In Re Doherty
MEMORANDUM OPINION
I.
Procedural Posture & Jurisdictional Statement
A сreditor attempted to seize funds held by the Chapter 13 Trustee following dismissal of the Debtor’s case but prior to distribution of the funds held by the Chapter 13 Trustee. The Chapter 13 Trustee moved to quash the creditor’s attempt to seize.
The issues in this matter involve the administration of a bankruptcy case filed under Title 11 of the United States Code. It is a core proсeeding.
II.
Facts
Debtors, John and Irene Doherty, filed a Chapter 13 petition October 7, 1996. The Dohertys were unable to confirm a plan. On February 19,1998, the Court granted a creditor’s motion to dismiss. The Order of dismissal was entered on February 26, 1998. The Washington State Department of Revenue wasted no time and on February 27,1998 pursuant to
On April 10, 1998, the Trustee filed a motion seeking to quash the Notice and Order to Withhold and Deliver. In the motion the Trustee stated that he was holding $9,330.00 received from or on behalf of the Debtors and that under LBR 2083 — 1(? )(5) he was entitled to deduct $516.00 for administrative expenses. 1 The Trustee seeks to pay the funds remaining after deduction of administrative expenses to the Debtors.
III.
Issue
Are funds held by the Chapter 13 Trustee after dismissal of the case prior to confirmation subject to a Notice and Order to Withhold and Deliver issued by the Washington State Department of Revenue or should the funds be returned to the Debtors?
IV.
Discussion
A. The Effect of Dismissal on the Estate and the Automatic Stay.
The commencement of a case under sections 301, 302 or 303 creates the Bankruptcy Estate.
Unfortunately the Bankruptcy Code is not specific as to when the estate passes out of existence. The First Circuit in
In re De Jesus Saez,
Section 362(c) provides that the stay continue as to creditor conduct not directed against property of the estate, only until dismissal, and as to conduct directed against such property, only so long as it remains in the estate. It seems self evident that there is no “estate” and hence no “property of the estate” unless there is an existing petition.
B. The Effect of the Notice and Order to Withhold under State Law.
The Court must determine if and when the state obtained a right in the funds in the trustee’s possession.
The State of Washington is attempting to seize the funds in the Chapter 13 Trustee’s possession relying on the State’s Notice and Order to Withhold and Deliver procedure. The Department of Revenue is proceeding under
The Court recognizes that the State is not proceeding upon a writ of garnishment issued by the Superior Court.
Before the Court can decide whether this imposition of a state lien on the funds held by the Trustee is an improper interference with the bankruptcy process, the Court must consider the Bankruptcy Codes directions as to the disposition of property upon dismissal of the case.
C. Disposition of Former Estate Property.
Once the bankruptcy petition is dismissed and the estate terminates, the question becomes what happens to the former property of the estate. The language of
The disposition of post-petition funds received by the Chapter 13 Trustee is addressed in
Dismissal of a Chapter 13 case does not automatically terminate the Court’s jurisdiction over the Chapter 13 Trustee or former estate funds that he holds. The source of the Court’s continuing jurisdiction is implied rather than expressly stated in the Bankruptcy Code. The court in
In re Ethington,
The Trustee is a creature of the Bankruptcy Code and the Court. The Court has a right and a duty to review the performance of the Trustee. Even after a case is dismissed, the Trustee must still deal with administrative claims pursuant to
Some courts have chosen to make the retention of jurisdiction part of the order of dismissal. These courts cite
In the post dismissal period, the Court has jurisdiction to deal with issues arising undеr
The United States Supreme Court discussed thе long recognized principal that where property is in the jurisdiction of one court another court may not seek to remove the property from the jurisdiction of the first court.
Murphy v. John Hofman Co.,
In Murphy v. Hofman, a creditor in a bankruptcy sought a writ of replevin in state court against the bankruptcy receivеr. The Supreme Court held that seizure of the goods pursuant to a writ of replevin was an improper invasion of the bankruptcy court’s possession of the property.
But, where the property in dispute is in the actual possession of the court of bankruptcy, there comes into play another principle, not peculiar to cоurts of bankruptcy, but applicable to all courts, Federal orstate. Where a court of competent jurisdiction has taken property into its possession through its officers, the property is thereby withdrawn from the jurisdiction of all other courts. The court, having possession of the property, has an ancillary jurisdiction to hear and detеrmine all questions respecting the title, possession or control of the property. In the courts of the United States this ancillary jurisdiction may be exercised, through it is not authorized by any statute. The jurisdiction in such cases arises out of the possession of the property, and is exclusive of the jurisdiction of all other courts, although otherwise the controversy would be cognizable in them.
