Cite as: Keith M. Lundin, Lundin On Chapter 13, § 53.13, at ¶ ____, LundinOnChapter13.com (last visited __________).
Although not founded in any statutory avoidance or recovery power, courts have authorized Chapter 13 trustees to recover overpayments to creditors. In Stevens v. Baxter (In re Stevens),1 the confirmed plan provided for Ford Motor Credit Company as a fully secured creditor. The collateral was destroyed after confirmation, and insurance paid Ford more than the balance of its allowed secured claim. The bankruptcy court, affirmed by the district court, permitted the trustee to recover the overpayment by withholding payments to Ford in other confirmed Chapter 13 cases:
Withholding payment from an overpaid creditor as a means to recover estate property paid out by the trustee is properly within the exercise of a Chapter 13 trustee’s fiduciary duty to the estate. . . . The authority supporting a Chapter 13 trustee’s power to withhold on account of an overpayment is apparent in the overall scheme of bankruptcy administration. . . . A Chapter 13 trustee has the right and duty to recover property of the estate held by a creditor. . . . The overpaid creditor cannot complain about a recovery effectuating repayment of improperly paid funds. . . . All that is required of Ford is a bookkeeping entry reflecting a deduction from the overpaid account and the corresponding addition to the other affected accounts. . . . The trustee’s power to withhold payment is not derived from any right to “setoff” . . . does not emanate from 11 U.S.C. § 542(a). . . . Rather, I recognize the right of a Chapter 13 trustee to recover an overpayment by withholding further payment to an overpaid creditor in the limited case where claims are already legally and formally defined and after the Chapter 13 case is confirmed.2
On appeal, the Eleventh Circuit affirmed the holding that a Chapter 13 trustee can recover overpayments to a creditor, but found the trustee was without authority to accomplish recovery by withholding payments to the same creditor in unrelated Chapter 13 cases.3 The Eleventh Circuit explained this limit on the trustee’s power to recover overpayments in terms of the trustee’s fiduciary duties:
As a fiduciary of the Chapter 13 estate, a trustee is authorized to bring an adversary action to recover overpayments from a creditor. . . . The authority to recover overpayments from a particular creditor, however, does not endow the Trustee with the authority to act on his own initiative to divert funds from the plans of other debtors in order to satisfy the overpayment. . . . The Trustee’s action was not only not authorized by the Code but also affirmatively violated the Trustee’s statutory obligations under the Code. . . . By withholding the amount of the overpayment from the unrelated plans, the Trustee violated his statutory obligation to make payments to creditors as required under the terms of a confirmed plan by, in effect, refusing to make the full payment required under the terms of the other plans administered by the Trustee. The Trustee also violated his obligation to assist the debtors in those unrelated cases in the performance of their plans. The Trustee’s action violated his duty to make payments on the behalf of the other debtors, placing them at risk for default.4
The U.S. Court of Appeals for the Tenth Circuit cited § 1327(a) as the source of a Chapter 13 trustee’s power to recover overpayments from a creditor. At confirmation, the provisions of the plan bind the debtor and all creditors under § 1327(a).5 In United States v. Richman (In re Talbot),6 the confirmed plan trifurcated the IRS’s claim into a priority claim of $15,875, a secured claim of $18,674 and a general unsecured claim of $3,111. Twenty months after confirmation, the debtor sold the property that was subject to the IRS’s lien. From the proceeds, the IRS grabbed substantially more than the balance of its secured claim for release of its lien. The trustee moved the bankruptcy court to require the IRS to disgorge the excess. The Tenth Circuit held that the IRS was bound by res judicata and § 1327(a) to accept the present value of $18,674 in full satisfaction of its lien and “the bankruptcy court had the power to order the IRS to disgorge all sums that it extracted from the [debtors] in derogation of the Plan.”7
Other courts find the trustee’s power to recover overpayments implicit in the statutory process for reconsideration of claims. Section 502(j) of the Code provides, “[A] claim that has been allowed or disallowed may be reconsidered for cause.”8 When a claim is reconsidered, the last sentence of § 502(j) provides, “[T]his subsection does not alter or modify the trustee’s right to recover from a creditor any excess payment or transfer made to such creditor.” As stated by one bankruptcy court in a class action by a Chapter 13 trustee alleging systematic overstatement of proofs of claim by Capital One Financial Corporation, “It is clear from [§ 502(j)] that a trustee’s authority to recover overpayments from a creditor is implied or contemplated by the Bankruptcy Code notwithstanding the absence of a specific Bankruptcy Code provision expressly granting such authority.”9 When the claims allowance process is the statutory platform for seeking disgorgement of overpayments, the passage of time may complicate recovery and may provide a defense to disgorgement.10
One reported decision demonstrates that not all overpayments will be recoverable by the trustee. In Davis v. Vestal (In re Vestal),11 the debtor operated a title loan business. The Chapter 13 trustee mistakenly coded the debtor for disbursements from a Chapter 13 estate. When the mistake was discovered, the trustee chased the debtor into state court and took a judgment. Before the judgment could be collected, the debtor did what debtors do—filed a Chapter 7 case. The Chapter 13 trustee brought a nondischargeability complaint under § 523(a)(6). The bankruptcy court concluded that the debtor’s failure to realize that he was not entitled to the payments was a negligent omission that would not support nondischargeability under the willful and malicious injury test in § 523(a)(6). The debt for the overpayments was discharged.
