No Distribution to Creditors after Chapter 13 Case Voluntarily Dismissed

Posted by NCBRC - August 10, 2018

The chapter 13 debtors who voluntarily dismissed their bankruptcy case were entitled to the proceeds from the sale of their homestead. Viegelahn v. Lopez, No. 17-50297 (5th Cir. July 31, 2018).

Chapter 13 debtors, Manuel and Dolores Lopez, sold their homestead without prior court approval and did not use the proceeds to purchase another home. Their confirmed plan provided that estate property would not revest in the debtors except upon order of the court. For various reasons, including Mr. Lopez’s arrest and deportation, the Lopezes had difficulty making plan payments. In response to the trustee’s third motion to dismiss, Ms. Lopez sought to use the proceeds from the sale of their homestead for plan payments after she paid approximately $20,000 for mandatory eye surgery. The trustee objected to any hold-back of the sale proceeds. The bankruptcy court agreed to allow Ms. Lopez’s modification, adding that if the Lopezes voluntarily dismissed their bankruptcy, they would be entitled to retain all the proceeds from the homestead sale. The Lopezes moved for voluntary dismissal and the trustee objected on the basis of bad faith. The bankruptcy judge granted the motion to dismiss and found that the proceeds should be returned to the Lopezes. The district court affirmed the dismissal but reversed on the issue of returning the proceeds.

On appeal, the Fifth Circuit began with the premise that, because the Lopezes did not use the funds to purchase a new homestead, the sale proceeds were non-exempt, estate property. The plain text of section 349(b)(3), provides that, unless the court finds “cause” to rule otherwise, upon voluntary dismissal of a bankruptcy case, estate property revests in the entity in which the property was vested prior to bankruptcy. The court noted that this comports with the general principles that when a chapter 13 case is voluntarily dismissed, the parties’ position should be returned to the status quo prior to filing to the extent possible, and that the bankruptcy case ceases to exist. The court found the district court’s order created an untenable situation in which a trustee to a dismissed case, distributes property of an estate that no longer exists. “Simply put, as counsel for the Trustee admitted at oral argument, this bankruptcy case is over. There is no Chapter 13 trustee. There are no bankruptcy creditors—only creditors.”

The court turned to the district court’s conclusion that there was adequate cause to deny revesting of the proceeds in the debtors. Here, the court found its role on appeal was to determine whether the bankruptcy court committed clear error in its order, rather than whether the district court’s reasoning was supported. The court found no error, clear or otherwise, in the bankruptcy court decision. In so holding, the court noted that after her husband was jailed and deported, Ms. Lopez undertook onerous steps to maintain her bankruptcy payments for four years, and only upon loss of payments on a wrap-around note and the need for her eye surgery, did she finally give up on the bankruptcy and take the court up on its choice of continuing to contribute homestead proceeds to the plan or dismiss and keep all the proceeds. This history hardly supported a finding of bad faith.

The court thus reinstated the bankruptcy court’s order that the homestead proceeds be revested in the Lopezes.

Lopez 5th Cir. July 2018

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