ILC E-Bulletin: In re Evans

The following is a case summary written by Kathleen A. Cashman-Kramer analyzing In re Evans, 618 B.R. 493 (Bankr. E.D. Mich.2020).

Summary

The Bankruptcy Court for the Eastern District of Michigan determined that, after conversion of the case from chapter 13 to chapter 7, the chapter 13 trustee was required to pay allowed attorneys’ fees of the debtor’s chapter 13 counsel from the funds that the chapter 13 trustee had on hand and then pay the balance of those funds to the debtor. 

To review the published opinion, click here.

Factual Background

The facts are simple: Wilbert Evans filed a chapter 13 case, and voluntarily converted it to chapter 7 nine months later.  The court had not confirmed a chapter 13 plan.  Post-conversion, the court issued an order allowing attorneys’ fees to the debtor’s chapter 13 counsel in the amount of $6,248.00 as a chapter 13 administrative claim.

The chapter 13 trustee, out of an abundance of caution, filed a motion seeking an order “Directing Disbursement of Funds on Hand.”  In the motion, the chapter 13 trustee sought the Court’s direction as to how to disburse those funds, in light of the U.S. Supreme Court’s decision in Harris v. Viegelahn, 575 U.S. 510, 135 S. Ct. 1829, 191 L. Ed. 2d 783 (2015).^[1]  The chapter 13 trustee was concerned that the Viegelahn decision could bar payment of the allowed attorneys’ fees to the debtor’s counsel, and instead require the chapter 13 trustee to disburse all of the funds that he had on hand directly to the debtor. The debtor supported payment of the allowed attorneys’ fees to the debtor’s counsel before paying anything to the debtor.

Result and Reasoning

The court in Evans ordered that the chapter 13 trustee must first pay the allowed attorneys’ fees to the debtor’s chapter 13 counsel, and then he must pay the remaining balance to the debtor.  In doing so, the court reviewed the reasoning behind the Supreme Court’s decision in Viegelahn. It found that the Viegelahn court’s requirement that the chapter 13 trustee could only turn the funds over to the debtor, and not to anyone else, could be reconciled as follows:

[Viegelahn] was a Chapter 13 case in which the debtor obtained confirmation of a plan, and made plan payments to the Chapter 13 trustee, but then later converted the case to Chapter 7. In that context, the Supreme Court held that after conversion, the Chapter 13 trustee could not distribute funds on hand to creditors as called for by the confirmed plan, but rather had to return the funds to the debtor.

Id. at 494. The Evans court then cited a decision out of the same district in Michigan, In re Arnold, 618 B.R. 822 (Bankr. E.D. Mich. 2020) which held, on facts different than Viegelahn, that when a chapter 13 case is converted to chapter 7 without a plan having been confirmed, Viegelahn is inapplicable. It held that the third sentence of Section 1326(a)(2) controlled the chapter 13 trustee’s disbursement of funds on hand from the debtor’s pre-confirmation plan payments, and required the trustee to pay the allowed attorneys’ fees of the debtor’s counsel before paying the debtor. Id. at *494 (citing In re Arnold, 618 B.R. at 494). 

The third sentence of Section 1326(a)(2) provides:

If 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) [11 USCS § 503(b)].

Relying on this statutory language and the court’s conclusion in the Arnold case that Viegelahn does not apply to cases converted to chapter 7 pre-plan confirmation, the Evans court ordered the chapter 13 trustee to pay the attorneys’ fees from the funds he was holding that otherwise would belong to the debtor.

Game, set match, you ask?  Maybe, maybe not.  The problem is that the Evans’ court ignored significant language in Viegelahn that may have called for a different result.  Specifically, the Viegelahn court considered and rejected a similar argument by the chapter 13 trustee in that case when it found:

When a debtor exercises his statutory right to convert, the case is placed under Chapter 7’s governance, and no Chapter 13 provision holds sway. §103(i) (“Chapter 13 . . . applies only in a case under [that] chapter.”). Harris having converted the case, the Chapter 13 plan was no longer “bind[ing].” §1327(a). And Viegelahn, by then the former Chapter 13 trustee, lacked authority to distribute “payment[s] in accordance with the plan.” §1326(a)(2); see §348(e).

