In re Carels

Citation416 B.R. 153
Decision Date20 August 2009
Docket NumberAdversary No. 09-0134.,Bankruptcy No. 07-17291bf.
PartiesIn re Scott M. CARELS and Joann M. Carels, Debtors Christine Shubert, Chapter 7 Trustee for the Estate of Scott M. Carels and Joann M. Carels, Plaintiff v. Scott M. Carels, Joann M. Carels, and William C. Miller, Esquire, former Chapter 13 Trustee for the Estate of Scott M. Carels and Joann M. Carels, Defendants.
CourtUnited States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

Paul Brinton Maschmeyer, Robert W. Seitzer Philadelphia, PA, for Plaintiff.

Robert F. Salvin, Community Impact Legal Services, Chester, PA, for Defendants.

MEMORANDUM

BRUCE FOX, Bankruptcy Judge.

The plaintiff, chapter 7 trustee Christine C. Shubert, Esq., commenced this adversary proceeding seeking a declaration that property of the estate, transferred to her possession by the former chapter 13 trustee, can be distributed to unsecured creditors under 11 U.S.C. § 726. William C. Miller, Esq., the former chapter 13 trustee, has agreed that he holds no interest in these funds. "Consent Order" (docketed July 21, 2009). The chapter 7 debtors, Scott and Joann Carels, object to the relief sought by the plaintiff and contend, via counterclaim, that the funds currently held by the chapter 7 trustee are exempt under section 522(d)(1), except for $5,503.89.

The chapter 7 trustee has moved for summary judgment.

The following material facts are not in dispute, many of which were stipulated to in a prior contested matter between the chapter 7 trustee and the debtors. See Motion for Summary Judgment, "Schedule 1"; Debtors' Affidavit, ¶ 1. The undisputed material facts are also derived from the debtors' bankruptcy schedules, affidavit, and documents filed of record with this court, including proofs of claim.

I.

On December 12, 2007, the debtors filed a voluntary petition in bankruptcy under chapter 13. William C. Miller, Esq., who has been appointed a standing chapter 13 trustee in this district, was assigned as trustee in their case. See 11 U.S.C. § 1302(a).

At the time of their bankruptcy filing, the debtors owned the real property located at 2830 Tyler Road, Bensalem, Pennsylvania, which property they were trying to sell. Their ownership interest in that realty was fully disclosed on their bankruptcy schedules and valued by them at $234,900. See Bankruptcy Schedule A. Moreover, the debtors claimed a federal homestead exemption under 11 U.S.C. § 522(d)(1) in the amount of $40,400. See Bankruptcy Schedule C.

On March 5, 2008, the chapter 13 trustee held and completed a section 341 meeting. At no time thereafter did the chapter 13 trustee object to the debtors' homestead exemption claim.

When the debtors filed their chapter 13 petition, both were unemployed. Their bankruptcy schedule of income revealed no monthly income. See Bankruptcy Schedule I. Their schedule of expenses disclosed no disposable income with which to fund a chapter 13 plan of reorganization. See Bankruptcy Schedule J. The debtors' purpose in their chapter 13 filing was to sell their home and avoid foreclosure. They hoped to sell the realty, repay creditors, and receive as much of their home equity (in the form of proceeds) as possible, while also obtaining a bankruptcy discharge.

Although the debtors were eligible to seek chapter 7 relief, they opted instead to file a chapter 13 petition because of their fear that a chapter 7 trustee would conclude that there was insufficient non-exempt equity in the realty to warrant marketing and selling their real property. As only the chapter 7 trustee has authority to sell estate property, see 11 U.S.C. §§ 363(b), 704(1), the debtors anticipated that a chapter 7 trustee would not exercise that authority. Therefore, the debtors were concerned that a chapter 7 filing would result in their mortgagee obtaining relief from the bankruptcy stay and proceeding to foreclosure. Upon a sale in foreclosure, the debtors thought it likely that all equity in their home would be lost. Thus, they filed a chapter 13 petition in order to invoke the bankruptcy stay, retain possession of estate property, see 11 U.S.C. § 1306(b), and have the right to sell their realty.

On April 11, 2008, about four months after their bankruptcy filing, the debtors found a buyer and signed an agreement of sale for the Bensalem realty in the amount of $216,000. See Debtors' Motion to Sell, Ex. A. On May 29, 2008 the debtors filed a motion seeking authority to sell under 11 U.S.C. §§ 363, 1303.

A hearing was held on that sale motion. After discussions between counsel for the chapter 13 trustee and counsel for the debtors, on June 24, 2008 an agreed order was entered authorizing the debtors to sell their realty. This sale order contained certain provisions proposed by the chapter 13 trustee and by the debtors.

