Ninth Circuit Court of Appeals Case of First Impression: Chapter 13 Trustee Not Entitled to Be Paid Percentage Fee When Case Dismissed Prior to Confirmation.

The following is a case summary written by Kathleen A. Cashman-Kramer regarding the recent Ninth Circuit Court of Appeals decision in Evans v. McCallister (In re Evans), 69 F.4th 1101 (9th Cir. 2023).

SUMMARY

In In re Evans, 69 F.4th 1101 (9th Cir. 2023), the Ninth Circuit Court of Appeals has joined the Tenth Circuit decision in In re Doll, 57 F.4th 1129 (10th Cir. 2023) on an issue that other circuits have also recently addressed, holding that a standing trustee in a Chapter 13 case may not be paid her percentage fee when the case is dismissed prior to confirmation.

On September 4, 2023, the Insolvency Law Committee published an e-bulletin regarding the cases of In re Baum, 650 B.R. 852 (Bankr. Ct. ED Mich May 5, 2023) and In re Johnson, 650 B.R. 904 (Bankr. Ct. ND Ill., ED, May 12, 2023). In those cases, the two courts reached opposite conclusions: the Court in Baum rejected the 10^th Circuit Doll decision and found that the chapter 13 trustee was allowed to retain the percentage fee in a case dismissed before plan confirmation, because 28 U.S.C. section 586(e) allows the deduction by providing that the trustee should “collect” the fees from the debtor’s payments. Conversely, the court in Johnson followed the Doll decision and found that the mandate of Bankruptcy Code section 1326(a)(2) was straightforward and that the standing trustee must return all of the pre-confirmation payments he receives (minus payments he or she already made to creditors), without first deducting his or her fee. Johnson at 910-912, quoting Doll at 1141.   

To read the published opinion, click here.  

FACTUAL BACKGROUND

The facts in the Evans, Doll, Baum and Johnson cases are essentially identical for purposes of the analysis: all involved chapter 13 cases which were dismissed before a chapter 13 plan was confirmed. In Evans, the debtors voluntarily dismissed their case and then brought a motion to have the chapter 13 trustee disgorge fees that the trustee had deducted from funds the trustee had received from the debtors, which the trustee had already collected. 

The bankruptcy court agreed with the debtors and granted their motion for the chapter 13 trustee to disgorge its fees.  The district court reversed. The debtors appealed to the Ninth Circuit, which reversed the district court. In re Evans, 69 F.4th at 1105. 

REASONING

The Ninth Circuit summarized the issue as follows:

The parties both argue that a proper interpretation of the word “collect” in 28 U.S.C. § 586(e)(2) controls this case. The relevant language reads: “[The trustee] shall collect such percentage fee from all payments received by such individual under plans … for which such individual serves as standing trustee.” 28 U.S.C. § 586(e)(2) (emphasis added).

According to Trustee, Section 586 directs her to collect—and keep—fees from payments made by debtors as she receives them, whether pre-or post-plan confirmation. For support, she argues that the word “collect” means “to receive payment.” Collect, BLACK’S LAW DICTIONARY (5th ed. 1979). Trustee also notes other laws where Congress qualified the word “collect” and argues that it purposely did not do so here. See, e.g., 28 U.S.C. § 1914(b) (“The clerk shall collect … such additional fees only as are prescribed ….” (emphasis added)). In her view, the unqualified use of the word “collect” indicates congressional intent for trustees to irrevocably collect their fees when they receive each payment prior to confirmation.

Debtors argue that if “collect” is read the way Trustee suggests—i.e., “irrevocably collect”—a conflict results between 28 U.S.C. § 586 and 11 U.S.C. § 1326(a)’s directive to return payments to the debtor if a plan is not confirmed. To avoid this conflict, Debtors urge us to adopt the bankruptcy court’s interpretation. Under that reading, Section 586(e)(2) directs the trustee to “collect and hold” fees from preconfirmation payments pending confirmation, while Section 1326(a) tells the trustee how to disburse payments once a decision on confirmation is made. If a plan is confirmed, the payments (and fees) are distributed in accordance with the plan; if a plan is not confirmed, the payments (and fees) are returned to the debtors.

In re Evans, 69 F.4th at 1105-06.

While ultimately agreeing with the debtors, the Ninth Circuit adopted the approach proposed by the National Consumer Bankruptcy Rights Center and National Association of Consumer Bankruptcy Attorneys when it found that reading section 586 in the context of the entire Bankruptcy Code shows that section 586 applies in cases of confirmed plans, while section 1326 applies to pre-confirmation payments in unconfirmed cases.  Id. at 1106-07.  The Ninth Circuit agreed that “if a plan is confirmed—and only if a plan is confirmed—does 1326(b) require that the trustee ‘be paid’ her percentage fee ‘[b]efore or at the time of each payment to creditors under the plan.’ Because payments are made “to creditors under the plan” only once a plan is confirmed, id. § 1326(a)(2), Section 1326(b) indicates that a standing trustee can be paid her percentage fee only after confirmation. Section 1326(b) also cross-references Section 586, which provides the source of and the amount (but not the timing) of trustee fees.”  Id. at 1107 (italics in the original).

As additional support, the Court addressed the rule against superfluities—a statutory canon of construction—in discussing a similar provision found in Chapter 12 cases. Unlike in chapter 13 cases, Bankruptcy Code section 1226(a)—establishing the relationship between a trustee’s fees and confirmation—contains explicit language that fees are to be paid to the chapter 12 trustee regardless of plan confirmation. Id. at 1108-09. Thus, Congress “has had numerous opportunities to add language explicitly permitting a trustee to receive her fees even if a plan is not confirmed” in the context of a chapter 13 case. Id. at 1109. “Its failure to do so strongly evinces its intent not to require payment of trustee fees when a plan is not confirmed.” Id.

The Ninth Circuit also noted that the only other circuit to weigh in on the issue—the Tenth Circuit in Doll—had reached the same result with the same analysis. Id. at 1108. 

AUTHOR’S COMMENTARY

As I stated at the conclusion of another ILC e-Bulletin—Show Me The Money: The Continuing Saga In Dismissed Unconfirmed Chapter 13 Cases – Johnson And Baum—“many of the courts that have considered and ruled on this issues believe that the statutes on which they rely – 28 U.S.C. section 586 and 11 U.S.C. section 1326(a) – are unambiguous.  Since it is difficult to understand how a series of unambiguous statutes can yield different results on similar facts, this author believes that it still remains to be seen how this apparent “split” will be resolved.” 

The Second Circuit, in Soussis v. Macco, No. 22-155 (2d Cir. argued Feb. 15, 2023), has not yet ruled on the same issue.  And there appear to be a number of bankruptcy cases where this issue keeps cropping up.  I do believe that the Ninth Circuit’s rationale and analysis here is solid.  However, should there be a circuit split, I would anticipate that the Supreme Court may take up the issue to resolve the issue in the foreseeable future.

These materials were authored by Kathleen A. Cashman-Kramer, Director at Fennemore LLP (KCashman-Kramer@Fennemorelaw.com).