Chapter 13 Trustee may not earn commission in unconfirmed Chapter 13 Case

Should the Chapter 13 Trustee earn a commission when a Debtor’s Chapter 13 case is dismissed and plan unconfirmed? The 9th Circuit says nope!

In a contentious matter that has divided the bankruptcy courts, the Ninth Circuit Court of Appeals has ruled in the matter of Evans v. McCallister that a Chapter 13 Trustee is not entitled to receive its percentage fee from plan payments as compensation in a Chapter 13 case when the plan is not confirmed. This decision aligns the Ninth Circuit with the Tenth Circuit, making them the only federal courts of appeals to have addressed this particular issue. (Goodman v. Doll (In re Doll), 57 F.4th 1129 (10th Cir. 2023)).

Interestingly, this issue is currently under consideration in the Second and Seventh Circuit Court of Appeals as well. (See Soussis v. Macco, 20-05673, 2022 WL 203751 (E.D.N.Y. Jan. 24, 2022) and In re Johnson, 650 B.R. 904 (Bankr. N.D. Ill. May 12, 2023)).

The case at hand involves debtors in the Evans case who filed for Chapter 13 bankruptcy. However, before their repayment plan was confirmed, the debtors voluntarily dismissed their case and subsequently filed a motion requesting the return of Chapter 13 fees collected from their payments. Initially, the bankruptcy court sided with the debtors and ordered the Chapter 13 Trustee to refund the fees. However, the Trustee appealed, and the district court reversed the decision. Subsequently, the debtors brought the case before the Ninth Circuit Court of Appeals.

The main point of contention between the parties revolved around the interpretation of the word "collect" in 28 U.S.C. § 586(e)(2). This section outlines the duties of the standing trustee and states that the Chapter 13 Trustee should "collect" a percentage fee from all payments received under the plans. The debtors argued that when read in conjunction with 11 U.S.C. § 1326(a), their position was supported. In their view, "collect" meant to hold the fees temporarily pending confirmation, and once a decision on confirmation was made, the trustee was to disburse the payments accordingly.

On the other hand, the Chapter 13 Trustee contended that "collect" meant to permanently retain the fees, thereby entitling her to keep the commission regardless of whether the plan was confirmed or not.

The Ninth Circuit, rather than adopting the reasoning of the Tenth Circuit, opined that the phrase "payments under the plan" in § 586(e)(2) referred specifically to payments under confirmed plans. This conclusion was drawn from the language of § 1326(a), which states that the debtor shall make payments as proposed by the plan to the trustee, and the trustee shall hold onto those payments until confirmation or denial of confirmation. Thus, according to the Ninth Circuit's interpretation, § 1326(b) only requires the Chapter 13 Trustee to be paid its fee when a plan is confirmed.

In supporting its decision, the Ninth Circuit also applied the rule against superfluities, pointing out that the Bankruptcy Code provisions governing trustee payments for subchapter V, 11, and 12 trustees explicitly required deduction of fees if a plan was not confirmed (§§ 1226(a) and 1194(a)), while § 1326 did not. This, in the court's view, indicated that Congress knew how to use language to ensure payment for trustees in specific circumstances, but had not done so in § 1326.

Furthermore, the Ninth Circuit rejected policy arguments put forth by the Chapter 13 Trustee, who claimed that denying payment for unconfirmed cases could lead to financial strains and incentivize trustees to neglect their duty to object to plans. The court maintained that such policy considerations were insufficient to override the clear language of the relevant provisions established by Congress.

Given that similar cases are pending in the Second and Seventh Circuits, there is a potential for a circuit split on this issue.

Brent Diefenderfer is a bankruptcy attorney practicing in the Middle District of Pennsylvania and Eastern District of Pennsylvania. These districts are in the Third Circuit and this decision is not binding in the Third Circuit.