Rick Warren v. United States Bankruptcy Court for the Western District of Oklahoma

BAP Appeal No. 20-41 Docket No. 38 Filed: 04/27/2021 Page: 1 of 30
NOT FOR PUBLICATION 1
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
_________________________________
IN RE ALEXANDER L. BEDNAR, BAP No. WO-20-041
BAP No. WO-20-042
Debtor.
___________________________________
JILL BEDNAR, RICK WARREN,
Oklahoma County Clerk of Court, and Bankr. No. 19-14021
JENNIFER BYLER, Deputy Courtroom Chapter 13
Clerk,
Appellants,
v.
ALEXANDER L. BEDNAR and JOHN T. OPINION
HARDEMAN, Chapter 13 Trustee,
Appellees.
_________________________________
Appeal from the United States Bankruptcy Court
for the District of Oklahoma Western
_________________________________
Before ROMERO, Chief Judge, SOMERS, and PARKER, Bankruptcy Judges.
_________________________________
ROMERO, Chief Judge.
________________________________
This unpublished opinion may be cited for its persuasive value, but is not
1
precedential, except under the doctrines of law of the case, claim preclusion, and issue
preclusion. 10th Cir. BAP L.R. 8026-6.
BAP Appeal No. 20-41 Docket No. 38 Filed: 04/27/2021 Page: 2 of 30
The subject of how chapter 13 Trustees are to deal with funds in their possession
upon the dismissal of a chapter 13 case has received considerable court attention the past
few years. This case presents yet another chapter in the ever-evolving manual for dealing
with such funds. In the matter before us, judgment creditors in a chapter 13 case
dismissed before confirmation moved the Bankruptcy Court for authority to initiate
garnishment proceedings against plan payments in the Trustee’s possession post-
dismissal. The Bankruptcy Court denied the request and this matter is now before us on
appeal.
I. FACTS
Alexander Bednar (“Bednar”) is a disbarred Oklahoma attorney who is no stranger
to the bankruptcy system. The present saga began in connection with proceedings to
foreclose Bednar’s interest in real property before the Oklahoma County District Court
(“Oklahoma Court”). Specifically, on June 6, 2019, Bednar was ordered by the
Oklahoma Court to appear for a hearing on assets. 2 Instead of appearing, Bednar filed a
voluntary petition under chapter 13 of the Bankruptcy Code before the United States
Bankruptcy Court for the Western District of Oklahoma (“Bankruptcy Court”), 3 causing
the hearing to terminate with no action. The First Case was promptly dismissed because
Bednar failed to obtain the mandatory credit counseling. 4
2
Appellants’ App. at 112.
3
Case No. 19-12312 (“First Case”). See id.
4
Id.
2
BAP Appeal No. 20-41 Docket No. 38 Filed: 04/27/2021 Page: 3 of 30
Subsequently the Oklahoma Court reset the asset hearing. 5 This was followed by
Bednar filing another bankruptcy petition, again preventing the hearing from going
forward. 6 Bednar failed to appear for the Meeting of Creditors and the Bankruptcy Court
dismissed the Second Case on September 6, 2019. 7 Once again, the Oklahoma Court
reset the asset hearing, 8 but the third try was not the charm, as Bednar filed bankruptcy
yet again on October 1, 2019. 9 These appeals arise from proceedings in the now-
dismissed Third Case.
Shortly after Bednar filed the Third Case, Oklahoma County Court Clerk Rick
Warren (“Warren”) and Deputy Courtroom Clerk Jennifer Byler (“Byler”) filed their
appearances before the Bankruptcy Court. 10 Warren and Byler, in their official
capacities, are each creditors of Bednar by virtue of four sanctions judgments against
him: two judgments issued by the Oklahoma Court and two issued by the Oklahoma
Supreme Court (“Sanctions Judgments”). 11 The four Sanctions Judgments arose upon
5
Id.
6
Case No. 19-12845 (“Second Case”). See id.
7
Id.
8
Id.
9
Case No. 19-14021 (“Third Case”). See id.
10
Appellants’ App. at 10 (Bankruptcy Court ECF No. 18).
11
Id. at 111.
3
BAP Appeal No. 20-41 Docket No. 38 Filed: 04/27/2021 Page: 4 of 30
findings Bednar engaged in frivolous and vexatious conduct and together total
$31,582.50 (excluding interest).
Warren and Byler promptly requested the Bankruptcy Court enter an order
confirming the non-existence of the automatic stay in the Third Case pursuant to 11
U.S.C. § 362(c)(4)(A)(i). 12 On October 10, 2019, the Bankruptcy Court agreed and
entered an Order confirming there was no stay in effect. 13
Over the next eight months, Bednar made multiple attempts to confirm a chapter
13 Plan. Each of Bednar’s confirmation attempts were opposed by Warren, Byler,
chapter 13 Trustee John Hardeman (“Trustee”) and Bednar’s ex-spouse, Jill Bednar (“J.
Bednar”). 14 On June 9, 2020, these efforts culminated in a final evidentiary hearing on
confirmation of Bednar’s Amended Chapter 13 Plan. 15 On June 24, 2020, the
Bankruptcy Court sustained the objections to confirmation, finding Bednar was not
eligible to proceed under chapter 13. 16 The Bankruptcy Court denied confirmation and
dismissed the Third Case effective June 24, 2020. 17 The Bankruptcy Court’s dismissal
12
Id. at 111-16. All future references to “Bankruptcy Code,” “Code,” or “§,” refer to Title
11 of the United States Code.
13
Id. at 117-18 (Bankruptcy Court ECF No. 20).
