Funds Held by Chapter 13 Trustee in Dismissed Case Belong to Debtor, Not Creditors

Funds Held by Chapter 13 Trustee in Dismissed Case Belong to Debtor, Not Creditors

The issue is what happens to plan payments in the hands of the Chapter 13 trustee when a case is dismissed. The Trustee is holding $2,084.23 in this dismissed case and argues that the funds should be paid to the creditors. The Debtor contends that the Trustee should return the funds to the Debtor. There are two lines of authority, both interpreting two Bankruptcy Code provisions. See, e.g., In re Edwards, 538 B.R. 536, 540-41 (Bankr. S.D. Ill. 2015). The first is Bankruptcy Code § 1326(a)(2), stating that “If a plan is confirmed, the trustee shall distribute any such payment in accordance with the plan as soon as is practicable.” The second is § 349(b)(3), providing that one effect of dismissal is to revest property of the estate in the entity in which such property was vested immediately before the case was filed.

In re Parrish, 275 B.R. 424 (Bankr. D.D.C. 2002) supports the Trustee’s position. According to Parrish, §§ 1326(a)(2) and 349 should be read together, meaning that § 349 revests funds in the debtor (or other party) subject to the restriction in § 1326(a)(2). “Section 1326(a)(2) simply requires the trustee to make distributions of those funds according to the confirmed plan, both before and after dismissal, regardless of the entity in whom title is vested.” Id. at 427.
Moreover, although § 349(b)(2) provides that dismissal vacates certain orders, an order
confirming a Chapter 13 plan is not among the orders listed. According to Parrish, this is
“additional evidence” that § 349 does not “terminat[e] the statutory commands” that the trustee
distribute funds according to the plan. Id. Although focusing on the statutory analysis, the court
also reasoned that nothing in the Bankruptcy Code suggested dismissal “undoes the confirmed
plan with respect to past payments” the trustee is holding. Id. at 433. From a policy perspective,
the court reasoned “[t]he debtor should not have both the benefit of creditors’ enforced collection rights having been stayed by reason of a confirmed plan, and the right to receive undisbursed plan funds on dismissal.” Id.

Other courts view Parrish’s reading of § 1326(a)(2) as overly narrow. Section 1326
begins by requiring the debtor to start making plan payments to the trustee within 30 days. 11
U.S.C. § 1326(a)(1)(A). Section 1326(a)(2), the provision on which Parrish relies, states that
these payments

shall be retained by the trustee until confirmation or denial of confirmation. If 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 pursuant to
paragraph (3) to the debtor, after deducting any unpaid claim allowed under section
503(b).

[Emphasis added.]

In context, then, “the directive in the second sentence [is limited] to payments made by the debtor to the trustee prior to the confirmation of the plan.” Williams v. Marshall, 526 B.R. 695, 697 (N.D. Ill. 2014). In other words, the language on which Parrish relies simply tells the Trustee what to do once the plan is confirmed, that is, promptly distribute funds according to the plan terms.

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2 Comments

  1. Robert Monfort

    Is there a public forum on here somewhere? I have a difficult case and would love some feedback from other attorneys.

    Reply

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