Viegelahn v. Lopez (In Re Lopez) , 897 F.3d 663 ( 2018 )

Case: 17-50297 Document: 00514579041 Page: 1 Date Filed: 07/31/2018
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
July 31, 2018
No. 17-50297
Lyle W. Cayce
Clerk
In the Matter of: MANUEL PALOMERA LOPEZ; DOLORES RONQUILLO
LOPEZ
Debtors
--------------------------------------
MARY K. VIEGELAHN,
Appellee,
v.
MANUEL PALOMERA LOPEZ; DOLORES RONQUILLO LOPEZ,
Appellants.
Appeal from the United States District Court
for the Western District of Texas
Before KING, ELROD, and GRAVES, Circuit Judges.
JENNIFER WALKER ELROD, Circuit Judge:
In this Chapter 13 bankruptcy case, debtors sold their Texas homestead
and did not use the sale proceeds to purchase another home. The debtors later
voluntarily dismissed their bankruptcy case. The bankruptcy court
determined that the debtors were entitled to the return of the homestead
proceeds because they voluntarily dismissed their case. The district court
disagreed, concluding that the proceeds should remain with the trustee for
Case: 17-50297 Document: 00514579041 Page: 2 Date Filed: 07/31/2018
No. 17-50297
distribution to creditors in the dismissed bankruptcy proceeding. Determining
that the bankruptcy court’s decision was correct, we REVERSE the judgment
of the district court as to the disbursement of the proceeds; AFFIRM the
district court’s judgment regarding the debtors’ motion to dismiss and the
trustee’s motion to modify; and REINSTATE the order of the bankruptcy court
directing the trustee to return the homestead proceeds to the debtors.
I.
In 2009, Manuel Palomera Lopez and Dolores Ronquillo Lopez
(hereinafter, the Debtors) filed a voluntary petition under Chapter 13 of the
Bankruptcy Code in the United States Bankruptcy Court for the Western
District of Texas. In their petition, the Debtors listed a property in San
Antonio as their homestead, which they claimed as exempt under 11 U.S.C.
§ 522(b)(3), the Texas Constitution, and the Texas Property Code. The Debtors
proposed a Chapter 13 plan under which they would pay a monthly plan
payment of $1,100 for 60 months. The bankruptcy court confirmed the
Debtors’ plan. The confirmation order provided in part that:
All property of the estate, including . . . other property which may
become part of the estate during the administration of the case,
shall not revest in the Debtor. Such property as may revest in the
Debtor shall so revest only upon further Order of the Court or upon
dismissal, conversion, or discharge.
In the course of this case, Mary K. Viegelahn, the Standing Chapter 13
Trustee for the Western District of Texas (hereinafter, the Trustee), filed three
motions to dismiss. In 2011, the Trustee filed the first motion to dismiss
alleging that the Debtors were in arrears with their plan payments, rendering
the plan infeasible unless the Debtors cured the arrears or increased the
amount of their monthly plan payments. In response, the Debtors filed a
motion to modify the plan, stating that they were no longer able to afford the
plan payments because Manuel Lopez had been incarcerated for the past ten
2
Case: 17-50297 Document: 00514579041 Page: 3 Date Filed: 07/31/2018
No. 17-50297
months and was unable to provide financial assistance. The Debtors also
stated that Dolores Lopez “has been working side jobs but her income is
insufficient to afford the plan payment.” The Debtors proposed to surrender a
vehicle to reduce the plan payments and stated that this modification would
allow them to successfully complete the plan. The bankruptcy court granted
the Debtors’ motion to modify and dismissed the Trustee’s motion to dismiss
as withdrawn. In 2013, the Trustee filed a second motion to dismiss, alleging
that the Debtors had failed to make required plan payments and were in
arrears. In response, the Debtors filed a motion to modify the plan, which the
bankruptcy court granted. In June 2014, the Trustee filed a third motion to
dismiss because of continued failure to make plan payments.
