In re Ward

Citation511 B.R. 909
Decision Date26 June 2014
Docket NumberNos. 13–31965–GMH, 13–32016–GMH.,s. 13–31965–GMH, 13–32016–GMH.
PartiesIn re Sharon C. WARD, and Anthony D. Ward, Debtors. In re Candace R. Simpson, Debtor.
CourtUnited States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Eastern District of Wisconsin

OPINION TEXT STARTS HERE

Arnold F. Lueders, III, Milwaukee, WI, for Debtors.

DECISION

G. MICHAEL HALFENGER, Bankruptcy Judge.

Counsel for the debtors, Credit Solutions, S.C., has appealed my rulings that it is not entitled to post-dismissal orders directing the trustee to pay counsel's attorneys' fees out of the debtors' funds in her possession. Counsel has also moved in both cases under Federal Rule of Bankruptcy Procedure 8005 for a “stay”—really an injunction—prohibiting the chapter 13 standing trustee from distributing any of the debtors' funds that she has in her possession until counsel's appeals are resolved.

For the reasons that follow, I grant counsel's motions. Although counsel's likelihood of succeeding on appeal is slight, there is no clear-cut answer to the underlying legal question. Allowing the trustee to distribute the debtors' funds in her possession while the appeals are pending threatens the appellate court's ability to grant effective relief, and enjoining the trustee from distributing those funds poses no significant threat of harm to others.

I

The debtors in these chapter 13 cases were represented by the same counsel. I dismissed both cases on the chapter 13 standing trustee's motion because the debtors failed to make pre-confirmation plan payments to the trustee as required under 11 U.S.C. § 1326(a)(1). While the trustee's motions to dismiss were pending, counsel filed applications requesting that I allow it to recover its attorneys' fees as administrative expenses to be paid out of the funds that the Bankruptcy Code required the debtors to pay to the trustee before confirmation. See 11 U.S.C. § 1326. In effect, the applications were counsel's effort to change the Code's default rule that a trustee must return “to the debtor” payments held by the trustee when a case is dismissed before confirmation. See § 1326(a)(2); see also 11 U.S.C. § 349(b)(3). Because counsel waited until the end of the objection period on the dismissal motions to file its applications, counsel's applications were not ripe for decision when the cases were dismissed. As a result, both cases were dismissed without action on counsel's fee applications.

After the cases were dismissed, counsel filed affidavits averring that no objections were received in response to its fee applications. I scheduled hearings on the applications for May 6, 2014. The cases were called separately, with the Wards' case called first. During the Ward hearing, counsel argued that even though the cases were dismissed, I still had authority to grant its application because the case was still open.

I explained that the Code's text appears to require counsel to obtain the court's approval of a fee application before a case is dismissed. When a plan is not confirmed, as when a case is dismissed before confirmation, § 1326(a)(2) requires the chapter 13 trustee to return a debtor's pre-confirmation plan payments to the debtor, less approved administrative expenses. § 1326(a)(2) (“If a plan is not confirmed, the trustee shall return any [pre-confirmation plan] payments ... to the debtor, after deducting any unpaid claim allowed under section 503(b) [i.e., any allowed administrative expense claim].”). In both the Ward and Simpson cases, however, no administrative expenses had been allowed when the cases were dismissed. As a result, I concluded that § 1326 required the trustee to return the payments held by the trustee to the debtors, and § 349(b)(3) revested the right to those payments in the debtors. Stating that I believed the revestment of the funds under § 349 was intractable absent grounds to vacate the dismissal order under Bankruptcy Rule 9024, I denied the Ward fee application.

Following this explanation, counsel made no further argument in support of the fee application. Instead, counsel appeared to concede the point, saying only, “Sure. I understand. Okay.” Following a brief discussion of potential future alternative practices that would allow the court to consider a fee application before a case is dismissed, counsel stated, “It's just a matter of getting [the application] in sooner. I understand.”

Ms. Simpson's case was called next. I denied counsel's application in the Simpson case on the same grounds that I denied counsel's application in the Ward case: I indicated that it did not appear that I had the authority to approve counsel's application and order the trustee to pay counsel from the debtor's funds in her possession because when the case was dismissed the right to those funds revested in the debtor pursuant to § 349(b)(3). Counsel made no argument opposing my ruling during the Simpson hearing. I subsequently entered orders in each case denying counsel's applications for compensation.

Counsel timely filed motions to reconsider, invoking the bankruptcy analogs to Federal Rules of Civil Procedure 59 and 60. See Fed. R. Bankr.P. 9023 & 9024. Counsel also filed motions to enjoin the chapter 13 trustee from disbursing the debtors' funds in her possession until I resolved the motions to reconsider. I granted the injunctive relief to ensure that reconsideration was not rendered moot, and I held a hearing on the motions for reconsideration on May 27, 2014.

After considering the arguments of debtors' counsel and counsel for the trustee at the May 27 hearing, I denied the motions to reconsider because they failed to meet the applicable standards. Counsel's entire argument for reconsideration was that I had misapplied the law. Rule 60 does not afford an avenue for relief from a misapplication of the law; rather, the proper avenue for relief from a misapplication of the law generally is to appeal. See United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 270–71, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) (evaluating Rule 60(b)(4)).

