On a question where the lower courts are split, District Judge R. Brooke Jackson of Denver sided with the majority, reversed the bankruptcy court and held that a chapter 13 trustee is not entitled to be paid if the case is dismissed before confirmation of a plan.
The debtor filed a chapter 13 petition in 2017. The bankruptcy court dismissed the case in 2020 because the debtor never confirmed a plan. While the case was pending, the debtor had paid the chapter 13 trustee almost $30,000.
Following dismissal, the chapter 13 trustee paid the debtor’s counsel almost $20,000 on an allowed fee application and distributed another $7,500 in payment of a priority tax claim. Toward partial payment of the chapter 13 trustee’s fee, the bankruptcy court allowed the trustee to retain the remainder, some $2,600.
With the $2,600 in controversy, the debtor appealed. Judge Jackson reversed in an opinion on December 6.
The Statutes
Arguably, the statutes don’t have an explicit answer to whether the trustee gets paid if dismissal precedes confirmation.
28 U.S.C. § 586(e) says that a standing trustee “shall collect such percentage fee from all payments . . . under [chapter 13] plans. . . .” [Emphasis added.]
Section 1326(a)(1) requires a chapter 13 debtor to commence making payments to the trustee within 30 days of filing. Subsection (a)(2) provides that payments made by the debtor “shall be retained by the trustee until confirmation or denial of confirmation. . . . If a plan is not confirmed, the trustee shall return any such payments not previously paid and not yet due and owing to creditors pursuant to paragraph (3) to the debtor, after deducting any unpaid claim allowed under section 503(b).”
The subsection has nothing explicit to say about the standing trustee’s fee if dismissal precedes confirmation.
However, Chapter 12 and Subchapter V of chapter 11 explicitly say what happens when dismissal precedes confirmation. Section 1226(a)(2) specifically allows the trustee to retain the statutory fee if a plan is not confirmed, and Section 1194(a) allows a Subchapter V trustee to be paid if the case is dismissed before confirmation.
Absence of Specific Language Was Pivotal
Judge Jackson found no controlling authority in the Tenth Circuit. He did cite the recent decision by the Ninth Circuit Bankruptcy Panel in a 2/1, nonprecedential opinion that a chapter 13 trustee is paid if dismissal comes before confirmation. McCallister v. Harmon (In re Harmon), 20-1168, 2021 WL 3087744 (B.A.P. 9th Cir. July 20, 2021).
Harmon contains a lengthy compendium of every argument on both sides of the issue. To read ABI’s report on Harmon, click here.
In his five-page opinion, Judge Jackson said that Section 586 “could be read as implying that the collected fee may be retained regardless of whether the plan is confirmed.”
“However,” Judge Jackson said, “it does not expressly address the question, and I conclude that it does not compel that result.”
“If the payments must be returned” under Section 1326(a)(2), “it follows that fees collected from such payments must be returned,” Judge Jackson said.
Judge Jackson noted there was no language in Section 1326(a)(2) requiring payment to the trustee that is comparable to the language in chapter 12 mandating payment.
Judge Jackson quoted the U.S. Trustee’s Handbook calling for the return of the fee “if there is controlling law in the district requiring such reversal.” He declined “to apply Chevron deference, because I conclude that the answer can be found in the language of the statutes.”
While reversing the bankruptcy court’s order that allowed the trustee to retain the fee, Judge Jackson said that he “might” prefer, “as a policy matter, . . . that the trustee be fairly compensated for his efforts.”
On a question where the lower courts are split, District Judge R. Brooke Jackson of Denver sided with the majority, reversed the bankruptcy court and held that a chapter 13 trustee is not entitled to be paid if the case is dismissed before confirmation of a plan.
The debtor filed a chapter 13 petition in 2017. The bankruptcy court dismissed the case in 2020 because the debtor never confirmed a plan. While the case was pending, the debtor had paid the chapter 13 trustee almost $30,000.
Following dismissal, the chapter 13 trustee paid the debtor’s counsel almost $20,000 on an allowed fee application and distributed another $7,500 in payment of a priority tax claim. Toward partial payment of the chapter 13 trustee’s fee, the bankruptcy court allowed the trustee to retain the remainder, some $2,600.
With the $2,600 in controversy, the debtor appealed. Judge Jackson reversed in an opinion on December 6.