In August 2014, the Debtors filed a nunc pro tunc motion 1 to sell
property, through which they sought permission to sell the property designated
in their petition as their homestead. In their motion, the Debtors stated that
the homestead property was sold in July 2011 on a wrap-around note with a
balloon payment. According to the Debtors, Dolores Lopez needed the proceeds
to pay for “mandatory eye surgery.” In her amended objections to the Debtors’
nunc pro tunc motion to sell their homestead, the Trustee questioned why the
Debtors did not seek permission from the bankruptcy court to sell their
homestead in 2011. The Trustee also emphasized that, under Fifth Circuit
precedent in Viegelahn v. Frost (In re Frost), 744 F.3d 384 (5th Cir. 2014),
proceeds from the sale of a homestead become property of the estate if not
reinvested in another home within six months. Thus, the Trustee maintained
that the Debtors could not use the homestead proceeds for eye surgery even if
the surgery was mandatory.
1 “Nunc pro tunc translates ‘now for then.’” MortgageAmerica Corp. ex rel. Knostman
v. Am. Fed. Sav. & Loan (In re MortgageAmerica Corp.), 831 F.2d 97, 97 n.1 (5th Cir. 1987)
(citing Fanelli v. Hensley (In re Triangle Chems., Inc.), 697 F.2d 1280, 1285 (5th Cir. 1983)).
3
Case: 17-50297 Document: 00514579041 Page: 4 Date Filed: 07/31/2018
No. 17-50297
The bankruptcy court approved the Debtors’ nunc pro tunc motion to sell
their homestead. However, the court ordered that the net proceeds from the
sale of the homestead—after all claims secured by liens on the property, ad
valorem taxes, and closing costs had been satisfied—be submitted to the
Trustee. The Trustee then filed a motion to modify the plan, asserting that the
net sale proceeds must be disbursed to creditors.
In response to the Trustee’s pending third motion to dismiss, the Debtors
filed a motion to modify the plan. The Debtors stated that they had fallen
behind in their plan payments because Manuel Lopez was no longer in the
United States and had been unable to remit money for the plan payment and
because Dolores Lopez had been sick and had not been receiving enough
income to remit the plan payment. They also stated that Dolores Lopez was
scheduled for eye surgery that would cost approximately $20,000. Noting that
they were over $4,000 in arrears, the Debtors proposed remitting a lump sum
of the net proceeds from the sale of their homestead less Dolores Lopez’s
medical costs related to her eye surgery.
In December 2014, the bankruptcy court held a hearing on the Trustee’s
third motion to dismiss the case for failure to make plan payments. At the
close of the hearing, the bankruptcy court indicated that it would allow Dolores
Lopez to pay her eye surgery bills from the net sale proceeds, stating “and then
the rest of it’s going to come in. Unless [Dolores Lopez] wants to dismiss the
case. If she wants to dismiss the case, she can keep it all, but then she won’t
have a discharge. So, that’s the trade-off.” (emphasis added). Later that
month, Independence Title Company delivered $42,148.58 from the sale of the
homestead to the Trustee. A month later, the Debtors—choosing a solution
that the bankruptcy court said was available—filed a motion to voluntarily
dismiss their Chapter 13 case.
4
Case: 17-50297 Document: 00514579041 Page: 5 Date Filed: 07/31/2018
No. 17-50297
The Trustee filed objections to the Debtors’ motion to dismiss. In her
amended objections, the Trustee asserted that the bankruptcy court should
deny the motion in part because the Debtors sought dismissal in bad faith. The
only evidence of bad faith that the Trustee alleged was that “[t]he Debtors
initially sold property of the estate without court authority[] and did so
approximately three . . . years ago,” and that the Debtors “now seek to dismiss
this case and retain a ‘windfall’ at the expense of their unpaid creditors.” The
Trustee also maintained that “cause” existed under 11 U.S.C. § 349(b) to keep
the homestead proceeds from returning to the Debtors. Thus, the Trustee
requested that the bankruptcy court deny the Debtors’ motion to dismiss and
grant the Trustee’s motion to modify or, if the case was dismissed, find “cause”
to order that funds held by the Trustee—i.e., the $42,148.58 in net sale
proceeds plus all plan receipts not yet distributed—be disbursed to the Debtors’
creditors.
