IN RE BOUTON

LARRY LESSEN, United States Bankruptcy Judge.

This matter concerns a case converted from Chapter 7 to Chapter 13 and is before the Court for confirmation of the Amended Chapter 13 Plan filed by Daryl and Minnie Bouton (DEBTORS), the motion for allowance of an administrative claim filed by the Chapter 7 Trustee, Gary T. Rafool, and the objection to Plan and motion to convert the case back to Chapter 7 filed by Trustee Rafool. The administrative claim is based upon the Chapter 7 Trustee's discovery, in the course of his investigation of the DEBTORS' affairs, of three assets: 1) an unscheduled income tax refund, 2) a potentially avoidable fraudulent conveyance by the DEBTORS of their home to their daughter, and 3) a potentially avoidable preferential transfer to Redbrand Credit Union.

The DEBTORS filed their Chapter 7 bankruptcy petition on February 20, 2001 and Gary T. Rafool was appointed Trustee. Schedule A filed by the DEBTORS discloses no real estate owned by them and Schedule B discloses no tax refunds. Trustee Rafool conducted the first meeting of creditors on March 21, 2001, at which the DEBTORS appeared and testified. At the first meeting, it was disclosed that the DEBTORS were receiving a $6,700 income tax refund and that they had conveyed title to their house to their daughter within four years of their bankruptcy filing. On May 14, 2001, the Trustee filed a report of possible assets and notice of abandonment disclosing his intent to administer the following assets:

Transfer of real estate equity to children Income tax refund Possible Preference Payment to Redbrand Credit Union

The case was originally filed as a no-asset case. In light of the Trustee's report, an Order was entered advising creditors that there may be assets in the case and setting deadlines for filing claims. On May 11, 2001, the Trustee filed his application to retain an attorney to investigate and pursue the possible fraudulent transfer of the DEBTORS' home and the possible preferential transfer to Redbrand Credit Union.

On May 23, 2001, the DEBTORS filed a notice of conversion to Chapter 13 and a Chapter 13 Plan. Conversion was ordered on May 30, 2001. In their Plan, the DEBTORS proposed to pay the Chapter 13 Trustee the sum of $100 per month for thirty-six months for a total of $3,600. This sum reflects the amount of disposable income shown on Schedules I and J. However, the amount of Daryl Bouton's payroll deductions, equaling 48% of his gross wages, appears to be overstated on Schedule I, and Schedule J shows a monthly expense of $390 for payments for a 1999 Monte Carlo automobile. In their Amended Plan filed June 13, 2001, the DEBTORS propose to surrender the Monte Carlo to the lienholder but do not propose to increase the monthly Plan payment amount of $100.

On June 18, 2001, Trustee Rafool filed a motion for allowance of administrative claim seeking compensation in the amount of $1,420 for the time he expended prior to conversion in carrying out his duties as Chapter 7 Trustee, plus $6.42 for postage and copying costs. Trustee Rafool also filed an objection to confirmation of the DEBTORS' Plan and a motion to convert the case back to Chapter 7. On July 11, 2001, Trustee Rafool filed a report indicating that he collected a total of $6,728.10 for the benefit of the estate and disbursed those funds to the Chapter 13 Trustee, Michael D. Clark, after conversion.

On July 9, 2001, the Court conducted a hearing on confirmation of the Amended Chapter 13 Plan, the Chapter 7 Trustee's motion for allowance of an administrative claim and the Chapter 7 Trustee's motion to convert the case from Chapter 13 to Chapter 7. The Court took these matters under advisement and set a briefing schedule. Trustee Rafool filed his memorandum on July 17, 2001, and the DEBTORS filed their response on July 27, 2001.

In support of his motion for allowance of an administrative claim, the Trustee argues that his efforts created a direct financial benefit for the bankruptcy estate through the recovery of the undisclosed tax refund and that the threatened avoidance actions triggered the conversion to Chapter 13 which will further benefit unsecured creditors. The DEBTORS argue that the Chapter 7 Trustee is amply compensated for his duties without allowance of administrative claims in converted Chapter 13 cases, and that the $6,700 tax refund was voluntarily turned over to the Chapter 7 Trustee by the DEBTORS. The DEBTORS also dispute the avoidability of both the DEBTORS' transfer of their house to their daughter, and the allegedly preferential payments to Redbrand Credit Union.

The majority of bankruptcy courts permit a Chapter 7 trustee to have an allowed administrative claim paid through a Chapter 13 plan after conversion where the trustee's services benefitted creditors, even though the case converted to Chapter 13 before the Chapter 7 trustee was able to disburse estate funds and earn his statutory fee. In re Hages, 252 B.R. 789 (Bankr.N.D.Cal. 2000); In re Rodriguez, 240 B.R. 912 (Bankr.D.Col. 1999); In re Colburn, 231 B.R. 778 (Bankr.D.Or. 1999); In re Monus, 210 B.R. 541 (Bankr.N.D.Ohio 1997); In re Berry, 166 B.R. 932 (Bankr.D.Or. 1994).

Here, the Chapter 7 Trustee's efforts benefitted the bankruptcy estate. Even if the $6,700 tax refund was "voluntarily" turned over to the Trustee by the DEBTORS, the DEBTORS nevertheless violated their absolute duty to disclose the refund on their bankruptcy schedules. They should not now be heard to complain when it is their own conduct that provides the basis for the Chapter 7 Trustee's administrative claim.

