In re Lennon
| Decision Date | 05 September 1986 |
| Docket Number | Bankruptcy No. 84-04162A. |
| Citation | 65 BR 130 |
| Parties | In re Patti LENNON a/k/a Patricia M. Lennon, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Georgia |
Robert L. Coley, Atlanta, Ga., Trustee.
Before the Court is a motion filed by Robert L. Coley, standing Chapter 13 trustee. The motion seeks direction regarding the disposition of undistributed payments held by the Chapter 13 trustee upon conversion from a Chapter 13 to a Chapter 7 case. No response to the motion has been filed by the debtor or the Chapter 7 trustee.
This debtor's Chapter 13 case was filed September 17, 1984. After an unsuccessful effort at rehabilitation, debtor was unable to obtain confirmation of her plan. The Court notes that an order of confirmation was entered June 25, 1985 but was vacated by order of July 17, 1985 because it had been inadvertently entered. Thereafter, the case was converted to a Chapter 7 case by Order of December 6, 1985.
During the period from the filing of the Chapter 13 case to the conversion to Chapter 7, the standing Chapter 13 trustee received payments from debtor of $642.24 which remain undistributed. The trustee alleges that he is unable to determine whether the undistributed funds should be turned over to the Chapter 7 trustee or be paid to the debtor.
This is a core proceeding pursuant to 28 U.S.C. Section 157(b)(2), which this Court has jurisdiction to determine. The issue presented is the proper disposition of undistributed post-filing pre-conversion payments by a Chapter 13 debtor to the standing Chapter 13 trustee when the case is converted to a Chapter 7 case.
The Bankruptcy Code is unclear with regard to the proper disposition of such payments upon conversion from Chapter 13 to Chapter 7. Resolution of this issue requires an analysis and determination of what is property of the Chapter 13 estate, and upon conversion what becomes property of the converted Chapter 7 estate.
In the present case no plan was confirmed. 11 U.S.C. Section 1326(a)(2) provides that "if a plan is not confirmed, the trustee shall return any payments to the debtor . . ." after deducting administrative expenses. If applicable, this provision will dispose of this matter. Accordingly, the Court must first determine the applicability of Section 1326(a)(2) as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984 to the subject case. The 1984 amendments were enacted July 10, 1984 and the amendments relevant here became "effective to cases filed 90 days after the date of enactment of this Act." Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, § 553(a), 98 Stat. 333, 392. Therefore, the 1984 Amendments to Section 1326 are inapplicable to cases filed prior to the effective date thereof. The subject case was filed September 17, 1984 almost a month before the effective date of the Amendments. Thus, present Section 1326 does not apply to the subject case.
When Congress enacted Chapter 13, it demonstrated its concern over the failure of old Chapter XIII of the Bankruptcy Act to encourage consumer debtor use of the chapter for creditor payment as opposed to straight liquidation. See H.R.Rep. No. 595, 95th Cong., 1st Sess. 116-120, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 6076-80. Chapter 13 of the Bankruptcy Code was designed for use by individual consumer or business debtors with regular income and certain debt limitations. As the history states, these limitations "create an irrebuttable presumption that Chapter 13 is inappropriate for businesses with more than $100,000 in unsecured debt or more than $500,000 in secured debt" while providing an alternative to Chapter 11 for small sole proprietors. Id. at 119, reprinted in 1978 U.S.Code Cong. & Ad.News 60801. Chapter 13 facilitates the adjustment of debts and rehabilitation of individuals with sufficiently stable and regular income through "plans funded out of future income, under the protection of the court." 5 Collier on Bankruptcy, ¶. 1300.02, at 1300-18 (15th ed. 1986).
It is mandatory under Section 1322(a)(1) that a Chapter 13 plan provide for submission of all or a part of debtor's future earnings or income for execution of the plan. This is the principal reason for the Section 1306 inclusion of future earnings as property of the Chapter 13 estate. Thus there is a presumption that Chapter 13 payments are made from future earnings. 5 Collier on Bankruptcy, ¶. 1322.01 3H, at 1322-15 (15th ed. 1986); H.R. Rep. No. 595, 95th Cong., 1st Sess. 123, reprinted in 1978 U.S.Code Cong. & Ad. News 6084. Otherwise, by funding a plan through liquidation, the legislative purpose of debtor rehabilitation is frustrated and the distinction between Chapter 13 and Chapter 7 is practically eliminated. In re Gavia, 24 B.R. 573, 575 (Bankr.App.Panel 9th Cir.1982); Cf. Matter of Anderson, 21 B.R. 443 (Bankr.N.D.Ga.1981).
