Decided today, May 18, 2015, the Supreme Court of the United States published its opinion in the case of HARRIS v. VIEGELAHN, CHAPTER 13 TRUSTEE, No. 14–400. Argued April 1, 2015—Decided May 18, 2015.

In this case, the Supreme Court holds:

A debtor who converts to Chapter 7 is entitled to return of any post-petition wages not yet distributed by the Chapter 13 trustee.

The U.S. Supreme Court agreed with the Third Circuit and overturned the Fifth Circuit ruling to the contrary.

The Court found: “[i]ndividual debtors may seek discharge of their financial obligations under either Chapter 7 or Chapter 13 of the Bankruptcy Code. In a Chapter 7 proceeding, the debtor’s assets are transferred to a bankruptcy estate. 11 U. S. C. §541(a)(1). The estate’s assets are then promptly liquidated, §704(a)(1), and distributed to creditors, §726. A Chapter 7 estate, however, does not include the wages a debtor earns or the assets he acquires after the bankruptcy filing. §541(a)(1).Chapter 13, a wholly voluntary alternative to Chapter 7, permits the debtor to retain assets during bankruptcy subject to a court-approved plan for payment of his debts. Payments under a Chapter 13 plan are usually made from a debtor’s “future income.” 1322(a)(1). The Chapter 13 estate, unlike a Chapter 7 estate, therefore includes boththe debtor’s property at the time of his bankruptcy petition, and any assets he acquires after filing. §1306(a). Because many debtors fail to complete a Chapter 13 plan successfully, Congress accorded debtors a nonwaivable right to convert a Chapter 13 case to one under Chapter7 “at any time.” §1307(a). Conversion does not commence a new bankruptcy case, but it does terminate the service of the Chapter 13 trustee. §348(e). Petitioner Harris, indebted to multiple creditors and $3,700 behind on his home mortgage payments to Chase Manhattan, filed a Chapter 13 bankruptcy petition. His court-confirmed plan provided thathe would resume making monthly mortgage payments to Chase, andthat $530 per month would be withheld from his postpetition wagesand remitted to the Chapter 13 trustee, respondent Viegelahn. Trustee Viegelahn would make monthly payments to Chase to pay down Harris’ mortgage arrears, and distribute remaining funds to Harris’ other creditors. When Harris again fell behind on his mortgage payments, Chase foreclosed on his 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. Approximately a year after the foreclosure, Harris convertedhis case to Chapter 7. Ten days after this conversion, Viegelahn distributed $5,519.22 in Harris’ withheld wages mainly to Harris’ creditors. Asserting that Viegelahn lacked authority to disburse his post-petition wages to creditors postconversion, Harris sought an orderfrom the Bankruptcy Court directing refund of the accumulated wages Viegelahn paid to his creditors. The Bankruptcy Court granted Harris’ motion, and the District Court affirmed. The Fifth Circuit reversed, concluding that a former Chapter 13 trustee must distribute debtor’s accumulated postpetition wages to his creditors.

In this case, the Supreme Court holds that a debtor who converts to Chapter 7 is entitled to return of any post-petition wages not yet distributed by the Chapter 13 trustee. The Court also addressed certain issues related to the following:

(a) Absent a bad-faith conversion, §348(f) limits a converted Chapter 7 estate to property belonging to the debtor “as of the date” theoriginal Chapter 13 petition was filed. Because postpetition wages do not fit that bill, undistributed wages collected by a Chapter 13 trustee ordinarily do not become part of a converted Chapter 7 estate. Pp. 5–6.

(b) By excluding postpetition wages from the converted Chapter 7estate (absent a bad-faith conversion), §348(f) removes those earnings from the pool of assets that may be liquidated and distributed tocreditors. Allowing a terminated Chapter 13 trustee to disburse thevery same earnings to the very same creditors is incompatible withthat statutory design. Pp. 7–8.

(c) This conclusion is reinforced by §348(e), which “terminates the service of [the Chapter 13] trustee” upon conversion. One service provided by a Chapter 13 trustee is disbursing “payments to creditors.” §1326(c). The moment a case is converted from Chapter 13 toChapter 7, a Chapter 13 trustee is stripped of authority to provide that “service.” P. 8.

(d) Section 1327(a), which provides that a confirmed Chapter 13plan “bind[s] the debtor and each creditor,” and §1326(a)(2), whichinstructs a trustee to distribute “payment[s] in accordance with the plan,” ceased to apply once the case was converted to Chapter 7.§103(i). Sections 13JP Morgan Chase27(a) and 1326(a)(2), therefore, offer no supportfor Viegelahn’s assertion that the Bankruptcy Code requires a terminated Chapter 13 trustee to distribute to creditors postpetition wagesremaining in the trustee’s possession. Continuing to distribute fundsto creditors pursuant to a defunct Chapter 13 plan, moreover, is not one of the trustee’s postconversion responsibilities specified by theFederal Rules of Bankruptcy Procedure. Pp. 8–10.

(e) Because Chapter 13 is a voluntary alternative to Chapter 7, a debtor’s postconversion receipt of a fraction of the wages he earnedand would have kept had he filed under Chapter 7 in the first placedoes not provide the debtor with a “windfall.” A trustee who distributes payments regularly may have little or no accumulated wages to return, while a trustee who distributes payments infrequently mayhave a sizable refund to make. But creditors may gain protection against the risk of excess accumulations in the hands of trustees by seeking to have a Chapter 13 plan include a schedule for regular disbursement of collected funds. Pp. 10–11.

You can download a copy of the opinion here.