533 B.R. 826
Bankr. D.N.M.2015Background
- Three Chapter 13 cases were voluntarily converted to Chapter 7; in two conversions occurred before plan confirmation and in one (Beauregard) after confirmation.
- The Chapter 13 (Standing) Trustee was holding post-petition wage payments collected under the Chapter 13 plans at the time of conversion.
- The Trustee asked whether she may disburse held funds to creditors and administrative claimants (e.g., debtor’s counsel) after conversion, following prior local practice and plan provisions.
- The Supreme Court’s decision in Harris v. Viegelahn addressed a similar factual situation: undistributed Chapter 13 wage payments held at conversion and the Chapter 13 trustee’s post-conversion disbursements.
- This Court interprets Harris to require return of all held non‑estate funds to the debtor on conversion, even if a plan was confirmed or administrative claims remain unpaid.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a former Chapter 13 trustee may pay creditors from funds held at conversion when the Chapter 13 plan was confirmed | Trustee (or creditors) argued the confirmed plan vested creditors and authorized the trustee to disburse funds per plan provisions | Debtor argued conversion places case under Chapter 7 and Chapter 13 provisions (including plan) no longer bind; funds must be returned | Held: After conversion, Chapter 13 provisions (and plan) no longer govern; trustee must return nondisposable funds to debtor and may not pay creditors |
| Whether a former Chapter 13 trustee may pay administrative expenses (e.g., unpaid attorney fees) from held funds when conversion occurs before plan confirmation | Trustees/creditors relied on pre-Harris practice and §1326(a)(2) to permit payment of allowed administrative claims from held funds before returning remainder to debtor | Debtor argued Harris forecloses giving effect to Chapter 13 distribution rules after conversion; administrative payments are Chapter 13 duties and cannot be performed post-conversion | Held: Trustee may not pay administrative expenses from held nondisposable funds after conversion; funds must be returned to debtor |
| Whether a debtor’s assignment or security interest in held funds can secure payment of unpaid counsel fees post-conversion | Debtor’s counsel (or trustee paying pursuant to assignment) argued an assignment attached to conversion notice can allow payment to counsel from held funds | Debtor (and Harris precedent) argued Chapter 13 scheme cannot be the basis for post-conversion disbursements, but assignments may be effective if created pre-conversion by debtor | Held: Court suggests attorneys may protect fees by obtaining debtor assignments/security interests in post‑petition wages prior to conversion (practical solution), but absent effective assignment, trustee cannot use Chapter 13 authority to pay fees post-conversion |
Key Cases Cited
- Harris v. Viegelahn, 135 S. Ct. 1829 (2015) (Supreme Court: upon conversion to Chapter 7, Chapter 13 provisions and confirmed plan no longer bind and undistributed postpetition wages must be returned to debtor)
- In re Harris, 757 F.3d 468 (5th Cir. 2014) (Fifth Circuit decision reversing district court and holding creditors had superior claim to undistributed funds)
- Harris v. Viegelahn, 491 B.R. 866 (W.D. Tex. 2013) (district court opinion affirming bankruptcy court order returning undistributed funds to debtor)
- In re Michael, 699 F.3d 305 (3d Cir. 2012) (rejecting notion that Bankruptcy Code classifies postpetition wages as belonging to creditors)