Court Opinion

ID: 4342884
Source: CourtListenerOpinion
Date Created: 2018-11-19 20:00:23.672117+00
Date Added: 2024-06-11T10:14:36.860985
License: Public Domain

PUBLISHED

                           UNITED STATES COURT OF APPEALS
                               FOR THE FOURTH CIRCUIT

                                       No. 17-2328

COMMONWEALTH OF VIRGINIA, DEPARTMENT OF SOCIAL
SERVICES, DIVISION OF CHILD SUPPORT ENFORCEMENT,

               Creditor – Appellant,

v.

BARRY SPENCER WEBB

               Debtor – Appellee,

HERBERT L. BESKIN, Ch. 13 Trustee,

               Trustee – Appellee,

and

U.S. TRUSTEE,

               Trustee.

------------------------------

CHRISTOPHER T. MICALE,

               Amicus Supporting Appellee.

Appeal from the United States District Court for the Western District of Virginia, at
Charlottesville. Norman K. Moon, Senior District Judge. (3:17-cv-00028-NKM)

Argued: September 28, 2018                              Decided: November 19, 2018
Before MOTZ, AGEE, and DIAZ, Circuit Judges.

Affirmed by published opinion. Judge Agee wrote the opinion, in which Judge Motz and
Judge Diaz joined.

ARGUED: Matthew R. McGuire, OFFICE OF THE ATTORNEY GENERAL OF
VIRGINIA, Richmond, Virginia, for Appellant. Angela M. Scolforo, CHAPTER 13
TRUSTEESHIP OF HERBERT L. BESKIN, Charlottesville, Virginia, for Appellees.
ON BRIEF: Mark R. Herring, Attorney General, Cynthia V. Bailey, Deputy Attorney
General, Elizabeth L. Gunn, Assistant Attorney General, Toby J. Heytens, Solicitor
General, Matthew R. McGuire, Deputy Solicitor General, OFFICE OF THE
ATTORNEY GENERAL OF VIRGINIA, Richmond, Virginia, for Appellant. Angela
M. Scolforo, Charlottesville, Virginia, for Trustee-Appellee. Jason B. Shorter, Roanoke,
Virginia, for Amicus Curiae.

                                           2
AGEE, Circuit Judge:

       Virginia’s Department of Social Services, Division of Child Support Enforcement

(the “Division”) appeals from the judgment of the district court affirming the bankruptcy

court’s decision to return Barry Webb’s post-petition Chapter 13 payments to him. Webb

filed a voluntary petition for bankruptcy under Chapter 13 of the United States

Bankruptcy Code and made post-petition payments to his Chapter 13 Trustee (the

“Trustee”) under 11 U.S.C. § 1326(a)(1) before the dismissal of the petition. Subsequent

to the dismissal, the Division sought to obtain the post-petition payments held by the

Trustee to apply against Webb’s delinquent child support. The bankruptcy court ordered

the Trustee to return the funds to Webb, and the district court affirmed. For the reasons

set forth below, we affirm the judgment of the district court.

                                                 I.

                                                 A.

       Chapter 13 is a voluntary proceeding that “allows a debtor to retain his property if

he proposes, and gains court confirmation of, a plan to repay his debts over a three- to

five-year period.” Harris v. Viegelahn, 135 S. Ct. 1829, 1835 (2015). When a debtor

files a petition for Chapter 13 bankruptcy, the Bankruptcy Code requires him to

“commence making payments not later than 30 days after” he proposes a plan. 11 U.S.C.

§ 1326(a)(1) (“post-petition payments”). The amount of the post-petition payments is set

in the proposed Chapter 13 Plan. Id. § 1326(a)(1)(A). The Chapter 13 trustee retains the

post-petition payments “until confirmation or denial of confirmation” of the Plan. Id.

                                             3
§ 1326(a)(2). “If a plan is not confirmed, the trustee shall return any [post-petition]

payments not previously paid and not yet due and owing to creditors pursuant to

paragraph (3) to the debtor, after deducting any unpaid claim allowed under section

503(b).” 1 Id. (emphases added). The proper construction of the language of this statute

is the issue before us.

       Upon filing for bankruptcy, a debtor walls off his property from his creditors,

including the post-petition payments to the Chapter 13 trustee. Nearly all of the debtor’s

property becomes “property of the estate.”       See 11 U.S.C. §§ 541(a) (defining the

property of the bankruptcy estate to include “all legal or equitable interests of the debtor

in property as of the commencement of the case”) and 1306(a) (including “all property”

the debtor “acquires after the commencement of the case but before the case is closed,

dismissed, or converted” as property of the estate).       While the bankruptcy case is

pending, creditors of the debtor are generally barred from any action against the debtor

(outside the bankruptcy court) under the provisions of the automatic stay of 11 U.S.C. §

362(a). Consequently, the post-petition payments that Webb paid to the Chapter 13

Trustee under § 1326(a)(1) are property of the estate and are covered by the automatic

stay while the bankruptcy case is pending.

