NOTICE: This opinion is subject to
formal revision before publication in the preliminary print of the
United States Reports. Readers are requested to notify the
Reporter of Decisions, Supreme Court of the United States,
Washington, D. C. 20543, of any typographical or other formal
errors, in order that corrections may be made before the
preliminary print goes to press.
SUPREME COURT OF THE UNITED STATES
_________________
No. 14–400
_________________
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.
