Evans v. McCallister (In re Evans), ___F.4th___, 2023 WL 3939837(9th Cir. June 12, 2023)
In an issue that has caused a split in the bankruptcy courts, the Ninth Circuit Court of Appeals held that a Chapter 13 Trustee is not entitled to its percentage fee of plan payments as compensation in a Chapter 13 when a plan is not confirmed. The Ninth Circuit joined the Tenth Circuit as the only federal court of appeals that has addressed this issue. See Goodman v. Doll (In re Doll), 57 F.4th 1129 (10th Cir. 2023). This issue is also currently pending in the Second and Seventh Circuit Court of Appeals. SeeSoussis 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 debtors in Evans filed a Chapter 13. Before the plan was confirmed, the debtors voluntarily dismissed their case, and then filed a motion to disgorge the Chapter 13 fees collected from their payments. The bankruptcy court agreed and ordered the 13 Trustee to return its fees. The 13 Trustee then appealed and the district court reversed, and then the debtors appealed to the Ninth Circuit Court of Appeals.
The 13 Truste argued that interpretation of the word “collect” under 28 U.S.C. § 586(e)(2) would resolve this dispute. Section 586 describes the duties of the standing trustee and that the subchapter V, 11, 12, and 13 trustees “…shall collect [a] percentage fee from all payments received by such individual under plans…” And the Debtors argued that reading § 586(e)(2) and 11 U.S.C. § 1326(a) together supported their argument. The Debtors argument was adopted by the Tenth Circuit in Doll. Under the 13 Trustee’s argument, she should be entitled to keep her commission because the word “collect” means to irrevocably keep the fees taken. The Debtors opined that the word “collect” means to collect and hold “pending confirmation, while Section 1326(a) tells the trustee how to disburse payments” once a decision on confirmation is made.” Section 1326(a)(2) provides that payments made by the debtor “shall be retained by the trustee until confirmation or denial of confirmation” and if the plan is not confirmed then the trustee shall return “any such payments not previously paid” after deducting any unpaid claim allowed under section 503(b).
Rather than adopt the main reasoning of the Tenth Circuit, the Ninth Circuit opined that when reading § 586(e)(2) and § 1326(a) together that the phrase payments under the plan pursuant to § 586(e)(2) referred to payments under confirmed plans. This is because § 1326(a)(1) says the debtor shall make payments in the amount “proposed by the plan to the trustee.”, and § 1326(a)(2) provides the trustee shall hold onto those payments “until confirmation or denial of confirmation.” So only when a plan is confirmed does § 1326(b) require the 13 trustee to be paid its fee.
Like the Tenth Circuit, the Ninth Circuit also bolstered its holding using the cannon of statutory construction applying the rule against superfluities. The Bankruptcy Code provisions § 1226(a) and 1194(a) that govern trustee payments for subchapter V, 11, and 12 trustees explicitly tell the trustees if a plan is not confirmed to deduct its fee, whereas § 1326 does not. This showed that Congress knew how to use language in § 1326 to explicitly make sure 13 trustees were paid like it did in §§ 1226 and 1194, but it did not.
Lastly the Evans court rejected policy arguments from the Chapter 13 Trustee. The 13 Trustee contended that not allowing a trustee to be paid its fee when a case is not confirmed would cause financial strains and incentive 13 Trustees to violate their duty to object to plans. The Ninth Circuit explained that policy arguments were not enough to overcome the plain language of the relevant provisions that were created by Congress.
With this current issue pending in the Seventh and Second Circuits, a circuit split may be imminent.