Jose Michael Medina v. Devin Derham-Burk

Opinion

1 2 3 6 7 JOSE MICHAEL MEDINA, Case No. 25-cv-02823-PCP

8 Appellant, ORDER RE: BANKRUPTCY APPEAL v. 9

Appellee. 11

12 13 Appellant Jose Medina appeals a decision of the United States Bankruptcy Court for the 14 Northern District of California denying his motion for a return of trustee fees. The motion arose 15 from Medina’s Chapter 13 bankruptcy case. Medina sought to compel the return of fees collected 16 by appellee Devin Derham-Burk, the Chapter 13 trustee, based on payments made to certain 17 creditors using the proceeds from the sale of Medina’s residential property. Medina claims that 18 because the bankruptcy court dismissed his case without confirming his proposed Chapter 13 plan, 19 the trustee was not entitled to retain her statutory fees under 28 U.S.C. § 586, as interpreted by the 20 Ninth Circuit in In re Evans, 69 F.4th 1101 (9th Cir. 2023). For the reasons below, the Court finds 21 that the bankruptcy court erred in denying Medina’s motion. The ruling of the bankruptcy court is 22 therefore REVERSED. 24 Medina filed for Chapter 13 bankruptcy in December 2023. “Chapter 13 bankruptcies 25 provide debtors receiving a regular income an opportunity to pay off their debts while retaining 26 their property.” In re Evans, 69 F.4th 1101, 1103 (9th Cir. 2023). Within fourteen days after filing 27 a Chapter 13 petition, the debtor must file a plan with the court detailing how they will pay off 1 standards to be ‘confirm[ed],’ which is bankruptcy parlance for ‘approved.’” Id. at 1104 (quoting 2 11 U.S.C. § 1325). 3 Once a Chapter 13 petition has been filed, a trustee supervises the case, “shepherding [the] 4 petition[] through the bankruptcy process. Among other things, the trustee collects the debtor’s 5 payments, ensures that payments are timely made to creditors, and objects (when necessary) to 6 plan confirmation.” Id. (citing 11 U.S.C. § 1302(b)). In return, the trustee receives a statutory fee. 7 See id. A “standing trustee”—i.e., one appointed to supervise all the Chapter 13 cases in a 8 particular region, see 28 U.S.C. § 586(b)—collects a percentage fee of no more than ten percent 9 from payments received by creditors “under [a] plan[].” See id. § 586(e)(2); Evans, 69 F.4th at 10 1104. That percentage fee is paid “before or at the time of each payment to creditors under the 11 plan.” 11 U.S.C. § 1326(b). 12 Chapter 13 plans generally must provide for the payment of debts using the debtor’s future 13 earnings. Specifically, plans must provide for the debtor to submit a portion of his monthly income 14 to the trustee, which the trustee then uses to pay creditors. See 11 U.S.C. § 1322(a)(1); Nobelman 15 v. Am. Sav. Bank, 508 U.S. 324, 327 (1993). Under 11 U.S.C. § 1326(a)(1)(A), the debtor must 16 begin making such payments to the Chapter 13 trustee “in the amount … proposed by the plan” no 17 later than 30 days after the filing of the plan or petition. See Evans, 69 F.4th at 1104. And 18 § 1326(a)(2) requires that any “payment made under [§ 1326(a)(1)(A)] shall be retained by the 19 trustee until confirmation or denial of confirmation” of the plan by the bankruptcy court. 11 20 U.S.C. § 1326(a)(2). Thereafter, “[i]f a plan is confirmed, the trustee shall distribute any such 21 payment in accordance with the plan as soon as is practicable.” Id. “If a plan is not confirmed, the 22 trustee shall return any such payments not previously paid and not yet due and owing to creditors 23 … to the debtor, after deducting” certain allowed administrative fees. Id. 24 In addition to providing for payments from a debtor’s future earnings, Chapter 13 plans 25 may provide for other means of paying creditors. See 11 U.S.C. § 1322; Nobelman, 508 U.S. at 26 327 (explaining that Chapter 13 allows individual debtors to design “flexible repayment plan[s]”). 