The Seventh Circuit Rules That a Chapter 13 Trustee May Not Take A Fee If the Case is Dismissed Pre-Confirmation

Posted by JIm Haller - May 8, 2024

On May 3, 2024, the Seventh Circuit Court agreed with the Ninth and Tenth Circuits that the Bankruptcy Code requires the Chapter 13 trustee to return her fee when the debtor’s plan is not confirmed.  See Evans v. McCallister (In re Evans), 69 F.4th 1101 (9th Cir. 2023) and Goodman v. Doll (In re Doll), 57 F.4th 1129 (10th Cir. 2023).

The debtor filed a chapter 13 bankruptcy and made approximately $3,800 in payments.  The trustee distributed about $750 in pre-confirmation adequate protection payments.  The court never confirmed the debtor’s plan, and the case was dismissed.  The trustee charged her fee of about $260.  The debtor filed a motion to turn over all remaining funds including the trustee’s fee and the bankruptcy court agreed.  The bankruptcy court certified the case for a direct appeal to the Seventh Circuit.

The court held:

If the plan is confirmed, the trustee must distribute the remaining payments in accordance with the plan. Id. § 1326(a)(2). But where, as here, a plan is not confirmed, “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).” Id. This requires “the standing trustee [to] return all of the pre-confirmation payments [she] receives, without first deducting [her] fee.” In re Doll, 57 F.4th 1129, 1141 (10th Cir. 2023) (emphasis in original). While § 1326(a)(2) has two exceptions, neither covers the trustee’s fee. As to the first, “[t]he Chapter 13 trustee’s fee is not an administrative expense under Section 503(b),” In re Evans, 69 F.4th 1101, 1104 n.2 (9th Cir. 2023), and the trustee has not argued that it is. As for the second, the trustee’s fee is not a payment “previously paid”—because only certain adequate protection payments are permitted pre-confirmation—nor is it a payment “due and owing to creditors.” 11 U.S.C. § 1326(a)(2). Because neither exception applies to the Chapter 13 trustee’s fee, she must return her fee to the debtor.

Marshall v. Johnson, No. 23-2212, 2024 U.S. App. LEXIS 10852, at *3-4 (7th Cir. May 3, 2024).  The court held that the trustee may not keep her fee under Section 1326(b) because that provision applies only to payments after a plan is confirmed.  Further the trustee has no right to keep her fee under 28 U.S.C. § 586(e)(2). 

And § 586(e)(2) is irrelevant, as it “only addresses the source of funds that may be accessed to pay standing trustee fees.” In re Doll, 57 F.4th at 1140; see also id. at 1144 (“‘[C]ollect’ in 28 U.S.C. § 586(e)(2) cannot mean … that the act of ‘collection’ of funds irrevocably constitutes a payment to the Trustee of his fees.”); In re Evans, 69 F.4th at 1108 (“Section 586 only provides that when a trustee does collect her fee pursuant to 1326(b), she does so by collecting her fee from all payments received under confirmed plans.”) (cleaned up). Rather, § 1326(a) governs “what happens to such [collected] payments if a Chapter 13 plan is not confirmed.” In re Doll, 57 F.4th at 1140. Section 1326(a)(2) mandates that the trustee return all payments, including her fee, to the debtor. Sections 1326(b) and 586(e)(2) do not compel a different result.

Marshall v. Johnson, No. 23-2212, 2024 U.S. App. LEXIS 10852, at *5-6 (7th Cir. May 3, 2024).  

The Second Circuit is still considering this issue in the case of in In re Soussis, Case No. 22-155 (2nd Cir. 2023).

This debtor was successfully represented by NACBA member Mike Miller from the Semrad Law Firm, LLC in Chicago, Illinois.

NACBA and NCBRC supported the debtor by filing an amicus brief in support and by providing Mr. Miller a moot court prior to oral argument.

In re Johnson – 7th Circuit Decision

NACBA-NCBRC File stamped brief

Trustee’s brief in Johnson appeal

In re Johnson – Appellee-Debtors brief

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