MemoraNdum
The issue in these Chapter 13 cases is: What happens at dismissal to funds held by the trustee in a confirmed Chapter 13 case? 11 U.S.C. § 349(b)(3) provides the answer: Absent court order otherwise, undistributed funds must be returned to the debtor at dismissal after confirmation. The following are findings of fact and conclusions of law. Fed. R. Bankr.P. 7052.
1. Facts
There are no disputed facts.
After confirmation, each of these debtors failed to fully fund their plans resulting in orders of dismissal. At dismissal, the Chapter 13 trustee held undistributed funds in each case, ranging from $2789 to $12,975. A disputed mortgage claim caused a large portion of the undistributed funds in each case — distributions were being held by the trustee pending resolution of the claims objections.
The standing Chapter 13 trustee filed an Application for Instruction Regarding Disposition of Trust Assets in each case. The trustee took no position in these Applications. When pressed at oral argument, the trustee observed that “general principles of trust law” support distribution pursuant to the confirmed plan of any sum held at dismissal. The trustee explained that payments made into plans from debtors’ postpetition earnings were the trust res impressed with the conditions in confirmation orders that would require him to distribute funds on hand at dismissal consistent with the confirmed plans. The trustee cited In re Parrish,
The law firm of Rothschild & Aus-brooks, PLLC, was granted leave to file an amicus brief on behalf of The Middle Tennessee Association of Consumеr Bankruptcy Attorneys (“MACBA”). Southeast Financial Credit Union appeared as well. These additional briefs were helpful.
MACBA argued that undistributed funds held at dismissal in a confirmed Chapter 13 case should be returned to the debtor after deducting any unpaid costs of administration allowed under 11 U.S.C. § 503(b).
MACBA invokes the opening phrase in 11 U.S.C. § 349(b)(3) — “[ujnless the court, for cause, orders otherwise” — as authority for its general rule of payment of attorney fees in Chapter 13 cases dismissed after confirmation. In this way, treatment of fees post confirmation would mirror treatment of undistributed funds in cases dismissed prior to confirmation under § 1326(b)(2).
Southeast Financial Credit Union (“Southeast”), self-described as a consumer lender, often holds secured (home mortgages, automobile loans) and/or unsecured (credit card debt) claims in Chapter 13 cases. Southeast argues that funds held by the Chapter 13 trustee at dismissal of a confirmed case should be distributed in accordance with the confirmed plan.
II. Discussion
The only issue in these cases is the disposition of undistributed funds held by the Chapter 13 trustee at dismissal of a confirmed Chapter 13 case.
A. 11 U.S.C. § 1326.
Southeast argues that the “plain language” of 11 U.S.C. § 1326(a)(2) and (c) requires distribution to creditors in accordance with the plan at dismissal after confirmation. This position has some support
There are at least two major problems with this approach. Section 1326 has nothing to say about payments to the trustee after confirmation and before dismissal. Perhaps more fundamentally, § 1326 provides no direction to the trustee in cases such as these that are dismissed after a plan has been confirmed.
Section 1326 provides:
(a)(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 fоr relief, whichever is earlier, in the amount—
(A) proposed by the plan to the trustee;
(B) scheduled in a lease of personal property directly to the lessor for that portion of the obligation that becomes due after the order for relief, reducing the payments under subparagraph (A) by the amount so paid and providing the trustee with evidence of such payments, including the amount and date of payment; and
(C) that provides adequate protection directly to a creditor holding an allowed claim secured by personal property to the extent the claim is attributable to the purchase of such property by the debtor for that portion of the obligation that becomes due after the order for relief, reducing the payments under subparagraph (A) by the amount so paid and providing the trustee with evidence of such payment, including the amount and the date of payment.
(2) A payment made undеr 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 payment 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 under section 503(b).
(c) Except as otherwise provided in the plan or the order confirming the plan, the trustee shall make payments to creditors under the plan.