27 For example, as relevant here, a plan may “provide for the payment of all or part of a claim against 1 while the statutory scheme presumes that a debtor’s payments to a trustee usually will not be 2 disbursed to creditors until a plan is confirmed, see 11 U.S.C. § 1326(a)(2); Evans, 69 F.4th at 3 1107–08, it contemplates that plans may require trustees to distribute some payments to creditors 4 prior to confirmation, see 11 U.S.C. § 1325(a)(2) (requiring as a prerequisite to confirmation the 5 payment of “any fee, charge, or amount required … by the plan[] to be paid before 6 confirmation[]”); id. § 1326(a)(2) (requiring that, where a plan is never confirmed, a trustee return 7 § 1326(a)(1)(A) payments that were “not previously paid” to creditors). 8 Medina submitted a proposed plan to the bankruptcy court in January 2023. As required, 9 the plan provided for monthly payments to the trustee from Medina’s future income in the amount 10 of $180.86. But the plan also proposed another way for Medina to pay off three mortgages on his 11 residential property: Medina would seek court approval for sale of the property, and the trustee 12 would use the proceeds from the sale to pay the mortgage creditors in full. The plan contemplated 13 that the trustee would make payments to the mortgage creditors “upon close of escrow by demand 14 of the chapter 13 Trustee.” 15 In accordance with his proposed plan, Medina filed a motion to sell his residential 16 property, which the bankruptcy court granted. The trustee then sent a written escrow demand to 17 the title company for the amounts necessary to pay the mortgage creditors and the trustee’s ten- 18 percent fee related to those payments under § 586. After the sale closed in April 2023, the title 19 company issued a check from escrow to the trustee, and the trustee provided checks to the 20 mortgage creditors to cover their pre-petition claims related to Medina’s residential property. The 21 trustee also paid herself the ten-percent fee. 22 In June 2023, the trustee moved to dismiss Medina’s bankruptcy case based on several 23 unresolved objections. The bankruptcy court dismissed the case in September. While the motion to 24 dismiss was pending, Medina moved to disgorge the trustee of allegedly excessive fees she had 25 collected from the disbursement of escrow funds to the mortgage creditors, but the bankruptcy 26 court denied Medina’s motion. This Court affirmed, finding “that there is no basis in the record to 27 find that the trustee breached her fiduciary duty.” Medina v. Derham-Burk, No. 23-cv-4988-PCP, 1 bankruptcy court and this Court noted that the Ninth Circuit’s decision in Evans—which held that 2 a standing trustee was required to return fees collected from a debtor’s § 1326(a)(1)(A) payments 3 when the debtor’s Chapter 13 case was dismissed without confirmation of a plan—might require 4 the trustee to return the challenged fees upon the eventual dismissal of Medina’s case. But neither 5 court had cause to address that issue because, “when the bankruptcy court denied Medina’s 6 Motion to Disgorge, his case had not yet been dismissed.” Id. at *4. 7 Following the dismissal of his case without confirmation of a plan, Medina moved for a 8 return of the trustee’s fees relating to the mortgage-creditor payments. The bankruptcy court 9 denied the motion, and Medina now appeals. 11 District courts have subject-matter jurisdiction “to hear appeals from final judgments, 12 orders, and decrees … of bankruptcy judges. 28 U.S.C. § 158(a)(1). On appeal, the Court 13 “review[s] findings of fact for clear error and conclusions of law and of mixed questions of law 14 and fact de novo.” In re Icenhower, 757 F.3d 1044, 1049 (9th Cir. 2014). 16 Two statutory provisions determine the outcome of this appeal: 28 U.S.C. § 586(e)(2) and 17 11 U.S.C. § 1226(b). As interpreted by the Ninth Circuit in In re Evans, 69 F.4th 1101 (9th Cir. 18 2023), these provisions permit a standing trustee to retain fees only from payments disbursed to 19 creditors after the confirmation of a Chapter 13 plan. Because Medina’s case was dismissed 20 without a confirmed plan, the trustee is not entitled to keep her fees in his case. The bankruptcy 21 court legally erred in concluding otherwise. 22 “Section 586 … provides the source of and the amount … of trustee fees” in a Chapter 13 23 case. Evans, 69 F.4th at 1107. As discussed above, the provision authorizes standing trustees to 24 “collect [a] percentage fee” not to exceed ten percent “from all payments received by [creditors] 25 under plans.” 