§ 44.7     Disposition of Preconfirmation Payments after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 44.7, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

There has long been controversy about entitlement to payments by the debtor to the trustee before confirmation in a Chapter 13 case when no plan is confirmed and the case converts or is dismissed.1 The amendments to § 1326(a)(2) by BAPCPA conflate this controversy.

[2]

Detailed immediately above,2 § 1326(a)(1) was amended by BAPCPA to require Chapter 13 debtors to make preconfirmation payments to the trustee, to lessors of personal property and to allowed purchase money secured creditors. Section 1326(a)(2) adds this new provision for disposition of payments made to the trustee before confirmation: “If a plan is not confirmed, the trustee shall return any such payments not previously 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).”3

[3]

“Paragraph (3)” in the quoted sentence seems to be § 1326(a)(3), which provides that the bankruptcy court may, upon notice and a hearing, and subject to § 363, “modify, increase or reduce the payments required under this subsection pending confirmation of a plan.”4 Section 1326(a)(3) allows the bankruptcy court to modify, increase or reduce payments to the trustee, payments to a lessor of personal property or payments to an allowed purchase money lender that are due before confirmation under new § 1326(a)(1).5

[4]

Read literally, the phrase in § 1326(a)(2), “not previously paid and not yet due and owing to creditors pursuant to paragraph (3)” applies only if the bankruptcy court has modified, increased or reduced payments otherwise required by § 1326(a)(1). If there has been no such court order, then there can be no payments “due and owing” pursuant to § 1326(a)(3).

[5]

Does this make any sense? Purchase money lenders and lessors of personal property will argue that the quoted sentence in § 1326(a)(2) was intended to capture for them unpaid preconfirmation payments described in § 1326(a)(1)(B) and (C) when the trustee holds money at conversion or dismissal in an unconfirmed Chapter 13 case. The House Report unhelpfully provides: “If the plan is not confirmed, the trustee must return to the debtor payments not yet due and owing to creditors.”6 Could it be that the “paragraph (3)” cross-reference is a mistake?

[6]

It is unclear what “not previously paid and not yet due and owing” means in this context. Any payment to the trustee that is “previously paid” to creditors would not be retained by the trustee and could not be returned to the debtor. Perhaps if the court has “ordered otherwise” under § 1326(a)(1) and the debtor is paying the trustee adequate protection of an allowed purchase money secured claim under § 1326(a)(1)(C),7 and if the bankruptcy court held a hearing and modified, increased or reduced payments required under § 1326(a)(3), then the trustee should not return to the debtor any amount that is “due and owing” to a lienholder pursuant to that court order. Curiously, § 1326(a)(2) does not instruct the Chapter 13 trustee to pay the creditor the amount “due and owing” in that circumstance. Would the due and owing portion of the money held by the trustee be subject to administrative expenses allowed under § 503(b)? There is no way to confidently construct the strange new words in § 1326(a)(2).

[7]

There is another wrinkle in § 1326(a)(2). BAPCPA substituted “paragraph (1)(A)” for “this subsection” in the first sentence of § 1326(a)(2). Read literally, the only payments “retained by” the trustee that are subject to the adequate protection rights of allowed secured claim holders under “paragraph (3)” are payments “proposed by the plan to the trustee.”8 Because plan payments and preconfirmation adequate protection payments are in separate subparagraphs in § 1326(a)(1) and may be further separated in time and space, if the plan does not address preconfirmation adequate protection issues, § 1326(a)(2) may have little traction. In other words, there will be no payments proposed by the plan that could be “due and owing” as preconfirmation adequate protection under “paragraph (3).”

[8]

More likely, § 1326(a)(2) was intended to capture payments proposed by the plan and held by the trustee that were intended for purposes other than preconfirmation adequate protection payments, and to make that money available for creditors described in § 1326(a)(1)(C) that have not received all amounts due. The words in § 1326(a)(2) must be tortured to reach that outcome.

[9]

And this reading leads to other problems. How would “due and owing” be determined when there is no court order under § 1326(a)(3)? If “(3)” means “(C),” then § 1326(a)(2) contains a circular logic: § 1326(a)(1)(A) payments are reduced by § 1326(a)(1)(C) preconfirmation adequate protection payments, but any § 1326(a)(1)(A) payments not due and owing under § 1326(a)(1)(C)—a null set?—would not be returned to the debtor.

[10]

There is often money held by the Chapter 13 trustee when confirmation eludes the debtor. If the cross-reference to “paragraph (3)” is read plainly to mean § 1326(a)(3), then new § 1326(a)(2) is some incentive for lessors of personal property and purchase money creditors to make motions under § 1326(a)(3) to be positioned to claim monies held by the Chapter 13 trustee if no plan is confirmed. A debtor dissatisfied with preconfirmation payments required by § 1326(a)(1)(B) or (C) should think twice before moving for relief under § 1326(a)(3). A reduction in the amount that must be paid prior to confirmation may come at the risk of losing the right to a return of funds held by the Chapter 13 trustee in the event no plan is confirmed.