In February 2015, the bankruptcy court held a hearing on the Trustee’s
motion to dismiss, the Trustee’s motion to modify the plan, and the Debtors’
motion to dismiss. The court inquired as to why the Debtors had sold their
homestead without first obtaining court approval. Counsel for the Debtors
responded:
I don’t know, Judge. [Dolores Lopez] basically was told by a realtor
or some third party that she could sell it. If you remember, her
husband got deported to Mexico. And they were having trouble
funding the plan, funding the house payment. And then they
decided that a way to solve that problem was to sell the house, get
some money.
Counsel for the Debtors also clarified that after Dolores Lopez sold the home,
she began receiving payments on the wrap-around note. Those payments were
somewhat greater than the payments that she continued to make on the first
lien note on the home, allowing her to use the difference for expenses, including
5
Case: 17-50297 Document: 00514579041 Page: 6 Date Filed: 07/31/2018
No. 17-50297
plan payments. When the balloon payment became due, it appears that
Dolores Lopez stopped receiving payments on the wrap-around note,
preventing her from continuing to make plan payments.
The bankruptcy court granted the Debtors’ motion to voluntarily dismiss
their case. The court stated that “[a]lthough Dolores Ronquillo Lopez sold her
homestead without prior approval of the Court, the Court does not find cause
for conversion to Chapter 7 or for an involuntary modification of the Chapter
13 Plan.” Moreover, the bankruptcy court ordered that the funds from the sale
of the homestead be transferred from the Trustee to Dolores Lopez after
payment of the Trustee’s commission. The bankruptcy court also entered
orders dismissing as moot the Trustee’s third motion to dismiss and the
Trustee’s motion to modify.
The Trustee appealed to the district court. The district court determined
that the homestead proceeds should be distributed to the creditors under the
Chapter 13 plan—even though the plan was now defunct. Moreover, the
district court held that, even if the proceeds would ordinarily vest in the
Debtors upon dismissal, “cause” existed under 11 U.S.C. § 349(b) to order that
the proceeds be distributed to the creditors. The district court then entered an
order that: (1) affirmed the bankruptcy court’s order dismissing as moot the
Trustee’s motion to modify the plan; (2) affirmed the portion of the bankruptcy
court’s order granting the Debtors’ motion to dismiss; (3) reversed the portion
of the order requiring that the funds held by the Trustee be returned to the
Debtors; and (4) remanded the case to the bankruptcy court “to enter an order
allowing the trustee to disburse [the homestead proceeds] to the creditors in
accordance with this Court’s order and the Chapter 13 plan in this case.” The
Debtors timely appealed.
6
Case: 17-50297 Document: 00514579041 Page: 7 Date Filed: 07/31/2018
No. 17-50297
II.
“We review ‘the decision of a district court sitting as an appellate court
in a bankruptcy case by applying the same standards of review to the
bankruptcy court’s findings of fact and conclusions of law as applied by the
district court.’” Endeavor Energy Res., L.P. v. Heritage Consol., L.L.C. (In re
Heritage Consol., L.L.C.), 765 F.3d 507, 510 (5th Cir. 2014) (quoting Clinton
Growers v. Pilgrim’s Pride Corp. (In re Pilgrim’s Pride Corp.), 706 F.3d 636,
640 (5th Cir. 2013)). “Acting as a ‘second review court,’” we review a
bankruptcy court’s legal conclusions de novo and its findings of fact for clear
error. Official Comm. of Unsecured Creditors v. Moeller (In re Age Ref., Inc.),
801 F.3d 530, 538 (5th Cir. 2015) (quoting Fin. Sec. Assurance Inc. v. T-H New
Orleans Ltd. P’ship (In re T-H New Orleans Ltd. P’ship), 116 F.3d 790, 796 (5th
Cir. 1997)); ASARCO, L.L.C. v. Barclays Capital, Inc. (In re ASARCO, L.L.C.),
702 F.3d 250, 257 (5th Cir. 2012). Issues of statutory interpretation are
reviewed de novo. Nowlin v. Peake (In re Nowlin), 576 F.3d 258, 261 (5th Cir.
2009).
III.
A.