The statutory scheme of the Bankruptcy Code reflects a congressional intent to make attractive and encourage greater use, which must be voluntary, of Chapter 13 rehabilitation and creditor payment, rather than Chapter 7 liquidation with little or no creditor payment.2 The Eleventh Circuit in In re Hall, 752 F.2d 582, 590 (11th Cir. 1985) noted this congressionally intended attractiveness of Chapter 13 as a goal in correcting deficiencies in Chapter XIII of the old Bankruptcy Act. Debtors are thus encouraged to make commitments of future earnings to pay creditors in Chapter 13. When a debtor, persuaded by the appealing benefits of Chapter 13 rehabilitation fails in the effort and converts to Chapter 7, it would seem contrary to the congressionally declared public policy choices underlying Chapter 13 to include, upon conversion, undistributed post-filing payments by a Chapter 13 debtor in the Chapter 7 estate. Hannan v. Kirschenbaum (In re Hannan), 24 B.R. 691, 692 (Bankr.E.D.N.Y.1982). The Court in Hannan, aptly stated the principle as follows:
When a Chapter 13 plan does not work out, the debtor has the privilege of converting to Chapter 7, and when he exercises that right, no reason of policy suggests itself why the creditors and the debtor should not be put back in precisely the same position as they would have been had the debtor never sought to repay his debts by filing under Chapter 13.
This precise restoration of position does not necessarily occur, however, since under Section 349(b) the Court may order otherwise for cause. Similarly, Section 348(d) specifically provides for treatment of post-filing, pre-conversion debts as having arisen pre-petition, thereby allowing those claims, other than a claim specified in Section 503(b), to be discharged. This result is consistent with the policy choices of Congress as expressed in amended Section 1326(a)(2).
The effect of conversion of a case from one chapter under the Bankruptcy Code to another is governed by Section 348. This section provides that the date of filing of the petition, the commencement of the case, and the order of relief are unaffected by the conversion except as provided in Section 348(b) and (c). These exceptions are inapplicable here and do not relate to the creation or the composition of the estate. Therefore, upon failure to obtain confirmation of a plan or to complete payments under a confirmed plan and upon conversion of the case from Chapter 13 to Chapter 7, the debtor is deemed to have commenced the Chapter 7 case as of the date the original Chapter 13 petition was filed. Resendez v. Lindquist, 691 F.2d 397 (8th Cir.1982); Dennis v. W.S. Badcock Corp. (In re Dennis), 31 B.R. 128 (Bankr.M.D.Ga.1983); Cranshaw v. Merritt & McKenzie, Inc. (In re Allied Mechanical Services, Inc.), Case No. 82-04321A, Adv. No. 85-0255A (Bankr.N. D.Ga. June 16, 1986) (Drake, B.J.). Thus, upon conversion, Section 348(a) requires the Court to look back to the date of the filing of the original Chapter 13 petition to determine the creation of the estate and what is included in property of the Chapter 7 estate. Several courts have applied this relation back principle in determining property of the Chapter 7 estate. See In re Peters, 44 B.R. 68 (Bankr.M.D.Tenn.1984) (); In re Bullock, 41 B.R. 637 (Bankr.E.D.Pa.1984) (); Oliphant v. Amarillo Pantex Federal Credit Union, 40 B.R. 577 (Bankr.N.D.Tex.1984) (); In re McFadden, 37 B.R. 520 (Bankr.M.D. Pa.1984) (). Hannan v. Kirschenbaum (In re Hannan), supra.
The cases on the issue, however, are divided. Other courts have reached a contrary conclusion. See Resendez v. Lindquist, supra (); Armstrong v. Lindberg (In re Lindberg), 735 F.2d 1087 (8th Cir.1984) (); In re Kao, 52 B.R. 452 (Bankr.D.Or.1985) (); In re Winchester, 46 B.R. 492 (Bankr.App. Panel 9th Cir.1984) (date of conversion controls determination of property of Chapter 7 estate and debtor's exemptions in that property); In re Wanderlich, 36 B.R. 710 (Bankr.W.D.N.Y.1984) (); In re Tracy, 28 B.R. 189 (Bankr. D.Me.1983) (); In re Giambitti, 27 B.R. 492 (Bankr.D.Or. 1983) (...
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