DIANE FINKLE, Bankruptcy Judge.
This matter presents unique circumstances in which the Chapter 13 trustee, upon completion of the term of the Debtors' confirmed plan, now seeks disgorgement by Pawtucket Creditor Union ("PCU") of five years of disbursements it received under the plan. The Trustee alleges that he made these distributions as the result of a clerical error on his part. He contends that PCU did not have a right to receive such distributions because its claim had been disallowed, despite a prior determination by the Court allowing the claim. The allowance of the claim followed a hearing on a motion to modify PCU's secured claim and a subsequent order confirming the Debtors' Chapter 13 plan (Doc. #59) ("Confirmation Order") which allowed PCU's claim in its entirety as an unsecured claim. PCU objects to the Trustee's turnover motion and asserts that its unsecured claim is an allowed claim and that it had the right to receive all of the plan disbursements paid by the Trustee. The resolution of this dispute is far from clear-cut based upon the confusing and contradictory record resulting from multiple errors and oversights by both the Trustee and PCU during the course of this case.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334 and DRI LR Gen 109(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B), (E).
The facts in this case are undisputed. On August 21, 2008, Debtors Michael DiRuzzo and Carmela Falco-DiRuzzo filed a petition under Chapter 13 of the Bankruptcy Code.
The Court conducted a hearing on both confirmation of the Plan and the Motion to Modify on February 26, 2009, and as noted in a docket entry following the hearing, the Court orally granted the Motion to Modify and confirmed the Plan.
Nearly five years later, on March 27, 2014, the Trustee filed the instant motion seeking turnover of funds in the amount of $41,212.43, explaining that as the result of a clerical error he erroneously disbursed funds to PCU under the Plan on account of its unsecured claim (Doc. # 100) ("Motion for Turnover"). PCU timely filed its objection to the Motion for Turnover (Doc. # 101) ("Objection"). The Court conducted a hearing on the Motion for Turnover and requested that the parties further address the role, if any, equitable considerations play given the errors committed by both parties, from which this quandary stems.
The Trustee explains that when he entered PCU's claim into his computer software program the amount of the claim should have been recorded as $0.00, but due to a clerical error, it was mistakenly recorded in the amount set forth in PCU's proof of claim. Consequently, he has made disbursements to PCU over the past five years totaling $41,212.43. The Trustee argues that because his objection to PCU's claim was sustained, PCU did not hold an allowed claim and it was not entitled to receive any disbursements under the Plan. He maintains that the provision in the Confirmation Order regarding PCU's claim in and of itself was insufficient to entitle PCU to such Plan disbursements. The time for filing proofs of claims
PCU challenges this argument by relying upon the Confirmation Order's express allowance of its second mortgage claim as an unsecured claim, thereby validating its claim independent of its later-filed proof of claim which, it asserts, was filed merely for the purpose of "valuation" to establish the precise amount of the claim. Objection ¶¶ 4-5. According to PCU, when the Trustee objected to the claim, PCU did not respond because it was willing to accept the Debtors' valuation of its claim. In further support of its position, PCU emphasizes that the Trustee knew about its claim as a result of the earlier hearing on the Motion to Modify and the provision in the Confirmation Order that its claim "will be allowed" as an unsecured claim. Id. ¶ 4. Furthermore, PCU contacted the Trustee's office in 2011 when the payments temporarily ceased to inquire if and when they would resume, and in fact the Trustee resumed the payments after this communication. PCU rests upon the finality of the Confirmation Order which it asserts has "res judicata effect [that] bars collateral attacks against PCU's allowed claim." PCU's Memo at 3 (emphasis added). PCU argues:
Id. at 4.
The specific language of the Confirmation Order, PCU further argues, insulates its claim from subsequent attack; "the policy favoring the finality of confirmation is stronger than the bankruptcy court's and the Trustee's obligations to verify a plan's compliance with the Code.... `Under § 1327, a confirmation order is res judicata as to all issues decided or which could have been decided at the hearing on confirmation.'" Id. at 5 (quoting In re Szostek, 886 F.2d 1405, 1406, 1408 (3rd Cir.1989)) (emphasis supplied in original). In short, PCU argues that the Confirmation Order "with its res judicata effect[] trump[s] the bar date set by the rules." Id. at 7 (emphasis added).
