Trustee Must Disgorge Fee Collected in Unconfirmed Chapter 13 Plan

Posted by NCBRC - September 4, 2014

Addressing an issue that “has been percolating through the courts,” an Arkansas bankruptcy court found that when a chapter 13 plan is not confirmed, the standing trustee must return to the debtors his percentage fee based on undisbursed payments on that plan. In re Dickens, No. 12-16982 (Bankr. E.D. Ark. July 25, 2014).

Prior to confirmation, the debtors paid $21,900 into the proposed chapter 13 plan. Upon pre-confirmation dismissal of the plan, the trustee returned $11,770.55 of undisbursed funds to the debtors but retained his percentage fee of $652.19 based on those payments (the debtors did not object to the trustee’s retention of his $477.26 percentage fee for the $9,000 that was disbursed to secured creditors as adequate protection payments). The debtors moved for an order compelling the trustee to disgorge the percentage fee related to the undisbursed funds. The motion was opposed by the standing trustee and the U.S. Trustee.

The court began its analysis with the language of 28 U.S.C. § 586(e)(2) which provides that the trustee “shall collect such percentage fee from all payments received by such individual under plans in the cases under chapter 12 or 13 of title 11 for which such individual serves as standing trustee.” The trustee argued that “(1) ‘plans’ includes both confirmed and unconfirmed plans; (2) ‘collect’ means to ‘obtain payment’; and (3) payment of the percentage fee is irrevocable and cannot be returned to the debtor.” The debtors countered that the language of section 586(e) is ambiguous and that, when read in conjunction with section 1326(a) of the Bankruptcy Code, it is clear that the fee must be returned to the debtors upon dismissal of the plan.

The court agreed with the trustees that “plan” in this section applied to plans both confirmed and unconfirmed. The court also agreed with the trustee’s interpretation of “collect” in its ordinary meaning of obtaining payment. The court disagreed, however, that once the trustee collects payment, that collection is irrevocable. Citing In re Acevedo, 497 B.R. 112, 122 (Bankr. D. N.M. 2013), the court found that section 586(e)(2) is amenable to differing interpretations. As evidence that payment of the percentage fee is revocable, the court noted that section 1226(a)(2) provides that where a chapter 12 case is dismissed prior to confirmation the trustee may retain his percentage fee. If retention of that fee were irrevocable under section 586(e)(2), there would be no need for section 1226(a)(2).

The court turned to section 1326(a) which provides that a debtor must begin making payments in an “amount . . . proposed by the plan,” 30 days after the plan is filed. In the event that the plan is not confirmed, paragraph (2) provides that “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).” The debtor argued that the trustee’s percentage fee is included in the “amount . . . proposed by the plan” and, therefore, must be returned upon dismissal.

The court agreed. It rejected the trustee’s argument that because the fee is a fixed percentage under section 586(e), it is not an “amount proposed by the plan.” Rather, agreeing with the reasoning in Acevedo, the court found that while the debtor lacks discretion to fix the percentage of the trustee’s fee, that fee is still determined by reference to the debtor’s proposed plan. That Congress provided for the retention of percentage fees in an unconfirmed chapter 12 plan lent further support to the court’s determination that in the absence of a comparable provision in chapter 13, the fee is revocable.

The court found that while section 586(e)(2) specifies the source from which the trustee collects the percentage fee, that “fee is included and described by the statute as an ‘amount proposed by the plan to the trustee’ under § 1326(a)(1), that must be returned to the debtor when a plan is not confirmed in accordance with subsection (a)(2).”

Dickens Bky ED Ark opinion



One Comment

  • Darlene
    Posted February 20, 2016 at 6:05 pm | Permalink

    If the bankruptcy is unconfirmed by your choice does it still count against you as a public record and go on your credit report?
    Can it be removed?
    Will mortgage lenders count it?

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