14
J. Bednar asserts non-dischargeable claims related to the parties’ divorce for at least
$141,469.56. See id. at 132.
15
Id. at 275 (Bankruptcy Court ECF No. 81).
16
Id. at 275-76.
17
Id. at 281-82 (Bankruptcy Court ECF No. 82).
4
BAP Appeal No. 20-41 Docket No. 38 Filed: 04/27/2021 Page: 5 of 30
order neither reserved jurisdiction for any particular purpose nor altered the typical
revesting of estate property provided in § 349(b).
Before dismissal, Bednar made plan payments totaling $30,838.92. 18 The Trustee
deducted his fees of $1,572.77, leaving a balance of $29,266.15. On June 26, 2020,
Warren and Byler filed a motion with the Bankruptcy Court seeking leave to garnish
those funds in the hands of the Trustee. 19 J. Bednar then filed her own motion for leave
to garnish the funds in the Trustee’s possession, asserting her garnishment rights as a
priority creditor holding domestic support obligations were superior over Warren and
Byler’s interest as general unsecured creditors. 20
The Bankruptcy Court entered an order requiring the Trustee to file a response
stating his position and setting a telephonic hearing for July 31, 2020. 21 The Trustee
responded, stating he opposed allowing garnishment of the funds in his possession. 22 The
Trustee agreed with Warren, Byler, and J. Bednar that, under the Barton doctrine, the
Bankruptcy Court must consent to any garnishment action proceeding in state court.
However, the Trustee also maintained § 1326(a)(2) required him to return any
18
Id. at 428.
19
Id. at 283-89.
20
Id. at 354-58.
21
Id. at 359-60.
22
Id. at 361-66.
5
BAP Appeal No. 20-41 Docket No. 38 Filed: 04/27/2021 Page: 6 of 30
undistributed plan payments to the Debtor irrespective of the Barton doctrine. 23 The
Bankruptcy Court took the matter under advisement at the end of the telephonic hearing.
On September 2, 2020, the Bankruptcy Court entered its Order Denying Motions for
Leave to Garnish Funds, denying both Oklahoma County’s Motion and Bednar’s Motion
(the “Order”). 24
The Bankruptcy Court first framed the request, explaining the movants “are
essentially asking this Court to grant them permission to institute garnishment actions
against the Trustee in state court while imposing a stay preventing the Trustee’s
distribution of surplus funds as directed by § 1326(a)(2).” 25 According to the Bankruptcy
Court, “Movants and the Trustee agree that before Movants may initiate garnishment
actions in state court to reach the funds held by the Trustee, the Barton Doctrine requires
them to obtain approval from this Court.” 26 Reviewing the policy and intent underlying
the Barton doctrine, the Bankruptcy Court found “the relief Movants seek here is the type
of action the Barton Doctrine is designed to prevent.” 27
The Bankruptcy Court reasoned the Barton doctrine applies in this case to protect
the Trustee from “a tremendous administrative burden . . . requiring him to be personally
23
Id.
24
Id. at 427-34.
25
Id. at 430.
26
Id.
27
Id. at 431.
6
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involved in garnishment actions across his district, which stretches across forty
counties.” 28 While the Bankruptcy Court acknowledged “the administrative duties may
be minimal in this one case,” the Bankruptcy Court found “the small burden of one
garnishment could quickly swell to a large burden of hundreds of garnishments if
creditors are given the green light to file immediately upon the conclusion of every
bankruptcy case.” 29 Even though the Bankruptcy Court found the Barton doctrine likely
prevented the garnishment from being enforced, after reviewing a split of authority on the
issue, it ruled the plain language of § 1326(a)(2) requires the Trustee to return the funds
to the Debtor with no possibility of any intervening diversion. 30
Warren, Byler and J. Bednar filed separate notices of appeal on September 15,
2020. J. Bednar requested the appeals be companioned for briefing and oral argument,
and a BAP motions panel (consisting of Judges Michael, Jacobvitz, and Parker) granted
the motion on October 13, 2020. Both appellants requested the Bankruptcy Court stay
the Order pending appeal. The Bankruptcy Court granted these requests on October 19,
2020, preventing the Trustee from returning the $29,266.15 to the Debtor prior to
disposition of the appeals.
28
Id.
29
Id. (internal citation omitted).
30
Id.
7
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II. JURISDICTION AND STANDARD OF REVIEW
The Order affects the final distribution of chapter 13 plan payments in the
Debtor’s underlying bankruptcy case, and therefore is a final appealable order. 31 Here,
the issues on appeal primarily involve pure questions of law which are reviewed de
novo. 32 Specifically, the Bankruptcy Court’s application of § 1326(a)(2) as a per se bar
to garnishment of a trustee following dismissal, irrespective of the Barton doctrine, is
reviewed de novo. Similarly, whether the Barton doctrine applies and requires leave to
sue presents an issue which is “jurisdictional in nature” and therefore subject to de novo
review. 33 However, the Bankruptcy Court’s decision to decline leave to sue the Trustee
under the Barton doctrine is reviewed for abuse of discretion because “the bankruptcy
court . . . given its familiarity with the underlying facts and the parties, is uniquely
situated to determine whether a claim against the trustee has merit.” 34
31
See In re Miranda, 285 B.R. 344, 2001 WL 1538003, at *1 (10th Cir. BAP Dec. 4,
2001) (concluding order denying chapter 13 trustee’s motion to distribute 10 percent
administrative fee under 28 U.S.C. § 586 from plan payments was a final order)
(unpublished); In re Yates, 337 B.R. 728, 2005 WL 2499488, at *2 (10th Cir. BAP Oct.