Murphy v. Hofman,
The policy behind the principle of
Custodia Legis
is to prevent a clash between judicial jurisdictions as a result of a court in one jurisdiction attempting to seize assets in the control of another.
In re Quakertown Shopping Center Inc.,
The State of Washington is relying upon its status as holder of a “judgment lien” to seize property in the custody of the Chapter 13 Trustee, an officer of the bankruptсy court. The State of Washington cannot compel the Chapter 13 Trustee to turnover the funds which are subject to a Section 503(b) administrative claim or payment of the Trustees fees and expenses. The last sentence of
If a plan is not confirmed, the trustee shall return any such payment to the debtor, after deducting any unpaid claim allowed under section 503(b) of this title.
This is a clear statutory mandate to the Trustee. The Court cannot permit the State’s levy to interfere with the accomplishment of the Trustee’s duties to determine and pay costs of administration. Those statutory duties are preemptive both under the Supremacy Clause of the United States Constitution and the doctrine of Custodia Legis. The Trustee in this case has accomplished these duties and the only matter remaining is distribution of the remainder of the funds to the debtor after paying costs of administration.
The question then becomes whether the State’s levy upon the funds not necessary to pay the administrative and trustee costs primes the Debtors’ claim to the funds.
The Trustee and Debtors’ have cited
In re Nash,
There is some authority at the bankruptcy court level on this issue. A number of these cases invоlve the effect of an IRS levy. On facts remarkably similar to those in this case the bankruptcy courts in
In re Pendrick,
The only instance the Court can find of an entity other than the Internal Revenue Service attempting to attach or levy on funds held by the Chapter 13 Trustee post dismissal is an attempted levy by the Illinois Department of Revenue in
In re Clifford,
The court in
In re Walter,
Does the statutory direction to pay to the debtor mean pay exclusively to the debtor or are the funds subject to execution by creditors? The language of
The Debtors argue that the language of
The Bankruptcy Code grants protection to debtors and their property in quite specific provisions. The automatic stay provision of
The Debtors might argue that this was another incentive offered by Congress to make Chapter 13 a more attractive alternative for debtors as compared tо relief under other chapters of the Code. Certainly the ability to set aside funds protected from the claims of creditors would be a great incentive to debtors but it is unlikely that Congress would supply that incentive to one who may have decided to forego the responsibilities to one’s creditors contained in the Bankruptcy Code.
Congress hаs specifically provided safeguards to protect debtors from the adverse consequences to them of choosing Chapter 13 relief as opposed to Chapter 7 relief. If the Chapter 13 fails, the debtors in good faith may convert their case to one under Chapter 7. In such cases the property of the estate and vаluation of secured claims is determined as of the date of the original filing as opposed to the conversion date.
The interpretation suggested by the Debtors would give more incentive to dismiss the case than to remain within the constraints of the Code provisions by converting case to one under Chapter 7. The court fails to see why Congress would intentionally encourage dismissal rather than conversion in these circumstances by giving debtors a head start in disposing of the funds in the race with their creditors.
The Trustee argues that allowing creditors to levy would be unduly burdensome tо his office. The Trustee is merely a stakeholder. The levy does not interfere with the administration of this case. That work is completed. There is not a compelling argument for why the Chapter 13 Trustee should be treated differently from any other person or entity who holds funds of the debtor. There is always a burden in responding to garnishments and levies but the Court questiоns whether it is any greater burden for the Trustee than for any other respondent to a Notice and Order to Withhold and Deliver. This argument is not persuasive.
IV.
Conclusion
The Court finds that the Trustee is authorized and entitled to deduct from the funds held the sum of $516.00 for administrative expenses. After deduction of this amount, the remaining funds are subject to the De
Notes
. Local Bankruptcy Rule for the Eastern District of Washington 2083-1 provides in pertinent part:
(1) Distributions and Payments by Chapter 13 Trustee
(5) Disposition of Funds on Conversion or Dismissal
(A) On the conversion or dismissal of a case, the Chapter 13 trustee shall, as soon as practicable, disburse any remaining funds in according with11 U.S.C. § 1326 . If a motion is filed pursuant to11 U.S.C. § 348(f)(2) and the trustee is served a copy thereof prior to disbursement, then the Chapter 13 trustee shall not further disburse until resolution of the motion.
(B) If a case is dismissed or converted prior to confirmation, then the Chapter 13 trustee shall be entitled to deduct and retain as reimbursement for set up and maintenance costs an amount as established by the Court.
. The language of