MEMORANDUM

KEITH M. LUNDIN, Chief Judge.

The issue in these Chapter 13 cases is: What happens at dismissal to funds held by the trustee in a confirmed Chapter 13 case? 11 U.S.C. § 349(b)(3) provides the answer: Absent court order otherwise, undistributed funds must be returned to the debtor at dismissal after confirmation. The following are findings of fact and conclusions of law. FED. R. BANKR.P. 7052.

I. FACTS

There are no disputed facts.1 These debtors confirmed Chapter 13 plans during 2012. The plan and/or order confirming the plan in each case overcame the vesting effect in 11 U.S.C. § 1327(b)2 by providing that all property remained property of the estate until conversion, dismissal or discharge.

After confirmation, each of these debtors failed to fully fund their plans resulting in orders of dismissal. At dismissal, the Chapter 13 trustee held undistributed funds in each case, ranging from $2789 to $12,975. A disputed mortgage claim caused a large portion of the undistributed funds in each case — distributions were being held by the trustee pending resolution of the claims objections.

The standing Chapter 13 trustee filed an Application for Instruction Regarding Disposition of Trust Assets in each case. The trustee took no position in these Applications. When pressed at oral argument, the trustee observed that "general principles of trust law" support distribution pursuant to the confirmed plan of any sum held at dismissal. The trustee explained that payments made into plans from debtors' postpetition earnings were the trust res impressed with the conditions in confirmation orders that would require him to distribute funds on hand at dismissal consistent with the confirmed plans. The trustee cited In re Parrish, 275 B.R. 424 (Bankr.D.D.C.2002), to support this outcome. Parrish holds that 11 U.S.C. § 1326(a)(2) requires distribution under the plan of funds held by the trustee at dismissal. If persuaded to this position, the court is then invited by the trustee to consider how the pending claims objections will be resolved in these now dismissed Chapter 13 cases.

The law firm of Rothschild & Ausbrooks, PLLC, was granted leave to file an amicus brief on behalf of The Middle Tennessee Association of Consumer Bankruptcy Attorneys ("MACBA"). Southeast Financial Credit Union appeared as well. These additional briefs were helpful.

MACBA argued that undistributed funds held at dismissal in a confirmed Chapter 13 case should be returned to the debtor after deducting any unpaid costs of administration allowed under 11 U.S.C. § 503(b).3 MACBA asserts that access to legal counsel for Chapter 13 debtors would be severely impaired if attorneys don't get paid in dismissed cases. MACBA explains that most Chapter 13 debtors enter bankruptcy having paid no attorney fees up front-counsel agrees to accept payments under the plan. To assure availability of counsel for Chapter 13 debtors, MACBA urges "a procedure whereby, upon dismissal of a Chapter 13 Plan, the Trustee routinely pays all claims allowed under Section 503(b) and distributes the balance to the Debtor, `unless the Court, for cause, otherwise directs' based upon the unique equities of the case." (Amicus Br. at 3.).

MACBA invokes the opening phrase in 11 U.S.C. § 349(b)(3) — "[u]nless the court, for cause, orders otherwise" — as authority for its general rule of payment of attorney fees in Chapter 13 cases dismissed after confirmation. In this way, treatment of fees post confirmation would mirror treatment of undistributed funds in cases dismissed prior to confirmation under § 1326(b)(2).

Southeast Financial Credit Union ("Southeast"), self-described as a consumer lender, often holds secured (home mortgages, automobile loans) and/or unsecured (credit card debt) claims in Chapter 13 cases. Southeast argues that funds held by the Chapter 13 trustee at dismissal of a confirmed case should be distributed in accordance with the confirmed plan. Southeast cites 11 U.S.C. §§ 1326(a)(2), (b)(1)(2) & (c) and 1306(b), for this conclusion. If there are objections to claims pending at dismissal, Southeast urges the court to hear and decide those claim objections prior to any final distribution and notwithstanding dismissal of the underlying case.