Id. at 793.  Because the services of the chapter 13 trustee were terminated upon conversion under Section 348(e), the chapter 13 trustee was stripped of authority to provide any “service,” and all funds the chapter 13 trustee had on hand were to be returned to the debtor.

In doing so, the Viegelahn court appeared unconcerned about whether the conversion of the case happened before or after confirmation: the significant fact to the Viegelahn court was the fact of a conversion, which caused Section 348(e) to come into play.

Author’s Commentary

While it is clear that Evans will not be appealed (all the parties seemed to agree on the result in that case), the decision highlights a split among courts on how to construe Viegelahn.  Specifically, while the Evans’ court relied on the third sentence in Section 1326(a)(2) as authority for the chapter 13 trustee to pay the attorneys’ fees, that appears to be a minority view.  The majority of courts follow the Section 348(e) language from Viegelahn, and thus the contrary result.. See Molloy v. Sikes, 2018 U.S. Dist LEXIS 21323 (D. Ct. W.D. La. 2018); In re Beaird, 578 B.R. 643 (Bankr. D. Kan. 2017); In re Hoggarth, 546 B.R. 875 (Bankr. D. Colo. 2016); In re Elms, 603 B.R. 11 (Bankr. S.D. Ohio 2019); In re Ivey, 568 B.R. 85 (Bankr. E.D. Ark. 2017); In re Vonkreuter, 545 B.R. 297 (Bankr. D. Colo. 2016); In re Lettie, 597 B.R. 637 (Bankr. E.D. Wis. 2019); In re Beauregard, 533 B.R. 826 (Bankr. D. N.M. 2015); In re Edwards, 538 B.R. 536 (Bankr. S.D. Ill. 2015); In re Demery, 570 B.R. 220 (Bankr. W.D. La. 2017); In re Brown, 2018 Bankr. LEXIS 4257 (Bankr. W.D. Tex. 2018); In re Hill, 2018 Bankr. LEXIS 837 (Bankr. N.D. Ok. March 22, 2018).  For cases that have found, in line with Evans, that a chapter 13 trustee may pay the allowed fees (after conversion and sometimes even after dismissal), see In re Kirk, 537 B.R. 856 (Bankr. N.D. Ohio 2015); In re Merovich, 547 B.R. 643 (Bankr. M.D. Pa. 2016); In re Cooper, 2018 Bankr. LEXIS 1963 (Bankr. E.D. Mich. 2018); In re Fairnot, 571 B.R. 767 (Bankr. E.D. Mich. 2017); In re Ikegwu, 2015 Bankr. LEXIS 3217 (Bankr. D. Md. 2015); In re Hightower, 2015 Bankr. LEXIS 3354 (Bankr. S.D. Ga. 2015) (dismissed case).

It remains to be seen how this apparent “split” will be resolved.

Author’s further note: When I volunteered to write on this case, I did not know that the Viegelahn case, on which the Evans’ court relied, was a unanimous decision authored by the late Supreme Court Justice Ruth Bader Ginsburg.  This author’s personal opinion is that the late Justice Ginsburg will be remembered in history as a thoughtful and insightful jurist, and that her presence on the Supreme Court will be missed.

These materials were authored by Kathleen A. Cashman-Kramer, Of Counsel at Sullivan Hill Rez & Engel (Cashman-Kramer@Sullivanhill.com), with editorial contributions from ILC member Jessica Simon.

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[1] In Viegelahn, the U.S. Supreme Court held that, pursuant to Bankruptcy Code Section 1327, property formerly in the Chapter 13 estate that was not disbursed by the chapter 13 trustee, did not become part of the Chapter 7 estate when the debtor converted his case to chapter 7 and revested in the debtor; this included postpetition wages.  The Supreme Court also determined that the debtor’s confirmed Chapter 13 plan was no longer binding after conversion under Section 1327(a), and the Chapter 13 trustee lacked authority to distribute payments pursuant to Section 1326(a)(2).