The Supreme Court’s decision in Harris v. Viegelahn, 135 S. Ct. 1829 (2015), did not resolve every question about the disposition of undistributed funds when a chapter 13 case is dismissed or converted.
Declining to extend Harris, Chief Bankruptcy Judge Brenda Moody Whinery of Tucson, Ariz., took sides with the minority of courts by holding in an opinion on June 18 that undistributed funds in possession of a chapter 13 trustee on conversion before confirmation must be applied toward payment of allowed administrative expenses, including the debtor’s attorney’s fees.
For several reasons based on the statutory language, the high court decided in Harris that undistributed funds must be returned to the debtor if conversion occurs after confirmation. Judge Whinery said that the “issue before the Supreme Court is not the issue before this Court.”
More particularly, the debtor in the case before Judge Whinery converted her case to chapter 7 just before the scheduled confirmation of her chapter 13 plan. At the time, the chapter 13 trustee was holding about $1,000 of the debtor’s post-petition wages that had not been distributed.
The debtor’s chapter 13 counsel filed an application for allowance and payment of the agreed, fixed fee of $4,650, which would be presumptively reasonable under the district’s standards for a so-called no-look fee. Although the chapter 13 trustee did not object, Judge Whinery analyzed whether the undistributed funds instead should be paid to the debtor.
Several provisions in the Bankruptcy Code are relevant and, in some instances, seemingly inconsistent. If a plan is not confirmed, the third sentence in Section 1326(a)(2) provides that the trustee shall return undistributed funds to the debtor, “after deducting any unpaid claim allowed under Section 503(b).” The debtor’s attorney’s fees would fall under Section 503(b) as administrative expenses.
Section 348(f)(1)(A), on the other hand, says that when a chapter 13 case is converted to another chapter, property of the estate in the converted case is property that is still in the debtor’s possession and that was property of the estate on filing in chapter 13. In other words, the chapter 7 estate in a converted case would not include post-petition wages, suggesting that undistributed post-petition wages should go to the debtor. Although that subsection would keep the $1,000 out of the debtor’s chapter 7 estate, it does not specifically address whether the $1,000 could be used to pay chapter 13 expenses.
In similar cases dealing with undistributed funds when conversion precedes confirmation, Judge Whinery said that a majority of courts view Harris as controlling and rule that “funds must be returned to the debtor, irrespective of outstanding administrative expenses.”
Judge Whinery instead elected to follow In re Brandon, 537 B.R. 231 (Bankr. D. Md. 2015), a case decided four months after Harris, where Bankruptcy Judge David E. Rice concluded that the trustee’s post-conversion duties include compliance with the third sentence in Section 1326(a)(2) because a plan was not confirmed.
The lower courts are similarly divided on the right of a standing trustee to retain his or her statutory fees if a chapter 13 case is dismissed before confirmation. For ABI’s discussion of a recent case on that question, click here.