National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

_7th Circuit

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

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).

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

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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State Law Does Not Create Exemption in Trust

A state statute protecting a trust from judgment creditors is not an exemption statute for bankruptcy purposes where it was not designated as such and it did not provide unequivocal protection against all forms of collection. In re Morris, No. 21-30468 (Bankr. N.D. Ill. Jan. 13, 2023).

In his chapter 7 bankruptcy schedules, the debtor listed an interest as a potential beneficiary in a trust that did not have a spendthrift provision. The debtor claimed an exemption for the interest under Illinois law, 735 ILCS 5/2-1403 (1999), which provides:

Judgment debtor as beneficiary of trust. No court, except as otherwise provided in this Section, shall order the satisfaction of a judgment out of any property held in trust for the judgment debtor if such trust has, in good faith, been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor. . . .

The trustee objected, arguing that the statute did not create a bankruptcy exemption.

Illinois is an opt-out state, so the court looked to state law to determine whether the trust interest would be exempt even though, unlike other specified exemptions like retirement plans and worker’s compensation awards, the statute at issue here did not create an explicit exemption. The court found that exemptions under the state laws are not limited to those so designated. Rather, “exempt property is any property that the legislature has identified and declared to be free from liability to processes such as seizure and sale, or attachment to satisfy debts.” The essential characteristic of an exemption “is simply whether the provision unequivocally protects the identified property against all forms of collection.”

In this case, the statute the debtor relied on was limited to protecting a debtor’s interest in a trust from judgment creditors. But the court found the chapter 7 trustee was merely gathering estate assets under section 541. He was not a judgment creditor nor was he attempting to collect on a judgment. The court quoted from In re Gutterridge, 2013 WL 395140 (Bankr. C.D. Ill., Jan. 31, 2013), discussing the same state statute, that “once a bankruptcy petition is filed, the Illinois statute in this case cannot apply to create an exemption to a trust that is otherwise simply an asset of the bankruptcy estate.”

The court noted that the grantors could have placed the trust out of reach under section 541(c)(2) by including a spendthrift provision. But the trust in this case did not do so.

The court rejected the debtor’s argument that because certain forms of collection such as levy, garnishment and attachment, all involve a judgment the state statute essentially applies to all collection actions. The court found no support for the argument in the language of the statute. Had the legislature intended to create an exemption, it could have done so.

The court concluded that the narrow language of the Illinois statute was not an “unequivocal” protection of the trust for bankruptcy exemption purposes. It sustained the trustee’s objection.

Morris Bankr SD Ill Jan 2023

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The Seventh Circuit Considers Whether a Chapter 13 Trustee May Take A Fee If the Case is Dismissed Pre-Confirmation

The Seventh Circuit, in the case of In re Johnson, Case No. 23-2212 (7th Cir. 2023), accepted a direct appeal from the Bankruptcy Court for the Northern District of Illinois.  The bankruptcy court held that a chapter 13 trustee may not deduct her fee if a chapter 13 case is dismissed without having a plan confirmed. The court adopted the reasoning in Goodman v. Doll (In re Doll), 57 F.4th 1129 (10th Cir. 2023).

At present, two courts have affirmed that a trustee may not deduct a fee if the chapter 13 case is dismissed prior to confirmation. In addition to the Doll opinion, the Ninth Circuit agreed in Evans v. McCallister (In re Evans), 69 F.4th 1101 (9th Cir. 2023).  The Doll decision is currently being considered for certiorari by the Supreme Court.  Another case is pending on this issue in In re Soussis, Case No. 22-155 (2nd Cir. 2023).

NCBRC and NACBA filed an amicus brief in support of the Debtor/Appellee.  NCBRC NACBA Filed Amicus Brief – In re Johnson

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Creditor Estopped from Objecting to Amended Plan

A mortgage creditor who accepted the debtor’s plan could not late object to confirmation of an amended plan that contained the same terms with respect to that creditor. In re Ritter, No. 22-40120 (Bankr. S.D. Ill. Feb. 2, 2023).

The debtor filed a chapter 13 petition listing his mortgagee’s claim at $116,819.95. The debtor proposed a plan to pay the claim at 0% interest and $0 monthly payments. Within minutes of filing that plan, he filed a second “original” plan proposing to make monthly payments to the mortgagee in the amount of $1,200.00 for 60 months, to pay $43,000.00 in arrearages, and to make a Limbo payment of $2,400.00. The creditor, Shellpoint Mortgage, filed an objection to the first original plan but withdrew it three days later stating that the second original plan provided sufficient treatment of its claim. Shellpoint then filed a proof of claim listing the outstanding principle as $119,308.66 and the arrearage as $35,247.86. It later added to its claim $2,125.00, in fees, expenses, and charges. Neither the debtor nor the trustee objected to Shellpoint’s claim.

The trustee objected to various aspects of the second original plan and, in response, the debtor filed a first amended plan, which mooted those objections. The amended plan also changed the payments to Shellpoint to a monthly payment of $763.72, the Limbo payment of $1,527.44, the pre-petition delinquency as $35,247.86, and the post-petition fees of $2,125.00. Shellpoint did not object to the amended plan, and the trustee objected only with respect to certain discrepancies which the debtor corrected in a second amended plan. Shellpoint objected to that plan raising for the first time the argument that the debtor could not cure arrearages because the property had been sold in a pre-petition foreclosure sale, though that sale had not yet been confirmed by the state court.

The debtor filed a third amended plan to correct certain issues raised by the trustee but did not change its treatment of the Shellpoint’s claim. Shellpoint reasserted its objections as to the third amended plan.

The court found Shellpoint’s objections were barred by the judicial estoppel and by certain provisions of the Bankruptcy Code.

As to judicial estoppel, the court found Shellpoint’s objections were inconsistent with its statement with respect to the second original plan that the plan “provides sufficient treatment as to Creditor.” At that time, Shellpoint’s asserted bases for its objection were not that the property had been sold, but were that the mortgage would not mature during the course of the plan and that the arrearage amount to be cured under the plan was $35,247.86. When the debtor amended his plan to conform to Shellpoint’s position, Shellpoint did not object or withdraw its claim.

In reliance on Shellpoint’s stated position, the court allowed Shellpoint to withdraw its objections and the trustee made monthly payments to Shellpoint totaling more than $10,000. The court found that if Shellpoint prevailed on its objections and were permitted to retain the payments as requested, it would give Shellpoint an unfair advantage over other creditors and harm the debtor.

The court also found sections 1325 and 1323 precluded the result Shellpoint sought. Section 1325(a)(5)(A) provides that the court shall confirm a plan if each secured creditor has accepted it. The court found Shellpoint’s withdrawal of its objection constituted such acceptance. Under section 1323, once it accepted the plan, Shellpoint could not later object to an amended plan containing the same terms.

The court overruled Shellpoint’s objections and confirmed the debtor’s plan.

Ritter Bankr SD Ill Feb 2023