11 U.S.C. § 1326 (emphasis added).
Section 1326(a)(2) must be read in context of the entire subsection. See, e.g., Massachusetts v. Pappalardo (In re Steenstra),
This subsection applies only to plan payments made prior to confirmation. The first sentence instructs trustees to retainpre-confirmation plan payments until the court cоnfirms a plan or denies confirmation. The next sentence tells the trustee, ‘now distribute those pre-confir-mation payments in accordance with the plan as soon as you can.’ The third sentence indicates what a trustee should do with those pre-confirmation payments if a plan is not confirmed.
After the trustee distributes those pre-confirmation payments, he or she can now act according to the confirmed plan. For this portion of the bankruptcy case, section 1326(c) instructs the trustee to “make payments to creditors under the plan.” As [Nash v. Kester (In re Nash),765 F.2d 1410 (9th Cir.1985) ] clarified, this section (previously 1326(b)) “was intended to address only the question of who should act as disbursing agent (debtor, trustee, or someone else) of Chapter 13 plan funds. Section 1326(b) [now (c) ] does not address whether the Trustee was required to continue making distributions after the first Chapter 13 case was dismissed.”
Indeed, none of the provisions оf § 1326 provide any direction to the trustee when a case is dismissed post-confirmation. “[Section] 1326(a)(2) applies only to payments paid to the trustee after the commencement of the case but prior to confirmation or denial of confirmation, and is inapplicable to funds paid to the trustee post-confirmation [....]” It is section 349(b)(3) to which we must turn for direction.
Williams v. Marshall (In re Williams),
It is not clear from the trustee’s Applications or from the stipulated facts whether any portion of the funds held in these cases was collected prior to confirmation. Section 1326(b)(2) states that pre-confirmation funds should be distributed in accordance with the confirmed plan “as soon as practicable.” Some courts have found that § 1326(a)(2) controls the distribution of funds held at dismissal at least to the extent those funds were received by the trustee before confirmation. See, e.g., In re Michael,
No party in these cases disputes that it was not practicable for the trustee to distribute all funds on hand before these debtors dismissed their Chapter 13 cases. A substantial portion of the funds on hand at dismissal in each of these cases was held by the trustee because there were unresolved claims objections. Chapter 13 trustees are forbidden to distribute funds to creditors with claims that have not been allowed because of pending objections. See 11 U.S.C. §§ 501, 502 & 1326(c); see, e.g., In re Dumain, No. 11-37183,
Practicality is a reasonable dividing line in this context. Chapter 13 trustees typically distribute funds to allowed creditors once a month. A standing trustee in a district with a large Chapter 13 program may issue tens of thousands of checks each month. Creditors expect distributions on a regular schedule, often on the same day of the month each month. The trustee has no control over the timing of dismissal of cases — dismissal can occur by court order at anytime during the month. Trustees cannot time distributions to manage actions like dismissal within individual cases.
For all funds in these cases that could not practicably be distributed pursuant to the confirmed plans before dismissal, Williams correctly directs attention to § 349(b).
B. 11 U.S.C. § 349(b)
Subsection (b) of § 349 — aptly entitled “Effect of dismissal”- — provides:
(b) Unless the court, for cause, orders otherwise, a dismissal of a case other than under section 742 of this title—
(1) reinstates—
(A) any proceeding or custodianship superseded under section 543 of this title;
(B) any transfer avoided under section 522, 544, 545, 547, 548, 549, or 724(a) of this title, or preserved under section 510(c)(2), 522(i)(2), or 551 of this title; and
(C) any lien voided under section 506(d) of this title;
(2) vacates any order, judgment, or transfer ordered, under section 522(i)(l), 542, 550, or 553 of this title; and
(3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.
