In re Neal

C. Kathryn Preston, Judge

Chapter 13

Craig Thomas Matthews, Attorney for Thomas Lilly, via CMECF service

Gregory Adam Wetzel, Hrabcak & Company, L.P.A., Attorney for 4030 West Broad, Inc., via CMECF service

OPINION AND ORDER ON THE TRUSTEE'S MOTION FOR AUTHORITY TO DISBURSE REMAINING FUNDS (DOC. # 327) AND MOTION OF THOMAS LILLY FOR RELEASE OF TRUSTEE FUNDS TO LILLY (DOC. # 333)

C. Kathryn Preston, Judge

This matter is before the Court on Chapter 13 Trustee Edward Bailey's (the "Trustee") Trustee's Motion for Authority to Disburse Remaining Funds (Doc. # 327) (the "Trustee's Motion") and the Motion of Thomas Lilly for Release of Trustee Funds to Lilly (Doc. # 333) ("Lilly's Motion").

The Trustee's Motion requests authority to disburse the funds (the "Funds") that the Trustee was holding when the present case was dismissed. Leo Neal Jr. (the "Debtor") filed an Objection to Trustee's Motion to Disperse [sic] Debtor's Plan Funds Motion to Deny Trustee Motion (Doc. # 328) (the "Debtor's Objection"), objecting to the Trustee's proposed disbursements of the Funds. The Debtor is appearing pro se. In addition to Lilly's Motion, Creditor Thomas Lilly ("Lilly") filed a Memorandum in Opposition to Trustee's Motion for Authority to Disburse Remaining Funds (Doc. # 329) ("Lilly's Objection"). Both Lilly's Motion and Lilly's Objection object to the Trustee's proposed disbursement, and request disbursement of the Funds to Lilly. The Trustee filed a reply to the objections filed by the Debtor and Lilly (Doc. # 330) (the "Trustee's Reply"), and a response to Lilly's Motion (Doc. # 334).

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the Amended General Order 05-02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).

I. Background

The Debtor filed a petition for relief under Chapter 13 of the Bankruptcy Code on April 27, 2022, seeking a discharge of various debts. In due course, the Debtor filed a proposed Chapter 13 Plan, which was followed by several amended plans. Creditor 4030 West Broad Inc. ("4030"), who has a judgment against the Debtor for over $120,000, filed an Objection of Creditor 4030 West Broad, Inc. to Confirmation of Debtor's Amended Chapter 13 Repayment Plan (Doc. # 193) (the "Objection to Confirmation"). 4030 asserted bad faith on the part of the Debtor. On July 20, 2023, the Court entered an Opinion and Order Sustaining Objection of Creditor 4030 West Broad, Inc. to Confirmation of the Debtor's Amended Chapter 13 Repayment Plan (Doc. # 319) (the "Opinion"), sustaining 4030's Objection to Confirmation on the grounds of the Debtor's lengthy history of bad faith, both in the present bankruptcy case and previous state court litigation. The Court entered a concurrent Order of Dismissal of Debtor's Chapter 13 Case (Doc. # 320).

For a detailed account of the Debtor's actions which led to the dismissal of his case, see 4030's Objection to Confirmation (Doc. # 193) and the Court's opinion on the matter (Doc. # 319).

Prior to the dismissal of the Debtor's case, in connection with claims litigation over 4030's Proof of Claim, the Court had considered the Creditor 4030 West Broad, Inc.'s Amended Motion for Sanctions Against Debtor Leo Neal, Jr. (Doc. # 270) (the "Motion for Sanctions"). In its Motion for Sanctions, 4030 requested an award of sanctions against the Debtor for failure to provide initial disclosures to 4030 in accordance with the Amended Order Setting Trial or Continuing Pretrial and/or Setting Deadlines on Debtor's Amended Objection to Claim #2 of 4030 West Broad, Inc. (Doc # 240). The Court issued an order to show cause to the Debtor (Doc. # 280) and held a hearing on June 12, 2023. At the hearing, the Debtor did not dispute 4030's claim that he had not made initial disclosures and did not articulate a defense for his failure to do so. Pursuant to the June 12 hearing, the Court entered an Order Granting 4030 West Broad Inc.'s Amended Motion for Sanctions Against Debtor Leo Neal Jr. (Doc. # 302) (the "Sanctions Order"), imposing sanctions against the Debtor, including attorney fees incurred by 4030 in the connection with the Motion for Sanctions and the associated hearing. The Court granted fees of $3558 in the Order Awarding Attorney Fees Pursuant to Order granting Creditor 4030 West Broad, Inc.'s Amended Motion for Sanctions Against Debtor Leo Neal, Jr. (Doc. # 325) (the "Fee Order").