The June 24th order provided that the debtors' real property could be sold for $216,000, authorized distribution at closing to repay the outstanding mortgage balance in full, authorized the payment of a real estate commission, and also authorized the payment of the debtors' two outstanding car loan balances totaling $11,749.86. See Motion for Summary Judgment, Ex. C. The sale order also directed the title clerk to pay the remaining proceeds to the chapter 13 trustee "as a special receipt, to be available under the debtor's [sic] plan for distribution to unsecured creditors." Id., at 2. This order also stated:

Debtor [sic] shall not be permitted to voluntarily dismiss the case; he [sic] may, however, convert this case to one under Chapter 7. In the event the case is converted to Chapter 7, any funds remaining in the possession of the standing trustee shall be transferred to the appointed Chapter 7 trustee....

Id., at 2.

The Bensalem realty was then sold on July 25, 2008, with the debtors' mortgage and secured car loans paid in full from the proceeds. After payment of various closing costs and commissions, $34,154.03 was transferred to the chapter 13 trustee in accordance with the sale order. See Motion for Summary Judgment, ex. G.1

On September 25, 2009, the debtors' proposed third amended chapter 13 plan was confirmed. Motion for Summary Judgment, ex. E. Under the terms of their confirmed plan, there were seven classes of claims. Classes I-III consisted solely of the three secured creditors (viz., mortgagee and two auto lenders) whose claims had been repaid in full from the realty sale proceeds prior to confirmation. Motion for Summary Judgment, ex. D. Class IV consisted of the secured claim of Blue Stone Investments in the amount of $4,492.03. Class V consisted of the claims of secured creditors not included in classes I-IV, if any. Class VI consisted of the priority claim of the Internal Revenue Service in the amount of $2,555.17. Finally, class VII consisted of the claims of general unsecured creditors. Id., at 2.

After classifying the various claims, the confirmed plan provided that the

Funds paid to the trustee shall be held for 30[sic]2 following confirmation of the debtors' plan or until all filed objections to claims are resolved, whichever is earlier. The Trustee should then distribute funds, less the trustee's commission, as follows:

(a). To the allowed secured claim, if any, of the Class VI claimant until paid in full;

(b). To the allowed claim, if any, of the Class IV claimant until paid in full;

(c). To the allowed claim, if any, of the Class V claimant until paid in full;

(d). To the allowed claims, if any, of the Class VII claimants until paid in full; and

(f). To the debtors following payment in full to all creditors.

Motion for Summary Judgment, ex. D, at 3 ¶ 6 (emphasis added).

At the time of confirmation, there were no objections to claims pending. There were also no secured proofs of claim filed by creditors, other than those placed in classes I-IV. The IRS and Bluestone proofs of claim filed with this court were consistent with the provisions of the confirmed plan and totaled $7,247.20. In addition, there were $15,553.61 in general unsecured claims filed of record. See Claims Register. Therefore, the creditor claims provided for by the confirmed plan not paid pre-confirmation from the realty sale proceeds equaled $22,800.81. The trustee had sufficient funds on hand to pay all claims in full at the time of confirmation, plus yield a surplus to the debtors.

The debtors' confirmed plan also provided as follows:

To facilitate the payment of creditors under this plan in a lump sum, as opposed to installment payments over an extended period, the debtors are waiving their exemptions for purposes of this plan. This waiver will not apply in the event the case is ever converted to Chapter 7.

Plaintiff's Motion, ex. D, ¶ 10.

The September 25th confirmation order stated, inter alia: That all property of the estate, including any income, earnings other property which may become a part of the estate during the administration of the case which property is not proposed, or reasonably contemplated, to be distributable to claimants under the plan shall revest in the debtor(s); provided, however, that no property received by the trustee for the purpose of distribution under the plan shall revest in the debtor except to the extent that such property may be in excess of the amount needed to pay in full all allowed claims as provided in the plan.

On October 1, 2008, just five days after confirmation, the debtors filed an application for conversion under 11 U.S.C. § 1307(a), thereby converting their case from chapter 13 to chapter 7. Upon conversion, the chapter 13 trustee retained about $3,100 as a commission under 11 U.S.C. § 1326(b)(2) and transferred the balance, roughly $31,000, to the chapter 7 trustee Ms. Shubert, appointed under section 701(a). The chapter 7 trustee currently has possession of those transferred funds and seeks to distribute them to general unsecured and priority creditors.

On November 17, 2008, counsel for the debtors communicated with the chapter 7 trustee and...

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2 cases
  • In re Manz
    • United States
    • U.S. Bankruptcy Court — District of New Jersey
    • March 10, 2020
    ...was to enable debtors to develop and maintain a plan for repayment of debts rather than be forced into a liquidation. In re Carels, 416 B.R. 153, 159 (Bankr. E.D. Pa. 2009) (citing Report of the Committee on the Judiciary, H.R. 95-595, 95th Cong. 1st Sess.1978, p. 118, U.S. Code Cong. & Adm......
  • In Re Barry L. Michael, 1:05-bk-06085MDF.
    • United States
    • United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Middle District of Pennsylvania
    • July 23, 2010
    ...to return payments received from the trustee before conversion to chapter 7 have uniformly rebuffed such requests. See In re Carels, 416 B.R. 153, 162 (Bankr.E.D.Pa.2009) (“[F]unds distributed by a chapter 13 trustee to creditors under the terms of a confirmed plan are not recoverable by th......

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