Bankruptcy Judge Timothy A. Barnes of Chicago certified a question for the Seventh Circuit to decide on direct appeal: May a chapter 13 trustee be paid her fee if the case is dismissed before confirmation?
So far, only the Tenth Circuit has ruled on the issue, coming down on the side of the debtor by holding that a trustee may not be paid when dismissal precedes confirmation. The same question is now pending in appeals to the Second and Ninth Circuits.
We invite our readers to wager on whether there will be unanimity or a split among the circuits.
Typical Facts
The chapter 13 debtor toiled through eight unsuccessful confirmation hearings until the U.S. Trustee ultimately prevailed on a motion to dismiss. Alongside dismissal, Judge Barnes granted the debtor’s counsel’s fee application.
Before the clerk closed the case, the debtor filed a motion to compel the chapter 13 trustee to disgorge the fees that the trustee had retained before returning the balance of the plan payments that the debtor had given the trustee before dismissal.
The chapter 13 trustee objected to the disgorgement motion, but Judge Barnes ruled in favor of the debtor in his May 12 opinion. The judge said that his decision “marks a significant change in the practice of the chapter 13 trustees in this District, if not this Circuit,” because chapter 13 trustees in Chicago have routinely retained their fees in cases dismissed before confirmation.
Judge Barnes recognized the economic significance of the issue for chapter 13 trustees. In 2019, for instance, he said that 21% of the district’s 18,000 cases were dismissed before confirmation, meaning that the trustees would not be paid in thousands of cases.
Judge Barnes Follows the Tenth Circuit
Judge Barnes said that the case involved “pure statutory interpretation.” The outcome pits two statutes against each other.
In favor of paying the trustee, Section 586(e) says that a standing trustee “shall collect such percentage fee from all payments . . . under [chapter 13] plans. . . .” [Emphasis added.]
In favor of the debtor, Section 1326 (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).”
Judge Barnes said it’s “clear” what happens to payments by the debtor once a plan is confirmed, but it’s “not as clear” about the chapter 13 trustee’s compensation when the case is dismissed before confirmation. In Chicago, though, he said it was the “tried-and-true practices of the chapter 13 trustee” to retain their fees even if the cases were dismissed before confirmation.
Judge Barnes cited cases coming down both ways. However, he found the Tenth Circuit to be “persuasive” in disallowing a trustee’s compensation when a plan is not confirmed before dismissal. See Goodman v. Doll (In re Doll), 57 F.4th 1129 (10th Cir. 2023). In Doll, the Denver-based appeals court held:
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.
Id. at 1144. To read ABI’s report on Doll, click here. The Tenth Circuit denied motions for rehearing and rehearing en banc, and also denied a motion to stay the issuance of the mandate pending a petition for certiorari to the Supreme Court.
Like Doll, Judge Barnes ruled in favor of the debtor by holding that the “Trustee must follow the express language of section 1326(a)(2) and return to the Debtor all collected payments still held by the Trustee at the time his case was dismissed, unless excepted from doing so by the express conditions of section 1326(a)(2).” Therefore, he said, the “Trustee is not authorized to deduct from held plan payments her statutory fee if a chapter 13 case is dismissed without confirmation of a plan.”
Certification of a Direct Appeal
Judge Barnes recognized that the Second and Ninth Circuits are on the cusp of deciding the same question in appeals from district courts in Idaho and New York. See McCallister v. Evans, 637 B.R. 144 (D. Idaho 2022), and Soussis v. Macco, 20-05673, 2022 WL 203751 (E.D.N.Y. Jan. 24, 2022). In both cases, the trustees prevailed. To read ABI’s reports on McCallister and Soussis, click here and here.
Sua sponte, Judge Barnes certified a direct appeal to the Seventh Circuit under 28 U.S.C. § 158(d)(2)(A). He said it was “a matter of public importance,” and “there is no controlling decision of the court of appeals in this Circuit or of the Supreme Court.”
Sua sponte, Judge Barnes also stayed enforcement of his opinion pending a decision from the Seventh Circuit.
Bankruptcy Judge Timothy A. Barnes of Chicago certified a question for the Seventh Circuit to decide on direct appeal: May a chapter 13 trustee be paid her fee if the case is dismissed before confirmation?
So far, only the Tenth Circuit has ruled on the issue, coming down on the side of the debtor by holding that a trustee may not be paid when dismissal precedes confirmation. The same question is now pending in appeals to the Second and Ninth Circuits.
We invite our readers to wager on whether there will be unanimity or a split among the circuits.