Cite as: Keith M. Lundin, Lundin On Chapter 13, § 54.7, at ¶ ____, LundinOnChapter13.com (last visited __________).
Chapter 13 debtors sometimes fund the plan in whole or in part from the sale of estate property.1 In a business Chapter 13 case, the sale of estate property may constitute the principal source of income for the debtor. In a nonbusiness case, the debtor may desire to sell a residence or personal property and, after exemptions, contribute the equity to the plan.
To the extent that proceeds from the sale of estate property are payments received by the Chapter 13 trustee, 28 U.S.C. § 586(e)(2) requires that the trustee assess the percentage fee for compensation and expenses. If a sale produces a substantial fund of money, deduction of the usual percentage fee may be a windfall to the trustee and a tremendous hardship on the debtor. The power to sell estate property is vested exclusively in the debtor in a Chapter 13 case.2 Because the Chapter 13 trustee is prohibited from conducting the sale,3 the trustee’s only role in a sale of estate property may be the routine disbursement of the proceeds to creditors. The standard percentage fee in a district may be substantial overcompensation to the trustee for this limited participation in the sale.
When the debtor intends to liquidate substantial estate property as part of the plan, debtor’s counsel should consider proposing to distribute the proceeds directly to creditors to avoid incurring the percentage fee.4 The Chapter 13 trustee may object, or counsel may succeed at negotiating a reduced fee for handling the lump-sum proceeds through the trustee’s office. At least one court has permitted a Chapter 13 trustee compensation on a quantum meruit basis when the debtor funded the plan from the sale of a residence.5
Occasionally, a Chapter 13 debtor will propose to satisfy a claim through the plan by the transfer or surrender of estate property. When the property is transferred or surrendered directly to the creditor, it can be argued that the transaction does not constitute a payment received by the Chapter 13 trustee, and thus no fee is payable.6 Sometimes the creditor will insist on participation of the trustee out of insecurity about passing title. Typically, the trustee will cooperate without demanding a fee. The debtor can accomplish the transfer or surrender of property through the plan without involving the trustee.7
1 See §§ 9.11 [ Income from Leasing, Selling or Liquidating Assets ] § 12.11 Income from Leasing, Selling or Liquidating Assets, 102.1 [ Surrender or Sale of Collateral ] § 74.5 Surrender or Sale of Collateral before BAPCPA and 198.1 [ Able to Make Payments and Comply with Plan ] § 111.1 Able to Make Payments and Comply with Plan.
2 11 U.S.C. § 1303. See § 44.1 [ Debtor Has Exclusive Control of Estate Property ] § 45.1 Debtor Has Exclusive Possession and Control of Estate Property.
3 See Walls v. Appalachian Tire Prods., Inc., 17 B.R. 701 (Bankr. S.D. W. Va. 1982) (Because the § 363 powers enumerated in § 1303 are exclusive powers of the Chapter 13 debtor, the Chapter 13 trustee cannot use, sell, or lease estate property.). But see In re Raymond, 38 B.R. 945 (Bankr. D.R.I. 1984) (Chapter 13 trustee is permitted to sell property of the Chapter 13 estate.).
4 See In re Roberts, 226 B.R. 240, 241 (Bankr. D. Idaho 1998) (Trustee not entitled to commissions on postconfirmation sale of property where trustee does not assist in sale, does not receive proceeds, and is not responsible for disbursements to creditors with liens. “‘Direct’ payments to creditors by a debtor (often inaccurately called payments ‘outside the plan’) are not payments received by the standing trustee and no percentage fee attends. . . . The same analysis applies for payments of claims accomplished by a debtor’s surrender of collateral, § 1325(a)(5)(C), or payments through a debtor’s delivery of property, § 1322(b)(8). . . . Had the Trustee assisted in the sale, § 506(c) might apply to ‘surcharge’ the collateral proceeds in compensation of certain of the Trustee’s expenses. Had the Trustee conducted the sale, received the proceeds, and been responsible for disbursement to the creditors, 28 U.S.C. § 586(e)(2) would appear to apply. Neither situation is presented here.”); In re Gregory, 143 B.R. 424 (Bankr. E.D. Tex. 1992) (Section 1326(c) permits debtor to act as disbursing agent for lump sum payment to IRS from equity in homestead that is to be sold at some point during the 36-month plan. “To require this type of one time payment to the trustee would be more in the nature of a windfall to the trustee rather than compensation for monitoring and distributing payments made on a periodic basis.”); In re Bettger, 105 B.R. 607 (Bankr. D. Or. 1989) (Chapter 13 trustee is not entitled to compensation on lump-sum payment directly to lienholder upon sale of estate property.).
5 In re Smith, 51 B.R. 273 (Bankr. D.D.C. 1984).
6 See In re Grear, 163 B.R. 524, 526 (Bankr. S.D. Ill. 1994) (Chapter 13 trustee is not entitled to a commission on the surrender of bank accounts and an insurance policy subject to a prepetition levy by the IRS. “When property securing a claim is surrendered to the claimholder pursuant to § 1325(a)(5)(C), however, there is no trustee fee assessed because the property is transferred directly to the secured creditor without involvement by the trustee.”); In re Bettger, 105 B.R. 607 (Bankr. D. Or. 1989) (No compensation is allowed to the Chapter 13 trustee when property is deeded to the creditor in lieu of a foreclosure.). See also McRoberts v. Associates Commercial Corp. (In re Derickson), 226 B.R. 879, 882 (Bankr. S.D. Ill. 1998) (Trustee not entitled to commission on insurance proceeds paid to a secured claim holder on the destruction of collateral during a Chapter 13 case because “payment of the insurance proceeds in each of these cases fails to qualify as a ‘payment’ from the debtor’s income or other property but, instead, constitutes a surrender of collateral to the creditors. . . . [T]here was no ‘payment’ within the meaning of § 586(e)(2).”).
7 See § 102.1 [ Surrender or Sale of Collateral ] § 74.5 Surrender or Sale of Collateral before BAPCPA.