Commonwealth of Virginia v. Barry Webb, 908 F.3d 941

Background

Barry Webb filed Chapter 13 bankruptcy and made $3,000 in post-petition plan payments to the Chapter 13 Trustee under 11 U.S.C. § 1326(a)(1).
Webb’s Chapter 13 plan was not confirmed and, with his consent, the bankruptcy court dismissed the case; no part of the $3,000 was paid to creditors while the case was pending.
After dismissal, Virginia’s Division of Child Support Enforcement served an Order to Withhold on the Trustee (pursuant to Va. Code § 63.2-1929) seeking the $3,000 to satisfy Webb’s unpaid child support debt (~$74,277).
The Trustee filed for direction, citing § 1326(a)(2) (which states the trustee “shall return any such payments . . . to the debtor” if a plan is not confirmed), and the bankruptcy court ordered the Trustee to return the funds to Webb.
The district court affirmed; the Division appealed. The Fourth Circuit reviewed statutory interpretation de novo and affirmed, holding § 1326(a)(2) plainly requires return of post-petition payments to the debtor when a plan is not confirmed, preempting conflicting state levy authority.

Issues

Issue	Plaintiff's Argument (Division)	Defendant's Argument (Webb/Trustee)	Held
Whether § 1326(a)(2) allows a state levy on post-petition payments held by the Chapter 13 Trustee after dismissal	§1326(a) does not prohibit the Trustee from complying with a state Order to Withhold; Division may levy on Trustee after stay lifts	§1326(a)(2) plainly mandates the Trustee "shall return" such payments to the debtor if plan not confirmed, with limited exceptions not applicable here	The Trustee must return the funds to the debtor; state levy against Trustee conflicts with §1326(a)(2) and is preempted
Whether reading §1326(a)(2) to require return of funds would produce absurd results (e.g., preventing amended plans or creating unfair windfalls)	Returning funds could frustrate amendment attempts and unfairly shield funds that would otherwise have been subject to collection	Statute’s plain text and §349(b)(3) (revesting estate property on dismissal) resolve outcome; Congress chose this rule	No absurdity; plain statutory text controls and outcome aligns with §349(b)(3)
Whether §1326(a)(2) conflicts with §§ 349 and 362 or should be read in conjunction to permit state collection post-dismissal	Post-dismissal lifting of stay under §362 allows state remedies against parties possessing debtor’s property, including Trustee	§1326(a)(2) addresses who receives funds; §362 governs timing of availability; there is no contradiction with §349’s revesting	§1326(a)(2) governs distribution on dismissal; it does not conflict with §§349 or 362 and prevents levy on Trustee while funds are held
Whether Virginia Code §63.2-1929 is preempted to the extent it authorizes levies on a Chapter 13 Trustee holding post-petition payments	State statute authorizes levy on any person holding debtor property, including Trustee	Federal statute (§1326(a)(2)) dictates Trustee must return funds to debtor; conflicting state law is preempted	State law is preempted to the extent it conflicts with the federal statutory mandate

Key Cases Cited

Harris v. Viegelahn, 135 S. Ct. 1829 (2015) (describing core mechanics and protections of Chapter 13 postpetition wage payments)
Ransom v. FIA Card Servs., N.A., 562 U.S. 61 (2011) (statutory interpretation of Bankruptcy Code begins with plain text)
United States v. Ron Pair Enters., 489 U.S. 235 (1989) (give effect to statutory language where plain)
Dellmuth v. Muth, 491 U.S. 223 (1989) (plain statutory language controls inquiry)
Russello v. United States, 464 U.S. 16 (1983) (different text in neighboring statutes implies deliberate congressional choice)
Fed. Communications Comm’n v. Nextwave Pers. Commc’ns Inc., 537 U.S. 293 (2003) (Congress expresses exceptions clearly when intended)
Carroll v. Logan, 735 F.3d 147 (4th Cir. 2013) (give effect to every word of a statute)
In re ESA Envtl. Specialists, Inc., 709 F.3d 388 (4th Cir. 2013) (standard of review for bankruptcy appeals)