The NACBA membership has filed an amicus brief in the case of Viegelahn v. Harris (In re Harris), No. 13-50374 (5th Cir. August 20, 2013) seeking affirmance of the lower courts’ opinions. There, the debtor filed a chapter 13 petition, but after a good faith attempt to fulfill his obligations under the plan, he converted to chapter 7. The trustee sought to distribute debtor’s wages collected pursuant to the plan but not yet distributed at the time of conversion. [Read more…] about NACBA Files Amicus in Conversion Case
Post-Confirmation Funds Returned to Debtor after Conversion to Chapter 7
What happens to funds paid into a confirmed chapter 13 plan that are still in the trustee’s possession when the bankruptcy is converted to chapter 7? That is the question recently answered by the district court for the Western District of Texas. The trustee had distributed the funds to creditors post-conversion and upon motion by the debtor, the bankruptcy ordered turnover to the debtor. Relying in large part on the Third Circuit case of In re Michael, 699 F.3d 305 (2012) in which NACBA participated as amicus, the district court affirmed. Veigelahn v. Harris (In re Harris), No. 12-540 (W.D. Tex. March 22, 2013).
Key to the decision was section 348(f) which provides that when a case is converted in good faith from chapter 13 to chapter 7 the property of the estate is determined as of the original petition date. Because the funds at issue had been garnished from debtor’s wages post-confirmation, they were not part of the debtor’s estate upon the original filing of the chapter 13 petition and, therefore, under section 348 would not be part of the chapter 7 estate upon conversion.
The trustee distinguished Stamm v. Morton (In re Stamm), 222 F.3d 216 (5th Cir. 2000), in which funds collected prior to confirmation of the chapter 13 plan were returned to the debtor upon conversion. Here, the trustee argued, the funds were collected post-confirmation thereby giving the creditors a vested interest in them even though the case was later converted. The trustee relied on section 1326(a)(2) which provides that “[i]f a plan is confirmed, the trustee shall distribute any such payment in accordance with the plan as soon as is practicable. If a plan is not confirmed, the trustee shall return any such payments not previously paid and not yet due and owing to creditors . . . to the debtor.” The trustee argued that because Congress specifically provided for the return of funds collected pursuant to a plan that was not confirmed it could be inferred that different treatment should be accorded funds collected after confirmation.
Acknowledging the superficial appeal of the trustee’s position, the court found that the Code sections at issue created an ambiguity that necessitated looking beyond the text. The court found that the legislative history indicated Congress’s intention to encourage debtors to file chapter 13 wherever possible without the inhibiting fear of penalty in the event that the chapter 13 failed and the debtor had to resort to chapter 7. H.R. Rep. No. 95-595 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 5966, 1977 WL 9628. In enacting section 348(f) Congress specifically addressed and sought to minimize the potential loss of property that a debtor could face upon conversion from chapter 13 to chapter 7 that would not have been at risk had the debtor filed directly in chapter 7.
The court also rejected the trustee’s argument that there is an inherent unfairness in returning the funds to the debtor upon conversion reasoning that the creditors lost nothing while reaping the benefits of payments made in accordance with the plan up to the time of conversion. Quoting Michael, the court found that the duties of the trustee delineated in section 1326 did not vest any rights in the creditors:
When the debtor transfers funds to the Chapter 13 trustee . . . under a confirmed plan . . . the funds become part of the estate, and the debtor retains a vested interest in them. Though creditors have a right to those payments based on the confirmed plan, the debtor does not lose his vested interest until the trustee affirmatively transfers the funds to creditors. Also, § 1326(a)(2) and (c) only address the obligation of the trustee to distribute payments in accordance with a confirmed plan; they do not vest creditors with any property rights.
Michael,699 F.3d at 313.
Furthermore, section 348(f)(2) protects creditors from unfair manipulation by debtors by including a provision that in the event of a bad faith conversion the estate would consist of property as of the conversion date rather than as of the petition date. As the court in Michael pointed out, the specific expansion of the chapter 7 estate in the event of bad faith, indicates that when the conversion is in good faith, the chapter 7 estate would be as of the petition date.
This is a case that illustrates the power of NACBA’s members to create good law around the country by getting involved in select cases on appeal.
