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SUPREME COURT OF THE UNITED STATES
_________________
No. 14–400
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CHARLES E. HARRIS, III, PETITIONER v.
MARY K. VIEGELAHN, CHAPTER 13 TRUSTEE
on writ of certiorari to the united states
court of appeals for the fifth circuit
[May 18, 2015]
Justice Ginsburg delivered the opinion of the
Court.
This case concerns the disposition of wages
earned by a debtor after he petitions for bankruptcy. The
treatment of postpetition wages generally depends on whether the
debtor is proceeding under Chapter 13 of the Bankruptcy Code (in
which the debtor retains assets, often his home, during bankruptcy
subject to a court-approved plan for the payment of his debts) or
Chapter 7 (in which the debtor’s assets are immediately liquidated
and the proceeds distributed to creditors). In a Chapter 13
proceeding, postpetition wages are “[p]roperty of the estate,” 11
U. S. C. §1306(a), and may be collected by the Chapter 13
trustee for distribution to creditors, §1322(a)(1). In a Chapter 7
proceeding, those earnings are not estate property; instead, they
belong to the debtor. See §541(a)(1). The Code permits the debtor
to convert a Chapter 13 proceeding to one under Chapter 7 “at any
time,” §1307(a); upon such conversion, the service of the Chapter
13 trustee terminates, §348(e).
When a debtor initially filing under Chapter 13
exercises his right to convert to Chapter 7, who is entitled to
post-petition wages still in the hands of the Chapter 13 trustee?
Not the Chapter 7 estate when the conversion is in good faith, all
agree. May the trustee distribute the accumu-lated wage payments to
creditors as the Chapter 13 planrequired, or must she remit them to
the debtor? That is the question this case presents. We hold that,
under the governing provisions of the Bankruptcy Code, a debtor who
converts to Chapter 7 is entitled to return of anypostpetition
wages not yet distributed by the Chapter 13 trustee.
I
A
The Bankruptcy Code provides diverse courses
overburdened debtors may pursue to gain discharge of their
financial obligations, and thereby a “fresh start.” Marrama
v. Citizens Bank of Mass., 549 U. S. 365, 367 (2007)
(quoting Grogan v. Garner, 498 U. S. 279, 286
(1991) ). Two roads individual debtors may take are relevant here:
Chapter 7 and Chapter 13 bankruptcy proceedings.
Chapter 7 allows a debtor to make a clean break
from his financial past, but at a steep price: prompt liquidation
of the debtor’s assets. When a debtor files a Chapter 7 petition,
his assets, with specified exemptions, are immediately transferred
to a bankruptcy estate. §541(a)(1). A Chapter 7 trustee is then
charged with selling the prop-erty in the estate, §704(a)(1), and
distributing the proceedsto the debtor’s creditors, §726.
Crucially, however, a Chapter 7 estate does not include the wages a
debtor earns or the assets he acquires after the bankruptcy
filing. §541(a)(1). Thus, while a Chapter 7 debtor must forfeit
virtually all his prepetition property, he is able to make a “fresh
start” by shielding from creditors his postpetition earnings and
acquisitions.
Chapter 13 works differently. A wholly voluntary
alternative to Chapter 7, Chapter 13 allows a debtor to retain his
property if he proposes, and gains court confirmation of, a plan to
repay his debts over a three- to five-year period. §1306(b), §1322,
§1327(b). Payments under a Chapter 13 plan are usually made from a
debtor’s “future earnings or other future income.” §1322(a)(1); see
8 Col-lier on Bankruptcy ¶1322.02[1] (A. Resnick & H. Sommer
eds., 16th ed. 2014). Accordingly, the Chapter 13 estate from which
creditors may be paid includes both the debtor’s property at the
time of his bankruptcy petition, and any wages and property
acquired after filing. §1306(a). A Chapter 13 trustee is often
charged with collecting a portion of a debtor’s wages through
payroll deduction, and with distributing the withheld wages to
creditors.
Proceedings under Chapter 13 can benefit debtors
and creditors alike. Debtors are allowed to retain their assets,
commonly their home or car. And creditors, entitled to a Chapter 13
debtor’s “disposable” postpetition income, §1325(b)(1), usually
collect more under a Chapter 13plan than they would have received
under a Chapter 7 liquidation.
Many debtors, however, fail to complete a
Chapter 13 plan successfully. See Porter, The Pretend Solution: An
Empirical Study of Bankruptcy Outcomes, 90 Texas L. Rev. 103,
107–111 (2011) (only one in three cases filed under Chapter 13 ends
in discharge). Recognizing that reality, Congress accorded debtors
a nonwaivable right to convert a Chapter 13 case to one under
Chapter 7 “at any time.” §1307(a). To effectuate a conversion, a
debtor need only file a notice with the bankruptcy court. Fed. Rule
Bkrtcy. Proc. 1017(f)(3). No motion or court order is needed to
render the conversion effective. See ibid.