It remains to be seen whether the Trustee's other efforts result in an actual benefit to the estate. The DEBTORS have denied that Redbrand Credit Union received a preferential transfer and have denied that the conveyance of their home to their daughter is an avoidable fraudulent transfer. Nevertheless, the recovery of the tax refund is reason enough for allowance of an administrative claim for the Chapter 7 Trustee.

In making a determination of the amount of the administrative claim to be allowed the Chapter 7 Trustee, this Court agrees with the suggestion of both parties that such determination should be made after the Court considers a detailed statement of the time expended by the Chapter 7 Trustee. Accordingly, the Chapter 7 Trustee should be given fourteen (14) days in which to submit a detailed statement of time expended in the administration of the case before conversion.

The Chapter 7 Trustee argues for conversion on the basis that the Plan is not confirmable as proposed and that no confirmable plan is feasible based on the DEBTORS' disposable income if the avoidance claims are meritorious. The Chapter 7 Trustee also contends that the conversion to Chapter 13 was made in bad faith in an effort to evade the fraudulent conveyance action. The Trustee cites Judge Lessen's opinion in In re Stephen, Case No. 98-70829 (Unpublished, issued Sept. 22, 1998), holding that a debtor's right to convert a Chapter 7 case under Section 706(a) is not absolute and may be denied where conversion would constitute an abuse of the bankruptcy process.

In Stephens, the debtors failed to disclose their ownership of out-of-state real estate either in their schedules or at the first meeting. When the trustee, after discovering the asset, filed a complaint objecting to their discharge, they moved to convert their case to Chapter 13.

Here, although the DEBTORS failed to disclose the tax refund in their schedules, they did disclose it at the first meeting and did turn it over to the Chapter 7 Trustee. The payments to Redbrand Credit Union were disclosed by the DEBTORS on their schedules. The transfer of their house was not disclosed on their schedules but appears to have occurred more than one year prior to their petition so that disclosure on their schedules was not required. The DEBTORS did disclose the transfer at the first meeting in response to the Trustee's questions. Accordingly, the Court finds that this case is factually distinguishable from Stephens.

The Court also disagrees with the Chapter 7 Trustee's theory that a confirmable plan is not feasible. The issue at the heart of this case is whether the transfers are, in fact, avoidable. That issue is the same whether it is decided within the framework of a Chapter 7 proceeding or a Chapter 13 proceeding. If it turns out that either or both of the transfers are avoidable, any recovery by the Chapter 13 Trustee would be used to fund the Plan. A plan may be confirmed, so long as it provides that whatever prepetition transfers the Chapter 13 Trustee recovers are to be distributed to creditors. Therefore, the Chapter 7 Trustee has shown no basis for conversion under Section 1307(c).

That issue aside, the Amended Plan is clearly not confirmable as proposed. The Plan makes no reference to the $6,700 tax refund turned over to the Chapter 13 Trustee that is disposable income that must be used to fund the Plan. The amount of the proposed Plan payment also fails to include the additional $390 in disposable income freed up by surrender of the 1999 Monte Carlo. In addition, Schedule I appears to substantially overstate an allowable deduction for payroll taxes and Social Security, meaning additional disposable income is likely available to fund the Plan. The Plan therefore violates Section 1325(b)(1)(B). The Plan also fails to provide for payment of the Chapter 7 Trustee's administrative claim, although the amount is yet to be determined, and therefore does not comply with Section 1322(a)(2).

The Plan also violates Section 1325(a)(4) by failing to provide that unsecured creditors will receive at least as much as they would in a Chapter 7 case. This follows directly from the failure to include the $6,700 tax refund in the Plan. The Court is also required to consider the impact of the Chapter 7 Trustee's allegations concerning the two avoidable transfers. If the Trustee is correct that those transfers are, in fact, avoidable, then additional assets would be available in a Chapter 7 liquidation for distribution to unsecured creditors. The conversion to Chapter 13 has rendered that issue both hypothetical and unnecessary for the Court to decide, at least for purposes of confirmation. The Chapter 13 Trustee has the discretion to retain counsel for the purpose of investigating and avoiding those transfers and should be given the opportunity to hire an attorney to do so. Any such recoveries must be paid into the Plan for distribution to creditors and the Plan should so provide. If, after investigation, the Chapter 13 Trustee decides not to pursue recovery of either or both of the allegedly avoidable transfers, his decision will foreclose further inquiry into the issue unless another interested party requests authorization to bring an avoidance action on behalf of the estate or conversion to Chapter 7 is ordered.

This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.

ORDER

For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED that:

1. Confirmation of the Amended Plan is DENIED and the DEBTORS shall have twenty-one (21) days in which to file a Second Amended Plan. The Second Amended Plan must provide that the Chapter 7 Trustee's allowed administrative claim, to be determined by the Court, will be paid in full, and that all amounts recovered by the Chapter 13 Trustee through avoidance actions will be used to fund the plan and increase the amount payable to unsecured creditors.

2. The Chapter 7 Trustee's Motion to Convert is DENIED.

3. The Chapter 7 Trustee's Motion for Allowance of Administrative Claim is provisionally ALLOWED subject to determination of the amount. The Chapter 7 Trustee shall file within fourteen (14) days a detailed itemization of time expended and costs incurred during his administration of the estate. The Court will then take the matter under advisement.

4. The Chapter 13 Trustee shall have twenty-one (21) days after a plan is confirmed in which to file an Application to Retain an Attorney for the purpose of investigating and pursuing recovery of the alleged fraudulent transfer of the DEBTORS' house and the alleged preferential transfer to Redbrand Credit Union.