In re Clements
OPINION
I. INTRODUCTION
Section 348(f) of the Bankruptcy Code provides that upon a good faith conversion of a case from chapter 13 to chapter 7, property of the bankruptcy estate consists only of property of the estate, as of the date of the bankruptcy filing, that is still possessed or controlled by the debtor, ie., only those property interests of the debtor that existed when the case was commenced that are part of the bankruptcy estate under
This case presents a similar, but distinct question: whether, upon conversion of a chapter 13 case prior to confirmation of a chapter 13 plan, the undistributed plan payments derived from the debtor’s post-petition assets should be returned to the debtor, or whether they should be distributed first on account of allowable chapter 13 administrative expenses. In this case, the Debtor’s chapter 13 counsel contends that, notwithstanding
As explained below, while the case is presented to the court as one which re
II. BACKGROUND
Debtor Ebony Clements (“the Debtor”) filed a chapter 13 bankruptcy petition on July 12, 2012. Throughout the case, she has been represented by Basso & Chambers, LLC (“B & C”).
On November 26, 2012, the Debtor filed an amended chapter 13 plan (“the Plan”). (Doc. # 14). The Plan required her to pay the Chapter 13 Trustee $499.00 per month for five (5) months, then $518.00 per month for fifty-five (55) months. While in chapter 13, the Debtor paid the Chapter 13 Trustee a total of $1,750.00.
On November 26, 2012, B & C filed an Application for Compensation and Reimbursement of Expenses (“the Application”) (Doc. # 15). In the Application, B & C requested compensation of $2,889.00 and reimbursement of $40.00 in expenses. B & C disclosed that it had received $389.00 from the Debtor prior to the filing of the bankruptcy petition, leaving a balance of $2,500.00 to be paid by the Chapter 13 Trustee.
The Plan was never confirmed by the court. Instead, on February 5, 2013, the Debtor filed what she styled as an “Application Under
After the entry of the court’s February 8, 2013 order, the case proceeded under chapter 7. The U.S. Trustee appointed an interim chapter 7 trustee (“the Chapter 7 Trustee”). The Clerk scheduled a meeting of creditors pursuant to
The Chapter 13 Trustee has retained $1,750.00 that the Debtor paid prior to the conversion of the case, pending further direction from the court. Notwithstanding the conversion of the case to chapter 7, B & C asserts that the court should rule on the pending Application and direct the Chapter 13 Trustee to pay B & C the amounts allowed as compensation and for reimbursement of expenses.
On February 28, 2013, the court entered an order requiring B & C to file a memorandum of law in support of its position. (Doc. # 39). The order also required that the memorandum be served on the Debtor, the Chapter 13 Trustee and the Chapter 7 Trustee in order to provide each of them with an opportunity to file an opposing memorandum. B & C filed its memorandum on March 15, 2013. None of the other parties responded. No party in interest requested an evidentiary hearing.
III. DISCUSSION
In Michael, the Court of Appeals discussed, in some detail, the relevant Code provisions relating to the disposition of
A.
1.
Section
property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.
(emphasis added).
In order to understand the effect of
In a chapter 13 case,
Conversion of a case from chapter 13 to chapter 7 effects, by operation of law, a material change in the scope of the bankruptcy estate.
In effect, because all (or at least most)
In most cases converted from chapter 13 to chapter 7, the undistributed plan payments held by the chapter 13 trustee do not flow into the chapter 7 estate upon conversion as a result of 348(f)(1)(A). This is because, usually, the source of the debt- or’s payments to the chapter 13 trustee is the debtor’s post-petition earnings and such earnings are not property of the estate by virtue of
In Michael, the court explained that the fundamental policy behind
2.
In this case, the Debtor disclosed in Schedule I that her income was derived from her employment as a claims examiner with the Veterans Benefits Administration. (Doc. # 1). It is fair to infer that her chapter 13 plan payments were derived, more likely than not, from post-petition earnings that are not included in the chapter 7 estate after conversion. B & C does not suggest otherwise. Further, the chapter 7 trustee appears to have reached the same conclusion, having filed a report stating that there are no assets to administer.
3.
As the Michael court held, albeit in the context of a post-confirmation conversion of a chapter 13 case to chapter 7,
B & C contends, however, that the third sentence of
B.
1.