II. DISCUSSION

The only issue in these cases is the disposition of undistributed funds held by the Chapter 13 trustee at dismissal of a confirmed Chapter 13 case.4 There is less controversy with respect to disposition of undistributed funds at conversion to another chapter or at dismissal prior to confirmation.5 With respect to confirmed cases, precedent is split.6

A. 11 U.S.C. § 1326.

Southeast argues that the "plain language" of 11 U.S.C. § 1326(a)(2) and (c) requires distribution to creditors in accordance with the plan at dismissal after confirmation. This position has some support in the case law.7

There are at least two major problems with this approach. Section 1326 has nothing to say about payments to the trustee after confirmation and before dismissal. Perhaps more fundamentally, § 1326 provides no direction to the trustee in cases such as these that are dismissed after a plan has been confirmed.

Section 1326 provides:

11 U.S.C. § 1326 (emphasis added).

Section 1326(a)(2) must be read in context of the entire subsection. See, e.g., Massachusetts v. Pappalardo (In re Steenstra), 307 B.R. 732, 737 (1st Cir. BAP 2004) ("To begin our analysis, we find that § 1326(a)(2) cannot be read alone...."). As Bankruptcy Judge Hollis recently explained:

Williams v. Marshall (In re Williams), 488 B.R. 380, 385-86 (Bankr.N.D.Ill.2013) (internal citations omitted). See also In re Tran, 309 B.R. at 335 ("In our view, § 1326(a)(2) was not intended to address the disposition of funds received by a chapter 13 trustee after confirmation".), aff'd without op., 177 Fed.Appx. 754 (9th Cir. 2006); In re Majkowski, No. 07-bk-199, 2011 WL 2652386, *1 (Bankr.N.D.W.Va. July 6, 2011) ("the better reasoned view is that § 1326(a)(2), by its very terms, is inapplicable to funds paid to the trustee post-confirmation but not disbursed pursuant to the confirmed plan at the time of dismissal"); In re Parker, 400 B.R. 55, 62 (Bankr.E.D.Pa.2009) ("[F]unds received and retained by the trustee prior to confirmation are directed ... by section 1326(a)(2) to be paid `in accordance with the plan as soon as practicable.' Such retained funds are distinguishable from funds received by the trustee postconfirmation."); In re Boggs, 137 B.R. 408, 410 (Bankr.W.D.Wash.1992) ("By its terms, § 1326(a)(2) does not pertain to funds received by a trustee after confirmation of a Chapter 13 plan."); In re Michael, 436 B.R. 323, 327 (Bankr.M.D.Pa.2010) (in a post confirmation conversion case, § 1326(a)(2) does not address "the disposition of plan payments made post-confirmation"), aff'd, 446 B.R. 665, 667-68 (M.D.Pa. 2011), aff'd, 699 F.3d 305 (3d Cir.2012).

It is not clear from the trustee's Applications or from the stipulated facts whether any portion of the funds held in these cases was collected prior to confirmation. Section 1326(b)(2) states that preconfirmation funds should be distributed in accordance with the confirmed plan "as soon as practicable." Some courts have found that § 1326(a)(2) controls the distribution of funds held at dismissal at least to the extent those funds were received by the trustee before confirmation. See, e.g., In re Michael, 699 F.3d 305, 314 (3d Cir. 2012); In re Majkowski, No. 07-bk-199, 2011 WL 2652386, at *2 (Bankr.N.D.W.Va. July 6, 2011) ("§ 1326(a)(2) applies only to payments paid to the trustee after the commencement of the case but prior to confirmation or denial of confirmation"). This reading of § 1326(a)(2) is almost right. Indeed, § 1326(a)(2) addresses only payments received by the trustee before confirmation. But even a payment received before confirmation with respect to which distribution pursuant to the plan was not practicable falls outside the directions of § 1326(a)(2) at dismissal.