Lastly, on the issue of equity, PCU complains that "[t]he Trustee has unclean hands as the Confirmation Order ... was drafted by the Trustee and he cannot claim to be the victim of an `error' of his own creation. There is a compelling interest in the finality of a confirmed Chapter 13 Plan which compels compliance regardless of any `error' once the appeal period has passed." Objection ¶¶ 9-10.
Pursuant to the Bankruptcy Code, a creditor generally is required to file a proof of claim for purposes of allowance of its claim. See 11 U.S.C. §§ 501(a), 502; Fed. R. Bankr.P. 3002(a). The significance
PCU maintains that while the Claims Bar Date passed without it filing a proof of claim or obtaining an extension of the deadline, it held an allowed claim before the Court entered the Confirmation Order because the Motion to Modify constituted an informal proof of claim. The merits of this argument are debatable.
The parties focus the majority of their arguments on whether the specific provision in the Confirmation Order submitted by the Trustee expressly providing that PCU's claim would be paid as an allowed unsecured claim is binding even in the absence of a timely filed proof of claim. The Trustee relies primarily on In re Zich, in which the debtors' confirmed plan provided that a creditor's unsecured claim would be paid in full despite the creditor having failed to file a timely proof of claim. After receiving some distributions from the Chapter 13 trustee, the creditor filed an untimely proof of claim to which the debtors objected. The court sustained the
In re Zich, 291 B.R. at 886 (footnotes omitted).
The matter before me has some significant distinguishing factors that prevent it from being neatly pigeonholed into this line of cases. First, the issue arises at the end of the Debtors' plan term in the context of disgorgement of payments to PCU made over a five-year period. Second, the Confirmation Order was presented after a hearing on the Motion to Modify and after the confirmation hearing at which the Court orally confirmed the plan. Third, the Confirmation Order was submitted by the Trustee, not only in response to that hearing, but also well after the Claims Bar Date had expired; the Trustee must be deemed to have known that at the time of the hearing and the presentation of the Confirmation Order, the Claims Bar Date had run some two months earlier and PCU had not filed a proof of claim.
PCU contends that the Confirmation Order was a final binding order under § 1327(a) on the issue of whether it held an allowed claim. See 11 U.S.C. § 1327(a) ("The provisions of a confirmed plan bind the debtor and each creditor."); In re Szostek, 886 F.2d at 1406 ("[A]fter the plan is confirmed the policy favoring the finality of confirmation is stronger than the bankruptcy court's and the trustee's obligations to verify a plan's compliance with the Code."); see also Factors Funding Co. v. Fili (In re Fill), 257 B.R. 370, 373 (1st Cir. BAP 2001) (citing Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083, 1086-87 (9th Cir.1999)) ("Plan confirmation is a final order, with res judicata effect, and is imbued with the strong policy favoring finality.") (emphasis supplied).
To some degree In re Fili supports PCU's position, although the facts are the reverse of those presented here. In that case the deadline for objecting to the Chapter 13 plan ran before the claims bar date, and debtors' plan proposed to disallow the creditor's claim in full. The Bankruptcy Appellate Panel explained:
In re Fili, 257 B.R. at 374 (emphasis supplied).
If the proceedings had ended with the hearing on the Motion to Modify and the confirmation of the Plan and the orders relating to that hearing, the outcome of the Trustee's Motion for Turnover might be more easily decided. But they did not, and PCU would have me completely overlook the order entered in this case without objection disallowing its late-filed proof of claim. Indeed the turmoil PCU now faces is in large part a result of its failure to respond to the Trustee's objection to its proof of claim — an action obviously adverse to PCU's interest.
In the end, the respective arguments of the parties do not illuminate a clear result. Essentially, the muddle before me boils down to this: the Trustee proposed, and the Court entered, two conflicting orders after the Claims Bar Date regarding PCU's claim, the Trustee and PCU both received notice of these orders, and five years of distributions were made to PCU under the terms of the Confirmation Order. We are well beyond the point of debating the finality of either of these orders. I turn, therefore, to what I believe to be the more useful analysis for resolution of this mess wrought by both parties through their oversights and errors: a review of the case law on overpayment and disgorgement of Chapter 13 plan disbursements and consideration of the equities under these unique circumstances.