11 U.S.C. § 349(b) (emphasis added).
The scope of § 349(b) is broad, and serves to undo the bankruptcy case to the extent possible — to put all parties in the positions they were in before the case was filed. S.Rep. No. 95-989, 49, reprinted in 1978 U.S.C.C.A.N. 5787, 5835 (“the basic purpose of [section 349(b) ] is to undo the bankruptcy case, as far as is practicable, and to restore all property rights to the position in which there were found at the commencement of the case”).
“Under 11 U.S.C. § 349(b), ‘the pre-disсharge dismissal of a bankruptcy case returns the parties to the positions they were in before the case was initiated.” In re Sanitate,415 B.R. 98 , 104 (Bankr.E.D.Pa.2009).... “[The] broad readings are in harmony with Congress’ stated intent that the purpose of this section is to ‘undo the bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found at the commencement of the case.’ ” [Sanitate ],415 B.R. at 105 (quoting S.Rep. No. 989, 95th Cong., 2d Sess. 48-49, 1978 U.S.C.C.A.N. 5787, 5835 (1978)).... [S]ince the Bankruptcy Court dismissed Debtor’s bankruptcy plan without granting a discharge, the court’s acceptance of that plan was negated and the parties were no longer bound by its terms.
Wells Fargo Bank, N.A. v. Oparaji (In re Oparaji),
In a Chapter 13 case, property of the bankruptcy estate consists of all of the debtor’s legal and equitable interests in property and “in addition ... all property of the kind specified in ... section [541] that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first”. 11 U.S.C. §§ 541(a) and 1306(a). Explicitly, property of the Chapter 13 estate includes “earnings from services performed by the debt- or after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or
Future earnings are the fundamental currency of Chapter 13 plans. Postpe-tition wages ordinarily fund the Chapter 13 plan. Indeed, “it is certain that employment is a fundamental aspect of a Chapter 13 case since postpetition earnings constitute the principal means of funding the Chapter 13 payment plan.” Walker v. Delta Air Lines, Inc., No. Civ. A. 100CV0558-TWT,
Section 349(b)(3) is not ambiguous: At dismissal — unless the court, for cause, orders otherwise — all postpetition earnings of the debtor vest in the debtor. Earnings from personal services during the Chapter 13 case are defined as property of the Chapter 13 estate by § 1306. There is no exception to the vesting effect in § 349(b)(3) for earnings held by the trustee at dismissal. Sections 541(a), 1306(a) and 349(b)(3) comprehensively answer the question in this case: Unless the court orders otherwise, postpetition earnings are property of the Chapter 13 estate that vest in the debtor at dismissal. No other section of the Bankruptcy Code upsets this outcome. As explained by Judge Ginsburg in Slaughter:
[F]unds held by the trustee go to the debtors rather than their creditors upon the dismissal of their Chapter 13 case. If the debtors had never filed Chapter 13, they would be entitled to possession of their wages in full, subject to whatever rights their creditors have to reach part of those wages in satisfaction of their claims under applicable nonbank-ruptcy law and procedure. Thus, giving the withheld wages to the debtors on dismissal more nearly produces the situation that would have existed had thе debtors never filed Chapter 13 than any other approach. There is certainly no indication that the authors of § 349 intended any other result. This court holds that pursuant to § 349(b) of the Bankruptcy Code and Nash, the debtor is entitled to receive the [undistributed funds] from the trustee.
In re Slaughter,
Some courts have held or suggested that postpetition wages escape the vesting effect in § 349(b)(3) at dismissal because postpetition wages “did not exist” at the petition to become property of the Chapter 13 estate. See In re Lewis,
The Chaptеr 13 trustee argues that state trust law vests rights in creditors to funds not distributed at dismissal. While not without support in the case law,
[N]o provision of the Bankruptcy Code classifies any property, including post-petition wages, as belonging to creditors .... When the debtor transfers funds to the Chapter 13 trustee ... under a confirmed plan ... the funds become part of the estate, and the debt- or retains a vested interest in them. 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.