(1) Unless the court orders otherwise, the debtor shall commence making payments not later than 30 days after the date of the filing of the plan or the order for relief, whichever is earlier, in the amount—
(A) proposed by the plan to the trustee;
(2) 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 pay*81 ment in accordance with the plan as soon as is practicable. If a plan is not confirmed, the trustee shall return any such payments not previously paid and not yet due and owing to creditors pursuant to paragraph (3) to the debtor, after deducting any unpaid claim allowed undersection 503(b) .
(emphasis added).
The first sentence of
Both the second and third sentences of
In this case, B & C asserts that the third sentence is applicable and that the relevant “deduction” is for “any unpaid claim allowed under
One purpose of the third sentence of
Another purpose, however, expressed in the mandatory deduction of allowed administrative expenses from the monies to be returned to the debtor, is to shift some of the risk of the failure of the case from administrative claimants to the debtor. See In re Barbee,
2.
The key question that arises — an aspect of the statutory “tension” identified in Michael — is how the third sentence of
B & C contends that the answer to these questions is “yes.” There is authority for B & C’s position. See, e.g., In re Hampton,
C. The Scope of the Third Sentence of
The determinative statutory interpretation question in this case is: does the phrase in the third sentence of
Based on a textual analysis of the three sentences in
(1) pre-confirmation duties;
(2) duties upon entry of an order confirming the debtor’s chapter 13 plan; and
(3) duties upon entry of an order denying confirmation of the debtor’s chapter 13 plan.
In light of the framework set out in the first sentence, which addresses the trustee’s pre-confirmation duty (and stating that the duty is to retain the payments), the second and third sentences of
The third sentence employs different wording from the first sentence, in that it uses the more general phrase “[i]f a plan is not confirmed,” rather than the words “denial of confirmation.” Nevertheless, given the context and the structure of the entire subsection, it makes more sense to read the third sentence to “close the circle” on the scenarios identified in the first sentence by setting forth the consequences of the denial of confirmation. Thus, when read in context, the third sentence of
The foregoing interpretation of the statute is supported by the principle of
In this case, the court did not deny confirmation of the Debtor’s chapter 13 plan; the Debtor converted the case to chapter 7 before any ruling on the confirmation of her chapter 13 plan. It follows that the third sentence of
D. The Michael Opinion
Before concluding, I return briefly to the Michael opinion.
As stated earlier, the dictum in the opinion might be read to be contrary to my ruling in this matter. See n. 15, supra. In particular, in footnote 7, the panel majority stated, without qualification, that “[i]n the pre-confirmation context, the trustee is obligated to pay allowed administrative expenses from accumulated payments he is holding,” citing
1.
Initially, there is no question that the commentary in footnote 7 is dictum.
The issue in Michael was whether, after a good faith conversion of a chapter 13 case to chapter 7 after the confirmation of the debtor’s chapter 13 plan, the undistrib
By comparison, this case involves an interpretation of the third sentence of
2.
It is settled law that dictum in a decision of the court of appeals is not binding on lower courts (or a subsequent panel of the court of appeals). See, e.g., Kool, Mann, Coffee & Co. v. Coffey,
Though stare decisis is fundamental to our jurisprudence, and the governing power of precedent is absolute, not every rumination of a higher court is to be awarded equal weight by a lower court. The doctrine of stare decisis focuses on the decision of the court and the rule the decision adopts. [A] case is important only for what it decides: for “the what,” not for “the why,” and not for “the how.”
Coregis Ins. Co. v. Law Offices of Carole F. Kafrissen,
Nevertheless, dictum in a decision of the court of appeals is entitled to deference and is not to be disregarded lightly. See, e.g., Official Committee of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery,
3.
The decision in this case is not inconsistent with the Michael court’s dictum. By citing the third sentence of
A conflict between this decision and Michael arises only if one reads the phrase “preconfirmation context” in footnote 7 of Michael as suggesting that the third sentence of
I also observe that the broad statement in footnote 7 (referring unqualifiedly to the “preconfirmation context”) did not differentiate between undistributed funds held by the chapter 13 trustee that become property of the chapter 7 estate under
Finally, as discussed earlier, it is not entirely clear that footnote 7 represents the entirety of the Court of Appeals’ thinking on the relationship between
IV. CONCLUSION
This case presents interrelated issues of statutory construction and bankruptcy policy.
In an effort to encourage the use of chapter 13 and to avoid penalizing debtors whose chapter 13 cases are unsuccessful and who convert in good faith to chapter 7,
For the reasons expressed in this opinion, I have held that the third sentence of
An appropriate order follows.
