In re Redick
| Decision Date | 01 December 1987 |
| Docket Number | 84-07717,84-08156,83-00593,83-00873,82-01183,84-07696,82-01225,82-00604,84-07835,Bankruptcy No. 81-00291,84-08074,84-08219,84-07724,85-08260 and 86-07622.,84-08042,82-01191,83-00422,85-08132 |
| Parties | In re Ernest E. REDICK, Jeffrey B. and Sherrie L. Dewar, Vincent Van Tol, Walter and Kathy F. Hoye, Jr., Randy M. and Charlene E. Briggin, Audrey Allen, Daniel L. and Joan Voight, Kathleen Ruddy, Robert W. and Priscilla King, Michael P. and Sandra K. Wilke, Peter W. and Margaret Siewert, Richard D. Hodson, Randall G. Miller, Terry L. LeClear, Ned & Genetha Campbell, Sally Jo Hicks, Boretha F. Hill, Linda A. Ridgeway, Renee M. Hatfield, Debtors. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan |
James L. Rowe, Jon T. Warren, Flint, Mich., for debtors.
Carl L. Bekofske, Flint, Mich., Chapter 13 trustee.
Michael A. Mason, Flint, Mich., Chapter 7 trustee.
Michael Mason, Flint, Mich., Chapter 7 trustee.
The facts of these cases have been stipulated by the debtors, the Chapter 7 trustees, and the Chapter 13 trustee, and are as follows. Each of the first fifteen cases listed above was commenced under Chapter 13 of the Bankruptcy Code prior to October 9, 1984, the effective date of the BAFJA.1 The remainder were filed after October 9, 1984 and so the BAFJA amendments are applicable to them. However, with respect to the narrow issue in dispute here, the amendments are not material. Each had a Chapter 13 plan confirmed and before the plan could be completed, the case was converted to Chapter 7. At the time of conversion, the Chapter 13 trustee was holding funds, presumably derived entirely from post-petition wages earned by the debtors, which had been collected prior to the date of conversion, but had not yet been distributed to creditors pursuant to each debtor's particular plan. The Chapter 13 trustee has refused to distribute these remaining funds to creditors, to return them to the debtors, or to turn them over to the respective Chapter 7 trustees. Accordingly, in several of these cases the debtors have filed motions to compel the Chapter 13 trustee to turn over these funds to them.2
The common question of law presented is this: When a Chapter 13 case is converted to a case under Chapter 7 should the funds received by the Chapter 13 trustee prior to conversion but not yet distributed be delivered to the Chapter 7 trustee, the debtor, or to the debtor's creditors according to the terms of the Chapter 13 plan?
The conflict over who has the strongest claim to the withheld funds arises from the fact that a Chapter 13 estate is constituted differently than a Chapter 7 estate. The term "property of the estate" is defined generally by 11 U.S.C. § 541(a) as including all of the property of the debtor as of the commencement of the case. Earnings from services rendered by individual debtors subsequent to the commencement of the case are expressly excluded from the estate by § 541(a)(6). The Chapter 13 estate, on the other hand, contains all of the property which the debtor possessed prior to the commencement of the case and "earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under Chapter 7 or 11 of this title, whichever occurs first." 11 U.S.C. § 1306(a)(2).
When a case under one chapter of the Bankruptcy Code is converted to a proceeding under a different chapter, § 348(a) provides:
Conversion from a case under one chapter of this title to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted, but, except as provided in subsections (b) and (c) of this section not applicable here, does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief.
Thus, when a case is converted from Chapter 13 to Chapter 7, the Chapter 7 estate consists only of the types of property set out in § 541(a) which the debtor possessed as of the date of the original petition for relief. Consequently, it would not seem to include any wages earned between the date of the original petition and the date of conversion, even though those wages had been part of the Chapter 13 estate up until the date of conversion.