[11]

Detailed elsewhere,9 § 1326(a)(1) allows the bankruptcy court to “order otherwise” with respect to preconfirmation payments to lessors of personal property and to the holders of purchase money allowed claims secured by personal property. Arguably, an order to make preconfirmation lease or adequate protection payments to the trustee rather than directly to a creditor is an order under § 1326(a)(1), not under § 1326(a)(3). If an order to make payments to the trustee pending confirmation is treated as an order that modifies, increases or reduces the payments required under “this subsection” for purposes of § 1326(a)(3), then the argument will be made that § 1326(a)(2) captures those payments held by the trustee when the case fails. One bankruptcy court, without direct analysis of this issue, stated: “[Section] 1326(a)(2) states that . . . pre-confirmation adequate protection payments made by a debtor to the Chapter 13 Trustee for disbursement to a specific creditor . . . could not be returned to the debtor.”10 It is inevitable that this issue will be tested especially as more bankruptcy courts realize the benefits from channeling all preconfirmation payments through the Chapter 13 trustee.

[12]

Whatever the amendments to § 1326(a)(2) mean, Chapter 13 trustees, debtors, creditors and lessors need a mechanism to determine who gets what when a plan fails of confirmation. A similar problem has always existed with respect to the payment of administrative expenses under § 503(b) from monies held by a Chapter 13 trustee at the implosion of a case before confirmation.11 After BAPCPA, creditors and lessors will need notice that the Chapter 13 trustee is holding funds in an unconfirmed case before the trustee returns that money to the debtor. Creditors and lessors may have to act quickly to intercept the refund to assert an entitlement under § 1326(a)(2).12 Will the amount “due and owing” to a lessor or purchase money lender grow with each passing month necessary to give notice and convene a hearing under new § 1326(a)(2)?

[13]

The term “adequate protection” in new § 1326(a)(1)(C) will suggest special status to secured claim holders if no plan is confirmed and preconfirmation payments are held by the trustee.13 Under § 507(b), when “the trustee” provides inadequate protection to a lienholder—leaving an administrative expense allowable under §§ 507(a)(2) and 503(b)—the lienholder may be entitled to a super priority over other administrative claims.14 Section 507(b) is rarely available to secured creditors in Chapter 13 cases because prepetition lienholders cannot satisfy the predicate that missed contract payments after the petition are allowable expenses of administration.15

[14]

New § 1326(a)(1)(C) may be interpreted to grant allowed purchase money secured lenders something like the adequate protection referred to in § 507(b).16 But the lienholder must still prove an entitlement to an administrative expense under § 503(b) to trump the debtor’s statutory right to a refund if no plan is confirmed. This is a difficult burden for a prepetition lender that is little eased by § 1326 as amended. Debtors will argue that the new entitlement of some lienholders to preconfirmation payments in § 1326(a)(1)(C), together with the specific recovery of (only) payments due and owing under § 1326(a)(3) when no plan is confirmed, demonstrates that BAPCPA did not change the general rule that funds held by the trustee are refunded to the debtor at the demise of an unconfirmed Chapter 13 case.17


 

1  See § 143.1  In Cases Filed before October 22, 1994 and § 153.1  In General.

 

2  See § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

3  11 U.S.C. § 1326(a)(2).

 

4  11 U.S.C. § 1326(a)(3), discussed in § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

5  See § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

6  H.R. Rep. No. 109-31, at 85.

 

7  See § 404.1 [ Adequate Protection before Confirmation ] § 47.2  Preconfirmation Adequate Protection after BAPCPA.

 

8  11 U.S.C. § 1326(a)(1)(A) (emphasis added).

 

9  See § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

10  In re Brown, 348 B.R. 583, 590 (Bankr. N.D. Ga. 2006).

 

11  See §§ 43.5 [ Return of Payments to Debtor ] § 44.5  Return of Payments to Debtor, 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2  In Cases Filed after October 22, 1994 and 338.1 [ In General ] § 153.1  In General.

 

12  See §§ 534.1 [ Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) ] § 143.3  Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA and 541.1 [ Consequences of Dismissal ] § 153.2  Consequences of Dismissal Added or Changed by BAPCPA.

 

13  Adequate protection before confirmation is discussed in §§ 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1  Adequate Protection of Lienholders before Confirmation, 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA and 404.1 [ Adequate Protection before Confirmation ] § 47.2  Preconfirmation Adequate Protection after BAPCPA.

 

14  See 11 U.S.C. § 507(b), discussed in §§ 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1  Adequate Protection of Lienholders before Confirmation, 297.1 [ Failed Adequate Protection ] § 136.12  Failed Adequate Protection before BAPCPA, 404.1 [ Adequate Protection before Confirmation ] § 47.2  Preconfirmation Adequate Protection after BAPCPA and 518.1 [ Failed Adequate Protection ] § 136.13  Failed Adequate Protection after BAPCPA.

 

15  See §§ 297.1 [ Failed Adequate Protection ] § 136.12  Failed Adequate Protection before BAPCPA and 518.1 [ Failed Adequate Protection ] § 136.13  Failed Adequate Protection after BAPCPA.

 

16  See 11 U.S.C. § 1326(a)(1)(C), discussed in § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

17  See §§ 297.1 [ Failed Adequate Protection ] § 136.12  Failed Adequate Protection before BAPCPA, 518.1 [ Failed Adequate Protection ] § 136.13  Failed Adequate Protection after BAPCPA and 534.1 [ Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) ] § 143.3  Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA.