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In Re: Terri Matthews Debtor

August 9, 2012

IN RE: TERRI MATTHEWS DEBTOR


BANKRUPTCY CASE No. 10-16869

The opinion of the court was delivered by: Yohn, J.

MEMORANDUM

Alan B. Kane, Esquire ("Kane"), appeals from the bankruptcy court's order granting debtor Terri Matthews's motion for payment of unclaimed funds. Kane, who represented Matthews during her Chapter 13 bankruptcy, argues that the bankruptcy court should have granted his application for attorney's fees and ordered the unclaimed funds dispersed to him instead of returned to Matthews. For the reasons that follow, I conclude that the bankruptcy court misapplied the relevant law and I will remand the case for further action.

I. PROCEDURAL HISTORY

On August 16, 2010, Matthews filed her Chapter 13 bankruptcy petition in the United States Bankruptcy Court for the Eastern District of Pennsylvania. At all times during the bankruptcy, Matthews was represented by Kane. On December 23, 2010, as a result of Matthews's failure to make all of her plan payments, the Chapter 13 trustee filed a motion to dismiss the bankruptcy. On March 22, 2011, Kane filed an application for compensation for a professional person (the "fee application"). No objections to the fee application were filed. On April 14, 2011, without ruling on the fee application, the bankruptcy court dismissed Matthews's bankruptcy before it was confirmed.*fn1 The dismissal order did not expressly retain jurisdiction to rule on the fee application.

On May 6, 2011, the trustee issued a check payable to Matthews for the payments she had made in the amount of $1,247.40 under the now dismissed bankruptcy plan (the "unclaimed funds"). The check was sent to Kane's office. Kane did not forward the check to Matthews and did not respond to her requests for the check. On November 7, 2011, the trustee issued a new check for the unclaimed funds to the clerk of the bankruptcy court. On November 30, 2011, Matthews filed a motion for payment of unclaimed funds requesting that the bankruptcy court direct the clerk of court to pay her the funds. On December 20, 2011, Kane filed objections to this motion. After a hearing, the bankruptcy court granted Matthews's motion on December 22, 2011, and ordered that the unclaimed funds be returned to her. The bankruptcy court never ruled on Kane's fee application.

On December 23, 2011, Kane filed his notice of appeal of the bankruptcy court's December 22, 2011, order granting Matthews's motion. The bankruptcy court filed a memorandum in support of its order on January 6, 2012.

II. STANDARD

The district courts have jurisdiction to hear appeals from final judgments and orders of the bankruptcy courts. Under the Federal Rules of Bankruptcy Procedure, a district court, sitting as an appellate tribunal, "may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." Fed. R. Bankr. P. 8013. In so doing, the district court applies a clearly erroneous standard to review a bankruptcy court's factual findings and a de novo standard to review its conclusions of law. See In re Siciliano, 13 F.3d 748, 750 (3d Cir. 1994). Additionally, a district court's review of "mixed questions of law and fact[] is plenary." Jones v. Chemetron Corp., 212 F.3d 199, 204-05 (3d Cir. 2000).

III. DISCUSSION

In its January 6, 2012, memorandum, the bankruptcy court concluded that it did not have jurisdiction over the unclaimed funds following its dismissal of Matthews's bankruptcy and thus the court declined to address Kane's pending fee application. Because this was a conclusion of law, I review the bankruptcy court's determination de novo.

This appeal requires me to consider the interaction of seemingly inconsistent provisions of the Bankruptcy Code. Fortunately, the Honorable Eric L. Frank has already grappled with these thorny Code sections and I am guided by his thorough and well-reasoned decision in In re Lewis, 346 B.R. 89 (Bankr. E.D. Pa. 2006), the reasoning of which I find persuasive.

In Lewis, the trustee filed motions to dismiss Lewis's Chapter 13 bankruptcy after she failed to make timely plan payments. Id. at 93. As a result of the pending motions to dismiss, Lewis's attorney filed a motion for legal fees. Id. at 93-94. In two separate orders entered on the same day, the bankruptcy judge handling the action at that time granted the motions to dismiss and denied the motion for legal fees pursuant to 11 U.S.C. § 349(b)(3). Id.at 94. Section 349(b)(3) provides that, after the bankruptcy is dismissed, and unless the court orders otherwise for cause, the bankruptcy court must return "the property of the estate [to] the entity in which such property was vested immediately before the commencement of the case[,]" which typically would be the debtor. Relying on this provision, the bankruptcy court concluded that it was required to return Lewis's plan payments to her, and, thus, could not pay those funds to the attorney. Id.

On appeal, the Honorable Juan R. Sanchez vacated the bankruptcy court's order on the fee motion. See In re Lewis, No. 05-6780, 2006 WL 562970 (E.D. Pa. Mar. 7, 2006). Judge Sanchez concluded that the bankruptcy court erred by relying solely on section 349(b)(3) in denying the fee motion. 346 B.R. at 95. Judge Sanchez held that the bankruptcy court should have investigated the interplay between section 349(b)(3) and, inter alia, section 1326(a)(2), which provides that when a bankruptcy plan is not confirmed, "the trustee shall return any [prior] payments . . . to the debtor, after deducting any unpaid claim allowed under section 503(b)."*fn2 11 U.S.C. ยง 1326(a)(2); Lewis, 346 B.R. at 95. In Lewis's case, where the plan was not confirmed and the bankruptcy has been dismissed, sections 349(b)(3) and 1326(a)(2) appear to dictate seemingly different results-section 349(b)(3) provides that if a bankruptcy case is dismissed, the trustee shall return the property of the estate to the debtor unless the court orders otherwise for cause, ...


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