On August 29, 2023, the Trustee filed the Trustee's Motion, seeking authority to disburse the Funds held at the time of dismissal, totaling $53,185. The Trustee requested authority to disburse $3,558 to 4030's attorneys Hrabcak & Company, L.P.A. ("Hrabcak"), pursuant to the Sanctions Order and the Fee Order. In addition, the Trustee noted that, in accordance with 28 U.S.C. § 586(e), he had collected his statutory Trustee fee of $3,248.60. The Trustee stated that any of the Funds payable to the Debtor would be hand delivered to him at the Trustee's office upon entry of an order on the Trustee's Motion.

On September 12, 2023 (after dismissal of this case), on account of his judgment against the Debtor, Lilly obtained from the Montgomery County Common Pleas Court a garnishment on the Funds held by the Trustee.

In the Debtor's Objection, the Debtor asserted multiple bases for opposing the Trustee's Motion, including but not limited to the Trustee receiving his statutory fee; the Trustee's failure to add interest on the Funds to the Debtor's account; the Trustee's request for authority to disburse funds to 4030 to satisfy the fee award; the Trustee's standing to file any motion in this case post-dismissal; and the Trustee's proposal to hand deliver the Funds to the Debtor at the Trustee's office rather than mailing them to his address. The Debtor cited no authority to support his objections.

In Lilly's Objection, Lilly did not object to the Trustee's proposed disbursement to Hrabcak, or to the Trustee deducting his statutory fee. Lilly objected only to the Trustee's proposal to return the remaining Funds to the Debtor in light of the garnishment. In Lilly's Motion, Lilly requested that after the Trustee's fee is deducted and the disbursement made to Hrabcak, the balance of the Funds be disbursed to Lilly in accordance with the garnishment order.

In his Reply, the Trustee refuted the Debtor's objections. The Trustee's Reply also noted that Lilly failed to seek the leave of this Court before obtaining the garnishment order on the Funds.

II. Analysis

a. The Trustee has Standing to Seek Court Direction for Disbursement of the Funds

The Debtor's Objection posits that, inasmuch as the Debtor's case has been dismissed, the Trustee lacks standing to seek authority to disburse the Funds. The Debtor does not cite a legal basis for this argument.

Of course the Trustee has standing to seek direction on how he should disburse the Funds. The Trustee holds the Funds to which multiple claims have been made by parties in this case. Any party whose position may be altered by an order of the Court has standing to bring a motion. Should the Trustee err in disbursement of the Funds, he may face legal accountability. Accordingly, that the Trustee has sought authority to disburse the Funds is not only understandable, but prudent.

Moreover, a Trustee's standing does not evaporate upon dismissal of a case. Unlike conversion of a Chapter 13 case to a case under another chapter, a Chapter 13 trustee is not discharged of his duties upon dismissal of the Chapter 13 case. 11 U.S.C. § 348(e) provides that "[c]onversion of a case under section 706, 1112, 1208, or 1307 of this title terminates the service of any trustee or examiner that is serving in the case before such conversion." 11 U.S.C. § 348(e). However, 11 U.S.C. § 349, which governs the effect of dismissal of a case, does not have a similar provision in the event a Chapter 13 case is dismissed.

As discussed in greater depth below, a Chapter 13 trustee has continuing duties upon dismissal of a Chapter 13 case. Inasmuch as the revesting of property in the Debtor pursuant § 349 and § 1326 is not automatic, the Trustee's Motion seeking direction on how to disburse the Funds post-dismissal aptly lends itself to this fact. Even the Debtor's own allegation that the Trustee has been unjustly enriched by deducting his statutory fee speaks to the Trustee's interest, and thus standing, in this matter. The Court finds this basis for the Debtor's Objection without merit.

b. The Trustee is Entitled to his Statutory Trustee Fee

In the Debtor's Objection, the Debtor asserts that, as his case was dismissed before confirmation of a plan, the Trustee has no responsibility for administering the Debtor's case and is not entitled to his statutory commission. The Debtor argues that allowing the Trustee to deduct his statutory fee would constitute unjust enrichment. The Debtor cites no authority for his argument other than vague references to "U.S. Code Title 11 and federal law."

