Standing Trustee Need Not Disgorge Fees when Plan Dismissed Prior to Confirmation

Posted by NCBRC - August 11, 2021

“[A] standing trustee is entitled to collect the statutory fee under [28 U.S.C.] § 586(e) upon receipt of each payment under the plan and is not required to disgorge the fee if the case is dismissed prior to confirmation.” McCallister v. Harmon, No. 20-1168 (B.A.P. 9th Cir. July 20, 2021) (unpublished).

The debtors made several payments in accordance with their proposed plan but voluntarily dismissed their bankruptcy prior to plan confirmation. The bankruptcy court’s order of dismissal included provision for the debtors’ attorney to collect his fee from the funds held by the trustee. The original order also provided for the trustee to retain the statutory fees she collected under section 586(e). Upon reconsideration of that order, though, the bankruptcy court concluded that section 1326(a)(2), which requires the trustee to retain plan payments until confirmation and return those payments to the debtor after deducting unpaid administrative claims if the case is dismissed prior to confirmation, mandated that the trustee return the fees to the debtor upon dismissal. In re Harmon, No. 19-01424-TLM, 2020 WL 6037759 (Bankr. D. Idaho June 23, 2020).

After her motion for reconsideration was denied, the trustee appealed to the Bankruptcy Appellate Panel for the Ninth Circuit.

The panel noted that the majority of courts, such as In re Evans, 615 B.R. 290 (Bankr. D. Idaho 2020), appeal filed, March 4, 2020, No. 4:20-cv-00112-DCN (D. Idaho), have held that the workings of section 586(e) and 1326(a)(2) create ambiguity. Those court resolved the ambiguity in favor of fee disgorgement.

The panel discussed the two methods of assigning a trustee to a chapter 13 case under section 1302: the UST may either appoint a “standing trustee” to handle all chapter 13 cases, or the UST may appoint one disinterested person to serve as trustee in a particular case. The methods of compensation differ. Under section 330(a), an individually appointed trustee is entitled to reasonable compensation for actual, necessary services, and reimbursement for actual, necessary expenses. The trustee is paid out of distributions under a confirmed plan and if no plan is confirmed, she may deduct her fees before returning plan payments to the debtor. In contrast, 28 U.S.C. section 568(e)(1) entitles a standing trustee to a percentage fee, and paragraph (2) of that section provides that the trustee “shall collect such percentage fee from all payments received by such individual under plans.” There is no provision dealing with payment when a plan is not confirmed.

Contrary to the bankruptcy court’s finding that section 1326(a) creates ambiguity with respect to the standing trustee’s payment when plan is dismissed prior to confirmation, the panel found that compensation for the standing trustee was not governed by the Bankruptcy Code because the text of section 586(e) was clear. Black’s Law Dictionary defines collect as “[t]o receive payment. To collect a debt or claim is to obtain payment or liquidation of it . . . .” It defines fee as “a charge fixed by law for services of public officers or for use of a privilege under control of government.” The panel found the plain meaning of the phrase “collect such percentage fee” “is that she obtains payment of the statutory charge, and a debtor pays it to the trustee, when she collects the fee from each payment under the plan.”

In the event the standing trustee collects more than her permitted compensation cap, section 589a provides that she must deposit the overage with the UST into the United States Trustee System Fund from which it cannot be refunded. The panel reasoned that the standing trustee would not be able to comply with this provision preconfirmation if she does not “own” the fees at the time of collection.

The panel noted that treating the standing trustee’s preconfirmation statutory fees as contingent upon confirmation, while treating other trustee’s compensation as based on time and costs, would lead to the a non-standing trustee being compensated without regard to plan confirmation while the standing trustee would depend upon confirmation for her compensation. Where the trustee has an obligation to object to, or seek dismissal of, some chapter 13 plans, this pay structure would be a disincentive for the standing trustee to do so.

The panel majority disagreed that the interplay between section 586 and section 1326 created ambiguity. Section 1326(a)(2) requires a trustee to hold plan payments until confirmation, then distribute them in accordance with the plan. But the standing trustee’s fee does not enter that pool of funds earmarked for distribution. Nor does the Code make any provision for payment of the standing trustee’s fee. That direction is found solely in section 586(e). Only if section 1326(a) were interpreted to create a “collect and hold” mandate with respect to the statutory fees, would there be a conflict with section 586(e). Therefore, the panel found that interpretation to be unreasonable.

The panel was unpersuaded by the argument that because both section 1194(a)(3) and section 1226(a)(2) include specific provisions permitting the standing trustee to retain fees upon pre-confirmation dismissal, the absence of a similar provision in section 1326(a), indicates that Congress did not intend that result in chapter 13. The panel observed that section 1326(a) pre-dates both of the other provisions greatly reducing the weight of any negative inference to be drawn by difference. In fact, the panel concluded that “[t]he language in § 1194 and § 1226 is best understood as reiterating the fact that once plan payments are made to a standing trustee, she shall ‘collect such percentage fee’ from those funds.” To the extent the panel’s interpretation of section 586(e) would render language in sections 1194 and 1226 surplusage, the panel cited Barton v. Barr, 140 S. Ct. 1442, 1453 (2020), that “[r]edundancy in one portion of a statute is not a license to rewrite or eviscerate another portion of the statute contrary to its text.”

The panel concluded that, based on the plain language of section 586(e), the standing trustee was not required to disgorge her statutory fees when the case was dismissed prior to confirmation. The panel vacated and remanded.

Bankruptcy Judge Spraker concurred despite qualms about rendering other bankruptcy provisions surplusage, “not out of some personal sense of equity, but because I find its reasoning more natural and less damaging statutorily to give effect to the plain and ordinary meaning of § 586(e).”

In a dissenting opinion, Bankruptcy Judge Lafferty, disagreed with the majority that the language of section 586(e) was sufficiently clear to resolve the quandary. The fact that Congress dealt with the same issue in concrete terms when it enacted sections 1194 and 1226 was significant, indicating both that Congress intended the Bankruptcy Code to regulate trustee payments, and to create the negative inference that the dissent found to have been incorrectly dismissed by the majority.

Harmon 9th BAP July 2021



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