Conversion from Chapter 13 to Chapter 7 does not
commence a new bankruptcy case. The existing case continues along
another track, Chapter 7 instead of Chapter 13, without
“effect[ing] a change in the date of the filing of the petition.”
§348(a). Conversion, however, immediately “terminates the service”
of the Chapter 13 trustee, replacing her with a Chapter 7 trustee.
§348(e).
B
In February 2010, petitioner Charles Harris
III filed a Chapter 13 bankruptcy petition. At the time of filing,
Harris was indebted to multiple creditors, and had fallen $3,700
behind on payments to Chase Manhattan, his home mortgage
lender.
Harris’ court-confirmed Chapter 13 plan provided
that he would immediately resume making monthly mortgage payments
to Chase. The plan further provided that $530 per month would be
withheld from Harris’ postpetition wages and remitted to the
Chapter 13 trustee, respondent Mary Viegelahn. Viegelahn, in turn,
would distribute $352 per month to Chase to pay down Harris’
outstanding mortgage debt. She would also distribute $75.34 per
month to Harris’ only other secured lender, a consumer-electronics
store. Once those secured creditors were paid in full, Viegelahn
was to begin distributing funds to Harris’ unsecured creditors.
Implementation of the plan was short lived.
Harris again fell behind on his mortgage payments, and in November
2010, Chase received permission from the Bankruptcy Court to
foreclose on Harris’ home. Following the foreclosure, Viegelahn
continued to receive $530 per month from Harris’ wages, but stopped
making the payments earmarked for Chase. As a result, funds
formerly reserved for Chase accumulated in Viegelahn’s
possession.
On November 22, 2011, Harris exercised his
statutory right to convert his Chapter 13 case to one under Chapter
7. By that time, Harris’ postpetition wages accumulated by
Viegelahn amounted to $5,519.22. On December 1, 2011—ten days after
Harris’ conversion—Viegelahn disposed of those funds by giving
$1,200 to Harris’ counsel, paying herself a $267.79 fee, and
distributing the remain-ing money to the consumer-electronics store
and six of Harris’ unsecured creditors.
Asserting that Viegelahn lacked authority to
disburse funds to creditors once the case was converted to Chapter
7, Harris moved the Bankruptcy Court for an order directing refund
of the accumulated wages Viegelahn had given to his creditors. The
Bankruptcy Court granted Harris’ motion, and the District Court
affirmed.
The Fifth Circuit reversed. In re
Harris, 757 F. 3d 468 (2014). Finding “little guidance in
the Bankruptcy Code,” id., at 478, the Fifth Circuit
concluded that “considerations of equity and policy” rendered “the
creditors’ claim to the undistributed funds . . . superior to that
of the debtor,” id., at 478, 481. Notwithstanding a Chapter
13 debtor’s conversion to Chapter 7, the Fifth Circuit held, a
former Chapter 13 trustee must distribute a debtor’s accumulated
postpetition wages to his creditors.
The Fifth Circuit acknowledged that its decision
conflicted with the Third Circuit’s decision in In re
Michael, 699 F. 3d 305 (2012), which held that a debtor’s
undistributed postpetition wages “are to be returned to the debtor
at the time of conversion [from Chapter 13 to Chapter 7].”
Id., at 307. We granted certiorari to resolve this conflict,
574 U. S. ___ (2014), and now reverse the Fifth Circuit’s
judgment.
II
A
Prior to the Bankruptcy Reform Act of 1994,
courts divided three ways on the disposition of a debtor’s
undistributed postpetition wages following conversion of a
proceeding from Chapter 13 to Chapter 7. Some courts concluded that
undistributed postpetition wages reverted to the debtor. E.g.,
In re Boggs, 137 B. R. 408, 411 (Bkrtcy. Ct. WD Wash.
1992). Others ordered a debtor’s undis-tributed postpetition
earnings disbursed to creditors pur-suant to the terms of the
confirmed (albeit terminated) Chapter 13 plan. E.g., In re
Waugh, 82 B. R. 394, 400 (Bkrtcy. Ct. WD Pa. 1988). Still
other courts, including several Courts of Appeals, held that, upon
conversion, all postpetition earnings and acquisitions became part
of the new Chapter 7 estate, thus augmenting the property available
for liquidation and distribution to creditors. E.g., In re
Calder, 973 F. 2d 862, 865–866 (CA10 1992); In re
Lybrook, 951 F. 2d 136, 137 (CA7 1991).
