In Re Juan O. Plata, in Re Catalina Plata, Debtors. Peter H. Arkison, Trustee v. Juan O. Plata, Catalina Plata ( 1992 )

BRUNETTI, Circuit Judge,

dissenting:

I respectfully dissent.

The majority misapplies In re Nash, 765 F.2d 1410 (9th Cir.1985). Nash involved a dismissal of a Chapter 13 case, not a conversion of a Chapter 13 case to a Chapter 7 case. Although the majority can find “no clear reason” for distinguishing between dismissals and conversions, one is given by Nash itself — the Bankruptcy Code. Nash relied primarily on section 349(b)(3) of the Bankruptcy Code which provides that dismissal of a case “revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case.” 11 U.S.C. § 349(b)(3). This statute expressly refers only to dismissal cases and does not apply to conversion cases. Recognizing this, the Nash court distinguished conversion cases that had ordered funds held by the Chapter 13 trustee upon conversion be distributed according to the confirmed plan on the basis that such cases “do not address the fact that dismissal revests the property of the estate in the debtor. 11 U.S.C. § 349(b)(3).” 765 F.2d at 1414 (distinguishing Resendez v. Lindquist, 691 F.2d 397 (8th Cir.1982), and In re Giambitti, 27 B.R. 492 (Bankr.D.Or.1983)). Nash, therefore, explicitly limited its holding to dismissal cases and is inapplicable here.¹

A comparison of Bankruptcy Code section 349, which governs the effect of dismissal, and section 348, which governs the effect of conversion, evidences Congress’ intent to distinguish the two means of terminating a Chapter 13 estate. Section 349(b)(3) is intended ‘“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.’ ” In re Nash, 765 F.2d at 1414 (quoting S.Rep. No. 989, 95th Cong., 2d Sess. 49 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5835). Section 348, by contrast, includes no such revesting provision. See Nash, 765 F.2d at 1414 (no bankruptcy rule or Code provision contemplates the revesting of the estate property upon conversion to Chapter 7). If Congress intended conversion to have a similar effect on the property in the converted case, it presumably would have included in section 348 language similar to that found in section 349(b)(3).

Stripped of Nash, the majority’s analysis lacks substance. Although I agree with the majority’s recognition of the lack of “controlling statutory authority or case law mandating a result one way or another,” I find that a common-sense interpretation of the Bankruptcy Code supports a finding that once a debtor has voluntarily given funds to the Chapter 12 trustee pursuant to a confirmed plan, the funds belong to the creditors and cannot be claimed exempt by the debtor on conversion of the case to Chapter 7.

Bankruptcy Code section 1227(b) provides that upon confirmation of the debt- or’s plan, all property of the estate vests in the debtor “[ejxcept as otherwise provided in the plan or order confirming the plan.” 11 U.S.C. § 1227(b) (emphasis added). Thus, in the case at hand, because disbursement of the disputed funds was provided for in the confirmed plan, the funds expressly are excepted from vesting in the debtors. In whom, if anyone, the covered funds are vested is not specifically stated in section 1227; the negative implication of this language, however, is that property necessary to effectuate the confirmed plan does not vest in the debtor.

The answer — that the funds belong to the creditors² — can be found in other sections of the Code. The Code provides that once a plan is confirmed, “the provisions of [the] confirmed plan bind the debtor” and claimants to the terms of the plan. 11 U.S.C. § 1227(a). The trustee must “distribute any ... payments [received by the trustee] in accordance with the plan.” Id. § 1226(a); see also id. § 1226(c) (“[ejxcept as otherwise provided in the plan or in the order confirming the plan, the trustee shall make payments to creditors under the plan”); id. § 1326(c) (mirror provision). These provisions obligate the trustee to distribute to the creditors all funds received according to the confirmed plan. This duty is not voided by the debtors’ subsequent voluntary conversion.

In re Redick, 81 B.R. 881 (Bankr.E.D.Mich.1987) — a bankruptcy court decision directly on point — found these Code sections persuasive. Redick similarly involved a Chapter 13 plan converted to a Chapter 7 plan. As in the present case, at the time of conversion, the Chapter 13 trustee possessed funds that had been paid to the trustee by the debtors prior to the date of conversion, but had not yet been distributed to creditors. Id. at 882. The Redick court, in concluding that the funds should be distributed to the creditors, gave significant weight to the trustee’s statutory duty to distribute the funds according to the confirmed plan. Id. at 885-87. The Redick court likened the trustee to an “agent for the creditors.” Id. at 887. A number of courts have followed Redick. See e.g., In re Halpenny, 125 B.R. 814, 816 (Bankr.D.Haw.1991) (creditors’ right to receive funds pursuant to confirmed plan vests at time trustee receives funds); In re Leach, 101 B.R. at 713; In re Burns, 90 B.R. 301, 304 (Bankr.S.D.Ohio 1988).³

