Matter of Schmeltz
| Decision Date | 01 May 1990 |
| Docket Number | Bankruptcy No. 88-32088-RKR. |
| Parties | In the Matter of Thomas Wayne SCHMELTZ, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Indiana |
Joseph D. Bradley, South Bend, Ind., Chapter 7 Trustee.
Tedd E. Mishler, Michigan City, Ind., Chapter 13 Trustee.
John W. VanLaere, South Bend, Ind., for debtor.
On June 23, 1989, the Chapter 7 trustee, Joseph D. Bradley, filed his Chapter 7 Trustee's Application for Turnover of Funds Held by Chapter 13 Trustee1 against the Chapter 13 trustee, Tedd E. Mishler. The parties stipulated to all facts, filed simultaneous briefs, and thereafter responded to the opponent's brief. On December 4, 1989, the court took the matter under advisement.
Thomas Wayne Schmeltz, the debtor herein, filed his petition under Chapter 13 of the Bankruptcy Code on November 17, 1988. The debtor made payments totalling $920.002 to the Chapter 13 trustee pursuant to the debtor's proposed Chapter 13 plan.3 In his Chapter 13 Statement, the debtor listed a secured debt of $12,275.80 for an automobile owed to First National Bank of Elkhart ("FNB"), his sole secured creditor. In the Chapter 13 plan, the debtor proposed to pay FNB in full in the amount of $1,850.00 with twelve percent interest per annum through a total of thirty-six (36) monthly payments, each payment in the amount of $152.47 (the total monthly payments as part of the Chapter 13 plan were in the amount of $160.00). On May 19, 1989, upon the debtor's motion but prior to confirmation of the plan, the court ordered that the case be converted to a case under Chapter 7 of the Code. Shortly thereafter, the Chapter 13 trustee moved the court for authority to deduct administrative expenses from the Chapter 13 payments and to turn over the remaining balance of the assets to the debtor. In response, the Chapter 7 trustee filed his motion for turnover of the payments from the Chapter 13 trustee. Later, however, the Chapter 13 trustee filed a motion to withdraw his application for administrative expenses.
In his brief the Chapter 7 trustee argues that Bankruptcy Rule 1019(5) directs the Chapter 13 trustee to turn over all property of the Chapter 13 estate to the Chapter 7 trustee. The Chapter 7 trustee further argues that case law, in a conceded split in authority, calls for the payments to be included in property of the Chapter 7 estate. Moreover, the Chapter 7 trustee contends that the payments should not be returned to the debtor. Alternatively, he asserts that the application of In re Northwest Engineering Company, 863 F.2d 1313, 1317-18 (7th Cir.1988), demands that the funds not be returned to the debtor because considerations of fairness require construction of the Bankruptcy Code in such a way that no difference arises between a conversion or a dismissal of a Chapter 13 case.
In rebuttal, the Chapter 13 trustee offers two policy considerations for his argument that the payments should be returned to the debtor. First, in a Chapter 7 liquidation the policy of a fresh start demands that post-petition wages not be made available to creditors. Congress included post-petition wages as property of the Chapter 13 estate so that a debtor could reorganize, but absent a reorganization the funds should not be considered property of the estate. Second, the Chapter 13 trustee points out that pursuant to § 1326(a)(2), payments made by the debtor to the trustee are to be returned to the debtor if the Chapter 13 plan is not confirmed. However, the Chapter 13 trustee provides no case law to support his position.
This Order shall represent findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, made applicable in this proceeding by Bankruptcy Rules 7052 and 9014. The matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(E) over which the court has jurisdiction pursuant to 28 U.S.C. § 157(b)(1). The issue before the court is whether all of the payments made by a debtor to a Chapter 13 trustee pursuant to an unconfirmed Chapter 13 plan should be returned to the debtor upon conversion of the case to Chapter 7.
Upon filing a petition for relief under Chapter 13, an estate is created under § 541 of the Bankruptcy Code. While § 541 limits the estate to interests of the debtor at the time of commencement of the case, § 1306 enlarges the estate to include the debtor's future earnings.4 In addition, § 1326(a)(1) directs the debtor to commence making the payments proposed by a plan within 30 days after the plan is filed. Section 1326(a)(2) further provides that 11 U.S.C. § 1326(a)(2) (Callaghan 1989).