Rule 59, in contrast, provides an avenue by which a litigant can ask a trial judge to revisit an order on the grounds that the judge misapplied the law. Relying on Seventh Circuit precedent, I explained that [r]ule 59(e) allows the movant to bring to the ... court's attention a manifest error of law or fact, or newly discovered evidence.” Bordelon v. Chi. Sch. Reform Bd. of Trs., 233 F.3d 524, 529 (7th Cir.2000). But [a] ‘manifest error’ is not demonstrated by the disappointment of the losing party. It is the ‘wholesale disregard, misapplication, or failure to recognize controlling precedent.’ See Oto v. Metro. Life Ins. Co., 224 F.3d 601, 606 (7th Cir.2000). And Rule 59 may not be used to either “raise novel legal theories that a party [should have raised] in the first instance”, Russell v. Delco Remy Div. of Gen. Motors Corp., 51 F.3d 746, 749 (7th Cir.1995), “or advance arguments that could and should have been presented to the ... court prior to the judgment”, Moro v. Shell Oil Co., 91 F.3d 872, 876 (7th Cir.1996).

In support of reconsideration, counsel for the first time cited trial-court decisions that have held that a bankruptcy court can consider requests to allow an administrative expense claim after a case is dismissed. See, e.g., In re Garris, 496 B.R. 343, 354–55 (Bankr.S.D.N.Y.2013); In re Lewis, 346 B.R. 89, 103–05 (Bankr.E.D.Pa.2006); In re Kent Funding Corp., 290 B.R. 471, 478 (Bankr.E.D.N.Y.2003). But other courts have suggested otherwise. See, e.g., Iannini v. Winnecour, 487 B.R. 434, 443 (W.D.Pa.2012); In re Ragland, No. 05–18142, 2006 WL 1997416, at *5–6 (Bankr.E.D.Pa. May 25, 2006); see also In re Matthews, No. 10–16869, 2012 WL 33213, at *2 (Bankr.E.D.Pa. Jan. 6, 2012), vacated,12–414, 2012 WL 3263599 (E.D.Pa. Aug. 9, 2012). And it's far from clear that the concept of ancillary jurisdiction—on which some courts rely in adjudicating post-dismissal awards of attorneys' fees—is so broad to permit a bankruptcy court to allow an administrative expense claim to be paid from estate property after the case is dismissed, because, as a general matter, dismissal of the case terminates that estate. See Lugo v. de Jesus Saez (In re de Jesus Saez), 721 F.2d 848, 851–52 (1st Cir.1983). Compare Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 378–80, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994) (taking narrow view of ancillary jurisdiction).

Counsel additionally cited a decision reasoning that § 349(b)'s revesting principle does not apply to a debtor's payments to the trustee when those payments come from the debtor's post-petition wages. See In re Garris, 496 B.R. at 353. I noted, however, that other decisions disagree and have held that § 349(b)'s principle applies equally to debtor property that was acquired after the petition was filed—including post-petition wages. See Williams v. Marshall, ––– B.R. ––––, No. 13–C–2326, 2014 WL 1457828, at * 3–4 (N.D.Ill. April 11, 2014) (collecting authorities); In re Hamilton, 493 B.R. 31, 38–39 (Bankr.M.D.Tenn.2013) (Section 349(b)(3) is not ambiguous: At dismissal—unless the court, for cause, orders otherwise—all postpetition earnings of the debtor vest in the debtor.”); see also Nash v. Kester (In re Nash), 765 F.2d 1410, 1413–14 (9th Cir.1985).

Counsel also relied (for the first time) on In re Lewis to argue that when an application for compensation is pending “cause [exists] under § 349 to order the funds to be paid according to § 1326 and to [ sic ] the attorney fees approved by this Court.” No. 13–31965, CM–ECF No. 50, at 5; No. 13–32016, CM–ECF No. 31, at 5. At the hearing, counsel argued that because its applications were pending at the time these cases were dismissed, the court could find cause after the fact and alter the dismissal orders to indicate that the funds held by the trustee did not revest in the debtors. I explained that although a pending application for compensation may constitute cause under § 349(b) to order that funds held by a chapter 13 trust...

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3 cases
  • In re Ward
    • United States
    • U.S. District Court — Eastern District of Wisconsin
    • 29 Diciembre 2014
    ...served as counsel for the debtors in two separate Chapter 13 actions before Bankruptcy Judge Michael Halfenger. See In re Ward, 511 B.R. 909, 911 (Bankr.E.D.Wis.2014).1 Judge Halfenger eventually dismissed both bankruptcy cases on motion by the trustee, because the debtors in both cases fai......
  • In re Sharon C. Ward. Credit Solutions, Case No. 14-CV-882-JPS
    • United States
    • U.S. District Court — Eastern District of Wisconsin
    • 23 Enero 2015
    ...it is clear that the bankruptcy court's decision was also in error. Compare In re Sweports, 2015 WL 127384, with In re Ward, 511 B.R. 909 (Bankr. E.D. Wis. 2014). The Court will, therefore,vacate the bankruptcy court's decision and remand this matter for further proceedings consistent with ......
  • In re Ryan
    • United States
    • U.S. Bankruptcy Court — Eastern District of Wisconsin
    • 15 Septiembre 2014
    ...and responsibilities, and a reasonable belief that a plan could be confirmed and consummated.” Id. at 83. See also In re Ward, 511 B.R. 909, 914 (Bankr.E.D.Wis.2014) (“Given that the debtors' plans were never confirmed, any benefit that counsel's services provided to the debtors is not obvi......

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