As discussed above, in this Chapter 13 bankruptcy case, the Debtors sold
their Texas homestead and did not use the sale proceeds to purchase another
home. The Debtors later voluntarily dismissed their bankruptcy case. The
bankruptcy court determined that the Debtors were entitled to the return of
the sale proceeds because they voluntarily dismissed their case, but the district
court disagreed. It is undisputed that the homestead proceeds at issue are non-
exempt and became part of the bankruptcy estate prior to dismissal because
the Debtors did not use the proceeds to purchase another homestead within six
7
Case: 17-50297 Document: 00514579041 Page: 8 Date Filed: 07/31/2018
No. 17-50297
months of the sale. 2 Thus, what we confront in this case are non-exempt assets
held by a trustee. The key question is whether these assets are to be returned
to the Debtors upon the voluntary dismissal of their case.
The Debtors’ plain-text statutory argument is straightforward:
Dismissal revests property of the estate—here, the homestead proceeds—in
“the entity in which such property was vested immediately before the
commencement of the case.” 11 U.S.C. § 349(b)(3). The homestead was vested
in the Debtors immediately before commencement of the case. Moreover, the
bankruptcy court did not find “cause” under § 349(b) to order that the proceeds
be disbursed to someone other than the Debtors. Therefore, the Debtors argue,
the proceeds belong to them following dismissal.
We begin with a few background principles. Chapter 13 is a “wholly
voluntary alternative to Chapter 7, . . . allow[ing] a debtor to retain his
property if he proposes, and gains court confirmation of, a plan to repay his
debts over a three- to five-year period.” Harris v. Viegelahn, 135 S. Ct. 1829,
1835 (2015); see 11 U.S.C. §§ 1306(b), 1322, 1327(b). “[T]he Chapter 13 estate
from which creditors may be paid includes both the debtor’s property at the
time of his bankruptcy petition, and any wages and property acquired after
filing.” 135 S. Ct. at 1835; see § 1306(a). A debtor generally has a right to
voluntarily dismiss her case under § 1307(b) at any time, although the
bankruptcy court may deny dismissal “for bad-faith conduct or abuse of the
bankruptcy process.” Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 649
(5th Cir. 2010); see § 1307(b), § 349(b).
2 However, at the time the Debtors sold their homestead—almost three years before
this court’s decision in Frost—it was not clear that the homestead sale proceeds, unlike the
homestead, would become part of the bankruptcy estate if not reinvested in another
homestead within six months of the sale.
8
Case: 17-50297 Document: 00514579041 Page: 9 Date Filed: 07/31/2018
No. 17-50297
In light of these background principles, we turn to the text of the relevant
statute, § 349(b)(3) of the Bankruptcy Code. See Nowlin, 576 F.3d at 261
(“When interpreting a statute, we begin by examining its language.”). Section
349(b) states that:
Unless the court, for cause, orders otherwise, a dismissal of a case
other than under section 742 of this title . . .
(3) revests the property of the estate in the entity in which
such property was vested immediately before the
commencement of the case under this title.
11 U.S.C. § 349(b)(3). The Bankruptcy Code does not define the terms “vest”
or “revest.” See 11 U.S.C. § 101. “When terms used in a statute are undefined,
we give them their ordinary meaning.” Hamilton v. Lanning, 560 U.S. 505,
513 (2010) (quoting Asgrow Seed Co. v. Winterboer, 513 U.S. 179, 187 (1995)).