       1
        Section 503(b) defines “administrative claims,” none of which are claimed to be
at issue here. In other words, the parties agree the administrative expense exception
under § 1326(a)(2) has no application to the Division’s claim for child support payments.
Similarly, no party claims any entitlement “pursuant to paragraph (3).” 11 U.S.C. §
1326(a)(2). Section 1326(a)(3) allows a court to “modify, increase, or reduce” certain
payments to creditors “pending confirmation of a plan,” which is not relevant or
applicable here. Id. § 1326(a)(3).

                                             4
      The stay protects the estate’s property “until such property is no longer property of

the estate.” 11 U.S.C. § 362(c)(1). Further, upon dismissal of a bankruptcy petition, the

bankruptcy court’s dismissal order “revests the property of the estate in the entity in

which such property was vested immediately before the commencement of the case.” Id.

§ 349(b)(3).

                                                B.

      In July 2016, Webb filed a voluntary petition for relief under Chapter 13 in the

United States Bankruptcy Court for the Western District of Virginia. At the time, Webb

owed nearly $75,000 to the Division for unpaid child support. In January 2017, the

Division filed a proof of claim setting Webb’s child support indebtedness in the amount

of $74,277.32. See J.A. 145.

      As required by § 1326(a)(1), Webb began making post-petition payments to the

Trustee while awaiting confirmation of his proposed Chapter 13 Plan. However, despite

four attempts, Webb was unable to propose a confirmable Chapter 13 Plan.               The

bankruptcy court, with Webb’s consent, dismissed the case on February 10, 2017. At the

time of dismissal, Webb had paid the Trustee $3,000. 2

      Section 63.2-1929 of the Code of Virginia permits the Division to serve a notice of

levy upon “any person, firm, corporation, association, political subdivision or department

of the Commonwealth.” Va. Code Ann. § 63.2-1929. Citing the authority of that

      2
         No part of the funds held by the Trustee represent a payment Webb made after
his case was dismissed.

                                            5
Virginia statute, the Division served the Trustee with an Order to Withhold for child

support indebtedness soon after Webb’s bankruptcy case was dismissed. The Order to

Withhold directed the Trustee to surrender to the Division the $3,000 in post-petition

payments the Trustee held.

          The Trustee concluded that the Order to Withhold left him with “conflicting

obligations.”      J.A. 163.    On the one hand, “Bankruptcy Code Section 1326(a)(2)

mandates that: ‘the trustee shall return any such payments’ to [Webb].” Id. Conversely,

“the Order to Withhold directs the Trustee to ‘immediately withhold from access by the

debtor any property, assets, or money which is due, owing, or belonging to the debtor

[and] deliver [such] property withheld . . . to the Division[.]’” Id. The state Order to

Withhold also purported to hold the Trustee personally liable—for Webb’s entire debt,

plus interest—if he failed to comply. J.A. 166.

          The Trustee then filed a motion in the bankruptcy court seeking direction as to

whom he should pay the post-petition funds. After a hearing, the bankruptcy court

directed the Trustee to return the funds to Webb. In a cogent opinion, the bankruptcy

court resolved the matter based on the plain language of the Bankruptcy Code:

                 This Court agrees with the line of cases finding that the language of
          section 1326(a)(2) is clear and unambiguous. That is, the Bankruptcy Code
          is clear that “[i]f a plan is not confirmed, the trustee . . . shall return such
          payments . . . to the debtor.” At the February 9, 2017 hearing on
          confirmation of the debtor’s chapter 13 plan, the Court did not confirm the
          plan and dismissed the case. At that point, the trustee became obligated
          under the Bankruptcy Code to return the funds to the debtor. [3] The Court

[3]
      The bankruptcy court added in a footnote that:

(Continued)
                                                 6
       finds no ambiguity or confusion in the language of the statute as enacted.
       The Court thus will enforce the plain reading of this section.

              The chapter 13 trustee in this case received the payments pursuant to
       his statutory duties as trustee. See 11 U.S.C. §§ 1302, 1326. The
       Bankruptcy Code, under section 1326, provides unambiguous terms for the
       trustee’s responsibilities with respect to the payments received. That section
       provides a mechanism for a creditor to be paid the funds held by the trustee.
       That mechanism is pursuant to section 503(b) or section 1326(a). In this
       case the Division admits that it has no claim under either section 503(b) or
       under section 1326(a), but it asks this Court to direct the trustee to pay the
       Division anyway on the grounds that it was the first creditor to exercise its
       non-bankruptcy law collection remedies to, in effect, attach the funds held
       by the trustee. To honor the Division’s collection order would require this
       Court to ignore the express language of Bankruptcy Code sections 1326
       and 349.

J.A. 181-82 (footnote omitted).