No party in these cases disputes that it was not practicable for the trustee to distribute all funds on hand before these debtors dismissed their Chapter 13 cases. A substantial portion of the funds on hand at dismissal in each of these cases was held by the trustee because there were unresolved claims objections. Chapter 13 trustees are forbidden to distribute funds to creditors with claims that have not been allowed because of pending objections. See 11 U.S.C. §§ 501, 502 & 1326(c); see, e.g., In re Dumain, No. 11-37183, 492 B.R. 140, 142-43, 2013 WL 1890256, at *2 (Bankr.S.D.N.Y. May 8, 2013) ("Section 501 provides that `[a] creditor or an indenture trustee may file a proof of claim.' Section 502 states that `[a] claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest ... objects.' ... Section 1326(c) requires the chapter 13 trustee to make plan distributions to creditors under the plan. The trustee can only make those distributions on account of allowed claims. FED. R. BANKR.P. 3021 (`after a plan is confirmed, distribution shall be made to creditors whose clams have been allowed....')"). Instead, the trustee typically holds the money intended for that creditor pending resolution of the objection, and just what happened here happens — the trustee holds money at dismissal that could not be paid to creditors under the confirmed plan, practicably or otherwise. Section 1326(a)(2) has nothing to say about the money held by the trustee that could not be distributed in accordance with the confirmed plan — without regard to when that money was received by the trustee. The practicality of distribution before dismissal is the statutory dividing line, not when the funds were received by the trustee.

Practicality is a reasonable dividing line in this context. Chapter 13 trustees typically distribute funds to allowed creditors once a month. A standing trustee in a district with a large Chapter 13 program may issue tens of thousands of checks each month. Creditors expect distributions on a regular schedule, often on the same day of the month each month. The trustee has no control over the timing of dismissal of cases — dismissal can occur by court order at anytime during the month. Trustees cannot time distributions to manage actions like dismissal within individual cases.

For all funds in these cases that could not practicably be distributed pursuant to the confirmed plans before dismissal, Williams correctly directs attention to § 349(b).

B. 11 U.S.C. § 349(b)

Subsection (b) of § 349 — aptly entitled "Effect of dismissal" — provides:

11 U.S.C. § 349(b) (emphasis added).

The scope of § 349(b) is broad, and serves to undo the bankruptcy case to the extent possible — to put all parties in the positions they were in before the case was filed. S.Rep. No. 95-989, 49, reprinted in 1978 U.S.C.C.A.N. 5787, 5835 ("the basic purpose of [section 349(b)] is to undo the bankruptcy case, as far as is practicable, and to restore all property rights to the position in which there were found at the commencement of the case").

Wells Fargo Bank, N.A. v. Oparaji (In re Oparaji), 698 F.3d 231, 238 (5th Cir.2012). See also In re Nash, 765 F.2d at 1414 ("[A] Chapter 13 dismissal `revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.' The legislative history of § 349(b) states that `[t]he basic purpose of the subsection is to undo the bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found at the commencement of the case.' We have previously stated that § 349 `obviously contemplates that on dismissal a bankrupt is reinvested with the estate, subject to all encumbrances which existed prior to the bankruptcy.'") (internal citations omitted); In re Williams, 246 B.R. at 596 ("[S]ection 349 seeks to undo the effect of the bankruptcy filing and to place all parties in interest in the same position they were in prior to the bankruptcy filing."); In re Wcislak, 446 B.R. 827, 829 (Bankr.N.D.Ohio 2011) ("§ 349 seeks, `to undo the bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found at the commencement of the case.'") (citing In re Plata, 958 F.2d 918, 923 (9th Cir.1992) (citing S.Rep. No. 989, 95th Cong., 2d Sess. 49,(1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5835)); In re Slaughter, 141 B.R. at 663-64 ("[Section] 349, seeks to undo the bankruptcy upon dismissal and make it seem, insofar as possible, as if there had never been a Chapter 13 case.").

In a Chapter 13 case, property of the bankruptcy estate consists of all of the debtor's legal and equitable interests in property and "in addition ... all property of the kind specified in ... section [541] that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first". 11 U.S.C. §§ 541(a) and 1306(a). Explicitly, property of the Chapter 13 estate includes "earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first." 11 U.S.C. § 1306(a)(1) & (2).

