In Re: Barry L. Michael v.
699 F.3d 305
| 3rd Cir. | 2012Background
- Barry Michael filed a voluntary Chapter 13 petition in 2005; his plan was confirmed in 2006 and funded largely by post-petition earnings directed to the Chapter 13 trustee.
- The plan allocated trustee-disbursement to secured and priority creditors, with unsecured creditors paid pro rata as funds became available.
- GMAC obtained relief from stay in 2006, foreclosing on the residence; the trustee continued to receive wage attachments despite GMAC’s stance.
- Wages were accumulated by the trustee because GMAC refused to accept plan payments; funds remained in trust until Michael converted to Chapter 7 in 2009.
- After conversion, Michael sought return of $9,181.62 held by the trustee; the trustee urged distribution to unsecured creditors under the plan.
- Both lower courts concluded that undistributed plan payments should be returned to Michael absent bad faith, and the trustee appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| What does § 348(f) require for undistributed Chapter 13 payments on conversion? | Trustee should distribute to creditors under the plan | Funds belong to the debtor under § 348(f) unless bad faith exists | Undistributed funds must be returned to the debtor absent bad faith |
| Does § 1326(a)(2) or plan confirmation affect ownership of post-petition funds on conversion? | Plan funds vest in creditors upon confirmation | Post-petition funds revert to debtor on conversion | § 348(f) governs; funds revert to debtor absent bad faith |
| Does the debtor’s good or bad faith affect the post-conversion disposition of funds? | Bad-faith conversion can vest funds in creditors | No presumption of bad faith; debtor entitled to funds absent bad faith | No bad faith shown; funds returnable to debtor under § 348(f) |
| What is the policy rationale behind § 348(f) as applied to post-petition earnings? | Return to debtor would undermine Congress’s intent to encourage Chapter 13 | Distribution to creditors aligns with plan and fairness | Textual history favors returning funds to debtor to encourage Chapter 13 |
| Should practical administration affect the result (trustee duties post-conversion)? | Trustee’s ongoing duties to distribute under the plan persist | Trustee's duties end; plan is no longer operative | Trustee duties narrowed; funds revert to debtor; plan no longer governs distribution |
Key Cases Cited
- In re Boggs, 137 B.R. 408 (Bankr. W.D. Wash. 1992) (undistributed Chapter 13 funds may be returned to debtor on conversion)
- In re Bobroff, 766 F.2d 797 (3d Cir. 1985) (post-petition income may not remain estate on conversion unless § 348(f) applies)
- Matter of Lybrook, 951 F.2d 136 (7th Cir. 1991) (circuit split regarding post-petition funds on conversion; § 348(f) adopted to resolve)
- Stamm v. Morton (In re Stamm), 222 F.3d 216 (5th Cir. 2000) (cites § 348(f) to hold post-petition income does not remain in Chapter 7 estate on conversion)
- In re Bell, 248 F.3d 236 (2d Cir. 2000) (post-petition earnings not part of Chapter 7 estate on conversion absent bad faith)