16 November 2015

SCOTUS in Review: US Supreme Court Bankruptcy Cases 2014-2015 -- Part 4

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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