Attorney Fees Paid Out of Undistributed Funds

Posted by NCBRC - September 22, 2017

Undistributed funds in the hands of the chapter 13 trustee at the time of the debtor’s voluntary dismissal revest in the debtor, and where the debtor’s contract with her bankruptcy counsel provided for payment of attorney’s fees out of undistributed funds there was “cause” for the court to order such payment. In re Beaird, No.16-21725 (Bankr. D. Kans. Sept. 11, 2017).

When Ms. Beaird voluntarily dismissed her chapter 13 plan, the trustee held $13,788.87 in undistributed funds earmarked for distribution to Rushmore Loan Management Corp. The accumulation of funds was a result of Rushmore’s delay in filing its proof of claim until approximately ten months after Ms. Beaird filed her petition.

Upon dismissal, Ms. Beaird moved to compel the trustee to turn over those funds, and to pay her attorney according to their contract which stated: “I/We agree that in the event my/our case is dismissed at any time after the Meeting of Creditors, that Moore & Associates, LLC shall have the right to recover all funds in the hands of the Chapter 13 Trustee that would otherwise be refunded, up to the total fees then due for this case.”

In the absence of Tenth Circuit guidance on the issue, Ms. Beaird advocated for adoption of the majority view which relies on section 349(b)(3). That section provides that upon dismissal, “unless the court, for cause, orders otherwise,” property of the estate “revests . . . in the entity in which such property was vested immediately before the commencement of the case under this title.”

The trustee and Rushmore promoted the minority view relying on section 1326(a)(2), which provides in part: “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 payment in accordance with the plan as soon as practicable.”

The court agreed with the majority position which interprets the word “such” in section 1326(a)(2) as referring to payments made prior to plan confirmation. The court found that upon dismissal the confirmed plan is no longer in force and no distributions can be made under it. Rather, section 349 governs the disposition of post-dismissal funds. By operation of section 541 and 1306, post-petition wages are property of the estate. The court found the debtor had a “future contingent interest” in her post-petition wages when she filed her petition. Therefore, it was logical to conclude that the post-petition income collected by the trustee would vest in the debtor upon dismissal along with any other estate property.

The court found support for this conclusion in Harris v. Viegelahn, __U.S. __, 135 S.Ct. 1829, 1835, 191 L.Ed.2d 783 (2015). where post-petition funds were found to revest in the debtor upon conversion under section 348 from chapter 13 to chapter 7. The Harris Court reasoned that by operation of section 1327, upon conversion, the chapter 13 plan was no longer binding and the chapter 13 trustee had no authority to act according to its provisions. The Beaird court found that, like section 1327, section 1326 divests the chapter 13 trustee of authority to act.

The court concluded that “[t]he majority’s construction effectuates the policy of § 349 that dismissal ‘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.’”

Having adopted the majority view as to the trustee’s power upon dismissal, the court turned to whether there was “cause” under section 349(b)(3) to make the requested payment from the funds to Ms. Beaird’s attorney. The court found such cause in the language of Ms. Beaird’s agreement with her attorney that upon dismissal the attorney fees would be paid out of undistributed funds.

The court rejected the trustee’s argument that cause likewise existed to distribute funds to Rushmore due to the “unfortunate circumstance” of Rushmore’s failure to file its proof of claim in a timely manner. The trustee argued that Ms. Beaird benefited by not having to make payments on that debt during the course of her plan. The court found that it was not Ms. Beaird’s fault that Rushmore delayed in filing its proof of claim and the mere existence of undistributed funds—a normal by-product of dismissed plans—could not constitute cause.

Beaird Bank Kans opinion Sept 2017



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