Bill Rochelle is on vacation. Please enjoy this piece written by Guest Writer Hon. Keith Lundin, a retired U.S. Bankruptcy Judge for the Middle District of Tennessee in Nashville who currently maintains a bankruptcy workshop website, LundinOnChapter13.com, in Pittsburgh.
I am thrilled to briefly pinch-hit here at Rochelle’s Daily Wire, though I doubt that Bill actually knows how to take a “vacation.” For those who have followed RDW through the years, you know that Bill Rochelle reigns as the undisputed champion of issue-spotting in the Bankruptcy Universe. And I can’t do better in this moment than to return to a discussion that Bill began:[1] What will become of the chapter 13 system if standing trustees must refund all fees collected in cases dismissed before confirmation? The answer is perhaps unexpected: Unsecured creditors in confirmed chapter 13 cases will pay the administrative expenses of cases that fail.
Bear with me a minute.
In FY 2022, chapter 13 trustees received nearly $5,000,000,000 from debtors and distributed just over $1,300,000,000 to unsecured creditors such as banks and medical providers. The costs of operating the chapter 13 system — for salaries, rent, data-processing and the like — are paid by debtors in the form of a percentage fee collected by standing trustees from every payment from debtors. That’s the system Congress enacted in 1986 in 28 U.S.C. § 586(e). Nationally, the “average” fee for reimbursement of trustee expenses in 2022 was 7.9%, making chapter 13 perhaps the most efficient debt-collection enterprise on the planet.
Prior to recent court decisions from the Ninth (Evans[2]) and Tenth (Doll[3]) Circuits, the expenses of the chapter 13 system were spread evenly across all chapter 13 cases without regard to whether the debtor had obtained confirmation of a plan. This sharing of expenses by all cases was important, because most of the costs of administration in a chapter 13 case are incurred during the early months of the case, before confirmation of a plan, and approximately 25% of filed chapter 13 cases are dismissed before confirmation.
As Bill explained in his earlier Wires, Doll and Evans turned on its head the statutory mechanism for financing the chapter 13 system by requiring chapter 13 trustees to refund to debtors all collected expenses of administration in cases dismissed before confirmation. This outcome forces successful debtors who obtain confirmation of a plan to shoulder the administrative costs of unsuccessful cases that are dismissed before distributions to creditors.
At first blush, Doll and Evans are a disaster for chapter 13 debtors who confirm plans that must pay higher administrative expenses and for chapter 13 trustees who must administer all cases, even those that are dismissed without reimbursing expenses. But a deeper look reveals that unsecured creditors will bear the brunt of the shifting of administrative costs caused by these cases.
Consumer bankruptcy practitioners know that the statutory entitlement of unsecured creditors in each chapter 13 case requires the calculation of “projected disposable income” — a term of art that reduces projected future wages by reasonable household expenses to determine the amount that must be paid to unsecured creditors to accomplish confirmation of a plan. Buried in that calculation is a deduction for the expenses of administration. In other words, the entitlement of unsecured creditors in chapter 13 cases is reduced by the amount of expense reimbursement payable to the chapter 13 trustee.
To the extent a chapter 13 trustee can raise the percentage fee for reimbursement of expenses in a district to compensate for the loss of expense reimbursement caused by Doll and Evans, the fee increase will be subtracted from the amount that would have been paid to unsecured creditors in confirmed cases. In a district in which expense reimbursement is already pushed up against the 10% maximum allowed by statute,[4] the “pot” of money available for unsecured creditors in confirmed chapter 13 cases will simply shrink by the additional expenses that must be recovered by the trustee before distributions to unsecured creditors. The inevitable effect of Doll and Evans will be less money for unsecured creditors in confirmed chapter 13 cases to pay the administrative expenses of “failed” cases.
How much money are we talking about? In 2022, approximately 33,000 chapter 13 cases were dismissed before confirmation.[5] The “average” chapter 13 case costs about $600 per year to administer.[6] Applying Doll/Evans to 2022 filings, chapter 13 trustees must recover $20,000,000 from confirmed cases to cover the costs of administration of cases dismissed before confirmation. Most of that money will come out of the pockets of unsecured creditors, every year, in the form of reduced distributions in cases with confirmed plans.
Sleeping out there is the distasteful next issue that keeps standing trustees awake at night: whether the Doll/Evans refund has a “retroactive” component in chapter 13 cases previously dismissed, and if so, how far back that entitlement might extend. A variation on that head-scratcher is playing out in chapter 11 cases after the Supreme Court’s decision in Circuit City.[7]
The statutory fix for the mess created by Doll/Evans is simple: Add at the end of 11 U.S.C. § 1326(a)(2) the phrase, “. . . and if a standing trustee is serving in the case, the percentage fee fixed for such standing trustee.” Congress should fix this one — and the unsecured credit community should lead the way.
[1] See Rochelle’s Daily Wire: “Two Circuits Now Hold: ‘13’ Trustees Aren’t Paid if Cases Dismiss Before Confirmation, June 15, 2023; “Seventh Circuit to Rule on Paying ‘13’ Trustees if Dismissal Precedes Confirmation,” May 18, 2023; “Tenth Circuit Doesn’t Pay ‘13’ Trustee if Dismissal Precedes Confirmation,” Jan. 20, 2023; “District Court Says Chapter 13 Trustee Is Paid Even if Dismissal Precedes Confirmation,” Feb. 15, 2022; “On a Split, District Judge Doesn’t Pay ‘13’ Trustee if Dismissal Precedes Confirmation,” Dec. 13, 2021; “Chapter 13 Trustees Are Paid Even if Dismissal Comes Before Confirmation, BAP Says,” Aug. 4, 2021; “No Fees for a Chapter 13 Trustee in a Case Dismissed Before Confirmation,” Feb. 28, 2020.
[2] In re Evans, 69 F.4th 1101 (9th Cir. June 12, 2023).
[3] In re Doll, 57 F.4th 1129 (10th Cir. Jan. 18, 2023).
[4] See 28 U.S.C. § 586(e)(1)(B)(i).
[5] 30,000 of those dismissed cases are accounted for by the Executive Office of the U.S. Trustee in its annual report of the operations of standing chapter 13 trustees in U.S. Trustee jurisdictions. The balance was gathered from data from the Bankruptcy Administrator districts in Alabama and North Carolina.
[6] This estimate is generated from the Chapter 13 Trustee Data and Statistics reported annually by the Office of the U.S. Trustee, available at https://www.justice.gov/ust/private-trustee-data-statistics/chapter-13-….
[7] See Siegel v. Fitzgerald (In re Circuit City Stores), ––– U.S. ––––, 142 S. Ct. 1770, 1777, 213 L. Ed. 2d 39 (2022) (fee increase in chapter 11 cases that exempted two states violated uniformity requirement of the Bankruptcy Clause).
In re Doll, 57 F.4th 1129 (10th Cir. Jan. 18, 2023).
I am thrilled to briefly pinch-hit here at Rochelle’s Daily Wire, though I doubt that Bill actually knows how to take a “vacation.” For those who have followed RDW through the years, you know that Bill Rochelle reigns as the undisputed champion of issue-spotting in the Bankruptcy Universe. And I can’t do better in this moment than to return to a discussion that Bill began: What will become of the chapter 13 system if standing trustees must refund all fees collected in cases dismissed before confirmation? The answer is perhaps unexpected: Unsecured creditors in confirmed chapter 13 cases will pay the administrative expenses of cases that fail.