A debtor may elect to convert his Chapter 13 case to a case under Chapter 7 at any time during the Chapter 13 proceeding. 11 U.S.C. § 1307(a) (Callaghan 1989). If the debtor elects to pursue this action, § 348(a) provides that the conversion does not "effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief." 11 U.S.C. § 348(a) (Callaghan 1989). In addition, a claim against the estate or the debtor that arises after the order for relief but before conversion in a case that is converted under § 1307, other than a claim specified in § 503(b), shall be treated for all purposes as if such claim had arisen immediately before the date of the filing of the petition. 11 U.S.C. § 348(d) (Callaghan 1989). Congress thus provided debtors with an inducement to attempt to reorganize under Chapter 13 since post-petition claims could be discharged upon a failed reorganization. Should the debtor convert his case to a Chapter 7, Bankruptcy Rule 1019(5) orders the Chapter 13 trustee to turn over records and property to Chapter 7 trustee.6
In analyzing the relevant case law7 the court determines that a split in authority exists concerning whether a debtor's pre-confirmation payments made in his Chapter 13 case should be returned to the debtor upon conversion to Chapter 7. The courts express divergent reasoning while reaching similar results. Courts holding that wage deductions are not part of the debtor's Chapter 7 estate utilize two theories. The first uses a relation-back concept to determine that payments are not property of the converted estate; and thus, the payments are to be returned to the debtor. Resendez v. Lindquist, 691 F.2d 397 (8th Cir.1982) (); In re Gorski, 85 B.R. 155 (Bankr.M. D.Fla.1988); Arkison v. Swift (In re Swift), 81 B.R. 621 (Bankr.W.D.Wash. 1987).
In Gorski, the court determined that conversion of a case from Chapter 13 to Chapter 7 does not change the date of filing of the bankruptcy petition. Gorski, 85 B.R. at 156. According to Gorski, § 348(a) requires a court to look back to the date of filing of the original Chapter 13 petition to determine what is included as property of the Chapter 7 estate. Id. The court found that post-petition wages are excluded from the debtor's converted estate pursuant to a strict application of § 541(a)(6). Id. at 157. The court further found that the debtors had no exemption rights but nonetheless were entitled to a return of the post-petition wages paid to the trustee as provided in § 1326(a)(6). Id.
A second theory is that § 541 applies only to that property in which the debtor has an interest as of the commencement of the case. Since debtors cannot hold an interest in unearned wages, the wages are not included in the estate. Under this theory, the application of § 1306 after conversion to Chapter 7 has the effect of penalizing the Chapter 13 debtor for attempting a Chapter 13 case. McCullough v. Luna (In re Luna), 73 B.R. 999 (Bankr.N.D.Ill.1987) (); In re Lepper, 58 B.R. 896 (Bankr. D.Md.1986); In re Peters, 44 B.R. 68 (Bankr.M.D.Tenn.1984); In re Bullock, 41 B.R. 637 (Bankr.E.D.Pa.1984).
The court is mindful of a recent case in this district wherein Judge Grant determined that § 348 should be construed as a source of continuity. In re Lybrook, 107 B.R. 611 (Bankr.N.D.Ind.1989). According to Judge Grant, "to interpret § 348 as requiring the court to reshuffle the bankruptcy estate upon conversion is to make it a source of disruption." Id. at 613. In disagreeing with those courts holding that Chapter 13 post-petition property is not property of the Chapter 7 estate, he explained that and § 348(a) "does not mandate or necessarily imply `that upon conversion a case is to be treated in all respects as if it had originally been filed under the chapter to which it has been converted.'" Id. at 612 (). The court concluded:
When § 348 is viewed as a source of continuity, the plain language of § 541 easily becomes susceptible to the conclusion that the bankruptcy estate, following conversion from Chapter 13 to Chapter 7, is the Chapter 13 bankruptcy estate. The estate was created upon the commencement of the case. 11 U.S.C. § 541(a). At the moment of creation, it essentially consisted of all of the property in which debtor had an interest. 11 U.S.C. § 541(a)(1). The estate does not, however, remain static. It also includes "any interest in property that the estate acquires after the commencement of the case." 11 U.S.C. § 541(a)(7).
Id. at 613 (...
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