In re Merovich

547 B.R. 643

In re: Daniel David Merovich, Debtor

CASE NO. 1:14–bk–04623–RNO

United States Bankruptcy Court, M.D. Pennsylvania.

Signed April 6, 2016

Kara Katherine Gendron, Law Office of Dorothy L. Mott, Dorothy L. Mott, Harrisburg, PA, for Debtor.

Jason Brett Schwartz, Mester & Schwartz, P.C., Philadelphia, PA, D. Brian Simpson, United States Attorney's Office, Scranton, PA, for Creditor.

OPINION¹

Robert N. Opel, II, Bankruptcy Judge.

Pending before the Court is a Motion to Allow Debtor's Counsel's Fees as an Administrative Expense Pursuant to 11 U.S.C. §§ 1326(a)(2) and 503(b)(2) ("Motion"). The Chapter 13 case was dismissed, but I retained jurisdiction to consider the Motion. For the reasons stated below, the Motion is granted.

I. Jurisdiction

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B), (E), and (O).

II. Facts and Procedural History

A Voluntary Petition under Chapter 13 of the Bankruptcy Code was filed on October 3, 2014, by Daniel David Merovich, doing business as Dan Merovich Construction ("Debtor"). Chapter 13 Voluntary Petition, October 3, 2014, ECF No. 1 (hereinafter "Petition"). Bankruptcy Schedules were filed with the Petition on October 3, 2014. Schedules A through J and Summary of Schedules, October 3, 2014, ECF No. 1. A Chapter 13 Plan was filed on October 3, 2014. Chapter 13 Plan, October 3, 2014, ECF No. 4. The Chapter 13 Plan was not confirmed.

The Debtor paid a total of $450.00 to the Chapter 13 Trustee prior to the dismissal of his case. Stipulation of Facts, February 2, 2016, ¶ 2, ECF No. 53. The Chapter 13 Trustee deducted a commission of $21.15 from the funds paid to the Chapter 13 Trustee. Stipulation of Facts, ¶ 3. The Chapter 13 Trustee now holds $428.85² and is awaiting further order of this Court before making any disbursement.

In August 2015, Debtor's counsel, Kara K. Gendron of Dorothy L. Mott Law Office, LLC (collectively "Debtor's Counsel"), discovered that the Debtor died on August 9, 2015. Id. at ¶ 5. On September 30, 2015, the Motion was filed seeking the allowance of Debtor's Counsel's fees as an administrative expense pursuant to 11 U.S.C. §§ 1326(a)(2)³ and 503(b) of the Bankruptcy Code. Motion to Allow Debtor's Counsel's Fees as an Administrative Expense Pursuant to §§ 1326(a)(2) and 503(b)(2), September 30, 2015, ECF No. 34. The Motion was set for hearing on November 4, 2015. A continued confirmation hearing was scheduled on October 7, 2015, but was continued to the November 4, 2015, hearing date to coincide with the hearing on the Motion. A Motion to Dismiss the Chapter 13 Case for Material Default was filed to Docket No. 32 by the Chapter 13 Trustee on September 8, 2015, due to the Debtor's failure to make plan payments ("Motion to Dismiss"). The Motion to Dismiss was also continued from October 7, 2015, to November 4, 2015.

After a hearing held on November 4, 2015, this Court granted the Motion to Dismiss. However, the dismissal order specifically retained jurisdiction pursuant to § 349(b) of the Bankruptcy Code, to address the Motion.

A hearing was held on January 6, 2016, to hear additional arguments from Debtor's Counsel and the Chapter 13 Trustee concerning the Motion. The gravamen of the Motion is that the post-petition fees incurred by Debtor's Counsel should be paid out of the funds paid by the Debtor and held by the Chapter 13 Trustee. The Motion references § 1326(a)(2) and § 503(b)(2) and seeks payment of Debtor's Counsel's fees before the Chapter 13 Trustee returns any funds to the Debtor's personal representative.

Debtor's Counsel and the Chapter 13 Trustee both submitted briefs in support of the Motion. No objections have been filed in opposition to the Motion. The Motion is now ripe for decision.

III. Discussion

I write this Opinion primarily for the benefit of the parties, both of whom support the award of attorney's fees, and solely based on the facts before me. Two principal sections of the Bankruptcy Code are implicated by the Motion—§§ 349(b)(3) and 1326(a)(2). The recent United States Supreme Court decision in Harris v. Viegelahn, which discussed the post-confirmation distribution of funds held by the Chapter 13 trustee at the time of conversion from a Chapter 13 to a Chapter 7 case, has caused several Bankruptcy Courts to address the proper post-dismissal distribution of funds held by Chapter 13 trustees. I will discuss Harris v. Viegelahn and §§ 349(b)(3) and 1326(a)(2) below.

