In re Elms

603 B.R. 11

IN RE: Delores J. ELMS, Valerie D. Mitchell, Andrew Robert Clang, Steven W. Rose, Chris Lynn Miller, Linda Brock, Debtors

Case Nos. 15-31489

17-30046

17-31296

17-31917

17-33693

18-30569

United States Bankruptcy Court, S.D. Ohio, Western Division.

Signed July 16, 2019

Rebecca Barthelemy-Smith, Dayton, OH, for Debtors.

Decision on Chapter 13 Trustee's Motion to Dismiss and the Distribution of Funds Held by the Trustee in a Post-Confirmation Dismissal

Guy R. Humphrey, United States Bankruptcy Judge

I. INTRODUCTION

This matter was before the court on the Chapter 13 trustee's motions to dismiss six different post-confirmation Chapter 13 cases (the "Motions").¹ The Motions were unopposed, but were noticed for hearing by the court to address how the Chapter 13 Trustee is required to distribute funds which the Trustee holds at the time a dismissal order is entered. At the conclusion of the hearing, the court granted the Motions to dismiss, but ordered that all funds held by the Trustee be distributed to the debtors in each of their respective cases, and denied any other relief sought in the Motions. The court entered orders consistent with its oral decision. The court is issuing this written decision to further explain the court's rationale.

II. FACTS AND PROCEDURAL BACKGROUND

Pursuant to a prior order entered in each of the six cases, the court conducted a hearing on the Motions on June 6, 2019, attended by Jeffrey M. Kellner, the Chapter 13 Trustee; Scott G. Stout, counsel for the Chapter 13 Trustee; Rebecca Barthelemy-Smith, counsel to Delores Elms and Chris Miller; Kenneth J. Krochmal, counsel to Steven Rose; Stephen J. Malkiewicz, counsel to Andrew Clang; Erin C. Renneker, on behalf of Amicus Curiae Harold Jarnicki & Associates; Andrew Zeigler and John Frederick Kennel, on behalf of Amicus Curiae, Kennel Zeigler LLC; and attorney Brian Flick.²

The Motions, with the exception of the specific dollar amount which the Trustee was holding in each debtor's case, provided that:

The Trustee states that he has approximately $[ ] on hand, which may change based on monies received and/or disbursements made in the administration of the case and pursuant to the Chapter 13 plan and the Confirmation Order. The Trustee intends to disburse until a filed order of dismissal is signed and docketed with the Court. Any remaining funds on hand at the time of the dismissal as a result of Debtor payments shall be refunded to the Debtor except to disburse for any signed order allowing Administrative Claims such as attorney fees. Further, any funds held by the Trustee from other sources, including but not exclusive of, insurance proceeds, personal injury awards, worker's compensation, buyouts, severance packages, lottery winnings or inheritance, shall be disbursed pursuant to the Plan and/or any applicable non-bankruptcy law.

The Trustee was holding $4,961.21 in the Elms case; $31.88 in the Mitchell case; $36.51 in the Clang case; $1,803.66 in the Rose case; $30.00 in the Miller case; and $30.00 in the Brock case. The above-quoted language in the Trustee's Motions was the result of a prior order of the court which provided that:

In the future, in order for the court to appropriately adjudicate post-confirmation motions to dismiss filed in Chapter 13 cases, and for all parties to be made aware of funds being held by the Trustee and the intended disposition of any such funds, the court will require each post-confirmation motion to dismiss filed by the Chapter 13 Trustee to state: a) whether the Trustee is holding funds; b) if the Trustee is holding funds, the amount of the funds which the Trustee is holding; and c) how the Trustee intends to dispose of the funds being held.

In re Taylor , Case No. 18-30211 (doc. 54) (emphasis omitted).

In its orders scheduling the hearing on the Motions the court provided that:

Upon review, the court has decided that a hearing is necessary to determine proper distribution of funds held by the Trustee at the time of dismissal or reconversion of a case to Chapter 7. At the time of the hearing, the court will address the following issues:

1. Is distribution of funds on hand to pay administrative claims, including attorney fees, permissible without the court ordering otherwise for cause under 11 U.S.C. § 349(b) ?

2. What is the legal basis for the exception for funds originating from "other sources"?

See, e.g. In re Elms , 15-31489 (doc. 54).

The Trustee filed a legal memorandum (the "Memorandum") supporting his Motions arguing that upon dismissal the Trustee was obligated to distribute any funds on hand to creditors pursuant to the confirmed Chapter 13 plan. See 11 U.S.C. § 1326(a)(2) and (c).³ Counsel for Andrew Clang filed a brief in support of the Trustee's position. In re Clang , Case No. 17-31296 (doc. 30). Amicus Curiae Jarnicki & Associates and Kennel Ziegler LLC also filed memoranda supporting the Trustee's position and making additional arguments in favor of distributing funds held by the Chapter 13 Trustee pursuant to the confirmed plan. See In re Elms , Case No. 15-31489 (docs. 62 and 63).

