When a chapter 13 debtor sells property, the debtor cannot be compelled to turn the proceeds over to the trustee, even if the proceeds would be required to confirm a plan, according to an opinion by District Judge Nelson S. Román of White Plains, N.Y.
Judge Román’s March 22 opinion allowed the debtor to avoid a significant financial problem later in the case. You see, courts disagree about paying a chapter 13 trustee’s fees in a case dismissed before confirmation. In the case on appeal, the sale had generated more than $350,000 in net proceeds.
If the case were dismissed before confirmation, and if the debtor had been compelled to turn over the sale proceeds, the court might rule later that the trustee was entitled to retain a considerable fee just based on the net proceeds. Judge Román’s opinion means that the trustee could not “collect” the proceeds and thus couldn’t claim a fee based on the proceeds.
As it turns out, the case was dismissed before confirmation. Consequently, the debtor avoided litigation over the question of whether the trustee was entitled to fees in a chapter 13 case dismissed before confirmation.
So far, there is only one circuit court opinion regarding a chapter 13 trustee’s fees in a case dismissed before confirmation: The Tenth Circuit has held that the fees are not paid. Goodman v. Doll (In re Doll), 57 F.4th 1129 (10th Cir. Jan. 18, 2023). To read ABI’s report, click here. A motion for rehearing en banc is pending in the Tenth Circuit.
The Sale Proceeds and the Arguments
The debtor owned commercial real property. In the chapter 13 case, she filed a motion to sell the property under Section 363(b). The sale generated more than $350,000 in net proceeds.
The chapter trustee insisted that the net proceeds be turned over to her. The debtor disagreed. Both sides agreed that the sale proceeds were not income.
The bankruptcy court entered an order directing the turnover of the net proceeds to the debtor, reasoning that the debtor could not confirm a plan without using the proceeds. The debtor appealed and won a reversal.
The Competing Theories
Conceding that the net proceeds were not part of the debtor’s “disposable income,” the chapter 13 trustee contended that directing turnover was within the court’s discretion under Section 105, given that the debtor could not satisfy the best interests test and confirm a plan without using the proceeds. The debtor relied on the notion that she was only obliged to turn over some or all of her disposable income.
Judge Román began his analysis by referencing Hamilton v. Lanning, 560 U.S. 505 (2010). He quoted the Supreme Court for saying that “Chapter 13 debtors are permitted to keep their property, but they must agree to a court-approved plan under which they pay creditors out of their future income.” Id. at 508. [Emphasis added by Judge Román.]
For guidance, Judge Román cited the Ninth Circuit Bankruptcy Appellate Panel for saying that the “deal” in chapter 13 allows a debtor to retain his or her prepetition property in return for committing all of the debtor’s post-petition disposable income toward payment of creditors’ claims. In re Burgie, 239 B.R. 406, 410 (B.A.P. 9th Cir. 1999).
Judge Román said that chapter 13 “affords debtors the permission to keep their property.” From the basic structure of chapter 13, he said it was clear that the court cannot compel the debtor to “turn over their pre-petition property, whether post-confirmation, as in Burgie, or pre-confirmation, as here.”
Judge Román went on to say:
Section 1325 does not enable the Bankruptcy Court to require a debtor to turn over any property other than the disposable income to make a plan feasible. Neither do any other sections of the Bankruptcy Code confer such authority.
Reversing the bankruptcy court order directing turnover to the trustee, Judge Román held that the right of the debtor to retain property “deprives the Bankruptcy Court of the authority to compel the sale proceeds of a pre-petition asset to be turned over to the Chapter 13 Trustee.”
When a chapter 13 debtor sells property, the debtor cannot be compelled to turn the proceeds over to the trustee, even if the proceeds would be required to confirm a plan, according to an opinion by District Judge Nelson S. Román of White Plains, N.Y.
Judge Román’s March 22 opinion allowed the debtor to avoid a significant financial problem later in the case. You see, courts disagree about paying a chapter 13 trustee’s fees in a case dismissed before confirmation. In the case on appeal, the sale had generated more than $350,000 in net proceeds.