4, 2005) (holding order denying motion for turnover of funds held by chapter 13 trustee
in case converted to chapter 7 was a final order) (unpublished).
32
Pierce v. Underwood, 487 U.S. 552, 558 (1988) (“For purposes of standard of review,
decisions by judges are traditionally divided into three categories, denominated questions
of law (reviewable de novo), questions of fact (reviewable for clear error), and matters of
discretion (reviewable for ‘abuse of discretion’”)). See also Fowler Bros. v. Young (In re
Young), 91 F.3d 1367, 1370 (10th Cir. 1996).
33
Lankford v. Wagner, 853 F.3d 1119, 1122 (10th Cir. 2017) (conducting de novo
review of District Court’s decision to dismiss suit against trustee under Fed. R. Civ. P.
12(b)(1) where plaintiffs did not seek or obtain leave under the Barton doctrine).
34
See In re VistaCare Grp., LLC, 678 F.3d 218, 232-33 (3d Cir. 2012).
8
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III. ANALYSIS
a. Barton Doctrine
Bankruptcy law, as it has evolved in United States jurisprudence, has led to the
creation of a few relatively obscure doctrines. One such concept, the Barton doctrine,
was established in Barton v. Barbour, 104 U.S. 126 (1881), and requires before suit can
be brought against bankruptcy trustees or their counsel for acts taken in their official
capacities during a bankruptcy case, the plaintiff must first seek leave of the overseeing
bankruptcy court. 35 The Barton doctrine includes actions seeking bankruptcy estate
property as well as actions against a bankruptcy trustee for conduct during the pendency
of the bankruptcy case. 36 Because of this, the Barton doctrine is “jurisdictional in
nature.” 37 As explained by the Bankruptcy Court, the doctrine “exists to ensure other
courts do not intervene in the bankruptcy court’s administration of an estate without
permission.” 38 Generally, the Barton doctrine is intended: “(1) to maintain the integrity
of the bankruptcy court’s jurisdiction; (2) to control burdensome litigation that may
35
See In re Lane, No. 11-20398 at ECF No. 1787 at 4-5 (Bankr. D. Wyo. Sept. 9, 2020)
(citing Lankford, 853 F.3d at 1122).
36
Id. (citing In re Delta Invs. & Dev., LLC, No. 12-01160-NPO, 2019 WL 137578, at *14
(Bankr. S.D. Miss. Jan. 8, 2019) (unpublished)).
37
Id. at 5 (citing Lankford, 853 F.3d at 1122).
38
Satterfield v. Malloy, 700 F.3d 1231, 1237 (10th Cir. 2012).
9
BAP Appeal No. 20-41 Docket No. 38 Filed: 04/27/2021 Page: 10 of 30
impede the trustee’s work as an officer of the court; and (3) to allow the bankruptcy court
to monitor effectively the trustee’s work.” 39
In Satterfield v. Malloy, 40 the Tenth Circuit Court of Appeals expounded on the
functions and purposes of the Barton doctrine. The court began by examining the
language of Barton v. Barbour itself, noting “[a] plaintiff who brings such a suit [against
a receiver] . . . attempts to ‘obtain some advantage over the other claimants upon the
assets in the receivers hands.’” 41 “If allowed to proceed, ‘the court which appointed the
receiver and was administering the trust assets would be impotent to restrain’ such a
plaintiff, complicating the proper administration of the estate.’” 42
Because the Barton doctrine is focused on protecting the receiver from
impediments to administration, as well as ensuring equality among competing claimants,
the Tenth Circuit applies the Barton doctrine to bankruptcy trustees as to “‘acts done in
the trustee’s official capacity and within the trustee’s authority as an officer of the
court.’” 43 The court further reasoned if a trustee “is burdened with having to defend
against suits by litigants disappointed by his actions on the court’s behalf, his work for
39
In re Horton, 612 B.R. 400, 404 (Bankr. D.N.M. 2020) (citations omitted).
40
Satterfield, 700 F.3d at 1234-35; see also Lankford, 853 F.3d at 1122.
41
Satterfield, at 1235 (quoting Barton v. Barbour, 104 U.S. 126 (1881)).
42
Id.43
Id. (quoting Heavrin v. Schilling (In re Triple S Rests., Inc.), 519 F.3d 575, 578 (6th
Cir. 2008)).
10
BAP Appeal No. 20-41 Docket No. 38 Filed: 04/27/2021 Page: 11 of 30
the court will be impeded.” 44 Moreover, the Barton doctrine continues to apply after
dismissal of a bankruptcy case because:
Without the requirement [of obtaining leave from the appointing court],
trusteeship will become a more irksome duty, and so it will be harder for
courts to find competent people to appoint as trustees. Trustees will have to
pay higher malpractice premiums, and this will make the administration of
bankruptcy laws more expensive (and the expense of bankruptcy is already
a source of considerable concern). Furthermore, requiring that leave to sue
be sought enables bankruptcy judges to monitor the work of the trustees
more effectively. It does this by compelling suits growing out of that work
to be as it were prefiled before the bankruptcy judge that made the
appointment; this helps the judge to decide whether to approve this trustee
in a subsequent case. 45
In sum, in the Tenth Circuit the Barton doctrine “exists to ensure other courts do
not intervene in the bankruptcy court’s administration of an estate without permission.” 46
As explained by an Indiana bankruptcy court in In re Shields, the Barton doctrine applies
to prevent the trustee’s performance from being “compromised by state court proceedings
that divert the Trustee’s attention.” 47 Thus, “[t]he Trustee should not be required to
defend against or otherwise appear in state court each time he is served with the
garnishment order.” 48 A Georgia bankruptcy court in In re Jankauskas expanded on
44
Id.45
Id. at 1236-37 (quoting In re Linton, 136 F.3d 544, 545 (7th Cir. 1998)).
