May 18, 2015

Supreme Court Decides Harris v. Viegelahn

On May 18, 2015, the U.S. Supreme Court decided Harris v. Viegelahn, No. 14-400, holding that when a debtor in bankruptcy converts from a Chapter 13 payment plan to Chapter 7 liquidation, any of the debtor’s post-petition wages not yet distributed to creditors by the Chapter 13 trustee must be returned to the debtor. 

Charles Harris III petitioned for Chapter 13 bankruptcy protection. Under the terms of Harris’s Chapter 13 payment plan, the Chapter 13 trustee collected part of Harris’s post-petition wages for distribution to creditors, including Harris’s home mortgage lender. When Harris again fell behind on his mortgage payments, his bank foreclosed on his home. The Chapter 13 trustee continued to collect money from Harris’s post-petition wages, but stopped distributing the portion of those funds previously earmarked for the bank. By the time Harris later converted his bankruptcy case from Chapter 13 to a Chapter 7 liquidation, the trustee had accumulated over $5,000 of Harris’s post-petition wages that had not been distributed to creditors. A few days after the case was converted, the trustee distributed the accumulated wages to Harris’s creditors, and Harris moved to have those wages refunded to him. The bankruptcy court and the district court held that Harris was entitled to the return of the wages because, although a debtor’s post-petition earnings frequently are used to fund payment of Chapter 13 payment plans, such post-petition earnings are not part of the bankruptcy estate to be distributed in a Chapter 7 liquidation.  The Fifth Circuit reversed, holding that the creditors had a superior claim to the accumulated but undisbursed earnings, notwithstanding the debtor’s conversion to Chapter 7.   

The Supreme Court reversed, holding that post-petition wages held by a Chapter 13 trustee at the time the case is converted to Chapter 7 must be returned to the debtor. The Court concluded that, although the bankruptcy code does not “expressly” direct that “[o]n conversion, accumulated wages go to the debtor,” that “is the most sensible reading of what Congress did provide.” The Court found further support for its conclusion in provisions of the Bankruptcy Code terminating the services of a Chapter 13 trustee (except for specified tasks) at the time the debtor converts the case to Chapter 7. 

Justice Ginsburg delivered the decision for a unanimous Court. 

Download Opinion of the Court. 

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