§ 143.4 — Priorities after Conversion: Two Trustees and a DSO
Revised: March 29, 2006
Just beyond the scope of this book, BAPCPA created interesting possibilities when a Chapter 13 case converts to Chapter 7 and there are assets to be distributed to the holder of a domestic support obligation (DSO). The Chapter 13 trustee may be a player.
BAPCPA amended § 507 to provide a first priority for allowed unsecured claims for DSOs.1 New § 507(a)(1)(C) protects a trustee who has collected assets that are distributed to the holder of a DSO by providing the trustee with a limited right to first payment of administrative expenses:
(C) If a trustee is appointed or elected under section 701, 702, 703, 1104, 1202, or 1302, the administrative expenses of the trustee allowed under paragraphs (1)(A), (2), and (6) of section 503(b) shall be paid before payment of claims under subparagraphs (A) and (B), to the extent that the trustee administers assets that are otherwise available for the payment of such claims.2
A Chapter 13 trustee is one of the persons entitled to be paid before the payment of a DSO to the extent that the Chapter 13 trustee has administered assets and has administrative expenses allowable under § 503(b).
When a Chapter 13 case converts to Chapter 7 and the Chapter 7 trustee then administers assets that are distributed to creditors pursuant to the priorities in § 726, the first priority under § 726(a)(1) will be payment of claims in the order specified in § 507. The first priority under § 507(a)(1) will be a DSO but subject first to payment of administrative expenses to the Chapter 7 trustee and to the prior Chapter 13 trustee to the extent either or both have allowed administrative expenses under § 503(b).
It is not inconceivable that a Chapter 13 trustee would have administrative expenses allowable under § 503(b) at conversion from Chapter 13 to Chapter 7 when the Chapter 13 trustee has administered the case without compensation and expense reimbursement. This happens in some districts when a Chapter 13 case converts to Chapter 7 before confirmation of a plan. Chapter 13 trustees do not routinely file claims in the subsequent Chapter 7 case. The BAPCPA amendments to § 507(a)(1)(C) recognize a new right of payment when it turns out that the Chapter 13 trustee administered the estate for the benefit of the holder of a DSO. Under § 726(b), the § 503(b) administrative expenses of a Chapter 7 trustee would be paid first, then the administrative expenses of the Chapter 13 trustee—both only to the extent they prime the DSO under § 507(a)(1)(C).
1 See 11 U.S.C. § 507(a)(1), discussed in §§ 440.1 [ New and Changed Priority Claims ] § 73.3 Priority Claims Added or Changed by BAPCPA and 519.1 [ Domestic Support Obligations ] § 136.21 Domestic Support Obligations after BAPCPA.
2 11 U.S.C. § 507(a)(1)(C), also discussed in § 514.1 [ Trustees’ Fees and Expenses ] § 136.5 Trustees’ Fees and Expenses after BAPCPA.