46
Id. at 1237.
47
In re Shields, 431 B.R. 446, 452 (Bankr. S.D. Ind. 2010).
48
Id.11
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Shields’s application of the Barton doctrine to post-dismissal garnishments. 49 The court
explained the Barton doctrine applies to post-dismissal garnishments because trustees
may have residual liability to the issuing court for failure to comply with the mandate of
the garnishment. 50
In this case, the proposed garnishment directly implicates the Trustee’s fiduciary
duties to Bednar with respect to property that was formerly part of the estate. 51 The
garnishment would also affect the Trustee’s final administration of the estate by
determining to whom the residual funds should be paid. Thus, the Panel agrees with the
Bankruptcy Court the Barton doctrine applies. Importantly, however, this holding speaks
only to whether pre-suit leave is required, not whether such leave should or should not be
granted. As noted by the court in Jankauskas, “application of the Barton doctrine does
not establish a per se ban on garnishments against a trustee, it merely requires bankruptcy
court approval before the garnishment may be filed.” 52
49
In re Jankauskas, 593 B.R. 1, 9 (Bankr. N.D. Ga. 2018).
50
Id. at 10.
51
See In re Christensen, 598 B.R. 658, 668-69 (Bankr. D. Utah 2019) (holding Barton
doctrine required leave to sue trustee for negotiating short-sale for improper motive,
explaining “[a] trustee becomes a fiduciary vis-à-vis a debtor because he holds property
that belongs to the debtor by operation of law. The scope of his duty, therefore, is strictly
limited to safeguarding property of the estate in the trustee’s possession or the proceeds
from the sale thereof to which the debtor is entitled and ensuring that the debtor receives
that property.”).
52
Jankauskas, 593 B.R. at 11-12.
12
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In In re VistaCare Group, the Third Circuit Court of Appeals reviewed the
bankruptcy court’s order granting Barton leave to sue a trustee and expounded on the
factors bearing on the court’s decision. 53 First, the party seeking Barton leave “‘must
make a prima facie case against the trustee, showing that its claim is not without
foundation.’” 54 Second, the bankruptcy court should consider the “potential effect of a
judgment against the trustee on the debtor’s estate.” 55 This “may involve a ‘balancing of
the interests of all parties involved’ and consideration of whether another tribunal may
have expertise regarding the issues in the proposed suit.” 56 However, the bankruptcy
court “is not required to consider immunities and defenses raised by a trustee when
evaluating a motion for leave. A bankruptcy court cannot be expected to conduct a trial
on the merits of a party’s proposed state law claim against a trustee simply to decide
whether to grant leave to purse such a claim in state court.” 57 Instead, the trustee
preserves any defenses for adjudication in the state court. 58
In In re Christenson, the bankruptcy court ruled it would exercise its discretion to
deny Barton leave to sue a trustee because none of the claims passed muster under the
53
In re VistaCare Grp., LLC, 678 F.3d 218, 232-33 (3d Cir. 2012).
54
Id. at 232 (quoting In re Nat’l Molding Co., 230 F.2d 69, 71 (3d Cir. 1956)).
55
Id.56
Id.57
Id. at 234-35.
58
Id.
13
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prima facie analysis. 59 Further, it held “even if” the proposed claims were found to be
merited, the bankruptcy court would take guidance from the Ninth Circuit Bankruptcy
Appellate Panel in In re Kashani. 60 Specifically, the Kashani panel enumerated five
factors bankruptcy courts should consider in deciding whether to grant Barton leave:
1. Whether the acts or transactions relate to the carrying on of the business
connected with the property of the bankruptcy estate. If the proceeding is
under 28 U.S.C. § 959(a), then no court approval is necessary. However,
the moving party may request this initial review by the bankruptcy court in
the motion for leave to sue the trustee, or perhaps in the form of a
complaint, seeking a declaratory judgment from the bankruptcy court.
2. If approval from the appointing court appears necessary, do the claims
pertain to actions of the trustee while administering the estate? By asking
this question, the court may determine whether the proceeding is a core
proceeding or a proceeding which is related to a case or proceeding under
Title 11, United States Code.
3. Do the claims involve the individual acting within the scope of his or her
authority under the statute or orders of the bankruptcy court, so that the
trustee is entitled to quasi-judicial or derived judicial immunity?
4. Are the movants or proposed plaintiffs seeking to surcharge the trustee;
that is, seeking a judgment against the trustee personally?
5. Do the claims involve the trustee’s breaching her fiduciary duty either
through negligent or willful misconduct? 61
By conducting such an analysis, the bankruptcy court will determine
whether the issues affect solely the administration of the bankruptcy estate and
should be heard by the bankruptcy court. The bankruptcy court will also be able
to determine whether the claims have been previously decided on the merits and
59
In re Christensen, 598 B.R. 658, 673 (Bankr. D. Utah 2019).
60
Id. (citing Kashani v. Fulton (In re Kashani), 190 B.R. 875, 886-87 (9th Cir. BAP
1995)).
61
Kashani, 190 B.R. at 886-87.
