Undisbursed Funds Go To Debtor upon Dismissal

Posted by NCBRC - October 20, 2015

Post-confirmation wages that are undisbursed upon dismissal of the debtor’s chapter 13 case must be returned to the debtor without distribution to the debtor’s attorney, the trustee, or creditors. In re Edwards, 2015 Bankr. LEXIS 3195, No. 13-30230 (Bankr. S.D. Ill. September 22, 2015).

The decision involved ten consolidated chapter 13 cases that were dismissed under section 349, with post-confirmation wages still in the hands of the trustee. The court made quick work of the directive in section 1326 requiring the trustee to distribute payments to creditors upon confirmation of the plan, finding that the provision refers to payments made prior to confirmation rather than post-confirmation payments and was, therefore, inapplicable.

The court then turned to section 349 to determine the proper disposition of post-confirmation payments. Section 349(b)(3) provides that upon dismissal, the property of the estate is revested “in the entity in which such property was vested immediately before the commencement of the case under this title.” The court held that this provision required that all post-confirmation property of the estate be returned to the debtor (or the entity holding it at the time of the petition).

Upon request by the chapter 13 trustees, the court considered the impact of the recent decision in Harris v. Viegelahn, 575 U.S. __, 135 S.Ct. 1829, 191 L.Ed.2d 783 (2015), on these post-dismissal cases and found that it did not control. Harris dealt with the disposition of undisbursed funds held by the trustee upon conversion under section 348 which is specific to conversion from one chapter to another. This case, dealing with dismissal, is governed by section 349.

The Law Offices of Mueller and Haller, L.L.C. d/b/a The Bankruptcy Center filed an amicus brief seeking a standing order providing that, upon dismissal under section 349, the chapter 13 debtor’s attorney receive payment out of undisbursed funds for time spent on the case. Amicus argued that in chapter 13 the debtor’s attorney is typically paid through the plan, and therefore, dismissal without providing for payment of the attorney’s fees will discourage bankruptcy attorneys from representing debtors in chapter 13. Unlike section 348, section 349  has room to accommodate such an order. Section 349(b) provides that dismissal revests estate property in the entity in which it was vested at the time of the petition, “[u]nless a court, for cause, orders otherwise.” Amicus argued that maintenance of the integrity of the chapter 13 bar, was sufficient cause to justify a standing order seeing to it that debtor’s counsel is paid.

The court declined, finding that the issue of the its jurisdiction to enter such an order was not properly before it. Recognizing the hardship its decision could inflict on chapter 13 attorneys (and by extension, debtors) the court noted that other courts, such as In re Beauregard, 533 B.R. 826 (Bankr. D. N.M. 2015), recommend that chapter 13 attorneys provide for assignment of fees upon dismissal or conversion in their fee agreements.

Edwards Bankr SD Ill opinion


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