PCU argues that the "principals of equity and the harmonization of the filings and orders in this case favor PCU retaining the funds paid by the Trustee." PCU's Memo at 11. No unfair prejudice to other creditors would arise from reliance solely on the Confirmation Order, it asserts, because a "mere diminution of their dividend
Some courts have held that "[t]he Chapter 13 trustee's power to recover overpayment is inherent in the overall scheme of a trustee's fiduciary duties as a necessary means to ensure that the trustee's payment system functions smoothly." Stevens v. Baxter (In re Stevens), 187 B.R. 48, 51-52 (Bankr.S.D.Ga.1995), aff'd in part and rev'd in part, Ford Motor Credit Co. v. Stevens (In re Stevens), 130 F.3d 1027, 1031 (11th Cir.1997); see also Kerney v. Capital One Fin. Corp. (In re Sims), 278 B.R. 457, 476 & n. 10 (Bankr.E.D.Tenn. 2002); Hope v. Brown & Williamson Fed. Credit Union (In re Vaughn), 110 B.R. 94, 95 (Bankr.M.D.Ga.1990). But in these cases it was solely the creditor who was at fault for soliciting or accepting overpayments from the debtor or the Chapter 13 trustee.
Other courts have denied a trustee's request to recover funds that were improperly distributed as a result of the trustee's own error. See, e.g., In re Randolph, No. 98-31564, 2001 WL 1223139, at *12-13 (Bankr.N.D.Ind. Sept. 20, 2001) (citing 11 U.S.C. § 1302) (concluding that "[a] trustee is accountable for all the property he receives and may be liable for improper distribution of funds," and denying the motion to compel repayment of erroneous distributions because "the error in this case must be attributed to the Standing Chapter 13 Trustee"); see also 8 Collier on Bankruptcy ¶ 1302.03[1][a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. rev. 2014) (citing Fed. R. Bankr.P.2015; Nash v. Kester (In re Nash), 765 F.2d 1410, 1415 (9th Cir.1985)) (stating that the Chapter 13 trustee must keep a record of all receipts and the disposition of money and property received, and in accordance with this responsibility, he is liable for improper distributions). When faced with a similar timeline as in the present case, one court ruled that the trustee could not recover overpayments made to several creditors under the Chapter 13 plan five years after the plan was confirmed, relying on the Fourth Circuit's doctrine of equitable estoppel. See Levin v. Fed. Land Bank of Balt. (In re Vick), 75 B.R. 248, 249 (Bankr.E.D.Va.1987).
The facts in both lines of cases, however, are distinguishable from the unusual state of affairs before me where both parties are at fault for the distributions made to PCU. The Trustee failed to timely note the passage of the Claims Bar Date without the filing of a proof of claim by PCU when he presented the Confirmation Order providing for the allowance of PCU's claim as an unsecured claim; he did not seek to modify or vacate the Confirmation Order; and after obtaining an order disallowing the claim as untimely, he made plan payments to PCU for five years. This is not a mere "technical" error. PCU failed to object or respond to the Trustee's post-confirmation objection to its proof of claim and its disallowance;
Considering these multiple errors, if I grant the Motion for Turnover, the Trustee would escape repercussions from these deficiencies and the erroneous administration of the Debtors' plan payments. Conversely, if I deny the Motion for Turnover, PCU would escape any repercussions from its deficiencies and mistakes during this case that contributed to this muddle. "It is well accepted that the bankruptcy court is guided by the principles of equity, and that the court will act to assure that `... technical considerations will not prevent substantial justice from being done.'" Gens, 112 F.3d at 576 (quoting Pepper v. Litton, 308 U.S. 295, 305, 60 S.Ct. 238, 84 L.Ed. 281 (1939)). The fair and equitable solution to this dilemma, as I see it, is to balance the equities between the Trustee and the bankruptcy estate on the one hand and PCU on the other. Where both parties could (and should) have acted to either avoid this conundrum, or to have brought it to the Court's attention sooner than five years post-confirmation, I conclude that the only just and even-handed result is for both parties to share equally in its resolution. PCU must turn over to the Trustee one-half of the distributions it received under the Plan.
I want to be very clear that my ruling is a narrow one, tailored to meet the unusual facts in this matter and limited to the peculiar circumstances before me.
The Trustee's Motion for Turnover is GRANTED IN PART and DENIED IN PART, and the Objection of PCU is SUSTAINED IN PART and OVERRULED IN PART. Within 30 days of the entry of this Memorandum and Order, PCU shall remit the sum of $20,606.22 to the Trustee for the benefit of the Debtors' estate.
See Confirmation Order, "Summary Of Disbursements To Be Made Under The Plan," Section D.1 (Doc. # 59) ("Disbursements Summary").