609 B.R. 712
Bankr. N.D. Ohio2019Background
- Debtors filed Chapter 7 on July 30, 2014; case closed as no-asset on Nov. 25, 2014 and reopened Sept. 2017 to disclose an unscheduled asset (Actos class-action claim).
- Trustee issued notice (via BNC) that creditors must file proofs of claim for recovered assets; deadline for those claims was set by court for Jan. 29, 2018; Trustee later filed a Final Report and made distributions to timely filed claims in Oct. 2018.
- On Nov. 13, 2018 the Trustee received two refund checks (total ~$3,802) from Second National Bank—Debtors say these were returned because they paid the underlying debt after discharge.
- Trustee sent his own 30-day "Notice of Extension of Time to File Claims against Surplus Funds." Chase filed Claim No. 6 on March 28, 2019 for $8,078.27, which was late relative to the Trustee’s 30-day notice.
- Debtors objected, arguing the returned funds should be returned to them (or they have a superior reimbursement/subrogation claim) and that tardily filed claims cannot be paid after the Trustee’s Final Report; Trustee and Chase argued §726(a)(3) gives tardily filed unsecured claims priority over the debtor’s share under §726(a)(6).
Issues
| Issue | Debtors' Argument | Chase/Trustee's Argument | Held |
|---|---|---|---|
| Whether Debtors are entitled to surplus funds ahead of Chase’s tardy unsecured claim | Debtors say they paid off Second National Bank and thus are entitled to the returned funds (reimbursement/subrogation); Final Report precludes paying tardy claims | §726(a)(3) gives tardily filed unsecured claims priority over the debtor’s share under §726(a)(6); Trustee may pay such tardy claims if administratively feasible | Court denied objection; late claim may be paid under §726(a)(3) and debtor’s right is subordinate to tardy claim |
| Whether §§502(e)/509 (reimbursement/subrogation) or similar equitable relief entitle Debtors to a higher priority | Debtors assert reimbursement/subrogation for paying the Bank’s claim | Those code provisions apply to codebtors (entities liable with the debtor); a debtor cannot subrogate or claim reimbursement for paying its own debt | Court held §§502(e)/509 don’t apply; Debtors are not codebtors and cannot claim subrogation for paying their own debt |
| Whether the Trustee’s 30‑day notice created a binding deadline that bars Chase’s late claim | Debtors argue Chase missed the Trustee’s 30‑day window, so claim should be barred | Trustee’s notice is not authority to alter statutory distribution scheme; statutory priorities control | Court held Trustee’s notice did not override the Code; the 30‑day limitation is irrelevant to §726(a)(3) priority |
| Whether Trustee’s Final Report and distributions preclude paying a tardily filed claim | Debtors contend Final Report approval prevents further payments to tardy claimants | Trustee says no undue administrative burden exists and the Code permits tardy claims to be paid under §726(a)(3) | Court found no showing that payment is impracticable and refused to bar Chase; distributions must follow statutory priorities |
Key Cases Cited
- Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017) (bankruptcy distributions must follow the priority scheme established by the Code)
- Law v. Siegel, 571 U.S. 415 (2014) (courts may not use equitable powers to alter statutory allocation created by Congress)
- In re Kreisler, 546 F.3d 863 (7th Cir. 2008) (debtor could have structured a payoff to obtain the creditor’s claim but did not)
- Rubenstein v. Ball Bros., Inc. (In re New England Fish Co.), 749 F.2d 1277 (9th Cir. 1984) (subrogation does not arise where one pays one’s own debt)
- In re Oliver, 511 B.R. 556 (Bankr. W.D. Wis. 2014) (disallowing attempts to invert §726 priorities to favor debtor)