Show Me the Money: The Continuing Saga in Dismissed Unconfirmed Chapter 13 Cases – Johnson and Baum

The following is a case summary written by Kathleen A. Cashman-Kramer analyzing two cases decided close in time, on the same issue, and with different results.  

SUMMARY

On February 18, 2021 there appeared in the ILC E-Bulletin a previous article I authored regarding the case of In re Evans, 618 B.R. 493 (Bankr. E.D. Mich.2020).  The Bankruptcy Court for the Eastern District of Michigan determined that, following conversion of the case from chapter 13 to chapter 7, the chapter 13 trustee was required to pay the allowed administrative attorneys’ fees of the debtor’s chapter 13 counsel from funds that the chapter 13 trustee had in her possession with the remaining balance of those funds returned to the debtor. (Note:  this Evans case did not specifically deal with the issue of the chapter 13 trustee’s statutory fee from the proceeds held in the Chapter 13 Trustee’s possession.)

Most recently, two bankruptcy courts considered a similar issue – how the  chapter 13 trustee’s statutory fees are administered, if at all – and true to form, the two bankruptcy courts decisions came down on opposite sides. This article will take a look and analzye those two casesof  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).  

To read the full published Baum decision, click here.

To read the full published Johnson decision, click here.

FACTS

The facts in the Baum and Johnson cases are similar:  Both involved chapter 13 cases that were dismissed before confirmation.  In Johnson, following the dismissal of the case, the debtor brought a motion against the chapter 13 trustee to disgorge the fees which the trustee had deducted from funds t held,prior to returning the remaining balance of the funds to the debtor.  Conversely, in Baum, the chapter 13 trustee filed its own motion asking for the bankruptcy court’s direction on how to disburse the more than $135,000 that the trustee had on hand, prior to returning the funds to the debtor.The debtor and a creditor timely objected to the Trustee motion. 

In Johnson, the bankruptcy court disallowed the deductions for payments taken by the trustee.  In Baum, the bankruptcy court granted the trustee’s motion and specifically overruled the opposition of a secured creditor, who sought to have all of the funds held by the trustee turned over to the alleged secured creditor with a lien on the proceeds, or in the alternative, to the state court.  The bankruptcy court allowed the trustee to retain his 8% fee collected under 28 U.S.C. section 586(e )(2) and to pay debtor’s counsel’s administrative fees allowed under Section 503(b), before returning the balance to the debtor.  

REASONING

Johnson

In Johnson, even though the Illinois bankruptcy court recognized that the common practice of the district was that Chapter 13 trustees were allowed to deduct their percentage fees prior to refunding the proceeds to the debtor under Section 1326(a)(2), it rejected the historical practice based on frequency and decided the matter on current authority.  Johnson at 909.  The bankruptcy court found the recent case of In re Doll, 57 F.4th 1129 (10th  Cir. 2023) instrumental in its decision, which had construed the mandate of Section 1326(a)(2) as straightforward stating:“[i]f a plan is not confirmed, the trustee shall return any such payments [made by the debtor] not previously paid and not yet due and owing…to the debtor.”  In so doing the Johnson court further quoted the Doll court stating that “we read that to mean that the standing trustee must return all of the pre-confirmation payments he receives, without first deducting his fee. There is no indication in this statutory language that the trustee should first deduct his fees before returning the pre-confirmation payments to the debtor when no plan is confirmed.” Johnson at 910, quoting Doll at 1141.  Indeed, the Johnson court did not find Section 1326(a(2) and 28 U.S.C. section 586 at odds; rather, it stated that both sections compelled the chapter 13 trustee to return all payments it collected from the debtor without deduction for trustee fees.  Id. At 911-12. 

Baum

The bankruptcy court in Michigan also construed the 10th Circuit Doll case, however theyrejected the 10th Circuit’s conclusions in Doll.  It then elected to follow those cases which concluded that 28 U.S.C. section 586(e) allows the deduction by providing that the trustee should “collect” the fees from the debtor’s payments.  It did so with only passing references to prior cases that have come down on both sides of the question.  As a result, in reliance on the cases cited, the Michigan bankruptcy court allowed the trustee to retain the fee.

AUTHOR’S COMMENTS

My commentary at the conclusion of the 2021 Evans article referred to above, mentioned a split among courts in similar Chapter 13 cases.  Many of those cases cited the same authorities: Bankruptcy Code sections 348, 349, 503(b),1326((a)(2), as well as 28 U.S.C. section 586(e).  The decision in Johnson does not appear to have been appealed despite the court’s certification of the decision as a direct appeal to the circuit court, and the Baum decision likewise does not appear to have been timely appealed. 

However, the Ninth Circuit Court of Appeals has now chimed in on this issue in one of the cases cited in the Johnson case, namely, McAllister vs. Evans (coincidental in name but unrelated to the Evans case cited above), 637 B.R. 144 (D. Idaho 2022): on June 12, 2023 the 9th Circuit, addressing a matter of first impression in the 9th Circuit, held that a standing trustee in a Chapter 13 case may not be paid her percentage fee when the case is dismissed prior to confirmation. See Matter of Evans, 69 F.4th 1101  (9th  Cir. June 12, 2023).  In doing so, the Ninth Circuit followed the recent Tenth Circuit decision in In re Doll, 57 F.4th 1129 (10th Cir. 2023), and noted that the same issue on similar facts is currently awaiting decision in the Second Circuit Court of Appeals.  The Ninth Circuit on the Evans/McCalliser case, specifically stated that: “Congress thus has had numerous opportunities to add language explicitly permitting a trustee to receive her fees even if a plan is not confirmed. Its failure to do so strongly evinces its intent not to require payment of trustee fees when a plan is not confirmed. See Guerrero-Lasprilla v. Barr, ––– U.S. ––––, 140 S. Ct. 1062, 1071–72, 206 L.Ed.2d 271 (2020); Lindh v. Murphy, 521 U.S. 320, 330, 117 S.Ct. 2059, 138 L.Ed.2d 481 (1997) (“[N]egative implications raised by disparate provisions are strongest when the portions of a statute treated differently had already been joined together and were being considered simultaneously when the language raising the implication was inserted.”). This case will be discussed in more detail in a later eBulletin. 

It is interesting to note that the Johnson,  Baum and Evans/McCallister courts all believe that the statutes on which they relief 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, and that future could see a trip to the Supreme Court to resolve this split.

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 Matthew D. Resnik of RMH Law (matt@rhmfirm).