Cert. Asks Supreme Court to Resolve Where Funds from Ch. 13 Should Go After Case Is Converted (Harris v. Vieglahn, No. 14-400)

The appellant argues, “…of 320,000 Chapter 13 cases filed each year, 60,000 are later converted to Chapter 7″. But where should the funds held by the Chapter 13 Trustee go when Debtor converts the case: back to the debtor or to the creditors?  Harris v. Viegelahn, No. 14-400, petition for cert. filed (U.S. Oct. 6, 2014).

Because of a circuit split, the appellant has asked the Supreme Court to resolve this issue.  The appellant reminds us that our 9th Circuit B.A.P. requires the return post-Chapter 7, undistributed funds to the debtor.

Please find the full article below from Westlaw Journal Bankruptcy at Debtor Wants Supreme Court to Resolve Where Post-Petition Funds Go After Conversion, 11 Westlaw Journal Bankruptcy 2 (2014).

A bankruptcy debtor has asked the U.S. Supreme Court to resolve a direct split between two circuit courts over whether funds held by a Chapter 13 trustee when a debtor converts his case to Chapter 7 go back to the debtor or to creditors.

Debtor Charles E. Harris III had won the return of the funds from both the U.S. Bankruptcy Court for the Western District of Texas and from the District Court on the initial appeal by the trustee.

However, the 5th U.S. Circuit Court of Appeals ruled in July on further appeal that the trustee may distribute the funds to creditors.  In re Harris, 757 F.3d 468 (5th Cir. July 7, 2014).

The appeals panel noted that the issue is one that has divided lower courts for 30 years and the 3rd Circuit reached the opposite conclusion in In re Michael, 699 F.3d 305 (3d Cir. 2012).

The issues arises because, under Chapter 7, creditors are paid using the debtor’s pre-petition assets, while the estate in a Chapter 13 case includes the debtor’s post-petition income as well.

Harris says in a petition for writ of certiorari that the Supreme Court should resolve this “undeniably recurring” issue.  He notes that of 320,000 Chapter 13 cases filed each year, 60,000 are later converted to Chapter 7.

Bankruptcy proceedings

Harris fell behind on his mortgage in early 2010 and filed a Chapter 13 petition in the Western District of Texas, according to his petition.

A few months later the Bankruptcy Court confirmed his plan to resume paying his mortgage while he repaid his arrears and other debts in full over 60 months through a monthly wage garnishment of $530, the petition says.

Harris again fell behind on his mortgage, and the mortgage company obtained relief from the automatic stay to begin foreclosure proceedings.  He subsequently converted his case to a Chapter 7 liquidation in November 2011, according to the petition.

The Bankruptcy Code authorizes a debtor to covert his Chapter 13 case to Chapter 7 at any time.

Mary K. Viegelahn, the Chapter 13 trustee initially assigned to Harris’ case, held about $4,300 in post-petition garnished wages.  She distributed those funds to Harris’ creditors, the petition says.

Harris filed a motion to compel a refund of the funds distributed after the conversion to Chapter 7.

The Bankruptcy Court granted his motion in a decision affirmed by the District Court.

But the 5th Circuit reversed on further appeal by Viegelahn.  It held that the post-petition wages had been appropriately distributed to creditors under his Chapter 13 plan.

The panel noted that eight Bankruptcy Court decisions have held that the funds should go back to the debtor, and a dozen bankruptcy courts have ruled that the funds may be distributed to creditors.

Certiorari petition

Harris asks the Supreme Court to grant review to resolve a long-standing dispute over an important and recurring question of bankruptcy law.  He says there is no reason to believe the circuit split will resolve itself, and it may only deepen without Supreme Court guidance.

Harris notes that in the two years since the Michael decision, the 9th Circuit Bankruptcy Appellate Panel and bankruptcy courts in Alabama and Wisconsin have adopted its approach to return post-Chapter 7, undistributed funds to the debtor.  Conversely, bankruptcy courts in Missouri and Massachusetts have employed the approach taken by the 5th Circuit to allow the trustee to distribute the leftover money to creditors, he says.

Harris further asserts that review is necessary because the 5th Circuit’s decision is wrong.  He argues that the Bankruptcy Code points to a requirement that Chapter 13 trustees return undistributed funds to the debtor upon good-faith conversion to Chapter 7.

Harris says it is undisputed that his conversion was done in good faith.  He further suggests that, should the 5th Circuit decision stand, it would serve as a disincentive for debtors to use Chapter 13.

Harris notes that had he simply started his case under Chapter 7, his post-petition wages would have been his alone.

The Supreme Court’s docket indicates the response to Harris’ petition is due Nov. 6.

Debtor Wants Supreme Court to Resolve Where Post-Petition Funds Go After Conversion, 11 Westlaw Journal Bankruptcy 2 (2014)

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