When overpayments are recovered from one creditor, the money then becomes available for distribution to other creditors consistent with the confirmed plan.12
1 187 B.R. 48 (Bankr. S.D. Ga. 1995), aff’d in part, rev’d in part, sub nom., Ford Motor Credit Co. v. Stevens (In re Stevens), 130 F.3d 1027 (11th Cir. 1997).
2 187 B.R. at 51–52. See also In re Seal, 192 B.R. 442 (Bankr. W.D. Mich. 1996) (Car lender that intentionally violated the automatic stay and maliciously harassed the debtor was in contempt of court and was sanctioned with attorneys’ fees, damages for lost wages, and punitive damages totaling $2,970.40. Because damages exceeded balance of creditor’s claim, debtors were permitted to set off damages, leaving the creditor owing $796.93. Citing Stevens v. Baxter (In re Stevens), 187 B.R. 48 (Bankr. S.D. Ga. 1995), debtors were permitted to collect the balance from distributions to the offending creditor in other Chapter 13 cases, if necessary.).
3 Ford Motor Credit Co. v. Stevens (In re Stevens), 130 F.3d 1027 (11th Cir. 1997).
4 130 F.3d at 1031. See also Hope v. Brown & Williamson Fed. Credit Union (In re Vaughn), 110 B.R. 94 (Bankr. M.D. Ga. 1990) (Chapter 13 trustee has standing to recover an overpayment to an unsecured claim holder caused by voluntary payments by the debtor directly to the creditor.).
5 See § 229.1 [ 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors ] § 120.2 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors.
6 124 F.3d 1201 (10th Cir. 1997).
7 124 F.3d at 1209.
8 11 U.S.C. § 502(j).
9 Kerney v. Capital One Fin. Corp. (In re Sims), 278 B.R. 457, 477 (Bankr. E.D. Tenn. 2002). Accord In re Wilson, 274 B.R. 4, 12 (Bankr. D.D.C. 2001) (One possible remedy for excessive distributions to creditors before the claims bar date is for the Chapter 13 trustee to recover the distributions made in error. Plan called for full payment of secured and priority claims and “variable rate payment” to general unsecured claims from funds available. Based on schedules, trustee began distributions to general unsecured claim holders before priority creditors filed timely proofs of claim that were larger than anticipated. Plan funding was then insufficient to pay priority and secured claims in full. Bankruptcy court denied trustee’s motion to increase payments to make up the shortfall. “[I]t would be appropriate, on motion of an affected creditor, to consider requiring the trustee to reimburse the estate unless she recovers, pursuant to an implicit right recognized by 11 U.S.C. § 502(j), all distributions made in error by the trustee.”).
10 See, e.g., In re Windom, 284 B.R. 644 (Bankr. E.D. Tenn. 2002) (Although bankruptcy courts occasionally permit debtors to recover payments to creditors after a successful claim objection, when the debtor waited more than three years to object to an untimely claim, it would be inequitable to require the creditor to disgorge.).
11 256 B.R. 326 (Bankr. M.D. Fla. 2000).
12 See also In re Bacon, 274 B.R. 682, 684–85 (Bankr. D. Md. 2002) (When creditors return distributions after discharge, trustee should redistribute those funds to other creditors consistent with the confirmed plan. After discharge, trustee held $1,432.66 that had been returned by secured creditors that were paid in full from the refinancing of a mortgage. Debtor did not modify the plan to account for the refinancing. “When the trustee has funds returned from secured creditors, the trustee is obligated to disburse those funds in accordance with the confirmed Plan. If the debtor did not want these funds to be distributed according to the Plan, it was her responsibility, pursuant to § 1329, to modify her Plan. When, she failed to do so, the trustee acted precisely as he was required to under the debtor’s confirmed Plan. . . . [W]hen a secured creditor returns funds to the trustee, ‘[t]he monies in the Chapter 13 Trustee’s hands are not “unclaimed property” pursuant to Section 347 and should not be paid into the Registry of Court.’”).