Future earnings are the fundamental currency of Chapter 13 plans. Postpetition wages ordinarily fund the Chapter 13 plan. Indeed, "it is certain that employment is a fundamental aspect of a Chapter 13 case since postpetition earnings constitute the principal means of funding the Chapter 13 payment plan." Walker v. Delta Air Lines, Inc., No. Civ. A. 100CV0558-TWT, 2002 WL 32136202, *6 (N.D.Ga. Aug. 1, 2002), aff'd without op., 66 Fed.Appx. 846 (11th Cir.2003). See also 11 U.S.C. § 1322(a)(1) ("The plan shall provide for the submission of all or such portion of future earnings ... of the debtor to the supervision and control of the trustee as in necessary for the execution of the plan."). Projected disposable income received during the applicable commitment period includes wages and earnings. See 11 U.S.C. § 1325(b). And, as set forth in § 1326, wage deductions must begin no later than 30 days after the order for relief or the filing of a plan, whichever is earlier.

Section 349(b)(3) is not ambiguous: At dismissal — unless the court, for cause, orders otherwise — all postpetition earnings of the debtor vest in the debtor. Earnings from personal services during the Chapter 13 case are defined as property of the Chapter 13 estate by § 1306. There is no exception to the vesting effect in § 349(b)(3) for earnings held by the trustee at dismissal. Sections 541(a), 1306(a) and 349(b)(3) comprehensively answer the question in this case: Unless the court orders otherwise, postpetition earnings are property of the Chapter 13 estate that vest in the debtor at dismissal. No other section of the Bankruptcy Code upsets this outcome. As explained by Judge Ginsburg in Slaughter:

In re Slaughter, 141 B.R. at 663-64 (internal citations and footnotes omitted) (applying pre-BAPCPA version of § 349). See also In re Williams, 488 B.R. at 386-87 (following Slaughter); In re Hufford, 460 B.R. 172, 177 (Bankr.N.D.Ohio 2011) ("[I]n a Chapter 13 case, property of the estate will include postpetition wages earned by a debtor. 11 U.S.C. § 1306(a)(2). Consequently, as pointed out by the court in In re Nash, the [re-]vestment language contained in § 349(b)(3), whereby upon the dismissal of a case property of the estate is revested in the debtor, naturally lends itself to the conclusion that funds held by a trustee upon dismissal should be returned to the debtor.").

Some courts have held or suggested that postpetition wages escape the vesting effect in § 349(b)(3) at dismissal because postpetition wages "did not exist" at the petition to become property of the Chapter 13 estate. See In re Lewis, 346 B.R. 89, 107 (Bankr.E.D.Pa.2006) ("While such funds constitute property of the estate,..., the plan payments are derived from postpetition earnings of the debtor, not prepetition assets. Since the funds did not exist as of the commencement of the case (although once in existence, the funds became property of the estate by virtue of 11 U.S.C. § 1306(a)(2)), it is difficult to conceptualize how the funds can revest `in the entity in which they [were] vested immediately before the commencement of the case,' as § 349(b)(3) directs. In other words, if the property did not exist prepetition, how can it "revest" in the entity in which it was vested prepetition?"); In re Shields, 431 B.R. 446, 450 (Bankr.S.D.Ind. 2012) (citing Lewis); see also In re Darden, 474 B.R. at 12 (Postpetition settlement proceeds "are property of the estate that, upon dismissal of the case, revest `in the entity in which such property was vested immediately before the commencement of the case'.... Even if the proceeds were subject to this provision (notwithstanding that neither they, nor the cause of action that gave rise to them, existed before the commencement of the case) and the Debtor were deemed the entity in which such property was vested immediately before the commencement of the case, cause would and does exist to `order otherwise.'"). Congress trumped this notion decades ago. Without regard to the immaturity of the debtor's interest in future wages that have not been earned, the Bankruptcy Code includes those future earnings in property of the Chapter 13 estate. 11 U.S.C. § 1306(a) (quoted above). This was a most sensible choice both to provide a plan funding mechanism from future earnings and to protect those future earnings from the anarchy of individual creditor collection actions. See 11 U.S.C. § 362(a)(1)-(8).