14
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should not be pursued by the movants or proposed plaintiffs on the basis of res
judicata or collateral estoppel. The bankruptcy court will also be in a position to
determine whether the trustee is entitled to quasi-judicial or derived judicial
immunity. Again, one or more of these factors may be a basis for the bankruptcy
court to retain jurisdiction over the claims. Such an analysis will also assist the
bankruptcy court in determining which claims should be tried in another forum. 62
Here, it appears the Bankruptcy Court’s Order in analyzing whether leave should
be granted focused upon mere speculation by the trustee that generally opening the
trustee to garnishment proceedings post-dismissal could create “a tremendous
administrative burden on him.” 63 As the foregoing authorities show, a bankruptcy court’s
exercise of discretion on a Barton question is much broader in scope and encompasses
much wider factors than potential inconvenience or burden to the Trustee. The mere
possibility of inconvenience cannot serve as a blanket protection for trustees from a legal
process to which any other person may ordinarily be subjected. It is significant the
Bankruptcy Court acknowledged in its decision “the administrative duties may be
minimal in this one case.” 64 In making a Barton determination, a bankruptcy court
should gather all relevant facts, and then consider the meritorious foundations of the
62
Id.63
Order at 5, in Appellants’ App. at 431.
64
Id.15
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garnishment claims, as well as the factors identified in the case law discussed herein,
particularly VistaCare Group and Kashani..
In sum, on de novo review, the Panel holds the Barton doctrine required Warren,
Byler and J. Bednar obtain approval of the Bankruptcy Court before commencing their
garnishment actions. However, the Panel further concludes the Bankruptcy Court abused
its discretion by denying Barton leave based upon unsupported allegations of potential
inconvenience to the Trustee without weighing the other important factors bearing upon
such a decision.
b. Section 1326
Notwithstanding its conclusion that the Barton doctrine prohibited the
enforceability of the garnishment in question, the Bankruptcy Court also dealt with
whether the proposed garnishment was also prohibited by § 1326(a)(2).
Whether the Bankruptcy Code permits creditor garnishment of the Trustee
following dismissal of a bankruptcy case without a confirmed chapter 13 plan is a
question of statutory interpretation, which naturally begins with the language of the
statute itself. The initial inquiry is whether there is ambiguity in the relevant Code
sections because “where . . . the statute’s language is plain, ‘the sole function of the
courts is to enforce it according to its terms.’” 65 Here, § 1326(a)(2) provides plan
payments
United States v. Ron Pair Enters., 489 U.S. 235, 241 (1989) (quoting Caminetti v.
65
United States, 242 U.S. 470, 485 (1917)).
16
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shall be retained by the trustee until confirmation or denial of confirmation.
If a plan is confirmed, the trustee shall distribute any such payment in
accordance with the plan as soon as is practicable. If a plan is not
confirmed, the trustee shall return any such payments not previously paid
and not yet due and owing to creditors . . . to the debtor, after deducting any
unpaid claim allowed under section 503(b). 66
Of course, § 1326 dovetails into the basic revesting language set forth in § 349(b)(3),
which provides dismissal “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.” 67
As recognized by the Bankruptcy Court, there is a split of authority in the
application of § 1326(a)(2). Some courts apply a plain meaning analysis to conclude
§ 1326(a)(2) and § 349(b)(3) unambiguously require the return of all plan payments to
the debtor following pre-confirmation dismissal. Other courts find ambiguity in
§ 1326(a)(2) within the context of § 349(b)(3), and instead focus on the technical
functionality of the competing Code provisions.
i. Plain Meaning Cases
The Bankruptcy Court adopted the view of those cases holding the plain language
of § 1326(a)(2) directs return of plan payments to debtors whose cases are dismissed
before confirmation. For example, in In re Oliver the court reviewed earlier case law and
concluded “section 13265(a)(2) [is] unambiguous, and the plain language of § 1326(a)(2)
66
11 U.S.C. § 1326(a)(2).
67
11 U.S. C. § 1326(b)(3).
17
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required the Trustee to turn over all funds to the debtor.” 68 The court reasoned its
conclusion would “place[] all of the relative parties in a position as near as possible to
where they would have been if the debtor had never filed for protection under the
Bankruptcy Code.” 69
Several years later, the court in In re Davis adopted what it referred to as the “In re
Oliver line of cases,” which hold § 1326(a) is clear and unambiguous with regard to the
disposition of funds. 70 The Davis court went further to expressly hold § 1326 “preempts
the state court garnishment statute” with respect to the trustee’s duty to return funds to
the debtor. 71 In reaching these conclusions, the Davis court relied heavily on its view of
the public policy underlying § 1326. As the court explained, the return of funds to the
debtor “fosters the policy of encouraging debtors who are financially able to repay their
debts to file Chapter 13. It ensures that debtors who attempt chapter 13 will not be
penalized for an unconfirmed attempt.” 72 The Davis court also reasoned the Oliver
approach ensures the “orderly and efficient disposition of chapter 13 cases” by ensuring
68
In re Oliver, 222 B.R. 272, 274 (Bankr. E.D. Va. 1998) (adopting the reasoning of In
re Walter, 199 B.R. 390 (Bankr. C.D. Ill. 1996) and In re Clifford, 182 B.R. 229 (Bankr.
N.D. Ill. 1995)).
69
Id. at 275. See also In re Hamilton, 493 B.R. 31, 37-38 (Bankr. M.D. Tenn. 2013)
(focusing on § 349(b) as the basis for the policy of returning debtors to their pre-petition
status quo ante).
70
In re Davis, No. 04-30002-DHW, 2004 WL 3310531 at *2 (Bankr. M.D. Ala. June 16,
2004) (unpublished).