While § 349(b) does not expressly provide that confirmation of the Chapter 13 plan is vacated by dismissal, courts have reasonably concluded that dismissal has that effect. See In re Nash,
Notice also that respecting the vesting of undistributed funds in the debtor at dismissal prevents continued interference with the state law rights of creditors. The distribution scheme worked by a confirmed Chapter 13 plan must follow Bankruptcy Code priorities and protocols — rules that often bear little resemblance to creditors’ rights outside of bankruptcy. The legislative history discussed above clearly signals congressional intent that dismissal of a bankruptcy case returns debtors and creditors as much as possible to status quo ante. Vesting undistributed funds at dismissal in the debtor serves this goal by respecting state law. As explained by the Bankruptcy Appellate Panel in In re Williams:
Since, in chapter 13 cases, postpetition earnings are also property of the estate, the funds held by the trustee revest in the debtor. Thus, § 349 seeks to undо the effect of the bankruptcy filing and to place all parties in interest in the same position they were in prior to the bankruptcy filing. If there had been no chapter 13 case, the property and wages would have been retained by the debtor subject to whatever rights the creditors had under state law to satisfy their claims. Thus, upon dismissal of the chapter 13 case, IMC had the same rights and state law remedies with regard to the property as existed prior to the filing. Since no discharge was granted, IMC may enforce these rights against the debtor personally and in rem. It would be inequitable, however, to permit IMC to enforce its rights by requiring turnover of the funds in the manner requested without requiring adherence to the state law proceedings and protections they would be required to follow in the nonbankruptcy context. Under the Bankruptcy Code, the funds are required to be returned to the debt- оr, and the debtor may then pay those funds over to his mortgagee. Indeed, the debtor is aware that he is obligated to pay the mortgage or lose his house in a foreclosure action.
Williams v. IMC Mortg. Co. (In re Williams),
C. Policy
Strong, long-standing policies support returning undisbursed funds to the debtor at dismissal after confirmation. Chapter 13 is an exclusively voluntary bankruptcy option. Chapter 13 is only available to individuals and then only to a subset of individuals with relatively limited amounts of secured and unsecured debts. See 11 U.S.C. § 109(e). Most individuals eligible for Chapter 13 are also eligible for liquidation under Chapter 7. In other words, most Chapter 13 debtors literally volunteer to pay their creditors money they don’t have to pay to realize bankruptcy relief. They could file Chapter 7 instead, walk away from all their debts without further payment and keep all future earnings from personal services free of the claims of prepetition creditors. By filing Chapter 13 instead, these individual debtors are voluntarily paying some or all of their dischargeable debt from future earnings that would otherwise be immune to the claims of their creditors. In § 349(b)(3), Congress chose not to penalize individual debtors who try and fail in a Chapter 13 case.
A Chapter 13 debtor may — absent prior conversion — dismiss the case at any time. 11 U.S.C. § 1307(a) & (b). Upon dismissal, the debtor has a reasonable expectation that wage deductions will cease and all earnings that have not been distributed to creditors will be returned to the debtor. Any other outcome would dissuade debtors from filing Chapter 13. The Third Circuit recognized this disincentive in Michael:
[I]f debtors must take the risk that property acquired during the course of an attempt at repayment will have to be liquidated for the benefit of creditors if chapter 13 proves unavailing, the incentive to give chapter 13 — which must be voluntary — a try will be greatly diminished. Conversely, when chаpter 13 does prove unavailing “no reason of policy suggests itself why the creditors should not be put back in precisely the same position as they would have been had the debtor never sought to repay his debts[.]