The Debtor's challenge to the Trustee's statutory fee is without merit. The Trustee correctly observed that, pursuant to 28 U.S.C. § 586(e), he is entitled deduct a percentage fee from all payments received. 28 U.S.C. § 586(e)(1) and (2). Despite the Debtor's contention, federal law explicitly provides the statutory basis for the Trustee's percentage fee on payments received by the Trustee. In the case of In re Cryder, this Court held that "the Trustee shall collect the percentage fee allowed under 28 U.S.C. § 586(e) on all payments received in cases in which the Trustee serves as the standing trustee, including cases that are dismissed or converted prior to confirmation of a Chapter 13 plan." In re Cryder, No. 2:11-bk-56676 (Bankr. S.D. Ohio June 15, 2012) (Hoffman, J.).

It is obvious that the Debtor failed to research the merits of his theory, in violation of Fed.R.Bankr.P. 9011, for which the Debtor may be subject to additional sanctions.

Further, the Court does not find persuasive the Debtor's allegation that payment of the Trustee's fee would constitute unjust enrichment because the Debtor's case was dismissed prior to the confirmation of a plan. Regardless of the dismissal of the Debtor's case before reaching confirmation, the Trustee performed his role for over a year before the case was dismissed on account of the Debtor's bad faith. In his role as administrator of the bankruptcy estate, he conducted the § 341 Meeting of Creditors, reviewed and analyzed the Debtor's schedules and other filings, analyzed the numerous plans proposed by the Debtor, determined whether the plans met the criteria for confirmation, prepared and filed appropriate documents, and undertook other activities. The Debtor's failure to conform to the requirements of the Bankruptcy Code and Bankruptcy Rules should not prejudice the Trustee. If the Trustee is not allowed his statutory fee, the only party who might arguably be unjustly enriched by the bankruptcy case is the Debtor, by virtue of receiving the benefit of the Trustee's services for over a year without compensation.

Accordingly, dismissal of the Debtor's case prior to confirmation does not impact the Trustee's entitlement to his statutory fee under 28 U.S.C. § 586(e).

c. The Trustee Is Not Required to Pay Interest on the Funds

Next, the Debtor asserts that the Trustee erred by failing to compute and add to the Debtor's account interest on the Funds. As with all of his other objections, the Debtor failed to cite any statutory or case law to support his theory. And the Court believes that there is none. As the Trustee pointedly stated, he is not required to utilize interest bearing accounts for debtors' Chapter 13 plan payments, and there is no Bankruptcy Code provision for accrual or payment of interest on individual debtors' plan payments. The Chapter 13 trustees do not receive interest on the accounts holding the funds remitted by Chapter 13 debtors. The Debtor's objection is without merit.

d. Hrabcak is Entitled to Payment of the Award of Attorney Fees from the Funds

The Debtor levies a volley of other objections to the Trustee's Motion, but they all boil down to whether Hrabcak should be paid the award of attorney fees from the Funds. The Debtor vehemently denies that Hrabcak is entitled to payment, first because he disputes the award, and second, because the purpose of the Funds was to fund his Chapter 13 Plan and diversion of the Funds for other purposes is inappropriate. The Court disagrees on both counts.

First, the award of fees to Hrabcak is no longer disputed. The Court has entered a final order on the matter. The Debtor has not filed an appeal or moved for reconsideration of the Court's order, and the periods for doing so have expired. Thus, the matter is no longer a contested issue.

Second, the Debtor's plan was not confirmed. Therefore, disposition of the Funds is governed by 11 U.S.C. § 1326, which provides in pertinent part:

(2) . . . If a plan is not confirmed, the trustee shall return any [of the debtor's plan] payments paid and not yet due and owing to creditors pursuant to paragraph (3) to the debtor, after deducting any unpaid claim allowed under section 503(b).

11 U.S.C. § 1326(a)(2). Section 503(b) claims encompass, among other things, administrative expenses of a bankruptcy estate. The question, then, is whether the fee award falls within the parameters of § 503(b).