III. POSITIONS OF THE PARTIES

The Trustee, counsel for Clang, and the Amicus Curiae assert that the Trustee has a duty to distribute funds which he is holding following a post-confirmation dismissal in accordance with the confirmed plan pursuant to § 1326(a)(2) and (c). No counsel or parties argued otherwise. The primary concern raised by the Trustee and legal counsel was the payment to debtors' attorneys on approved, but un-paid attorney fee applications. Because attorney fees and expenses are accorded administrative expense priority status over creditors, any funds held by the Trustee first would be distributed to attorneys for un-paid fees and expenses.⁴

IV. FINDINGS OF FACT AND CONCLUSIONS OF LAW

The court ordered that the cases be dismissed and that the funds held by the Chapter 13 Trustee be distributed to the debtors in each of their respective cases. As the court noted in its oral decision, while the court respects the professional and diligent work performed by legal counsel in Chapter 13 cases and favors counsel being paid reasonable and just compensation for that work, absent circumstances authorizing the court to "order[s] otherwise" pursuant to § 349(b), the court finds that the law requires that the Trustee distribute to the debtors funds he is holding at the time of dismissal.⁵

Distribution of funds in post-confirmation dismissals in Chapter 13 has received great attention following the Supreme Court's decision in Harris v. Viegelahn , ––– U.S. ––––, 135 S. Ct. 1829, 191 L.Ed.2d 783 (2015).⁶ In Harris the Court determined that funds held by a Chapter 13 trustee upon the conversion of a Chapter 13 case to Chapter 7 must be distributed to the debtor. The Court held that "[t]he moment a case is converted from Chapter 13 to Chapter 7, however, the Chapter 13 trustee is stripped of authority to [disburse payments to creditors]." Harris , 135 S. Ct. at 1838. The Court also indicated that upon conversion of a Chapter 13 case to Chapter 7, the Chapter 13 plan is "defunct." Id. at 1839.

The trustee in Harris , following conversion of the case, distributed post-petition wages she was holding pursuant to the debtor's confirmed Chapter 13 plan. See 11 U.S.C. § 1306 (property of the estate in Chapter 13 includes "earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted ... whichever occurs first."). Some of the funds went to unsecured creditors, and $1,200 went to the debtor's counsel for unpaid attorney fees. Harris , 135 S. Ct. at 1836. The debtor moved that the unsecured creditors return the funds paid to them, arguing the trustee acted outside her statutory authority. Id. The Court held that those funds must be returned to the debtor. Id. The Court noted under § 348(f)(1)(A) those funds did not belong to the Chapter 7 estate.⁷ Id. The Court found that allowing the trustee "to disburse the very same earnings to the very same creditors is incompatible with that statutory design." Id. at 1837. The Court explained that § 348(e) terminates the services of the trustee, and. that "[a] core service provided by a Chapter 13 trustee is the disbursement of ‘payments to creditors ’ " and further, upon conversion, the plan was no longer binding under § 1327. Id. at 1838 ; see also 11 U.S.C. § 1327(a) ("The provisions of a confirmed plan bind the debtor and each creditor ...."). The Court found that returning funds to the debtor was not a trustee "service" barred by § 348(e). Harris , 135 S. Ct. at 1838.

The Trustee, legal counsel, and the Amicus Curiae argued in these cases that the statutory structure for dismissal is different than conversion and the rationale of Harris should not be applied to post-confirmation dismissals. They first emphasize the language of § 1326(a)(2) and (c). These provisions instruct Chapter 13 trustees that once a plan is confirmed, they are to distribute the funds collected from the debtors "in accordance with the plan as soon as is practicable", "[e]xcept as otherwise provided in the plan or in the order confirming the plan ...." 11 U.S.C. § 1326(a)(2) and (c). They further argue that while § 348(e) expressly terminates the services of a trustee upon conversion of a case to another chapter of the Code, § 349 concerning dismissal of a case has no such provision terminating the services of a trustee. Therefore, since § 349 has no such provision terminating the services of a trustee upon dismissal, the implication is that Congress intended Chapter 13 trustees to continue with their duties upon dismissal, including distributing funds on hand pursuant to the confirmed plan. Further, they argue that § 349(b)(3) provides that upon dismissal, property of the estate revests in the entity which held it at the time the case was filed. They note that it is impossible to "return" or "revest" the funds which came to the Trustee from...