In re Michael,
Returning undistributed funds to the debtor at dismissal parallels the outcome for Chapter 13 debtors who convert to Chapter 7 in good faith under 11 U.S.C. § 348(f). See, e.g., In re Michael,
First, it fosters the policy of encouraging debtors who are financially able to repay their debts to file chapter 13. It ensures that debtors who attempt chapter 13 will not be penalized for an unconfirmed attempt. Returning the money to the debtor ensures the orderly and efficient disposition of chapter 13 cases. Congress no doubt considered the possibility that creditors would like to participate in the money held by the trustee. By requiring the trustee to return the money to the debtor, Congress ensured that any attempts to reach the money would ensue outsidе the jurisdiction of the bankruptcy court. Therefore, unconfirmed cases may be closed as quickly as statutorily possible following dismissal. Holding to the contrary would create as “race to the trustee” and effectively ignore the statutory mandate to return the money to the debtor.
In re Bailey,
MACBA submits that failure to pay attorney fees from funds on hand at dismissal will have a chilling effect on counsel’s willingness to represent debtors in Chapter 13 cases. There are other, better solutions to this problem. One suggested in the case law is to provide in the Chapter 13 plan how undistributed funds will be distributed in the event of dismissal after confirmation.
D. “Unless the Court, for cause, orders otherwise”
Section 349(b) prefaces the unwinding of a bankruptcy case at dismissal with the phrase “unless the court, for cause, orders otherwise.” At oral argument, the trustee and all amici seemed to agree that any outcome in this case should include an opportunity for parties in interest to grab for a piece of whatever funds are held by the trustee — before dismissal threatens loss of jurisdiction in the bankruptcy court.
As the court in Lewis recognized, exercising the discretion afforded under § 349(b)(3) “require[s] that all interested parties be given notice of the potential fund which exists ... once the court intervenes to alter the presumptive revesting of estate property.” In re Lewis,
At dismissal after confirmation of a Chapter 13 plan, § 349(b)(3) controls arid undistributed funds held by the trustee must be returned to the debtor. Bankruptcy courts have statutory discretion to order otherwise. To properly exercise that discretion, notice must be given to all parties in interest with opportunity to demonstrate cause for an outcome other than return of all funds to the debtors.
Order
For the reasons stated in the memorandum filed contemporaneously, IT IS ORDERED, ADJUDGED and DECREED that all undistributed funds held by the trustee must be returned to the debtors after notice and opportunity for parties in interest to ask the court to order otherwise.
IT IS SO ORDERED.
Notes
. The parties stipulated that all facts presented by the trustee were accurate and that no additional proof was necessary. Mentioned below, there is a hole in the stipulated facts that is not outcome determinative.
. 11 U.S.C. § 1327(b) states:
(b) Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.
. Attorney fees are among the administrative expenses contemplated by 11 U.S.C. § 503(b)(3) ("compensation and reimbursement awarded under section 330(a) of this title”).
. See, In re Slaughter,
. See, e.g., Williams v. IMC Mortg. Co. (In re Williams),
.Funds returned to debtor: Nash v. Kester (In re Nash),
Funds distributed pursuant to plan; In re Parrish,
. See, e.g., In re Parrish,
(1) Unless the court orders otherwise, the debtor shall commence making the payments proposed by a plan within 30 days after the plan is filed.
(2) A payment made under this subsection shall be retained by the trustee until confirmation or denial of confirmation of a plan. If a plan is confirmed, the trustee shall distribute any such payment in accordance with the plan as soon as practicable. If a plan is not confirmed, the trustee shall return any such payment to the debtor, аfter deducting any unpaid claim allowed under section 503(b) of this title.
11 U.S.C. § 1326(a) (prior to 2005 BAPCPA amendments).
. See, e.g., In re Galloway,
. There is no statute or rule that precisely defines the deadline for claims objections in a Chapter 13 case. See Morton v. Morton (In re Morton),
. See, e.g., In re Hufford,
. See discussion below. See, e.g., In re Lewis,
. See, e.g., In re Matthews, No. 10-16869-MDC,
. One court described the disparity in treatment of administrative claims as "an anomalous and unfair outcome” that could be addressed “for cause” under § 349(b). In re Lampman,
. See, e.g., In re Darden,
. See, e.g., In re Halabu, No. 11-59449,