71
Id.72
Id.18
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“any attempts to reach the money would ensue outside the jurisdiction of the bankruptcy
court” so cases “may be closed as quickly as statutorily possible following dismissal.” 73
Thus, “[h]olding to the contrary would create a ‘race to the trustee’ and effectively ignore
the statutory mandate to return the money to the debtor.” 74
The court in Commonwealth of Virginia v. Beskin framed its plain language
approach against the Supreme Court’s expressed views on the voluntary nature of chapter
13 proceedings. 75 In Harris v. Vieglahn, the Court stated “the ‘wholly voluntary’ process
of chapter 13 bankruptcy is meant to ‘benefit debtors and creditors alike.’” 76 Moreover,
in Czyzewski v. Jevic Holding Corp., the Court “emphasized that dismissal of a
bankruptcy case ‘aims to return to the prepetition financial status quo.’” 77
In sum, courts adopting the plain language approach to post-dismissal pre-
confirmation garnishment find harmony between the wording of § 1326 and the policy
purposes served by the statutory language. The court in In re Inyamah summarized this
view by enumerating three “statutory purposes” served by the plain language of § 1326:
As noted by the In re Davis court, returning the funds to debtors
accomplishes three statutory purposes: (1) when plans fail allowing
creditors to seize debtors’ funds would be in conflict with the policy of
encouraging chapter 13 filings; (2) return of the funds to debtors allows for
73
Id.
74
Id.
75
Commonwealth of Virginia v. Beskin, 581 B.R. 162, 166 (Bankr. W.D. Va. 2017), aff’d
sub nom. Commonwealth of Virginia v. Webb, 908 F.3d 941 (4th Cir. 2018).
76
Id. (quoting Harris v. Viegelahn, 575 U.S. 510 (2015)).
77
Id. (quoting Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2015)).
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the prompt closing of the estate by precluding conflicting efforts of
creditors to gain access to funds held by chapter 13 trustees; and (3)
returning funds to debtors fosters the concept of revesting upon dismissal
by placing the funds in their hands thereby restoring all parties to their
original positions. 78
ii. The “Debtor of a Debtor” Cases
The divergent line of cases, which approve of post-dismissal trustee garnishments,
not only takes a different view of the statutory language, but also the underlying policy
motivations. These cases generally do not disagree with the plain language interpretation
of § 1326, but instead take a more practical approach which gives the language more
meaning within the broader context of the Code.
The first such case is In re Steenstra. 79 There, the debtor’s chapter 13 case was
dismissed prior to confirmation of a plan and was followed by efforts to levy plan
payments held by the trustee. 80 The bankruptcy court followed the plain language
approach to § 1326, holding the funds remained in custodia legis and were not subject to
levy until the case was closed. 81 The First Circuit Bankruptcy Appellate Panel reversed,
approving the notion of post-dismissal garnishment.
78
In re Inyamah, 378 B.R. 183, 185 (Bankr. S.D. Ohio 2007). See also In re Locascio,
481 B.R. 285, 289 (Bankr. S.D.N.Y. 2012) (“The plain language of section 1326(a)(2),
the policies behind that provision, and the Supremacy Clause all mandate return of plan
payments directly to the debtor upon dismissal, despite the existence of a garnishment.”);
In re Hamilton, 493 B.R.at 31.
79
In re Steenstra, 307 B.R. 732 (1st Cir. BAP 2004).
80
Id. at 735.
81
Id.20
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First, the panel focused on the termination of the bankruptcy estate and the
automatic stay upon entry of a dismissal order. 82 Thus, while § 1326(a)(2) and
§ 349(b)(3) ostensibly require a trustee return payments to the debtor, any such payments
lose the protection of the automatic stay upon dismissal. 83 In the panel’s view, this is
critical because “the revestment is not immediate or automatic.” 84 For example,
§ 1326(a)(2) requires the trustee to pay administrative expenses before returning the
funds to the debtor. 85 In this sense, “before the funds may be returned to the debtor, the
chapter 13 trustee must complete the administration of the case. . . .” 86 Because the
trustee’s withholding of administrative expenses occurs before the funds are returned to
the debtor, the funds payable for such expenses “are protected from levy or garnishment”
as part of trustee’s ongoing estate administration. 87 The question, then, is whether “the
remaining funds are also protected from levy or garnishment once the automatic stay has
terminated.” 88
82
Id. at 737-38 (“[D]ismissal of a bankruptcy petition ‘has the simultaneous effect of
undoing the bankruptcy estate and lifting the automatic stay[.]’”) (quoting In re Garnett,
303 B.R. 274, 278 (E.D.N.Y. 2003)).
83
Id.84
Id. at 738.
85
Id.
86
Id.
87
Id.
88
Id.
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The panel then approvingly cited In re Doherty as expressing the correct reasoning
upon which to consider this question. In Doherty, the court “reasoned that because the
dismissal order terminated the automatic stay, there was no stay in place to protect the
funds held by the trustee after the court entered the dismissal order.” 89 “Because the
dismissal of a bankruptcy case prior to confirmation removes the protections afforded by
the Bankruptcy Code, the funds belonging to the debtor but which are held by the trustee
are not afforded protection from levy merely because they were once part of the estate.” 90
This creates what the Steenstra panel approvingly referred to as the “debtor of the debtor”
approach to the trustee’s predicament:
[T]he Court finds that, once the order of dismissal is entered, and the stay
has been lifted, and the Trustee has been ordered to turn over the funds to
the Debtor, she becomes a debtor of the Debtor to that extent. The funds
held by the Trustee are subject to levy or garnishment by creditors of the
Debtor, pursuant to applicable law. The Trustee is bound to accept the levy
if she has any money that belongs to the Debtor. 91
Finally, the Steenstra panel considered whether the funds are excepted from the
possibility of levy because they remained within the bankruptcy court’s custody and
control pursuant to the doctrine of in custodia legis. 92 The panel rejected the possibility
of protection through this doctrine, reasoning that in the absence of a formal retention of
jurisdiction, entry of the dismissal order retires the bankruptcy court’s duties and
89
Id. at 739 (quoting In re Doherty, 229 B.R. 461 (Bankr. E.D. Wash. 1999)).