The award to Hrabcak is not a claim of the kind that would traditionally fall under § 503(b). While there is no specific provision of the Bankruptcy Code addressing this exact situation, the Court takes guidance from Goode-Parker v. Siegel (In re Goode-Parker), 2007 Bankr. LEXIS 4899 (9^th Cir. BAP 2007) and Reading Co. v. Brown, 398 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968))). In Goode-Parker, sanctions in the form of attorney fees had been imposed on a Chapter 7 trustee and his counsel for failure to cooperate with discovery. The Goode-Parker court observed that administrative claims under 11 U.S.C. § 503 include expenses which "arise out of the trustee or debtor in possession's actual and necessary costs of administering the estate." 2007 Bankr. LEXIS 4899, at *27 (citing Industrial Comm'n of Ariz. v. Solto (In re Sierra Pac. Broadcasters), 185 B.R. 575, 578 (9^th Cir. BAP 1995) (citing Reading Co. v. Brown, 398 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968))). The court stated that "[p]resumably, any sanctions incurred by Trustee and his counsel were . . . based upon acts taken within the scope of Trustee's authority and potentially payable from the estate." Id. at *27-28 (footnote omitted).

In Reading Co. v. Brown, the United States Supreme Court addressed the scope of "actual and necessary costs" in a Chapter XI case under the Bankruptcy Act in effect at that time. As does the present statute, the Bankruptcy Act provided that actual and necessary costs of administering the bankruptcy estate were paid prior to prepetition unsecured claims. In that case the court appointed receiver had failed to obtain appropriate insurance coverage. A fire broke out which severely damaged property of the bankruptcy estate and surrounding properties. Owners of the surrounding properties sought payment for their losses from the bankruptcy estate. The Court held that damages incurred during a business debtor's bankruptcy reorganization case as a result of negligence of the receiver acting within the scope of his authority gave rise to "actual and necessary costs" of the administration of the estate. Reading, 391 U.S. at 485. The Court reasoned that this result is more natural and fair inasmuch as the injured party suffers loss as a result of the operations and administration of the bankruptcy estate.

Reading was decided under § 64(a) of the old Bankruptcy Act of 1898, but because that provision is virtually identical to § 503(b), it remains good law. Id. at *27, n. 21.

In this district, part of the burden of administration of a Chapter 13 bankruptcy estate falls on the debtor. In most cases, the Chapter 13 debtor takes on the responsibilities of objecting to claims, pursuing avoidance of preferential transfers, and managing assets of the estate. In the instant case, the Debtor elected to file an objection to the claim of 4030 but declined to abide by the rules and orders of the Court pertaining to the litigation. The Debtor's conduct took place during this Chapter 13 case, in the course and scope of the Debtor's responsibilities as a Chapter 13 debtor dealing with the bankruptcy estate. Under the reasoning of Goode-Parker and Reading, the legal fees of 4030 levied as a sanction for the Debtor's conduct became a cost of administration of the estate and are entitled to payment pursuant to 11 U.S.C. § 503(b). It is, accordingly, appropriate for 4030's attorney fees to be paid from the Funds held by the Trustee.

e. Lilly Was Required to Obtain Leave of Court Prior to Instituting Action Against the Trustee

"It is well settled that leave of the appointing forum must be obtained by any party wishing to institute an action in a non-appointing forum against a trustee . . . ." Allard v. Weitzman (In re DeLorean Motor Co.), 991 F.2d 1236, 1241 (6^th Cir. 1993) (citing Barton v. Barbour, 104 U.S. 126, 26 L.Ed. 672 (1881); other citations omitted). This is known as the Barton Doctrine. Lilly has not cited any authority to the contrary; nor has Lilly advanced any arguments that the Barton Doctrine does not apply here. "Moreover, the Barton doctrine continues to apply after dismissal of a bankruptcy case . . . ." Bednar v. Bednar (In re Bednar), 2021 Bankr. LEXIS 1129 *10-11 (10^th Cir. BAP Apr. 27, 2021).

Lilly failed to obtain leave of this Court to institute legal action against the Trustee; therefore, his garnishment is void and without effect against the Trustee. In re Jacobs, No. 10-12785, slip op. at 4 (Bankr. S.D. Ohio March 22, 2011) (Perlman, J); In re Inyamah, 278 B. R. 183 (Bankr. S.D. Ohio 2007) (Caldwell, J.)

f. The Trustee Must Remit the Net Funds to the Debtor

After dismissal of this case but before the Trustee disbursed any of the Funds, Lilly obtained from the Montgomery County [Ohio] Common Pleas Court an order of garnishment of the Funds, in an effort to obtain payment on his judgment.

