Joining the Tenth Circuit, the Ninth Circuit also has held that chapter 13 trustees are not paid their fees when cases are dismissed before confirmation. The identical issue was argued on February 15 before the Second Circuit.
In short order, we’ll have either unanimity or a split of circuits. A split will give rise to an issue worthy of a grant of certiorari by the Supreme Court.
Notably, the Ninth Circuit’s opinion on June 12 adopted reasoning in an amicus brief filed in support of the debtor by the National Consumer Bankruptcy Rights Center and National Association of Consumer Bankruptcy Attorneys.
Lower Court Rulings
A couple filed a chapter 13 petition. After dismissing the case voluntarily before confirmation, the debtors filed a motion asking the bankruptcy court to have the chapter 13 trustee disgorge the fees that she had retained.
Chief District Bankruptcy Judge Joseph M. Meier of Boise, Idaho, decided that the statutes were ambiguous and concluded that a chapter 13 trustee is paid only if a plan is confirmed. See In re Evans, 615 B.R. 290 (Bankr. D. Idaho Feb. 13, 2020). To read ABI’s report, click here.
On appeal, the district court reversed, found no ambiguity in the statute, and held that “§ 1326(a)(2) does not direct the Trustee to return it if confirmation does not happen.” McCallister v. Evans, 637 B.R. 144, 150 (D. Idaho Feb. 8, 2022). To read ABI’s report, click here.
The debtors appealed to the Ninth Circuit.
The Relevant Statutes
The fees of chapter 13 trustees are not to be a burden on taxpayers nor on the budget of the U.S. courts. To be paid by chapter 13 debtors, the trustees’ fees are determined by the Attorney General under the criteria specified in 28 U.S.C. § 586(e)(1). Sometimes read in favor of paying trustees in all circumstances, 28 U.S.C. § 586(e)(2) says that a standing trustee “shall collect such percentage fee from all payments . . . under [chapter 13] plans . . . .” [Emphasis added.]
Debtors rely on Section 1326(a)(2) of the Bankruptcy Code, which 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).”
Section 1326 (a)(2) does not explicitly say what happens to a trustee’s fees when the case is dismissed before confirmation.
The chapter 13 trustee relied on the definition of “collect” in Black’s Law Dictionary to mean “receive payment.” The debtor wanted the Ninth Circuit to read “collect” to mean “collect and hold.”
In his decision for the Court of Appeals, Circuit Judge Milan D. Smith, Jr. said that the amici had the “better approach.”
The Twomey Interpretation
Judge Smith paraphrased the amici for positing “that the phrase ‘payments . . . under plans’ in Section 586, when read in the larger context of the Bankruptcy Code, refers only to payments under confirmed plans, rendering the provision irrelevant to the pre-confirmation period.” [Emphasis in original.] He retold how the amici said that “the place to look is instead Sections 1326(a) and (b).”
Proffering his own interpretation, Judge Smith said that “Section 1326(a)(1)(A) refers to payments ‘proposed by the plan,’” while Section 586 “refers to ‘payments . . . under plans.’”
“Accordingly,” Judge Smith said, “prior to confirmation, a trustee does not ‘collect’ or ‘collect and hold’ fees under Section 586, but instead ‘retains’ payments ‘proposed by the plan’ pursuant to Section 1326(a)(2).” If the plan is not confirmed, he said that “Section 1326(a) requires return of ‘any such payments’ . . . to the debtor, after deducting amounts previously paid and due and owing to creditors.”
Saying that “[w]e generally agree with” the amici, Judge Smith read Section 1326(b) as indicating “that a standing trustee can be paid her percentage fee only after confirmation.”
Holding that trustees are not paid if dismissal precedes confirmation, Judge Smith said that the “plain text of Section 1326(b) unambiguously shows that it is the specific provision governing when a trustee ‘shall be paid’: ‘before or at the time of each payment to creditors under the plan,’ which necessarily means post-confirmation of a plan.”
Further lauding the amici’s reading of the statutes, Judge Smith said that their “interpretation is consistent with the opinion of the only other circuit to reach this issue,” citing the Tenth Circuit in Goodman v. Doll (In re Doll), 57 F.4th 1129 (10th Cir. 2023). To read ABI’s report on Doll, click here. [Note: 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. Time remains for the trustee to file a petition for certiorari.]
Other Theories
To assuage doubt about his interpretation of the statutes, Judge Smith pointed to chapter 12 and Subchapter V of chapter 11, which, he said, “have language almost identical to Section 1326(a), but explicitly mandate that fees be paid to trustees regardless of plan confirmation.” Those statutes, he said, “show that Congress knew how to explicitly require payment of trustee fees in the event of non-confirmation . . . and suggest that it intentionally chose not to require the same in the Chapter 13 context.”
With regard to policy, Judge Smith mentioned the trustee’s contention that disallowing fees in dismissed cases would unfairly shift the burden onto debtors whose cases are not dismissed. However, he noted that the “policy was only changed recently.” Trustees were first permitted to collect fees prior to confirmation in 2012 and weren’t allowed to collect on receipt until 2014.
“Notably,” Judge Smith referred to the Executive Office for the U.S. Trustee’s Handbook for Chapter 13 Standing Trustees, which tells trustees to reverse payment only if there is controlling law in the district. He said that the “Trustee’s policy arguments are not enough to overcome the plain language and context of the relevant statutory provisions, which indicate that standing trustees are only to be paid once a plan is confirmed.”
Updates
In the Eastern District of New York, Bankruptcy Judge Robert E. Grossman ruled that a chapter 13 trustee is entitled to compensation if the case is dismissed before confirmation. See In re Soussis, 624 B.R. 559 (Bankr. E.D.N.Y. Nov. 12, 2020). To read ABI’s report, click here. Judge Grossman was affirmed in district court. See Soussis v. Macco, 20-05673, 2022 WL 203751 (E.D.N.Y. Jan. 24, 2022). To read ABI’s report on the district court opinion in Soussis, click here.
The debtor appealed. Oral argument was held in the Second Circuit on February 15. The debtor in Soussis immediately gave the Second Circuit a copy of the Ninth Circuit decision.
Recently, Bankruptcy Judge Timothy A. Barnes of Chicago denied compensation in a dismissed case and certified the question to the Seventh Circuit for direct appeal. See In re Johnson, 650 B.R. 904 (Bankr. N.D. Ill. May 12, 2023). To read ABI’s report, click here. The Seventh Circuit has yet to accept or reject a direct appeal.
Joining the Tenth Circuit, the Ninth Circuit also has held that chapter 13 trustees are not paid their fees when cases are dismissed before confirmation. The identical issue was argued on February 15 before the Second Circuit.
In short order, we’ll have either unanimity or a split of circuits. A split will give rise to an issue worthy of a grant of certiorari by the Supreme Court.
Notably, the Ninth Circuit’s opinion on June 12 adopted reasoning in an amicus brief filed in support of the debtor by the National Consumer Bankruptcy Rights Center and National Association of Consumer Bankruptcy Attorneys.