Congress addressed the matter in 1994 by adding
§348(f) to the Bankruptcy Code. Rejecting the rulings of several
Courts of Appeals, §348(f)(1)(A) provides that in a case converted
from Chapter 13, a debtor’s postpetition earnings and acquisitions
do not become part of the new Chapter 7 estate:
“[P]roperty of the [Chapter 7] estate in
the converted case shall consist of property of the estate, as of
the date of filing of the [initial Chapter 13] petition, that
remains in the possession of or is under the control of the debtor
on the date of conversion.”
In §348(f)(2), Congress added an exception for
debtors who convert in bad faith:
“If the debtor converts a case [initially
filed] under chapter 13 . . . in bad faith, the property
of the estate in the converted case shall consist of the property
of the estate as of the date of the conversion.”
Section 348(f), all agree, makes one thing
clear: A debtor’s postpetition wages, including undisbursed funds
in the hands of a trustee, ordinarily do not become part of the
Chapter 7 estate created by conversion. Absent a bad-faith
conversion, §348(f) limits a converted Chapter 7 estate to property
belonging to the debtor “as of the date” the original Chapter 13
petition was filed. Postpetition wages, by definition, do not fit
that bill.
B
With this background, we turn to the question
presented: What happens to postpetition wages held by a Chapter13
trustee at the time the case is converted to Chapter 7? Does the
Code require return of the funds to the debtor, or does it require
their distribution to creditors? We conclude that postpetition
wages must be returned to the debtor.
By excluding postpetition wages from the
converted Chapter 7 estate, §348(f)(1)(A) removes those earnings
from the pool of assets that may be liquidated and distributed to
creditors. Allowing a terminated Chapter 13 trustee to disburse the
very same earnings to the very same creditors is incompatible with
that statutory design. We resist attributing to Congress, after
explicitly exempting from Chapter 7’s liquidation-and-distribution
process a debtor’s postpetition wages, a plan to place those wages
in creditors’ hands another way.
Section 348(f)(2)’s exception for bad-faith
conversions is instructive in this regard. If a debtor converts in
bad faith—for example, by concealing assets in “unfair manipulation
of the bankruptcy system,” In re Siegfried, 219
B. R. 581, 586 (Bkrtcy. Ct. Colo. 1998)—the converted Chapter
7 estate “consist[s] of the property of the [Chapter 13] estate
as of the date of conversion.” §348(f)(2) (emphasis added).
Section 348(f)(2) thus penalizes bad-faith debtors by making their
postpetition wages available for liquidation and distribution to
creditors. Conversely, when the conversion to Chapter 7 is made in
good faith, no penalty is exacted. Shielding a Chapter 7
debtor’s postpetition earnings from creditors enables the “honest
but unfortunate debtor” to make the “fresh start” the Bankruptcy
Code aims to facilitate. Marrama, 549 U. S., at 367
(internal quotation marks omitted). Bad-faith conversions apart, we
find nothing in the Code denying debtors funds that would have been
theirs had the case proceeded under Chapter 7 from the start. In
sum, §348(f) does not say, expressly: On conversion, accumulated
wages go to the debtor. But that is the most sensible reading of
what Congress did provide.
Section 348(e) also informs our ruling that
undistrib-uted postpetition wages must be returned to the
debtor.That section provides: “Conversion [from Chapter 13 to
Chapter 7] terminates the service of [the Chapter 13] trustee.” A
core service provided by a Chapter 13 trustee is the disbursement
of “payments to creditors.” §1326(c) (emphasis
added). The moment a case is converted from Chapter 13 to Chapter
7, however, the Chapter 13 trustee is stripped of authority to
provide that “service.” §348(e).
Section 348(e), of course, does not require a
terminated trustee to hold accumulated funds in perpetuity; she
must (as we hold today) return undistributed postpetition wages to
the debtor. Returning funds to a debtor, however, is not a Chapter
13 trustee service as is making “paymen[t] to creditors.” §1326(c).
In this case, illustratively, Chapter 13 trustee Viegelahn
continued to act in that capacity after her tenure ended. Eight
days after the case was converted to Chapter 7, she filed with the
Bankruptcy Court a document titled “Trustee’s Recommendations
Concerning Claims,” recommending distribution of the funds
originally earmarked for Chase to the remaining secured creditor
and six of the 13 unsecured creditors. No. 10–50655 (Bkrtcy. Ct. WD
Tex., Nov. 30, 2011), Doc. 34. She then acted on that
recommendation. She thus provided a Chapter 13 trustee “service,”
although barred fromdoing so by §348(e). Returning undistributed
wages to the debtor, in contrast, renders no Chapter 13-authorized
“service.”
