§ 125.2     Can Employer Charge a Fee?
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 125.2, at ¶ ____, LundinOnChapter13.com (last visited __________).

Employers will not be surprised to learn that Chapter 13 debtors and trustees resist efforts to charge debtors for implementing income deduction orders.


It is common under state law that court clerks and government agencies are authorized to collect fees from monies collected by garnishment, attachment, execution or assignment. Sometimes it is a fixed percentage of the funds captured; other times it is a dollar amount or a sliding scale of fees. The logic of these statutes and rules is that the party holding the money (the employer, for example, and then the court clerk) is innocent of any obligation or wrongdoing and is entitled to compensation for facilitating collection.


Is an income deduction order in a Chapter 13 case enough like a garnishment or execution or assignment to trigger the payment of fees or expenses under other statutes or rules? It is ironic that this issue came first to the courts because of a federal fee-assessment statute.


Prior to 1996, 5 U.S.C. § 5520a(j)(2) (emphasis added) required federal agencies to promulgate regulations for the recovery of “administrative costs in executing a garnishment action” with respect to employee obligations for child support, alimony and certain other debts.


As amended in 1996, 5 U.S.C. § 5520a(j)(2) (emphasis added) was changed to read “administrative costs incurred in executing legal process.


Effective November 18, 1997, 5 U.S.C. § 5520a(j)(2) was again amended to resurrect the pre-1996 language, “costs in executing a garnishment action.”


Through all these changes in the statute, the Postal Service regulations imposed a $50 fee.1 At least four reported decisions address the question whether an income deduction order in a Chapter 13 case is subject to the $50 fee.


In United States v. Santoro,2 the U.S. District Court for the Eastern District of Virginia held that the bankruptcy court had jurisdiction to entertain a trustee’s motion to stop the Postal Service from deducting the $50 administrative fee and that the trustee had standing to recover the $50. The court considered the pre-1996 version of 5 U.S.C. § 5520a that limited imposition of the fee to executing a garnishment. The district court concluded that “a Chapter 13 pay order directing the debtor’s employer to withhold the amount of the monthly plan payments from the debtor’s pay was not in the nature of a garnishment and was not subject to the administrative fee authorized by the version of 5 U.S.C. § 5520a as it was written at the time the fee was imposed.”3 The court found in the 1996 amendments to 5 U.S.C. § 5520a that Congress recognized a “distinction between garnishments and legal process . . . at the time the administrative fee was imposed by USPS.”4 This distinction supported the conclusion that an income deduction order was not a garnishment. The court expressed no view with respect to the “legality of imposing a similar fee pursuant to the amended version.”5


The bankruptcy court in Hudson v. United States Postal Service (In re Hudson),6 faced both versions of 5 U.S.C. § 5520a(j)(2). The debtor in Hudson was a Postal Service employee hit with more than one of the $50 administrative fees on income deduction orders. The first $50 fee was withheld in November of 1995 when 5 U.S.C. § 5520a(j)(2) read “costs in executing a garnishment action.” The second $50 fee was withheld in April of 1997 when 5 U.S.C. § 5520a(j)(2) read “costs incurred in executing legal process.” Citing Santoro with approval, the bankruptcy court held that the $50 deducted by the Postal Service was property of the Chapter 13 estate and the deduction violated the automatic stay. Without relief from the stay, the Postal Service was warned that it did not have permission to deduct the $50 administrative fee in any future Chapter 13 cases. Digging deeply into the statute, the bankruptcy court observed that 5 U.S.C. § 5520a(a)(3) defined “legal process” to mean “any writ, order, summons or other similar process in the nature of garnishment.” The bankruptcy court explained that an income deduction order in a Chapter 13 case is not in the nature of garnishment for purposes of this definition:

[I]ncome deduction pursuant to 11 U.S.C. § 1325(c) is not a “garnishment” under 5 U.S.C. § 5520a. . . . [A]n income deduction order under Bankruptcy Code § 1325(c) is not a garnishment or legal process utilized to collect a debt of a federal employee. Chapter 13 is a voluntary process initiated by the debtor, whereas a garnishment order is not voluntary and is initiated by the creditor. . . . [O]ne subject to garnishment cannot dismiss an involuntary garnishment order. . . . [T]he bankruptcy order does not result in personal liability on the part of the employer.7

Hudson was affirmed by the district court.8 Hudson gives well-reasoned arguments why the Postal Service’s $50 administrative fee is not permissible without regard to which version of the authorizing statute is in effect. It might be hoped that the logic of Hudson would put this issue to rest with respect to the Postal Service and any other agency that might burden income deduction orders pursuant to 5 U.S.C. § 5520a. Unfortunately, one reported court of appeals decision erects a bizarre jurisdictional barrier to protecting Chapter 13 debtors from the administrative fee in 5 U.S.C. § 5520a.


