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The Security National Bank of Sioux City, IA v. Vera T. Welte Testamentary Trust

Summarizing by Amir Shachmurove

Viegelahn v. Harris, III (In the Matter of Harris, III)

Case No. 13-50374 (5th Cir. July 7, 2014)
REVERSED district court's holding that payments in possession of Chapter 13 trustee at time of case conversion from Chapter 13 to Chapter 7 be returned to debtor and remanded case back to district court. Acknowledging the split in the courts on this issue, the Fifth Circuit held that payments in the possession of the Chapter 13 trustee at the time the case was converted from Chapter 13 to Chapter 7 must be distributed to creditors who have a superior claim to the funds. Under equitable and policy considerations, the Fifth Circuit held that returning undistributed funds to the debtor is not justified by policy of encouraging debtors to proceed through Chapter 13 rather than Chapter 7. Fairness also dictates distribution of funds to creditors. The attached wages given up are quid pro quo during the pendency of the reorganization in return for being permitted to stave off creditors.
Procedural context:
Debtor filed Chapter 13 petition and plan was confirmed three months later. Debtor's case was subsequently converted to Chapter 7 and Chapter 13 trustee distributed funds to six unsecured creditors, among others, that were being held by trustee after a hold had been placed on distributions to Debtor's mortgagee because Debtor's home had previously been foreclosed upon. After the foreclosure, Debtor continued to make the same plan payment and did not modify his plan before conversion causing an accumulation of funds previously paid to mortgagee.
Debtor's proposed Chapter 13 plan was approved and out of each plan payment, $352 was to go to Chase Bank for his mortgage arrears and the rest to another secured creditor. Debtor was also to make a separate payment to Chase outside the plan. Debtor got behind on his mortgage, Chase moved to lift the automatic stay which was granted and foreclosed on Debtor's house. Debtor continued to make the monthly plan payments including that portion approved for Chase. The trustee placed a hold on the payments to Chase after foreclosure and continue to accumulate the funds that originally where to go to Chase. Debtor did not modify the plan and eventually, the case was converted to Chapter 7. At that time, the trustee held $5,519.22 in his possession and distributed the funds to pay debtor's counsel, the other secured creditor, six unsecured creditors and a portion to himself. Trustee then filed a final report and accounting for the Chapter 13 case.
Benavides, Clement and Graves, Circuit Judges.

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