Harris v. Viegelahn
Issues
Does a debtor who has paid part of his wages to a trust as part of a Chapter 13 bankruptcy agreement recover the wages upon conversion to Chapter 7 bankruptcy, or do those wages belong to the creditors?
The Supreme Court will determine whether undistributed funds in a Chapter 13 trustee’s possession must be returned to the debtor upon conversion to Chapter 7, or whether creditors have a right to those funds. See Brief for Respondent, Mary K. Viegelahn, Chapter 13 Trustee at i. Harris argues that the Third Circuit’s rule is right in that a debtor’s post-petition wages become part of the property of the estate and thus revert back to the debtor upon conversion. See Brief for Petitioner, Charles E. Harris, III at 18–20. Viegelahn, however, counters that the Fifth Circuit’s rule is the correct one because funds belong to creditors, as the Bankruptcy Code creates an escrow relationship between the trustee and creditors. See Brief for Respondent at 19–21. The resolution of this case has the potential to affect the incentives a debtor has to file under Chapter 13, and may also implicate the balance of equitable considerations between debtor and creditor. See Brief of Amicus Curiae the National Association of Consumer Bankruptcy Attorneys (“NACBA”), in support of Petitioner at 29; see Brief for Respondent at 28; Brief of NACBA at 25.
Questions as Framed for the Court by the Parties
Chapter 13 of the Bankruptcy Code allows debtors to repay their creditors by turning a portion of their monthly income over to a Chapter 13 trustee for distribution to those creditors. At any time, however, a debtor may convert a Chapter 13 bankruptcy case to one under Chapter 7. Congress has provided that "[e]xcept" where the conversion is made in bad faith, the resulting Chapter 7 estate is limited to the debtor's property "as of the date" the original Chapter 13 petition was filed; it does not include wages or property that the debtor acquired after the petition date. 11 U.S.C. § 348(f).
The question presented is:
When a debtor in good faith converts a bankruptcy case to Chapter 7 after confirmation of a Chapter 13 plan, are undistributed funds held by the Chapter 13 trustee refunded to the debtor (as the Third Circuit held in In re Michael, 699 F.3d 305 (2012) [sic] or distributed to creditors (as the Fifth Circuit held below)?
In February of 2010, after falling $3,700 behind on his mortgage loan, Charles E. Harris III filed for bankruptcy under Chapter 13 of the Bankruptcy Code. See In re Harris, 757 F.3d 468, 471 (5th Cir.). His reorganization plan was confirmed in April of 2010.
Edited by
Additional Resources
- The Knowledge Effect: Debtor wants Supreme Court to resolve where post-petition funds go after conversion, Thomson Reuters Blog (Oct. 23, 2014).
- Michael Lipkin: Justices To Decide Who Gets Funds In Bankruptcy Conversion, Law360 (Dec. 12, 2014).