In an opinion inexplicably hostile to the systemic concerns of Chapter 13 trustees, in Black v. United States Postal Service (In re Heath),9 the Seventh Circuit held the bankruptcy court lacked jurisdiction over a trustee’s adversary proceeding to recover the $50 fee charged by the Postal Service. In Heath, as in Santoro and Hudson, the debtor worked for the Postal Service. Upon receipt of an income deduction order, the Postal Service charged the $50 fee. The confirmed plan in Heath provided, “The debtor’s income and other assets . . . remain estate property to the extent necessary to fulfill the plan.” The Chapter 13 trustee sued the Postal Service to recover the $50 fee.


Repeatedly mischaracterizing the “take out order” as a “garnishment,” and in complete denial of the monumental problem that employer charges on income deduction orders would cause in a million pending Chapter 13 cases, the Seventh Circuit, through Judge Posner, gratuitously observed, “The trustee’s motivation in pursuing this minuscule claim through three courts eludes us.”10 Without addressing the substantive question whether the Postal Service was authorized to charge the $50 fee, the court concluded it was without even “related to” jurisdiction to entertain the trustee’s lawsuit:

We read . . . 1306(a)(2) and 1327(b), to mean simply that while the filing of the petition for bankruptcy places all the property of the debtor in the control of the bankruptcy court, the plan upon confirmation returns so much of that property to the debtor’s control as is not necessary to the fulfillment of the plan. It would presumably be an abuse of discretion for the bankruptcy judge to confirm a plan that retained more of the property in the hands of the trustee than was reasonably necessary to fulfill the plan, though we need not decide that in this case. If the $50 taken from Heath’s wages to pay the Postal Service’s garnishment fee were property of the estate, this adversary action would be within the core jurisdiction of the bankruptcy court. . . . But as it is not property of the estate, and no other basis of core jurisdiction, the action can be maintained in the bankruptcy court only if it is “related” to the bankruptcy proceeding, . . . which means (so far as bears on the present case) only if it is likely to affect the debtor’s estate . . . of which there is no evidence.11

The Seventh Circuit had to know that the $50 was coming out of the debtor’s income. It wasn’t that the $50 loss had no effect on the debtor’s ability to perform the plan; just that the loss of $50 from the debtor’s budget was not obviously fatal. In some Chapter 13 cases, $50 is more than a month’s funding of the plan. Does bankruptcy court jurisdiction to police charges on income deduction orders depend on the size or significance to the debtor of the fees imposed by an employer? Does Heath mean that the bankruptcy court has jurisdiction to stop fees on income deduction orders only for “poor” Chapter 13 debtors whose incomes are small relative to the amount of the fee? “Rich” debtors can be charged by employers with impunity for income deduction order privileges? Bankruptcy court jurisdiction does not usually fracture on these lines. Should it make a difference that the “minuscule” $50 recovery sought by the Chapter 13 trustee in Heath multiplies into tens of millions of dollars if employers charge fees for complying with income deduction orders in all Chapter 13 cases? Was it necessary to chastise the Chapter 13 trustee for doing exactly what a fiduciary should do in the trustee’s position—resist efforts to surcharge debtors who are already struggling to pay their debts through Chapter 13 plans? The Seventh Circuit’s callous analysis of the loss of the $50 is disrespectful of debtors and trustees.


The monumental overstatement in Heath of the effect of confirmation on bankruptcy court jurisdiction in Chapter 13 cases has already come back to haunt the Seventh Circuit.12 Both Hudson and Santoro contain better-reasoned analysis that Chapter 13 debtors and trustees have standing to pursue a fee imposed on an income deduction order and the bankruptcy court has jurisdiction both to enforce the automatic stay and to recover the $50 that was stolen from the estate.


After Heath, Santoro and Hudson were reported, the bankruptcy court in Mosley v. Henderson (In re Mosley)13 held that unilateral refund of the $50 surcharge by the U.S. Postal Service did not moot a Chapter 13 debtor’s class action for violation of the income deduction order.