A. Harris v. Viegelahn

In Harris the United States Supreme Court held that plan payments made by a Chapter 13 debtor from post-petition wages and held by the Chapter 13 trustee at the time a case is converted to Chapter 7 must be returned to the debtor, rather than distributed to creditors. Harris v. Viegelahn, ––– U.S. ––––, 135 S.Ct. 1829, 1837, 191 L.Ed.2d 783 (2015). The Supreme Court specifically rejected the Chapter 13 trustee's argument that on conversion undistributed funds must be disbursed to creditors pursuant to §§ 1326(a)(2) and 1327(a). Harris v. Viegelahn, 135 S.Ct. at 1838. Instead, the Supreme Court found that § 348(f) requires that on conversion accumulated wages must be returned to the debtor. Id. However, the Supreme Court did not address the distribution of funds held by a Chapter 13 trustee after a pre-confirmation dismissal of a case. That, of course, is the issue I address today.

Judge Woods discussed the application of Harris in a Chapter 13 dismissal context in In re Kirk. In re Kirk, 537 B.R. 856, 859 (Bankr.N.D.Ohio 2015). In re Kirk is factually and procedurally similar to the case before me. Judge Woods also faced the question of how funds held by the Chapter 13 trustee should be distributed when a case is dismissed prior to confirmation. In re Kirk, 537 B.R. at 857–58. In re Kirk essentially found that, unlike a case converted from Chapter 13 to Chapter 7, which is no longer governed by any Chapter 13 provision, certain provisions of Chapter 13 "e.g., § 1326(a)(2) —statutorily and necessarily apply in a chapter 13 case that has been dismissed but not yet closed." Id. at 859.

In re Kirk distinguishes Harris in large part because of the importance of § 348 to the conclusion in Harris. Id. Section 348 addresses the effect of conversion from one bankruptcy chapter to another. In Harris, the Supreme Court noted that conversion to another chapter terminates the services of the Chapter 13 trustee pursuant to § 348(e). Harris v. Viegelahn, 135 S.Ct. at 1838. It found that conversion immediately stripped the Chapter 13 trustee of the authority to make payments to creditors. Id. In the case of dismissal there is no successor trustee to make any appropriate distribution. I find that after dismissal a Chapter 13 trustee has residual authority to make distributions in accordance with the Bankruptcy Code. Matter of Hightower, No. 14–30452–EJC, 2015 WL 5766676, *5 (Bankr.S.D.Ga. Sept. 30, 2015).

Ultimately, In re Kirk granted the debtor's attorney an administrative expense claim pursuant to § 503(b)(2) in the amount of $1,000. In re Kirk, 537 B.R. at 862. The Chapter 13 trustee was ordered to distribute $1,000 to counsel in payment of post-petition attorney fees. Id.

Other courts have followed Judge Woods' rationale in Kirk. Judge Rice reached a similar conclusion in the case of In re Brandon. In re Brandon, 537 B.R. 231, 235–36 (Bankr.D.Md.2015) (Harris only applies to a converted case and does not abrogate § 1326(a)(2) ). See also, In re Ulmer, No. 15–30220, 2015 WL 3955258 (Bankr.W.D.La. June 26, 2015) ; Matter of Hightower, No. 14–30452–EJC, 2015 WL 5766676, *6 (Bankr.S.D.Ga. Sept. 30, 2015) (remaining funds returned to debtor after pre-confirmation dismissal because no administrative expenses or adequate protection payments due).

At least one case has held that Harris controls even on dismissal of a Chapter 13 case. See, In re Brown, 538 B.R. 714, 720 (Bankr.E.D.Va.2015). However, I distinguish In re Kirk and its brethren from In re Brown. In re Brown suggests that Harris stands for the proposition that all funds held by the Chapter 13 trustee on dismissal must be repaid to the debtor. In re Brown, 538 B.R. at 720. The decision primarily concerns whether there were grounds to support the trustee's motion to dismiss. There is no discussion of § 349 or § 1326(a)(2) in Brown. Although In re Brown cites to Harris for the rationale that all funds which a trustee holds on dismissal must be returned to the debtor, I cannot find sufficient support for why Harris applies to the dismissal of a Chapter 13 case. I read Harris' holding for purposes of the case before me as limited to the distribution of funds held by the Chapter 13 trustee on pre-confirmation conversion to Chapter 7. That is not the procedural posture of this case.

Thus, for purposes of the facts and Motion before me, which has no objections filed thereto, I find In re Kirk persuasive and conclude that Harris is inapplicable to the distribution of funds held by the Chapter 13 Trustee on the pre-confirmation dismissal of this case. Next, I will address which section controls distributions from the Chapter 13 Trustee when the Debtor's case has been dismissed pre-confirmation.

B. Sections 349(b)(3) and 1326(a)(2)

Section 349(b) governs the dismissal of a Chapter 13 case, which states that:

(b) Unless the court, for cause, orders otherwise, a dismissal of a case other than under section 742 of this title—... (3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.

11 U.S.C. § 349. However, § 349 is not the sole section of the Bankruptcy Code that is implicated when a Chapter 13 case is dismissed. Section 1326(a)(2) provides that:

A payment made under paragraph (1)(A) shall be retained by the trustee until confirmation or denial of confirmation. If a plan is confirmed, the trustee shall distribute any such payment in accordance with the plan

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