ORDER
AND NOW, upon consideration of the Application for Compensation and Reimbursement of Expenses (“the Application”) (Doc. # 15) filed by Basso and Chambers, LLC (“B & C”), and B & C’s Memorandum of Law in support thereof, and for the reasons stated in the accompanying Opinion, it is hereby ORDERED that
1. B & C s request that, pursuant to
2. The Application is DENIED WITHOUT PREJUDICE.
Notes
. Michael was a 2-1 decision, with Judges Ambro and Sloviter in the majority and Judge Roth dissenting.
. Excepted from the general rule are assets acquired by the debtor by bequest, devise, inheritance, marital settlement agreements or as the beneficiary of a life insurance policy or a death benefit plan are treated as property of the estate if acquired by the debtor within 180 days of the filing of the bankruptcy petition. Also, certain other assets, not owned or possessed by the debtor as of the commencement of the case may become estate assets as a result of post-petition events. See
.
. Subsection (f)(1)(A) was added to
. Various types of assets that fall within the broad definition of property of the estate under
. The Bullock decision preceded the enactment of
.Certainly, there are cases in which this will not be true. If, for example, the source of the debtor’s chapter 13 plan payments prior to conversion were rents from real property owned by the debtor, the funds held by the trustee may well be included in the chapter 7 bankruptcy estate after conversion. See
. Theoretically, it is also possible that the chapter 7 trustee believed that the undistributed plan payments were part of the chapter 7 estate but decided not to administer them because they were of inconsequential value or because the debtor could exempt them. However, in light of the information in the Debtor's schedules, this is unlikely.
. Consequently, this case does not require a determination regarding the proper disposition of undistributed plan payments after conversion of a case in which the undistributed plan payments, in whole or in part, become part of the chapter 7 bankruptcy estate pursuant to
.
.
I note that some reported cases and two (2) leading treatises seem to imply, that § 1326(c) may have nothing to do with the trustee's duties, but rather, the purpose of this provision is to permit the debtor, rather than the trustee, to serve as the disbursing agent under the plan. See Williams,
. I will further discuss the phrase "if a plan is confirmed” in Part III.C, infra, because it is susceptible to two (2) potential interpretations and that choice affects the disposition of this matter.
. The other deduction is for amounts due to creditors under
Throughout the balance of this opinion, for ease of reference, I will refer only to the administrative expense exception. By doing so, 1 do not intend to imply that the
.
. Certain passages in Michael also can be read to support B & C’s position, while other passages tend to support the contrary result.
At one point in the opinion, the panel majority juxtaposed §§ 348 and 349 with
Sections 348 and 349 are broad provisions applicable to every Chapter of the Bank*83 ruptcy Code. The specific provisions of Chapter 13 supersede any distinction that may be read into these proceeding general provisions.
On the other hand, the ratio decidendi of the decision was that a creditor’s right to payment under a confirmed plan does not vest against the plan payments themselves until the payments are actually delivered; hence, a creditor has no vested rights in the undistributed plan payments in the possession of the chapter 13 trustee:
[NJo provision in the Bankruptcy Code classifies any property, including post-petition -wages, as belonging to creditors. Rather, property comes into and flows out of the estate.... Though creditors have a right to those payments based on the confirmed plan, the debtor does not lose his vested interest until the trustee affirmatively transfers the funds to creditors. Also,§§ 1326(a)(2) and (c) only address the obligation of the trustee to distribute payments in accordance with a confirmed plan; they do not vest creditors with any property rights.
If the second sentence of
. This issue regarding the scope of the third sentence of
. Several years ago, in In re Lewis,
In Lewis, no order was entered denying confirmation before the entry of the dismissal order. Consequently, I discussed various arguments in favor of each interpretation of the statute.
In the end, the actual, narrow holding in Lewis was that the third sentence of
. The third sentence of
. I am cognizant that the narrow construction I have given to the third sentence of
As I have interpreted the statute, the third sentence of
I note further, however, that to the extent that the narrow interpretation of the scope of the third sentence of
. Section 726(b) provides that administrative expenses allowed under
. By comparison,
. I recognize that the outcome in this case may not be satisfying to the professionals who appear regularly in bankruptcy cases. The underlying issues are significant and it is understandable that they would like them resolved. However, as a trial court, not an appellate court, I consider it appropriate, and in the best tradition of the common law, to endeavor to decide only those issues that are necessary to resolve the controversy before the court. See Peter Margulies, Article: Advising Terrorism: Material Support, Safe Harbors, and Freedom of Speech, 63 Hastings L.J. 455, 497 & n. 243 (2012); see also In re Midway,