28 U.S.C. § 586(e)(2). Section 1326(b) “is the specific provision governing when a 26 trustee ‘shall be paid’: ‘before or at the time of each payment to creditors under the plan[.]” Evans, 27 69 F.4th at 1107 (emphasis added) (quoting 11 U.S.C. § 1326(b)). In Evans, the Ninth Circuit held 1 plans” or “under the plan” means payments made pursuant only to “confirmed” plans. See id. at 2 1107 (“‘[P]ayment to creditors under the plan’” for purposes of § 1326(b) “necessarily means 3 post-confirmation of a plan.”); id. at 1108 (“Section 586 … provides that when a trustee does 4 collect her fee pursuant to 1326(b), she does so by ‘collecting’ her fee ‘from all payments 5 received’ under confirmed plans.” (citation modified)). In other words, Evans held that a standing 6 trustee neither earns nor can collect statutory fees in a Chapter 13 case until a plan is confirmed. 7 That holding squarely applies here. As the bankruptcy court recognized, § 586(e) 8 determines the amount of fees to which the trustee is entitled. The trustee has not argued 9 otherwise. The trustee also concedes that § 1326(b) governs when she becomes “entitled to keep 10 her percentage fee.” And it is undisputed that no plan was confirmed before the bankruptcy court 11 dismissed Medina’s case. It unavoidably follows that, under Evans’s reading of § 586(e) and 12 § 1326(b), the trustee was not entitled to keep any fees. 13 To resist this conclusion, the trustee argues (and the bankruptcy court reasoned) that the 14 facts of this case care are distinguishable from Evans. There, the proposed Chapter 13 plan 15 contained no bespoke payment provisions, so payments were to be made under the routine 16 schedule set forth in § 1326(a). See 69 F.4th at 1105. That meant that the debtors began making 17 payments to the trustee from their earnings before their plan was confirmed, but the trustee could 18 disburse those payments to creditors only after confirmation. See 11 U.S.C. § 1326(a)(1)–(2). If 19 confirmation did not occur, the trustee would be required to return the payments to the debtors. 20 See id. § 1326(a)(2). Here, however, Medina’s proposed plan authorized the trustee to disburse 21 payments to the mortgage creditors before confirmation using proceeds from the sale of Medina’s 22 residential property. The trustee therefore argues that she is entitled to “her fee that is to be paid 23 ‘[b]efore or at the time of each payment to creditors under the plan’” under § 1326(b). But that 24 argument runs headlong into Evans’s holding that “under the plan” means under a “confirmed” 25 plan. See 69 F.4th at 1107–08. The trustee may disagree with Evans’s interpretation of this 26 language, but it is binding on this Court. See Hart v. Massanari, 266 F.3d 1155, 1171–72 (9th Cir. 27 2001). ] taken from payments made by the debtors under § 1326(a)(1)(A), while the trustee took her fees in 2 || this case from property-sale proceeds released from escrow. So unlike in Evans, she argues, 3 § 1326(a)(2) does not compel the return of her fees in the absence of a confirmed plan. That does 4 || not change the analysis. As already explained, the Ninth Circuit has interpreted § 586(e) and 5 § 1326(b) to mean that a standing trustee is not entitled to her statutory fee where a plan is never 6 || confirmed. See Evans, 69 F.4th at 1107-08. Nothing in the text of those provisions or in Evans 7 || suggests that they apply differently to fees taken from debtors’ § 1326(a)(1)(A) payments than to 8 || those taken from other sources. Thus, the trustee was not entitled to pay herself any fees prior to 9 || confirmation, whatever their source. Whether § 1326(a)(2) applies or not, the only available 10 || remedy to the trustee’s violation of § 586(e) and § 1326(b) is for her to return the fees to Medina. 11 The bankruptcy court’s contrary conclusion rested on an erroneous interpretation of the statutory 12 || scheme and Evans, constituting reversible legal error. 14 For the foregoing reasons, the bankruptcy court improperly denied Medina’s motion to 2 15 || return trustee fees. The ruling of the bankruptcy court is therefore REVERSED. a 16 IT IS SO ORDERED. 2 17 || Dated: February 17, 2026 18

P. Casey PMtts 20 United States District Judge 21 22 23 24 25 26 27 28