- Case Type:
- Case Status:
- Reversed and Remanded
- 20-041, 20-042 (10th Circuit, Apr 27,2021) Not Published
- The Tenth Circuit’s Bankruptcy Appellate Panel (BAP) held that the 1881 Barton doctrine, designed, at least in the Tenth Circuit, to ensure other courts do not intervene in an estate’s administration without the bankruptcy court’s permission, extends to post-dismissal garnishments of chapter 13 plan payments. A party seeking leave from this bar must first make a prima facie case as to its garnishment claim’s meritorious ground(s). A bankruptcy court must then weigh five factors, applied to all relevant facts, to gauge the potential effect of a judgment against a trustee on a debtor’s estate.
- Procedural context:
- In the third case for relief pursuant to chapter 13 of the Bankruptcy Code (Code) filed by Alexander L. Bednar (DR), a disbarred Oklahoma attorney, and dismissed by the United States Bankruptcy Court for the Western District of Oklahoma (BC), judgment creditors moved BC for authority to initiate post-dismissal garnishment proceedings against plan payments still in the possession of the John Hardeman (TR), the chapter 13 trustee of the DR’s third estate. At the time, the TR held $29,266.15 of payment funds, having subtracted his own fee of $1,572.77 from the DR’s total payments of $30,838.92. On September 2, 2020, the BC denied these motions, with two of its determinations serving as the cynosure of the BAP’s opinion. It first found that the Barton doctrine likely prevented the garnishment from being enforced, warning that “the small burden of one garnishment could quickly swell to a large burden of hundreds of garnishments if creditors are given the green light to file immediately upon the conclusion of every bankruptcy case.” Having so concluded, the BC turned its attention to § 1326 and § 349(b)(3) of the Code—and reviewed the split amongst bankruptcy court over whether these sections permit creditor garnishment of a trustee following dismissal of a bankruptcy case without a confirmed chapter 13 plan. As the BC noted (and the BAP would naturally echo), § 1326(a)(2) provides plan payments “shall be retained by the trustee until confirmation or denial of confirmation” and, “[i]f a plan is not confirmed, the trustee shall return any such payments not previously paid and not yet due and owing to creditors . . . to the debtor, after deducting any unpaid claim allowed under section 503(b),” and § 349(b)(3) declares that 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.” Invoking plain meaning, some courts have read § 1326(a)(2) and § 349(b)(3) to unambiguously require the return of all plan payments to the debtor following pre-confirmation dismissal. Another line of cases, known as “the debtor of a debtor cases,” instead take a more practical approach which gives the language more meaning within the broader context of the Code. These cases, to quote the BAP, “account for the functional practicalities of the tripartite relationship between the trustee, the garnishor, and the debtor” by requiring the turn of funds only “where there are no post dismissal intervening events that challenge the debtor’s right to receive the funds or claim the property.” After reviewing this split, the BC adopted the former approach. It thus ruled that plain language of § 1326(a)(2) required the TR to return the funds to the DR with no possibility of any intervening diversion. The judgment creditors timely appealed. At their requests, the BC stayed its order.
- The stage for this appeal was set by two prior cases. In 2019, a creditor launched foreclosure proceedings against the DR’s interest in real property before the Oklahoma County District Court (OKDC). Consistent with state law, the OKDC scheduled a hearing on assets for June 6, 2019. As this date approached, the DR launched his first bankruptcy case (First Case) with the filing of a barebones chapter 13 petition. Noting the automatic stay’s effect, the OKDC terminated its planned June 6 hearing. Soon thereafter, the BC dismissed this First Case due to the DR’s failure to obtain mandatory credit counseling. The OKDC again scheduled a hearing; the DR again filed a chapter 13 petition, beginning yet another chapter 13 case (Second Case); the OKDC again cancelled any hearing; and the BC again dismissed when the DR again flouted an administrative obligation by neglecting to appear at the § 341 Meeting of Creditors. For the third time, the OKDC placed an asset hearing on its calendar; for the third time, the DR turned to the Code. And so the Third Case, with roughly the same constellation of parties and with the DR’s aim seemingly unchanged, had begun. The instant appeal grew from the actions of three creditors in the course of this Third Case, which lasted months longer than the DR’s first two forays. Specifically, the clerk and Deputy Clerk of the OKDC, Rick Warren (Warren) and Jennifer Byler (Byler), respectively, appeared as creditors of the DR. They did so by virtue of four sanctions judgments that Oklahoma’s state courts had issued against him (Sanctions Judgments)—two judgments by the OKDC and two more by the Oklahoma Supreme Court, together totaling $31,582.50 (excluding interest)—that arose from findings that the DR had engaged in frivolous and vexatious conduct. Relatively early in the Third Case’s trajectory, Warren and Byler requested the BC enter an order confirming the non-existence of the automatic stay as to these Sanctions Judgments pursuant to § 362(c)(4)(A)(i). The BC did so. Meanwhile, the Third Case floundered. Bednar sought to confirm various plans, all of which were opposed by Warren, Byler, the TR, and even the DR’s ex-spouse. At a final evidentiary hearing, the BC sustained these persons’ objections and found the DR to be ineligible for chapter 13 relief, but neither reserved jurisdiction for any particular purpose nor altered the typical revesting of estate property provided in § 349(b). After this dismissal, Warren and Byler filed a motion seeking leave to garnish the funds in the hands of the TR; the DR’s ex-spouse did the same, arguing that her domestic support obligations were superior to Warren’s and Byler’s. Though the TR conceded that the Barton doctrine required the BC’s consent to any garnishment proceeding in state court, he opposed these requests based on the plain text of § 1326(a)(2).
- Michael E. Romero; Dale L. Somers; and Cathleen D. Parker
3308 in the system
1 Being Processed