Black’s Law Dictionary defines “vest” to mean, in relevant part: “[t]o confer
ownership (of property) on a person”; “[t]o invest (a person) with the full title
to property”; or “[t]o give (a person) an immediate, fixed right of present or
future enjoyment.” VEST, Black’s Law Dictionary (Bryan A. Garner ed., 10th
ed. 2014). To “revest” means “[t]o clothe or vest again or anew, as with rank,
authority, or ownership.” REVEST, Black’s Law Dictionary. Thus, the
ordinary meanings of both “vest” and “revest” are broad. The homestead
property was undoubtedly “vested” in the Debtors at the commencement of the
bankruptcy case, and a key component of the Debtors’ property right in the
homestead was the right to sell that same property. See 73 C.J.S. Property
§ 47 (2017) (“The right to sell or otherwise dispose of property is an incident to
the right of ownership.”). Because the Debtors’ right to the sale proceeds was
inherent in their right to the homestead property, the proceeds were “vested”
9
Case: 17-50297 Document: 00514579041 Page: 10 Date Filed: 07/31/2018
No. 17-50297
in the Debtors at the commencement of the bankruptcy case for the purpose of
§ 349(b)(3). 3
Both text and precedent support this conclusion. Holding that
homestead proceeds that debtors acquire post-petition generally revest in them
upon voluntary dismissal best comports with § 349(b)(3)’s textual directive to
return to debtors “the property of the estate” following dismissal. 4 “A textually
permissible interpretation that furthers rather than obstructs the document’s
purpose should be favored.” Antonin Scalia & Bryan A. Garner, Reading Law:
The Interpretation of Legal Texts 63 (2012). 5
3 Frost does not undermine this conclusion. Frost does not concern the distribution of
homestead proceeds upon voluntary dismissal, and its distinction between homestead and
proceeds bears on the Texas exemption question, not on rights of ownership or vesting of
property. See generally 744 F.3d 384; cf. Hawk v. Engelhart (In re Hawk), 871 F.3d 287, 294
(5th Cir. 2017) (“In light of the Supreme Court’s decision in [Taylor v. Freeland & Kronz, 503
U.S. 638 (1992)], it is somewhat difficult to understand how proceeds from the sale of the
homestead in Frost could be brought into the bankruptcy estate ‘at a time when the
homestead had already been declared exempt from the estate.’” (quoting Frost, 744 F.3d at
387)) (distinguishing Frost and holding in a Chapter 7 case that funds in an individual
retirement account did not lose their exempt status even though Texas law provided that
proceeds distributed from exempt retirement accounts remain exempt only if reinvested in
other accounts within sixty days).
4 Compare § 1306(a)(1) (“Property of the estate includes . . . all property of the kind
specified in [§ 541] that the debtor acquires after the commencement of the case . . . .”), with
§ 1327(b) (“Except as otherwise provided . . . , the confirmation of a plan vests all of the
property of the estate in the debtor.”). As noted above, the order confirming the Debtors’ plan
provides that property of the estate that “may revest in the Debtor shall so revest only upon
further Order of the Court or upon dismissal, conversion, or discharge.”
5 Indeed, under the whole-text canon, we ought to “consider the entire text, in view of
its structure and of the physical and logical relation of its many parts.” Scalia & Garner,
Reading Law, at 167. “Context is a primary determinant of meaning” and “[t]he entirety of
the document . . . provides the context for each of its parts.” Id. Given the Bankruptcy Code’s
provisions indicating that estate property that had been acquired by debtors post-petition
generally vests in them and the fact that § 349 alone governs the legal effect of dismissal on
a Chapter 13 case, § 349(b)(3) must govern the disposition of all estate property upon
voluntary dismissal under Chapter 13. Interpreting § 349(b)(3) in any other way leads to an
absurd result that is unnecessary under the plain language of the statute and unsupported
by the Bankruptcy Code as a whole: property acquired by a debtor that vests in no one and
can go nowhere upon voluntary dismissal.
10
Case: 17-50297 Document: 00514579041 Page: 11 Date Filed: 07/31/2018
No. 17-50297
Under our precedent, § 349(b)’s purpose is clear: to “undo the bankruptcy
case, as far as practicable, and to restore all property rights to the position in
which they were found at the commencement of the case.” Wells Fargo Bank
v. Oparaji (In re Oparaji), 698 F.3d 231, 238 (5th Cir. 2012) (quoting In re
Sanitate, 415 B.R. 98, 105 (Bankr. E.D. Pa. 2009)) (determining that because
dismissal of a bankruptcy case restores the status quo, the parties were no
longer bound by the terms of the Chapter 13 plan). Indeed, the bankruptcy
estate ceases to exist upon dismissal. See SEC v. Great White Marine &
Recreation, Inc., 428 F.3d 553, 556 (5th Cir. 2005) (“An estate is a separate
legal identity, created on (and by) the filing of a bankruptcy petition, and
continuing until confirmation, conversion, or dismissal of the case.” (quoting
In re Herberman, 122 B.R. 273, 278 (Bankr. W.D. Tex. 1990))). Before the
Debtors in this case initiated their Chapter 13 bankruptcy proceeding, they
owned a homestead. Restoring the status quo requires returning to the
Debtors the proceeds from the sale of that asset. See Oparaji, 698 F.3d at 238. 6
That is what the bankruptcy court did. 7
In addition, a trustee lacks any inherent authority to distribute property
to creditors upon dismissal. Simply put, a trustee has authority to distribute
funds only pursuant to the express terms of a plan. See § 1326(a)(2); 8 Collier
6 See also First Nat’l Bank of Oneida v. Brandt, 887 F.3d 1255, 1261 (11th Cir. 2018)
(stating that “insofar as the dismissal of a bankruptcy case is concerned, the aim of § 349(b)
is to return the parties, as far as practicable, to the financial positions they occupied before
the case was filed”).
