A short post today but you can catch up by going to Parts 1, 2, and 3.
III. Chapter
13: The Effect of Conversion
Chapter 13
trustee Mary Viegelahn was holding over $5,500 in wage deductions awaiting
distribution according to the debtor’s Chapter 13 plan when the debtor exercised his right
to convert to a Chapter 7 proceeding.[1]
The trustee nevertheless distributed the funds she held to creditors (including
the debtor’s attorney and herself) according to the terms of the plan. The
bankruptcy court granted the debtor’s motion for a refund and the district
court affirmed, but the Fifth Circuit reversed, holding that “considerations of
equity and policy” justified awarding the undistributed funds to the creditors
instead of the debtor.[2]
The Supreme
Court granted certiorari and unanimously reversed the Fifth Circuit. Writing
for the Court, Justice Ginsburg held that a straightforward application of
Bankruptcy Code §§ 541(a)(6) and 348(e), coupled with a modest extension of
Bankruptcy Code § 348(f), mandated return of the debtor’s wages to him. That
latter section, as restated by Justice Ginsburg, provides that
Property of the [Chapter 7] estate in
the converted case shall consist of property of the estate [defined in
Bankruptcy Code § 541(a)], as of the date of the filing of the [initial chapter
13] petition, that remains in the possession of or is under the control of the
debtor on the date of conversion.[3]
The fact
that the chapter 13 trustee actually controlled these funds was irrelevant
because “conversion [from Chapter 13 to Chapter 7] terminates the service of
[the Chapter 13] trustee.”[4]
The trustee’s obligation to return the funds to the debtor had priority over
any interests his creditors might have because his wages would not have been
property of the estate under Bankruptcy Code § 541.[5]
In brief, official actions taken by the trustee after conversion—after her term
had ended—were at her peril.
[1]
Bankruptcy Code § 1307(a) (“The debtor may convert a case under this chapter to
a case under chapter 7 of this title at any time.”)
[2]
Viegelahn v. Harris (In re Harris),
757 F.3d 468, 479–81(5th Cir. 2014). The Fifth Circuit’s decision conflicted
with the Third Circuit’s opinion in In re Michael,
699 F.3d 305 (3d Cir. 2012).
[3]
Harris v. Viegelahn, 135 S.Ct. 1829, 1837 (2015).
[4] Id.
[5]
Bankruptcy Code § 541 reads as follows:
The commencement of a case . . .
creates an estate. Such estate is comprised of all the following property,
wherever located and by whomever held:
(6) Proceeds, product, offspring,
rents, or profits of or from property of the estate, except such as are
earnings form services performed by an individual debtor after the commencement
of the case.
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