Section 349 of the Bankruptcy Code provides, in pertinent part, that

(b) Unless the court, for cause, orders otherwise, a dismissal of a case . . .

(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). As noted above, upon dismissal of a case, § 1326 directs the Chapter 13 trustee where and when to remit unexpended funds:

(2) . . . If a plan is not confirmed, the trustee shall return any [of the debtor's plan] payments paid and not yet due and owing to creditors pursuant to paragraph (3) to the debtor, after deducting any unpaid claim allowed under section 503(b).

11 U.S.C. § 1326(a)(2).

However, the revesting of funds held by the trustee is neither immediate nor automatic. Before any funds may be returned to the debtor, "the Chapter 13 trustee must complete the administration of the case, including making payment for expenses related to the administration of the estate." In re Kirk, 537 B. R. 856, 861 (Bankr.N.D.Ohio 2015) (citing Mass. v. Pappalardo (In re Steenstra), 307 B.R. 732, 738 (BAP 1^st Cir. 2004) (internal citations omitted)). Additionally, the Chapter 13 trustee must remit to any creditors those payments "due and owing to [such] creditors." See 11 U.S.C. § 1326(a)(3). Thus, unlike conversion of a Chapter 13 case to a case under another chapter (governed by § 348), it is evident that a Chapter 13 trustee is not discharged of his duties upon dismissal of the Chapter 13 case. The trustee "is required to distribute undisbursed plan payments in accordance with § 1326(a)(2) to complete administration of the bankruptcy estate." In re Kirk, 537 B.R. 856, 861 (Bankr.N.D.Ohio 2015). Therefore, the Trustee still answers to the Court for his actions and is still bound to comply with the provisions of the Bankruptcy Code.

It is axiomatic that when there is conflict between Federal law and state law, the Federal law prevails. Article VI, paragraph 2 of the United States Constitution is commonly referred to as the Supremacy Clause. It establishes that the Constitution and Federal laws are the supreme law in the United States, taking precedence over state laws. Because the Trustee is continuing to perform his role as trustee, he is not merely a holder of the Funds. Rather, he is continuing to administer the case, and he must continue to adhere to the provisions of the Bankruptcy Code, including those of § 1326(a)(2). In the instant case, the state law, which authorizes the garnishment, must yield to the Federal law, which mandates the disposition of funds on hand with the Trustee when a case is dismissed. The Trustee must disburse the Funds, net of the deductions authorized by § 1326(a)(2), to the Debtor.

g. The Trustee's Proposal to Deliver the Funds to the Debtor at the Trustee's Office Is Well Taken

In the Trustee's Motion, the Trustee suggested that any payment due the Debtor should be hand delivered to the Debtor at the Trustee's office rather than mailed to the Debtor's home, because the Debtor has had difficulties receiving mail at his home address. Indeed, the Debtor has complained about this numerous times in hearings before the Court. He even brought to a hearing proof that mail was not being delivered, consisting of numerous documents which had been mailed by the Bankruptcy Noticing Center ("BNC") and returned to BNC. The Judge's chambers also has sent mail to the Debtor which was returned. The Court cannot discern any reason why the Trustee should not endeavor to protect his office in the manner he proposed. The Court agrees with the Trustee that his proposed delivery procedure is in the best interest of all concerned.

III. Conclusion

In light of the foregoing, it is hereby ORDERED AND ADJUDGED that:

1. The Trustee's objection to the Motion of Thomas Lilly for Release of Trustee Funds to Lilly is sustained, and the Motion of Thomas Lilly for Release of Trustee Funds to Lilly (Doc. # 333) is DENIED.

2. The objections to the Trustee's Motion for Authority to Disburse Remaining Funds by the Debtor and Thomas Lilly are overruled, and the Trustee's Motion for Authority to Disburse Remaining Funds (Doc. # 327) is GRANTED.

a. The Trustee shall deduct from the Funds his commission pursuant to 11 U.S.C. § 586, to the extent he has not previously done so.

b. The Trustee shall remit to Hrabcak & Company, L.P.A. the sum of $3,558.00 from the Funds.

c. The Trustee shall remit to the Debtor the Funds net of the amounts set forth above. The Trustee shall deliver the net Funds, via hand-delivery to the Debtor at the Office of the Chapter 13 Trustee, at a mutually convenient date and time after expiration of the 14-day period within which a notice of appeal of this Order may be filed.

IT IS SO ORDERED.