Trustee Must Return Funds upon Conversion
The Third Circuit in In re Michael, 2012 U.S. App. LEXIS 22244 (3d Cir. Oct. 26, 2012), ruled for the debtor on the issue of whether the Chapter 13 trustee had to turn over to the debtor funds that the trustee was holding when the debtor converted from Chapter 13 to Chapter 7 after confirmation of the plan. Rejecting the trustee’s position, which was supported by an amicus brief filed by all the chapter 13 trustees in the circuit, the court held that the trustee could not distribute the funds to creditors. The court reasoned that the conversion ended the Chapter 13 trustee’s services and vacated the order confirming the plan. It also found that the legislative history of Section 348(f) supported the conclusion that Congress did not intend for the debtor to have the disincentive to filing chapter 13 that would be caused by the risk that filing a chapter 13 case could cause the loss of postpetition property if the debtor later had to convert to Chapter 7. NACBA’s brief was written by Irv Ackelsberg, who was also permitted to argue on NACBA’s behalf in the court of appeals.
Riverside Bankruptcy Court’s Sua Sponte Dismissal Reversed
The District Court for the Central District of California reversed the bankruptcy court’s dismissal of the debtors’ Chapter 13 case after the debtors filed a notification of conversion to Chapter 7. Taylor v. Danielson (In re Taylor), No. 11-1879 (C.D. Cal April 13, 2012). The court distinguished Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007), where the Supreme Court found that a debtor does not have an absolute right to convert a case from Chapter 7 to Chapter 13 under Section 706(a). In Marrama, the Court reasoned, in part, that conversion from Chapter 7 to Chapter 13 could result in a debtor either escaping the consequences of bad faith by voluntarily dismissing under Chapter 13, or benefiting from the conversion despite bad faith by gaining access to estate assets to the detriment of creditors.
Conversions from Chapter 13 to Chapter 7 are distinguished by the fact that upon such conversion, the trustee has control over estate assets and the court retains jurisdiction over the debtor, so the concerns that were dispositive in Marrama are not present. Additionally, the Bankruptcy Rules treat conversions from Chapter 7 to Chapter 13 differently from conversions from Chapter 13 to Chapter 7. Rule 1017(f)(2) contemplates judicial scrutiny over conversions from Chapter 7 to Chapter 13, while, in contrast, Rule 1017(f)(3) provides that a “chapter 13 case shall be converted without court order when the debtor files a notice of conversion under . . . [§] 1307(a).”
NCBRC’s Tara Twomey assisted in the writing of the debtors’ brief.
In re Taylor, No. 11-1879 (C.D. Cal.)
Type: Debtor’s brief
Date: February 7, 2012
Description: Whether Bankruptcy Court erred in dismissing chapter 13 case, sua sponte, after notice of conversion to chapter 7 had been filed.
Result: Judgment reversed and remanded (April 13, 2012)
Appeal of Sua Sponte Dismissal in Central District California
NCBRC’s Tara Twomey assisted debtors’ counsel in appealing a decision by the Bankruptcy Court of the Central District of California, Riverside Division, in which the court refused to give effect to debtors’ notice of conversion and instead dismissed the case with a 180-day bar to refiling. In re Taylor, No. 11-1879 (C.D. Cal.). In Taylor, the judge dismissed the debtors’ Chapter 13 case sua sponte the day after the Chapter 13 debtors filed a notice of conversion to Chapter 7. While acknowledging that the notice of conversion had been filed, the court refused to give the notice any effect. At a continued confirmation hearing, debtors’ counsel commented that the case had been converted the prior day, but the judge responded by saying: “No, it wasn’t. Confirmation denied. Case dismissed. 109(g) applies.” [Read more…] about Appeal of Sua Sponte Dismissal in Central District California
NACBA files Amicus in Conversion Case
NACBA filed an Amicus brief in the case of DeHart v. Michael, No. 11-1992 (3d Cir.). The case involves a debtor who converted his chapter 13 case to a chapter 7 after paying into his plan for several years. At the time of the conversion, the estate held some undistributed post-petition wages and the trustee argued that the creditors had a vested right to those funds. The lower courts rejected this argument and the trustee brought this appeal. NACBA’s brief argues that, under section 348(f) a chapter 7 estate that has been converted from chapter 13 consists of the property owned by the debtor at the time of the original chapter 13 petition, and, therefore, the debtor is entitled to return of his post-petition wages.
NACBA member, Irv Ackelsberg, filed the brief on behalf of NACBA.
Brief
DeHart v. Michael, No. 11-1992 (3d Cir.)
Type: Amicus
Date: October 25, 2011
Description: Whether creditors have a vested right to undistributed post-petition funds paid into confirmed chapter 13 plan prior to conversion to chapter 7.
Result: Judgment affirmed, October 26, 2012
Marrama v. Citizens Bank of Massachusetts, No. 05-996 (USSCt)
Type: Amicus
Date: August, 2006
Description: Whether section 706(a) grants debtor unqualified one-time right to convert from chapter 7 to chapter 13
Result: Affirmed. Debtor lost. 549 U.S. 365, 127 S.Ct. 1105 (2007)
Brief