7 The Trustee argues that the “basic bargain” of Chapter 13 requires distributing the
homestead proceeds to creditors. Simply put, the Trustee fails to appreciate the nature of
the Chapter 13 bargain. As the Supreme Court has stated, Chapter 13 proceedings “can
benefit debtors and creditors alike.” Harris, 135 S. Ct. at 1835. Moreover, the creditors here
still may pursue any viable state-court remedies against the Debtors. See In re Slaughter,
141 B.R. 661, 664 (Bankr. N.D. Ill. 1992) (“If the debtors had never filed Chapter 13, they
would be entitled to possession of their [post-petition] wages in full, subject to whatever rights
their creditors have to reach part of those wages in satisfaction of their claims under
applicable nonbankruptcy law and procedure.”).
11
Case: 17-50297 Document: 00514579041 Page: 12 Date Filed: 07/31/2018
No. 17-50297
on Bankruptcy ¶ 1307.09 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.
2018) (“[U]pon dismissal of a chapter 13 case, the trustee has a duty to return
to the debtor all property of the debtor held by him or her at the time of the
dismissal and to take no further steps to implement the chapter 13 plan.”); see
also Nash v. Kester (In re Nash), 765 F.2d 1410, 1413 (9th Cir. 1985)
(determining that the dismissal of a confirmed Chapter 13 plan “effectively
vacated” the plan), superseded by statute on other grounds. 8 Thus, not only
does the district court’s interpretation of § 349(b)(3)—that the proceeds vested
in no one and therefore may go to creditors—conflict with other provisions of
the Bankruptcy Code, but in making this determination, the district court
created an untenable situation: a trustee distributing funds to creditors
pursuant to a Chapter 13 plan when that plan itself is defunct and the case is
over. Therefore, we hold that under § 349(b)(3) of the Bankruptcy Code,
proceeds from the post-petition sale of a debtor’s exempt homestead generally
must be returned to the debtor upon voluntary dismissal. 9
Counsel for the Trustee conceded at oral argument that she could cite to no case that
8
allows a trustee, in the absence of an operative plan, to distribute funds to creditors.
9It would strain these principles and our caselaw to hold otherwise. Cf. Lowe v.
DeBerry (In re DeBerry), 884 F.3d 526, 529–30 (5th Cir. 2018) (holding that proceeds from
the post-petition sale of a pre-petition homestead in a Chapter 7 case remain exempt from
the debtor’s estate even if they are not reinvested in another homestead within six months
and stating that “Texas’s homestead exemption . . . has much deeper roots than the
protections afforded retirement accounts” (citing Perry v. Dearing (In re Perry), 345 F.3d 303,
316 (5th Cir. 2003) (“Homesteads are favorites of the law, and are liberally construed by
Texas courts.”))).
Moreover, the Supreme Court recently considered a related issue in Harris v.
Viegelahn, holding that post-petition wages held by a Chapter 13 trustee at the time of
conversion to Chapter 7 must be returned to the debtor, not distributed to creditors upon
conversion. 135 S. Ct. at 1834–35. (Harris v. Viegelahn involved the same trustee as in this
case; in Harris, the Supreme Court reversed this court’s decision that had held in favor of the
Trustee. See id. at 1836, 1840.) While not dispositive of the issue before us today because of
the distinctions between Chapter 13 and Chapter 7 and between conversion and dismissal,
we find the Court’s analysis instructive. The Court in Harris firmly rejected “the suggestion
that a confirmed Chapter 13 plan gives creditors a vested right to funds held by a trustee.”