The Chapter 13 trustee argues that state trust law vests rights in creditors to funds not distributed at dismissal. While not without support in the case law,8 this argument runs squarely into § 349(b)(3). Whatever "trust" features there may be to funds held by the Chapter 13 trustee pending distribution under a confirmed plan, federal law directs that those funds vest at dismissal in the only entity that could claim entitlement to those future earnings at the petition — the debtors whose personal services would earn the wages that § 1306(a) captures for the Chapter 13 estate. As the Third Circuit recently observed in Michael:

In re Michael, 699 F.3d at 312-13. See also Viegelahn v. Harris (In re Harris), Cv. No. SA:12-CV-00540-DAE, 491 B.R. 866, 870-76, 2013 WL 1189686, *4-*9 (W.D.Tex. Mar. 22, 2013); In re Boggs, 137 B.R. 408, 410 (Bankr.W.D.Wash.1992) ("I cannot conclude that Congress intended legislatively to create trusts for creditors in enacting § 1326(a)(2) and (c); rather, Congress was apparently dealing with the questions of when plan payments are to begin, the disposition of funds in the event no plan is confirmed, and who is to handle the funds.").

While § 349(b) does not expressly provide that confirmation of the Chapter 13 plan is vacated by dismissal, courts have reasonably concluded that dismissal has that effect. See In re Nash, 765 F.2d at 1413 ("The dismissal effectively vacated the first confirmed plan."); see also In re Parker, 400 B.R. 55 (Bankr.E.D.Pa.2009) ("[D]ismissal renders the former debtor no longer obligated to tender play payments, and frees her creditors and the bankruptcy trustee from any compliance with the terms of the confirmed plan.") (citing In re Parrish, 275 B.R. at 433); In re Doyle, 11 B.R. 110, 111 (Bankr.E.D.Pa.1981) (once Chapter 13 case is converted to Chapter 7, order confirming Chapter 13 plan is no longer in force). To hold otherwise creates a host of knotty problems that evaporate when § 349(b)(3) is fully respected. Courts requiring distributions pursuant to the plan after dismissal do not explain how courts and trustees are to decide which plan provisions survive dismissal and which do not. Do priorities in the Code still control? What happens to the claims allowance process? These cases well illustrate that problem. The trustee here cannot know which creditors have allowed claims that would be payable under the confirmed plan until all claims litigation is completed. There may be other claims objections not yet filed.9 How is the trustee to be compensated for completing the administration of dismissed Chapter 13 cases like these that will require extensive litigation to determine the allowance of mortgage claims? What purpose is served by these efforts in cases that are going nowhere except to archives?

Notice also that respecting the vesting of undistributed funds in the debtor at dismissal prevents continued interference with the state law rights of creditors. The distribution scheme worked by a confirmed Chapter 13 plan must follow Bankruptcy Code priorities and protocols — rules that often bear little resemblance to creditors' rights outside of bankruptcy. The legislative history discussed above clearly signals congressional intent that dismissal of a bankruptcy case returns debtors and creditors as much as possible to status quo ante. Vesting undistributed funds at dismissal in the debtor serves this goal by respecting state law. As explained by the Bankruptcy Appellate Panel in In re Williams:

Williams v. IMC Mortg. Co. (In re Williams), 246 B.R. 591, 596-97 (8th Cir. BAP 1999) (per curiam).

C. POLICY

Strong, long-standing policies support returning undisbursed funds to the debtor at dismissal after confirmation. Chapter 13 is an exclusively voluntary bankruptcy option. Chapter 13 is only available to individuals and then only to a subset of individuals with relatively limited amounts of secured and unsecured debts. See 11 U.S.C. § 109(e). Most individuals eligible for Chapter 13 are also eligible for liquidation under Chapter 7. In other words, most Chapter 13 debtors literally volunteer to pay their creditors money they don't have to pay to realize bankruptcy relief. They could file Chapter 7 instead, walk away from all their debts without further payment and keep all future earnings from personal services free of the claims of prepetition creditors. By filing Chapter 13 instead, these individual debtors are voluntarily paying some or all of their dischargeable debt from future earnings that would otherwise be immune to the claims of their creditors. In § 349(b)(3), Congress chose not to penalize individual debtors who try and fail in a Chapter 13 case.

A Chapter 13 debtor may — absent prior conversion — dismiss the case at any time. 11 U.S.C. § 1307(a) & (b). Upon dismissal, the debtor has a reasonable expectation that wage deductions will cease and all earnings that have not been distributed to creditors will be returned to the debtor. Any other outcome would dissuade debtors from filing Chapter 13. The Third Circuit recognized this disincentive in Michael:

In re Michael, 699 F.3d at 315 (quoting Bobroff v. Continental Bank (In re Bobroff), 766 F.2d 797, 803 (3rd Cir.1985) (quoting In re Hannan, 24 B.R. 691, 692 (Bankr.E.D.N.Y.1982))) (internal quotations omitted).

