirmed, “the trustee shall return any [payments made by the debtor] not previously paid [to creditors] and not yet due and owing to creditors . . . to the debtor . . . .”
The creditor appealed, but neither the trustee nor the debtor opposed. Indeed, the debtor consented to having undistributed funds paid to the creditor, presumably because a direct turnover would reduce the judgment that was not being discharged as a consequence of dismissal.
Despite the lack of opposition, Judge Suddaby independently analyzed the merits of the appeal, reversed the bankruptcy court in his March 20 opinion, and directed a turnover of the funds to the creditor.
Judge Suddaby admitted there is a split of authority. Some courts follow the plain meaning of the statute and direct payment of undistributed funds to the debtor despite a pre-bankruptcy judgment lien. Other courts operate on the theory that undistributed funds go to a creditor with a pre-bankruptcy judgment lien.
Courts taking the latter view focus on the “due and owing” language in Section 1326(a)(2). Those courts interpret “due and owing” to mean “payable” and work from the proposition that undistributed funds are no longer estate property and are not protected by the automatic stay, thus allowing a judgment lien to attach on dismissal.
Judge Suddaby did not take sides on the split. Instead, he said that the debtor “expressly” consented to having the trustee turn the funds over to the creditor. He said that turning the money over to the judgment creditor “does not violate the statute under the narrow circumstances of this case and is consistent with principles of equity and efficiency.”
For whatever it is worth, Judge Suddaby said that he otherwise “would be amenable to the bankruptcy court’s plain-meaning analysis.” The judge added that he was “somewhat more hesitant to apply” a “preemption rationale” relying on the idea that Section 1326(a)(2) overrides state law that would direct the funds to a judgment creditor.
Judge Suddaby’s opinion is not the only recent example of a court relying on unique facts to achieve a result seemingly at odds with a statute. In Title Max v. Wilber (In re Wilber), 876 F.3d 1302 (11th Cir. Dec. 11, 2017), rehearing en banc denied Feb. 14, 2018, the majority held, over a strident dissent, that a creditor need not object to confirmation of a chapter 13 plan. Instead, the majority held that the confirmed plan did not bind the creditor because the lender had previously filed a motion to declare that a car was no longer estate property. The majority also held that state law can operate automatically to take property out of a bankrupt estate after filing.
Based on unique facts, Judge Suddaby’s desire to achieve what appears to him to be an equitable, efficient result seems inoffensive when no one objects, the debtor consents, and rights of other creditors do not appear to be affected. On the other hand, trotting out unique facts to achieve an extra-statutory result when it seems proper, as the Eleventh Circuit majority did in Wilber, is a questionable approach when the debtor does object.
To read ABI’s discussion of Wilber, click here.