Id. at 1839. This is because “estate property does not become property of creditors until it is
12
Case: 17-50297 Document: 00514579041 Page: 13 Date Filed: 07/31/2018
No. 17-50297
Cogent reasoning from a number of courts also supports our holding. See
In re Edwards, 538 B.R. 536, 539–40 (Bankr. S.D. Ill. 2015) (collecting cases
and stating that “[a] majority of courts . . . hold that [funds held by the trustee
when a confirmed Chapter 13 case is dismissed] must be returned to the
debtor”); Nash, 765 F.2d at 1414 (determining that post-petition wages
received by the trustee before dismissal must be remitted to the debtors rather
than distributed to the creditor upon dismissal of the Chapter 13 case); In re
Slaughter, 141 B.R. 661, 663 (Bankr. N.D. Ill. 1992) (“It would be anomalous
to give prepetition property of the estate to the debtor under § 349(b)(3) and
postpetition property of the estate to creditors.”). 10 Therefore, § 349(b)(3)
generally requires a trustee to return to debtors the proceeds from the post-
petition sale of their exempt homestead upon the voluntary dismissal of their
Chapter 13 case. Simply put, as counsel for the Trustee admitted at oral
argument, this bankruptcy case is over. There is no Chapter 13 trustee. There
are no bankruptcy creditors—only creditors.
B.
Under the clear-error standard that we apply to a bankruptcy court’s
findings of fact, we will reverse only if, “on the entire evidence, we are left with
the definite and firm conviction that a mistake has been made.” Templeton v.
O’Cheskey (In re Am. Hous. Found.), 785 F.3d 143, 152 (5th Cir. 2015)
(quoting Morrison v. W. Builders of Amarillo, Inc. (In re Morrison), 555 F.3d
distributed to them.” Id.; see also 11 U.S.C. § 1306(b). Indeed, “[n]o provision in the
Bankruptcy Code classifies any property . . . as belonging to creditors.” 135 S. Ct. at 1839
(quoting In re Michael, 699 F.3d 305, 312–13 (3d Cir. 2012)).
10The Trustee contends that Slaughter and analogous cases do not address whether
there was “cause” to order that post-petition property be distributed to creditors. This is
beside the point. “Cause” is a separate question. Section 349(b) provides that the bankruptcy
court may find “cause” to prevent the return of estate property to a debtor. That does not
undermine the conclusion that § 349(b)(3) requires returning post-petition property to the
debtor upon dismissal unless such cause is found.
13
Case: 17-50297 Document: 00514579041 Page: 14 Date Filed: 07/31/2018
No. 17-50297
473, 480 (5th Cir. 2009)). “Although we may ‘benefit from the district court’s
analysis of the issues presented, the amount of persuasive weight, if any, to be
accorded the district court’s conclusions is entirely subject to our
discretion.’” Age Ref., Inc., 801 F.3d at 538 (quoting Zer-Ilan v. Frankford (In
re CPDC, Inc.), 337 F.3d 436, 441 (5th Cir. 2003)). “Where there are two
permissible views of the evidence, the factfinder’s choice between them cannot
be clearly erroneous.” Jacobsen, 609 F.3d at 662 (quoting Anderson v. City of
Bessemer City, 470 U.S. 564, 574 (1985)). In upholding a bankruptcy court’s
finding of bad faith in the context of 11 U.S.C. § 1307, we have stated that “the
bankruptcy court, sitting as the factfinder, ha[s] the ability to evaluate [the
debtor’s] testimony and his credibility firsthand.” Id.