A literal reading of § 348(a) leads to the possibly anomalous result that wages which were property of the debtor's bankruptcy estate3 so long as the case continued under Chapter 13 are retroactively withdrawn from that estate when the case is converted to Chapter 7. Under this construction, since they are not property of the estate, the funds held by the Chapter 13 trustee ought to be returned to the debtor, as they were not property of the estate as of the commencement of the case. However, many courts have been uneasy with this result, and there has been a split of authority as to whether the debtor or the Chapter 7 trustee is the appropriate recipient of the funds. Compare, In re DeVos, 76 B.R. 157 (N.D.Cal.1987); In re Luna, 73 B.R. 999 (N.D.Ill.1987); In re Shattuck, 62 B.R. 14 (Bankr.D.N.H.1986); In re Lepper, 58 B.R. 896, 14 C.B.C.2d 1040 (Bankr.D.Md. 1986); In re Peters, 44 B.R. 68, 11 C.B.C.2d 881 (Bankr.M.D.Tenn.1984); In re Bullock, 41 B.R. 637, 10 C.B.C.2d 1292 (Bankr.E.D. Pa.1984); In re Oliphant, 40 B.R. 577 (Bankr.N.D.Tex.1984); In re McFadden, 37 B.R. 520 (Bankr.M.D.Pa.1984); In re Hannan, 24 B.R. 691, 9 B.C.D. 1151, 7 C.B.C.2d 750 (Bankr.E.D.N.Y.1982); and In re Richardson, 20 B.R. 490, 9 B.C.D. 197 (Bankr. W.D.N.Y.1982), wherein the courts held that the funds on hand at the time of conversion should be returned to the debtor; with In re Resendez, 691 F.2d 397 (8th Cir.1982); In re Kao, 52 B.R. 452 (Bankr.D. Ore.1985); In re Williams, 52 B.R. 15 (Bankr.W.D.Pa.1985); In re Wanderlich, 36 B.R. 710, 11 B.C.D. 467 (Bankr.W.D.N. Y.1984); In re Tracy, 28 B.R. 189, 10 B.C.D. 541, 8 C.B.C.2d 440 (Bankr.D.Me.1983); In re Giambitti, 27 B.R. 492 (Bankr.D.Ore. 1983); and In re Stinson, 27 B.R. 18, 10 B.C.D. 354, 8 C.B.C.2d 16 (Bankr.D.Ore. 1982), rev'd in unpublished decision, opinion published as appendix to In re Kao, 52 B.R. 452. (Civ. Nos. 83-43, 44-RE, April 26, 1983), wherein the courts held that the funds should be turned over to the Chapter 7 trustee.
We think the correct interpretation is the one which is most consistent with the plain reading of §§ 348(a), 541(a), and 1306(a); and therefore hold that when determining whether something is an asset of the Chapter 7 estate, it is the date of the original petition rather than the date of conversion which controls. Not only is this result in accord with the general maxims of statutory construction, it is also consistent with policies underlying the availability of Chapter 13 relief. As the court noted in Peters, Congress wished to encourage debtors to opt for relief under Chapter 13 rather than to file a Chapter 7 petition. Towards that end, Congress drafted Chapter 13 to allow debtors to retain possession of their property and broadened the category of debts which may be discharged. Although Peters did not point specifically to any legislative history, it considered the effect of § 348(a) as another incentive for debtors to attempt to pay their debts if possible:
Since this section treats the date of commencement of the Chapter 13 case as the date of commencement of the Chapter 7 case after conversion, the debtor is not penalized for originally pursuing a Chapter 13 case instead of a Chapter 7 case. If the debtor is unable to succeed under Chapter 13, he is treated as if he had originally filed a petition under Chapter 7.
In re Peters, 44 B.R. at 71. Following this reasoning, funds earned by the debtor post-petition but not yet distributed to creditors under the Chapter 13 plan are not part of the Chapter 7 estate. The Chapter 7 trustees have no claim to these undistributed funds.
Courts which have concluded that the undistributed wages belong to the Chapter 7 trustee have supported that conviction with the declaration that it would be "unfair" to permit funds which were voluntarily remitted to the Chapter 13 trustee for distribution to unsecured creditors to now be returned to the debtor.4 The potential inequity visited upon pre-petition unsecured creditors upon conversion is discussed in Tracy. The court noted that according to § 348(d), claims that arise after the commencement of the case, but prior to conversion (except for administrative claims), are treated as if they were incurred just before the commencement of the case. Thus, for distribution purposes, all holders of pre-conversion claims, whether the claims arose pre- or post-petition are treated equally, and it is the date of conversion rather than the date of filing which determine the nature of the claim. That being so, the court concluded that it followed "logically" that the estate from which prepetition and pre-conversion creditors receive a distribution should also be determined as of the date of conversion. In re Tracy, 28 B.R. at 190. Also see In re Winchester, 46 B.R. 492, 495 (9th Cir. BAP 1984). Withdrawing the pre-conversion wages from the pool of assets available for distribution would work to the detriment of the pre-petition creditors. Therefore, Tracy held that the Chapter 7 estate is determined as of the date of conversion. However, Tracy's conclusion is flawed; the fact that the funds do not enter the Chapter 7 estate does not necessarily mean that the debtor winds up with them.
The Chapter 13 trustee agrees with Tracy that giving the funds on hand to the debtor is unfair to the creditors. To the debtor, he says, the receipt of those funds is an unexpected and uncertain windfall. Drawing on personal...
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