The first court of appeals to rule on a question where the lower courts are widely split, the Tenth Circuit held that a chapter 13 trustee was not entitled to payment of her fee because the case was dismissed before confirmation of a plan.
Although the Bankruptcy Code does not expressly answer the question, the January 18 opinion by Circuit Judge David M. Ebel found the statutes to be unambiguous, in favor of requiring trustees to disgorge fees if the chapter 13 case was dismissed before confirmation. He was particularly persuaded to rule in favor of the debtor because the Bankruptcy Code explicitly says that trustees retain their fees in Subchapter V and chapter 12 if the case was dismissed before confirmation.
Typical Facts
The facts were typical of cases where the courts come down both ways. The debtor filed a chapter 13 petition and slogged through four iterations of a plan over 18 months. After the bankruptcy court denied confirmation of the fourth plan, the court dismissed the case.
While the case was pending, the debtor had paid the trustee almost $30,000 toward what would have been distributions to creditors and other plan payments. 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 $2,600 in controversy, the debtor appealed. The district court reversed in December 2021, requiring the chapter 13 trustee to refund the $2,600 to the debtor. Doll v. Goodman (In re Doll), 21-00731, 2021 BL 464213, 2021 WL 5768991 (D. Colo. Dec. 6, 2021). To read ABI’s report, click here.
Supported by an amicus brief from the National Association of Chapter 13 Trustees, the chapter 13 trustee appealed. The debtor found support in an amicus brief from three organizations on the side of debtors.
The Statute Is Not Ambiguous
Admirably, Judge Ebel traced the history of chapter 13 trustees, how they were delegated responsibilities previously thrust on courts, and why they were given fixed fees rather than allowances to be made by the court in every case. He explained how and why the fees paid to chapter 13 trustees are too low in some cases and too high in others.
Judge Ebel laid out the relevant statutes, particularly 28 U.S.C. § 586(e) and Section 1326(a)(1) and (a)(2).
Section 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 . . . to creditors . . . , after deducting any unpaid claim allowed under section 503(b).” The subsection says nothing explicitly about the standing trustee’s fee if the case was dismissed before confirmation.
Judge Ebel said that the “question presented here is resolved unambiguously by reading together both 28 U.S.C. § 586 and 11 U.S.C. § 1326.” He added that the language in Section 1326(a)(2) is “straightforward.”
He read Section 1326(a)(2) “to mean that the standing trustee must return all of the pre-confirmation payments he receives, without first deducting his fee.” He found “no indication in this statutory language that the trustee should first deduct his fees before returning the pre-confirmation payments to the debtor when no plan is confirmed.”
Judge Ebel “bolstered” his conclusion by noting how Congress expressly allowed trustees in chapter 12 and Subchapter V cases to retain their fees if the cases were dismissed before confirmation. See Sections 1194(a) and 1226(a). He found the “differing treatment” of chapter 13 trustees to be “compelling” and “persuaded [him] that Congress intended that Chapter 13 standing trustees not deduct their fees before returning pre-confirmation payments to the debtor when a plan is not confirmed.”
Drawing inferences from the differences in the statutes, Judge Ebel said:
Giving effect to §§ 1194(a)(3) and 1226(a)(2)’s express direction that standing trustees in Chapter 12 and Chapter 11 (Subchapter V) cases should deduct their fees from pre-confirmation payments before returning them to the debtor when no plan is confirmed suggests that Congress did not intend Chapter 13 standing trustees to do the same where such language is omitted.
Judge Ebel held that:
11 U.S.C. § 1326(a), read together with 28 U.S.C.§ 586(e)(2), and considered in light of the different language in 11 U.S.C. §§ 1194(a)(3) and 1226(a)(2), unambiguously require the standing Chapter 13 trustee to return pre-confirmation payments to the debtor without the trustee first deducting his fee, when a proposed Chapter 13 reorganization plan is not confirmed.
Judge Ebel ended his opinion rejecting arguments proffered by the trustee that had been espoused by other courts ruling to the contrary.
The word “collect” in Section 526(e) “cannot mean,” Judge Ebel said, “that the act of ‘collection’ of funds irrevocably constitutes a payment to the Trustee of his fees.” Likewise, he said that language in the Chapter 13 Trustee Handbook was “hardly the exercise of agency expertise in interpreting an ambiguous statute or filling a regulatory gap left by Congress to which a court usually defers.”
Judge Ebel ended his opinion by saying that he “need not decide here whether the Handbook is entitled to any sort of deference because the statutory language at issue here is unambiguous.”
Recent Contrary Authority
The district and bankruptcy courts are split. In a decision last year, a district court in Idaho found no ambiguity in the statute but concluded that the trustee was entitled to retain the fee. See McCallister v. Evans, 637 B.R. 144 (D. Idaho Feb. 8, 2022). To read ABI’s report, click here.
The first court of appeals to rule on a question where the lower courts are widely split, the Tenth Circuit held that a chapter 13 trustee was not entitled to payment of her fee because the case was dismissed before confirmation of a plan.
Although the Bankruptcy Code does not expressly answer the question, the January 18 opinion by Circuit Judge David M. Ebel found the statutes to be unambiguous, in favor of requiring trustees to disgorge fees if the chapter 13 case was dismissed before confirmation. He was particularly persuaded to rule in favor of the debtor because the Bankruptcy Code explicitly says that trustees retain their fees in Subchapter V and chapter 12 if the case was dismissed before confirmation.