Section 348(e) of the Code, which provides that conversion terminates the services of the trustee of the converted case and provides for the replacement of the Chapter 12 trustee with a Chapter 7 trustee, is not contrary. The Chapter 12 trustee does not simply walk away from the case; he must, for example, file a final report and accounting of the Chapter 12 estate. See Redick, 81 B.R. at 886; 11 U.S.C. §§ 1202(b)(1), 704(9); Bankruptcy Rule 1019(6). I do not believe that Congress intended section 348 to have the effect of denying creditors monies, which the debtors have paid with the expectation of being distributed and which creditors are required to accept under the confirmed plan, merely because the monies had not been distributed by the trustee before conversion. Again, I agree with the Redick court which, similarly rejecting an argument based on section 348(e), stated:

[E]ven after the disintegration of the plan, the order confirming the plan and the trustee’s status as an official “Chapter 13 trustee”, the “trustee” is holding the undistributed funds as an agent for the creditors. In essence, when he received those funds from the debtor, he did so as the agent for the creditors, and so the fact that he never got around to writing out individual checks for each of them is immaterial.

Redick, 81 B.R. at 887. Permitting the debtors to regain the undistributed monies paid to the trustee, the Redick court found, would be the result of the neglect of the trustee or “[t]he mere happenstance of the delay inherent in accounting for the receipt of the debtor’s wages and the preparing and mailing of checks.” Id.

Though the delay in the present case was not due to “mere happenstance,” but rather to the insufficiency of the berry crop proceeds to meet the requirements of the plan and the trustee’s subsequent failure to distribute the funds pursuant to the plan, Redick’s reasoning is still pertinent. See also, Resendez, 691 F.2d at 399 (it is unfair to permit funds held by the trustee to be claimed as exempt upon conversion to Chapter 7 merely because “they had not been distributed to the creditors”); In re Leach, 101 B.R. at 713 (determining ownership of funds based on time of disbursement by trustee would thwart the integrity of the negotiations process entered into by debtor with creditors prior to the submission of a Chapter 12 plan).

Once the debtor voluntarily pays the trustee according to the plan, the debtor cannot make a claim for the return of the payment on conversion to Chapter 7. Accordingly, I would reverse the Bankruptcy Appellate Panel decision and disallow the Debtors’ exemption claim.

1 . Although the reasoning of cases interpreting Chapter 13 generally should apply to cases interpreting Chapter 12, see supra majority’s note 9, one court has found Nash distinguishable on this basis. The bankruptcy court in In re Samford, 102 B.R. 724 (Bankr.E.D.Mo.1989), stated,

[i]f followed in Chapter 12 cases, the Nash decision would lead to patently unfair results. In most Chapter 12 plans, payments are made on an annual basis. Creditors are held off throughout the growing season. It would be unfair to allow the debtor to voluntarily remit the proceeds from the crops to the trustee and then deny the creditors the distribution of those funds pursuant to a confirmed Plan by simply dismissing their case. I must conclude that those funds held by a trustee, pursuant to a confirmed Chapter 12 plan, cannot be returned to the debtors, but must be distributed in accordance with the plan.

Id. at 726.

2 . The alternative to possession by the debtor or creditors, that the funds belong to the Chapter 7 trustee, has been rejected by a majority of the courts. See In re Leach, 101 B.R. 710, 712 (Bankr.E.D.Okla.1989), and cases cited therein; cf. Resendez, 691 F.2d 397.

3 . In re de Vos, 76 B.R. 157 (N.D.Cal.1987), illustrates the significance of these sections, de Vos concerned the conversion of the debtor’s case from Chapter 13 to Chapter 7 in 1983. The court held that the debtors were entitled to a return of the undistributed funds in the Chapter 13 estate upon conversion. Id. at 159. The court noted, however, that the 1984 amendment of section 1326, adding the provision that "[i]f a plan is confirmed, the trustee shall distribute any such payment in accordance with the plan," would have required a different result. Id. at 159 n. 9; see Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, § 318, 98 Stat. 357. ”[H]ad this amendment been in effect for the case at bar,” the de Vos court stated, "the chapter 13 trustee would have had to make payment to the creditors named in the confirmed chapter 13 plan, and not to either the debtors or chapter 7 trustee.” 76 B.R. at 159 n. 9.