As discussed above, § 349(b) states that property of the estate revests
upon dismissal “[u]nless the court, for cause, orders otherwise.” 11 “[R]ead in
context, [§ 349(b)] appears designed to give courts the flexibility to ‘make the
appropriate orders to protect rights acquired in reliance on the bankruptcy
case.’” Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 984 (2017) (quoting
H.R. Rep. No. 95-595, at 338) (holding that a bankruptcy court lacks the
authority, absent the consent of affected parties, to order a distribution scheme
related to a Chapter 11 dismissal that skips the Bankruptcy Code’s “basic
priority rules” for “final distributions of estate value in business
bankruptcies”). The Bankruptcy Code does not appear to define what
constitutes “cause” under § 349(b). In re Darden, 474 B.R. 1, 12 (Bankr. D.
Mass. 2012). The Trustee argues that the Debtors acted in bad faith, engaged
in dishonesty, and abused the bankruptcy process. We need not decide
whether a finding of “cause” under § 349(b) must be based on evidence of bad
11Moreover, we have held that a debtor’s right to voluntarily dismiss her case under
§ 1307(b) is not absolute but is “subject to a limited exception for bad-faith conduct or abuse
of the bankruptcy process.” Jacobsen, 609 F.3d at 649.
14
Case: 17-50297 Document: 00514579041 Page: 15 Date Filed: 07/31/2018
No. 17-50297
faith or whether other considerations may also justify such a finding. This is
because, considering the record, we are not “left with the definite and firm
conviction” that the bankruptcy court erred in determining that there was no
“cause” to order that the homestead proceeds be kept from the Debtors. 12 See
Am. Hous. Found., 785 F.3d at 152. Indeed, this determination was not error—
clear or otherwise.
Here, when the Debtors fell behind in plan payments, they proposed to
surrender a vehicle in the hopes that this modification would allow them to
successfully complete the plan. Later, the Debtors proposed remitting a lump
sum of the net proceeds from the sale of their homestead (less Dolores Lopez’s
medical costs related to her eye surgery) to help reduce the amount they owed
in arrears. Rather than abusing the bankruptcy process, the Debtors
apparently made payments under their plan for at least four years. They filed
a motion to dismiss only after the bankruptcy court clearly stated that Dolores
Lopez could voluntarily dismiss the case and receive all of the homestead
proceeds as an alternative to discharge. Moreover, counsel for the Debtors
represented that Dolores Lopez had been using payments received on the
wrap-around note from the sale of the homestead to make plan payments, thus
benefitting creditors. It appears that she stopped making plan payments only
when she was no longer receiving payments on the wrap-around note. These
considerations undermine the idea that the Debtors acted in bad faith or
abused the bankruptcy process and undercut the Trustee’s assertion that
creditors would suffer inequity unless the Trustee distributes the homestead
proceeds to them.
12While the Trustee faults the bankruptcy court for allegedly taking no evidence at
the bankruptcy hearings, this argument saws the branch on which it sits. The argument
that no evidence was taken undermines the assertion that evidence of “cause” existed at all.
15
Case: 17-50297 Document: 00514579041 Page: 16 Date Filed: 07/31/2018
No. 17-50297
In addition, the Debtors’ exempt homestead (sold in 2011) was not
property of the estate 13 and, prior to this court’s 2014 decision in Frost, the
Debtors would not have been on notice that the homestead sale proceeds,
unlike the homestead, would become part of the estate if not reinvested in
another homestead within six months of the sale. This undermines the
assertion that “cause” exists because the Debtors did not disclose the existence
of the homestead proceeds when those proceeds first became part of the
bankruptcy estate. Thus, on this record, the bankruptcy court did not err in
determining that “cause” did not exist to keep the homestead proceeds from
returning to the Debtors.
IV.
Therefore, because the homestead proceeds vested in the Debtors upon
dismissal of their Chapter 13 case and because the bankruptcy court did not
err in finding no “cause” to order otherwise, the Trustee must return the
homestead proceeds to the Debtors. Accordingly, we REVERSE the judgment
of the district court as to the disbursement of the proceeds; AFFIRM the
district court’s judgment regarding the Debtors’ motion to dismiss and the
Trustee’s motion to modify; and REINSTATE the order of the bankruptcy court
directing the Trustee to return the homestead proceeds to the Debtors.
13 “Under Texas law, a debtor’s homestead is permanently exempted from the
bankruptcy estate . . . .” Frost, 744 F.3d at 385.
16