90
Id.91
Id. at 740 (quoting In re Schlapper, 195 B.R. 805, 806 (Bankr. M.D. Fla. 1996)).
92
Id.22
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jurisdiction with respect to property formerly part of the now non-existent estate. 93 In
contrast, in custodia legis “relates to specific funds held by the court for a specific
purpose.” 94 “[W]here nothing more remains for the custodian to do but make delivery of
the property or payment of the money, the reason for the doctrine of in custodia legis is
satisfied[.]” 95
The court in In re Fischer followed similar reasoning to conclude garnishment had
no effect on the trustee’s obligation to return funds to the debtor. 96 First, the Fischer
court reasoned:
In short, there is nothing special about funds the Chapter 13 trustee holds
that should prevent a creditor from proceeding with garnishment after
dismissal of a Chapter 13 case. If the trustee is holding funds that belong to
the debtor, viz-a-viz a third party creditor with a writ of garnishment, the
trustee is just like any other “debtor of the debtor,” and a creditor should
not be prevented from garnishing such funds. 97
Importantly, the Fischer court went on to reconcile its approach with the “plain
meaning” reasoning of courts reaching the opposite conclusion. Rather than finding
§ 1326 ambiguous, the Fischer court explained the statute “simply states that the ‘trustee
shall return’ to the debtor any payments made in accordance with an unconfirmed
93
Id.
94
Id.
95
Id. at 741 (quoting United States v. Powell, 492 F. Supp. 1030, 1032 (W.D. Tex. 1980),
aff’d, 639 F.2d 224 (5th Cir. 1981)).
96
In re Fischer, 432 B.R. 863, 864 (Bankr. M.D. Fla. 2010).
97
Id. at 865.
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plan.” 98 According to Fischer, nothing in the plain language of § 1326(a) prohibits post-
dismissal garnishment, but rather operates to prevent the trustee from retaining the funds
or distributing them to an unrelated party. 99 Thus, “there is no difference between this
situation and a typical wage garnishment in which an employee is entitled to any wages
earned, except when a creditor has a valid writ of garnishment allowing it to garnish
wages held by the employer.” 100
The court in In re Cohen also followed the “debtor of a debtor” reasoning, but
further responded to the purported policy justifications referenced in the plain meaning
cases (for example, those articulated by the court in Inyamah). 101 First, the court rejected
the idea that returning plan payments to debtors encourages chapter 13 filings by not
penalizing debtors for their failed efforts. The court reasoned this policy “fails to explain
why a debtor who did not confirm a plan is given greater consideration than one whose
plan is confirmed. Additionally, this argument may encourage bad-faith filings solely
motivated by the purpose of avoiding payment obligations.” 102 In the court’s view, a
hypothetical debtor “could file bankruptcy, receive protection from garnishment against
98
Id.
99
Id.
100
Id. See also In re Price, 484 B.R. 870, 873-74 (Bankr. E.D. Ark. 2013) (“[A] trustee
who owes amounts to a debtor is not any different than any other party that is subject to a
garnishment.”).
In re Cohen, No. 2:14-bk-11079-DPC, 2016 WL 797656 (Bankr. D. Ariz. Feb. 29,
101
2016) (unpublished).
102
Id. at *5.
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his wages, fail to confirm a plan, receive those funds back safely from the trustee, and
then potentially spend those funds before a creditor could reinstate a wage garnishment
after the case is dismissed.” 103 The result of such a practice could be “rewarding debtors
who do not produce a viable plan, while not extending similar protections to debtors who
made serious efforts toward repaying creditors.” 104
Next, the Cohen court was not persuaded by the argument levy orders impose
additional administrative burdens on the trustee’s office. The court reasoned the trustee
has no stake in who gets the money, and therefore can comply with a garnishment as
easily as she could return the funds to the debtor. 105 Moreover, trustees can avoid the
problem altogether by immediately returning the funds upon dismissal, avoiding a race to
the trustee by preempting any garnishment efforts. 106
Finally, the Cohen court addressed the purported policy behind the plain language
approach to § 1326 to return debtors to the pre-petition status quo ante. These arguments
“greatly overlook[] the protections chapter 13 provides debtors” because prior to
dismissal “a debtor will have had the advantage of the bankruptcy automatic stay and
their income will have been protected against garnishment and levies all the while.” 107
103
Id.
104
Id.
105
Id.
106
Id.
107
Id.
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Indeed, the court observed “[a]bsent the bankruptcy automatic stay, those funds likely
would have been garnished or levied at an earlier time.” 108 Therefore, returning the funds
to the debtor after dismissal does not actually return debtor to his pre-petition status, but
rather, enhances the debtor’s position by enabling him to delay levy with no
consequence. 109
Arguably, the foregoing analyses reach different conclusions from the plain
language cases without necessarily disagreeing on whether § 1326 is plain and
unambiguous. Rather, these cases can be viewed as simply taking a more nuanced and
functional approach to applying the statute. The court in Shields expanded on this
dynamic, while comprehensively summarizing the debtor of a debtor approach:
Assuming that § 1326(a)(2) applies in dismissed cases, it does not, and
cannot, provide for every scenario for disposition of funds in a dismissed
case with an unconfirmed plan. For example, to whom should the funds be
returned upon the death of a debtor? Upon incarceration of a debtor? Upon
incompetency of a debtor for which a guardian has been appointed? Would
the Trustee argue § 1326(a)(2) directs him to pay the funds to the debtor in
such cases? If the funds cannot be returned to the debtor due to the
debtor’s incarceration, incompetency or death, would the trustee hold the
funds indefinitely?