C
Viegelahn cites two Chapter 13 provisions in
support of her argument that the Bankruptcy Code requires a
termi-nated Chapter 13 trustee “to distribute undisbursed funds to
creditors.” Brief for Respondent 21. The first, §1327(a), provides
that a confirmed Chapter 13 plan “bind[s] the debtor and each
creditor.” The second, §1326(a)(2), instructs a trustee to
distribute “payment[s] in accordancewith the plan,” and that,
Viegelahn observes, is justwhat she did. But the cited provisions
had no force here, for they ceased to apply once the case was
converted to Chapter 7.
When a debtor exercises his statutory right to
convert, the case is placed under Chapter 7’s governance, and no
Chapter 13 provision holds sway. §103(i) (“Chapter 13
. . . applies only in a case under [that] chapter.”).
Harris having converted the case, the Chapter 13 plan was no longer
“bind[ing].” §1327(a). And Viegelahn, by then the former
Chapter 13 trustee, lacked authority to distribute “payment[s] in
accordance with the plan.” §1326(a)(2); see §348(e).
Nor can we credit the suggestion that a
confirmed Chapter 13 plan gives creditors a vested right to funds
held by a trustee. “[N]o provision in the Bankruptcy Code
classifies any property, including post-petition wages, as
belonging to creditors.” Michael, 699 F. 3d, at
312–313.
Viegelahn alternatively urges that a terminated
Chapter 13 trustee’s “duty” to distribute funds to creditors is a
facet of the trustee’s obligation to “wind up” the affairs of the
Chapter 13 estate following conversion. Brief for Respondent 25
(internal quotation marks omitted). The Federal Rules of Bankruptcy
Procedure, however, specify what a terminated Chapter 13 trustee
must do postconversion: (1) she must turn over records and assets
to the Chapter 7 trustee, Rule 1019(4); and (2) she must file a
report with the United States bankruptcy trustee, Rule
1019(5)(B)(ii). Continuing to distribute funds to creditors
pursuant to the defunct Chapter 13 plan is not an authorized
“wind-up” task.
Finally, Viegelahn homes in on a particular
feature of this case. Section 1327(b) states that “[e]xcept as
otherwise provided in the [Chapter 13] plan . . . the
confirmation of a plan vests all of the property of the estate in
the debtor.” Harris’ plan “otherwise provided”: It stated that
“[u]pon confirmation of the plan, all property of the estate shall
not vest in the Debto[r], but shall remain as property of the
estate.” App. 31 (emphasis added). That plan language does not
change the outcome here. Harris’ wages may have been “property of
the estate” while his case proceeded under Chapter 13, but estate
property does not become property of creditors until it is
distributed to them. See Michael, 699 F. 3d, at 313.
Moreover, the order confirming Harris’ plan provided that upon
conversion to Chapter 7, “[s]uch property as may revest in the
debtor shall so revest.” App. 48. Pursuant to that provision,
property formerly in the Chapter 13 estate that did not become part
of the Chapter 7 estate revested in Harris; here, Harris’
postpetition wages so revested.
D
The Fifth Circuit expressed concern that
debtors would receive a “windfall” if they could reclaim
accumulated wages from a terminated Chapter 13 trustee. 757
F. 3d, at 478–481. As explained, however, see supra at
2–3, Chapter 13 is a voluntary proceeding in which debtors endeavor
to discharge their obligations using postpetition earnings that are
off-limits to creditors in a Chapter 7 proceeding. We do not regard
as a “windfall” a debtor’s receipt of a fraction of the wages he
earned and would have kept had he filed under Chapter 7 in the
first place.
We acknowledge the “fortuit[y],” as the Fifth
Circuit called it, that a “debtor’s chance of having funds
returned” is “dependent on the trustee’s speed in distributing the
payments” to creditors. 757 F. 3d, at 479, and n. 10. A
trustee who distributes payments regularly may have little or no
accumulated wages to return. When a trustee distributes payments
infrequently, on the other hand, a debtor who converts to Chapter 7
may be entitled to a sizable refund. These outcomes, however,
follow directly from Congress’ decisions to shield postpetition
wages from creditors in a converted Chapter 7 case, §348(f)(1)(A),
and to give Chapter 13 debtors a right to convert to Chapter 7 “at
any time,” §1307(a). Moreover, creditors may gain protection
against the risk of excess accumulations in the hands of Chapter 13
trustees by seeking to include in a Chapter 13 plan a schedule for
regular disbursement of funds the trustee collects.
* * *
For the reasons stated, the judgment of the
United States Court of Appeals for the Fifth Circuit is reversed,
and the case is remanded for further proceedings consistent with
this opinion.
It is so ordered.