Returning undistributed funds to the debtor at dismissal parallels the outcome for Chapter 13 debtors who convert to Chapter 7 in good faith under 11 U.S.C. § 348(f). See, e.g., In re Michael, 699 F.3d at 312-16 ("§ 348(f), particularly in light of its legislative history, leads us to conclude that undistributed plan payments held by a Chapter 13 trustee at the time of conversion must be returned to the debtor absent bad faith. This result furthers Congress's preference that on conversion to Chapter 7 a Chapter 13 debtor receive all post-petition property that is held by the Chapter 13 trustee, but still is under the control of the debtor, so that debtors are encouraged to attempt to repay their debts through reorganization rather than liquidation.") (collecting cases). When a debtor chooses to dismiss and deal with creditors in the normal course outside of bankruptcy, no stated congressional policy is served to make it less advantageous for the debtor to dismiss than to convert to Chapter 7. The court in In re Bailey, 330 B.R. 775 (Bankr.D.Or.2005), expressed similar reasoning in the context of dismissal of an unconfirmed case:

In re Bailey, 330 B.R. at 777 (quoting In re Davis, No. 04-30002-DHW, 2004 WL 3310531, at *2 (Bankr.M.D.Ala. June 16, 2004)). See also In re Locascio, 481 B.R. 285, 288-89 (Bankr.S.D.N.Y.2012).

MACBA submits that failure to pay attorney fees from funds on hand at dismissal will have a chilling effect on counsel's willingness to represent debtors in Chapter 13 cases. There are other, better solutions to this problem. One suggested in the case law is to provide in the Chapter 13 plan how undistributed funds will be distributed in the event of dismissal after confirmation.10 Alternatively, counsel will almost always be aware of impending dismissal of a client's case and can seek payment from any undistributed funds by motion under the "for cause" exception to § 349(b).11

D. "UNLESS THE COURT, FOR CAUSE, ORDERS OTHERWISE"

Section 349(b) prefaces the unwinding of a bankruptcy case at dismissal with the phrase "unless the court, for cause, orders otherwise." At oral argument, the trustee and all amici seemed to agree that any outcome in this case should include an opportunity for parties in interest to grab for a piece of whatever funds are held by the trustee — before dismissal threatens loss of jurisdiction in the bankruptcy court.12 MACBA points out that administrative claimants are given priority in a case dismissed prior to confirmation under § 1326(b)(2), and unpaid attorneys should have an opportunity to argue for similar treatment at dismissal of a confirmed case.13 Creditors may have statutory or equitable arguments for a share of the undistributed pie.14 In these cases, substantial funds are undistributed at dismissal due to mortgage claims objections. Who should benefit from this distortion in the normal distribution pattern of a Chapter 13 case: the debtors living in houses with unpaid mortgages? the attorneys who filed the mortgage claims objections? the mortgagees that haven't been able to produce timely proof of their entitlements in these bankruptcy cases? These not-simple questions demand a predictable protocol for decision.

As the court in Lewis recognized, exercising the discretion afforded under § 349(b)(3) "require[s] that all interested parties be given notice of the potential fund which exists ... once the court intervenes to alter the presumptive revesting of estate property." In re Lewis, 346 B.R. at 111. Defining "all interested parties" may be complicated in some cases.15

III. CONCLUSION

At dismissal after confirmation of a Chapter 13 plan, § 349(b)(3) controls and undistributed funds held by the trustee must be returned to the debtor. Bankruptcy courts have statutory discretion to order otherwise. To properly exercise that discretion, notice must be given to all parties in interest with opportunity to demonstrate cause for an outcome other than return of all funds to the debtors.

ORDER

For the reasons stated in the memorandum filed contemporaneously, IT IS ORDERED, ADJUDGED and DECREED that all undistributed funds held by the trustee must be returned to the debtors after notice and opportunity for parties in interest to ask the court to order otherwise.

IT IS SO ORDERED.