One bankruptcy court has tackled an income deduction surcharge imposed by a nongovernmental employer. There is good news and bad news for debtors in Morrison v. Fleetwood Homes of Georgia (In re Morrison).14 In Morrison, the debtor was employed by Fleetwood Homes of Georgia. After confirmation, the bankruptcy court sent Fleetwood an order to deduct plan payments from the debtor’s income and remit the deductions to the Chapter 13 trustee. Fleetwood complied with the order but also deducted a one-time fee of $25 and a recurring fee of $3 to $5 per paycheck. Fleetwood did not ask permission to pay itself these fees. The debtors filed a complaint for turnover of the fees and sanctions for violation of the automatic stay.


The bankruptcy court first held that the income deduction order itself prohibited Fleetwood from deducting fees. The court warned employers that failure to comply with the deduction and remittance responsibility could result in “fines or other sanctions.” The court then cited Eleventh Circuit authority that “‘each party to a court order is responsible for insuring its own compliance with that order and shouldering the cost of compliance.’”15 The court concluded that Fleetwood acted improperly by unilaterally shifting the economic burden of the income deduction order to the debtor by imposing the unauthorized fee.


But the bankruptcy court did not stop there. The court acknowledged that “an income deduction order entered pursuant to § 1325(c) is not a garnishment of a debtor’s wages because it and garnishment under state law are two very distinct legal devices designed to achieve different objectives in different situations.”16 But the court conceded that, from the employer’s standpoint, an “analogy can be drawn” to garnishment under state law. This analysis led the bankruptcy court to open the door for employers to ask for allowance of administrative expenses under § 503(b):

Recognizing the position of garnishees, legislatures have enacted statutes relieving garnishees of the costs they incur as a result of the garnishment order. . . . It would thus be consistent if the Bankruptcy Code allowed employers subject to income deduction orders, who stand in a position analogous to that of garnishees under state law, to obtain relief from the economic burden of compliance with the income deduction order. Arguably, the Bankruptcy Code does so in Section 503(b)(1)(A), pursuant to which Defendant could have filed an administrative expense claim . . . . Defendant could have filed a motion to quash the Order subject to its right to recover the cost of compliance. Defendant may not, however, transfer the responsibility of bearing the economic burden of its compliance to another party without authorization, and Defendant has initiated no proceedings in this case to obtain such authorization.17


1  See 39 C.F.R. § 491.


2  208 B.R. 645 (E.D. Va. 1997).


3  208 B.R. at 650.


4  208 B.R. at 650.


5  208 B.R. at 650 n.5.


6  216 B.R. 244 (Bankr. W.D. Tenn. 1997), aff’d, 230 B.R. 542 (W.D. Tenn. 1999).


7  216 B.R. at 246–47.


8  United States Postal Serv. v. Hudson (In re Hudson), 230 B.R. 542, 545 (W.D. Tenn. 1999) (“[T]he fifty dollar fees deducted from Hudson’s wages represent ‘earnings from services performed by the debtor,’ and were therefore property of the bankruptcy estate. Hence, exercising control over those earnings violated the automatic stay.”).


9  115 F.3d 521 (7th Cir. 1997).


10  115 F.3d at 522.


11  115 F.3d at 524.


12  See Cable v. Ivy Tech State College (In re Cable), 200 F.3d 467, 470–72 (7th Cir. 1999) (Citing Bankruptcy Rule 6009 and distinguishing Black v. United States Postal Service (In re Heath), 115 F.3d 521 (7th Cir. 1997), “debtor-in-possession” in a Chapter 13 case has standing to file, prosecute and appeal an action under the Americans With Disabilities Act. “Heath holds that the trustee may bring actions only for the benefit of the estate, rather than for the benefit of the debtor. . . . Here, the plan specifically directs that the potential proceeds . . . benefit the estate and its creditors. . . . Heath and the cases cited therein do not concern the authority of debtors-in-possession under Chapter 11 or 13. . . . Heath itself deals with Chapter 13, but not specifically with a debtor-in-possession. While this Court stated that the trustee exercises exclusive authority to sue and be sued, see Heath, 115 F.3d at 523, we did not address the situation presented when a debtor-in-possession acts, pursuant to its statutory command, in the role of trustee. . . . To say that the trustee has ‘exclusive authority’ does not mean that the debtor-in-possession cannot act as a trustee and therefore enjoy that same authority. . . . The Chapter 13 debtor has standing to bring claims that benefit the estate.”).


13  260 B.R. 590 (Bankr. S.D. Ga. 2000).


14  250 B.R. 456 (Bankr. S.D. Ga. 2000).


15  250 B.R. at 460.


16  250 B.R. at 460.


17  250 B.R. at 461.