***
I conclude that what § 1326(a)(2) and § 349(b)(3) do unambiguously
provide for is the return of the funds to (after payment of § 503(b)
expenses) and the revesting of property in the debtor where there are no
post dismissal intervening events that challenge the debtor's right to receive
the funds or claim the property. However, application of these sections
beyond this garden variety scenario, in my opinion, just was not
108
Id.
109
Id.
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contemplated by Congress. . . . I do not believe that Congress would have
so easily disregarded creditors who, free from the automatic stay, enforce
their judgments by obtaining valid state court garnishment orders and
levying property that is neither property of the estate nor property needed to
pay administrative claims. Had Congress intended to sequester funds from
these creditors under these circumstances, it certainly knew how to provide
for it and could have added “notwithstanding any challenge after dismissal
but before closing of the case” or similar language to § 1326(a)(2) or
§ 349(b)(3). . . .
Rather, I follow the lead of the Steenstra and Doherty cases and conclude
that, § 362 controls here. As stated in those cases, dismissal of a case
terminates the automatic stay and the bankruptcy estate. What was
formerly property of the estate revests in the entity in which it was vested
prior to the commencement of the case under § 349(b)(3) and is no longer
property of the estate. Such property loses the protection of the automatic
stay upon dismissal under § 362(c)(1) and nothing in § 362, § 349, or
§ 1326 expressly shields from levy funds that are not needed to pay
§ 503(b) claims. Since the funds are not protected, they are subject to levy
and the trustee is like any other third-party holding funds owed to a debtor
against which a judgment creditor has levied. 110
The Panel agrees with the reasoning of the “debtor of the debtor” approach as
summarized by Shields. The plain language cases are attractive for their simplicity, but
their literalistic approach to § 1326(a)(2) fails to account for the functional practicalities
of the tripartite relationship between the trustee, the garnishor, and the debtor. Because
of the termination of the automatic stay and the non-existence of the prior bankruptcy
estate upon entry of a dismissal order, the Trustee is effectively no longer operating as
court-appointed fiduciary. Certainly, the Trustee can no longer be thought of as a
representative of the estate exercising control over property of the estate.
110
In re Shields, 431 B.R. 446, 450-51 (Bankr. S.D. Ind. 2010). See also In re
Jankauskas, 593 B.R. 1 (Bankr. N.D. Ga. 2018).
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Instead, the legal relationship between the debtor and a trustee following dismissal
is akin to a traditional bailment. 111 The debtor has voluntarily transferred personal
property to a third party who, absent the duties of a trustee as estate representative, is
merely a custodian safeguarding the debtor’s property in a trustee’s hands. As discussed
hereinabove, a similarly situated custodian, such as a bank, is not excused from
complying with a levy or garnishment concerning the subject property. The Panel sees
no reason why a different rule should apply to trustees merely because they were
formerly an estate representative and the property used to be in custodia legis through an
estate which no longer exists.
Moreover, even under the plain language approach, there is reason to question
whether a trustee’s compliance with the garnishment even violates the statutory direction
to return the funds to the debtor. While the trustee physically completes the transfer of
possession of the money to the garnishor, the transfer of title to the property occurs
through operation of state law, not by action of the trustee. This must be so because, as
discussed, the trustee merely holds possession of, but not title to, the funds after
dismissal.
Upon delivery of the garnished funds, the debtor’s ownership interest is removed
while the debtor’s liability on the underlying debt is reduced. Both sides of the
111
See Chambers v. Morgan, 671 P.2d 89, 90 (Okla. App. 1983) (“Bailment is a legal
status created by the transference of possession of personal property to another for the
accomplishment of some particular purpose and establishes a bailor-bailee [ ]
relationship.”).
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transactional ledger must be considered, especially in a post-dismissal reference frame
where the debtor is no longer seeking reorganization or discharge. In this sense, the
trustee would in fact be returning the property to the debtor, not in the form of a cash
payment, but in the form of a debt reduction. In the same sense, the trustee is also
returning debtor’s ledger to its pre-petition status—the property and liability columns
have changed but in equal amounts on each side. The transfer may not be to the debtor,
but it is nevertheless made for the debtor’s benefit. 112
IV. CONCLUSION
Trustees play an invaluable role in the bankruptcy process and the Barton doctrine
provides appropriate protection against litigation which may seriously and adversely
affect the execution of their duties. The line is difficult to enunciate; but we believe more
than mere inconvenience is required to trigger such prohibition of actions against a
trustee once a case has been dismissed. Further, once a case is dismissed, if the Barton
doctrine does not prohibit a proposed garnishment action, a trustee sits in a similar
position to any other party holding money for another and subject to garnishment.
112
This approach also comports with the court’s solution in Shields. There, the court
directed the trustee to issue a check in the debtor’s name, but to deliver the check to the
possession of the state court which issued the writ of garnishment for further proceedings.
Shields, 431 B.R. at 452. The court explained “[b]y ordering the Trustee to issue the
Check payable to the Debtors and to send it to the State Court, the Trustee’s concerns
with § 1326(a)(2)’s ‘mandate’ are allayed, and the Court preserves a source of recovery”
for the creditor. Id.
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For the foregoing reasons the decision of the Bankruptcy Court is REVERSED
and REMANDED for the purpose of conducting further proceedings on the Barton
doctrine issues consistent with this opinion.
30