       The bankruptcy court bolstered its conclusion by pointing out that, if it adopted the

Division’s preferred construction, it would create a “race to the trustee,” a result at odds

with the effect of a dismissal under § 349(b)(3). J.A. 182. Thus, the bankruptcy court

found that its reading of § 1326(a)(2) “returned [the parties] as closely as possible to their

respective [pre-petition] positions.” Id. 4

       In this case, the Division does not assert a claim under section 503(b) nor
       any rights to payments due and owing under section 1326(a)(3). No other
       creditors or parties in interest assert any claims under section 503(b) or
       right to payments due and owing under section 1326. Accordingly, under
       the statute, the funds held by the trustee “shall” be returned to the debtor.

J.A. 181 n.1.
       4
         The bankruptcy court stayed its order pending appeal. That stay is still in effect
and the Trustee has not distributed the $3,000 in post-petition payments.

                                              7
       The Division appealed to the district court, which affirmed the bankruptcy court’s

decision finding that the “[plain] language [of § 1326(a)(2)] . . . is determinative.” J.A.

247. The district court noted that, after the automatic stay expires, creditors may pursue

state law remedies against the debtor generally, including levying upon “other individuals

who possess the debtor’s property or income (for example, an employer).” J.A. 248.

“But Congress changed the default situation in Section 1326(a)(2) by directing the

Chapter 13 trustee to give the funds [paid to him by the debtor back] to the debtor.” Id.

       Relying on the plain language of the statute, the district court rejected the

Division’s alternate arguments. As the district court observed, Congress was certainly

free to determine which party received a Chapter 13 debtor’s funds upon dismissal, and it

had made that choice unequivocally in § 1326(a)(2).

       The Division appeals the district court’s judgment. This Court has jurisdiction

under 28 U.S.C. § 158(d)(1).

                                                 II.

                                                 A.

       “When considering an appeal from a district court acting in its capacity as a

bankruptcy appellate court, [this Court] conduct[s] an independent review of the

bankruptcy court’s decision, reviewing factual findings for clear error and legal

conclusions de novo.” Campbell v. Hanover Ins. Co. (In re ESA Envtl. Specialists, Inc.),

709 F.3d 388, 394 (4th Cir. 2013).

                                                 B.

                                             8
       The Supreme Court has long held that the “interpretation of the Bankruptcy Code

starts ‘where all such inquiries must begin: with the language of the statute itself.’”

Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 69 (2011) (quoting United States v. Ron

Pair Enters., 489 U.S. 235, 241 (1989)). Congress “says in a statute what it means and

means in a statute what it says there.” Hartford Underwriters Ins. Co. v. Union Planters

Bank, N.A., 530 U.S. 1, 6 (2000) (internal quotation marks and citation omitted). If the

statute’s language is plain, that is “where the inquiry should end.” Ron Pair Enters., 489

U.S. at 241. The Court “should give effect to every word of a statute whenever possible.”

Carroll v. Logan, 735 F.3d 147, 152 (4th Cir. 2013).

       Section 1326(a)(2) plainly states that when the bankruptcy court does not confirm

a plan, the Chapter 13 trustee “shall return” post-petition payments to the debtor. 11

U.S.C. § 1326(a)(2). Congress has carved out an exception to this clear rule only for

“payments not previously paid and not yet due and owing to creditors” under §

1326(a)(3) and after deducting “any unpaid claim allowed under section 503(b).” Id.

The parties fully agree that neither of these exceptions apply in this case. Consequently,

that leaves only the clear statutory direction to the trustee who “shall return any such

payments . . . to the debtor[.]” Id. (emphasis added).

       Congress could have added other exceptions to this rule, but it did not. Fed.

Commc’ns Comm’n v. Nextwave Pers. Commc’ns Inc., 537 U.S. 293, 302 (2003)

(“[W]here Congress has intended to provide regulatory exceptions to provisions of the

Bankruptcy Code, it has done so clearly and expressly[.]”). For example, Congress

obviously knows how to make a special designation for child support payments when it

                                             9
so chooses, as Congress did in the immediately preceding statute, § 1325.         Under

§ 1325(b)(2), child support payments are specifically excluded as part of a debtor’s

“disposable income.” But Congress simply chose not to reference such payments in the

application of § 1326(a)(2). See Russello v. United States, 464 U.S. 16, 23 (1983)

(“Where Congress includes particular language in one section of a statute but omits it in

another    section     of    the      same        Act,   it   is   generally   presumed

that Congress acts intentionally and purposely in the disparate inclusion or exclusion.”)

(internal quotation marks omitted).

      Thus, Congress’ intention “is unmistakably clear in the language of the statute”:

when a case is not confirmed, the trustee must return the post-petition payments to the

debtor. Dellmuth v. Muth, 491 U.S. 223, 230 (1989) (internal quotation marks omitted).

Here, Webb’s Chapter 13 plan was not confirmed. Pursuant to the plain language of the

statute, the Trustee must now return those post-petition payments to him. See Carroll,

735 F.3d at 152.

                                                  C.

      Notwithstanding the clear direction from Congress in § 1326(a)(2), the Division

presents three arguments in support of its position. None have merit.

      First, the Division argues that the language of § 1326(a) neither prohibits the

Trustee from complying with the Order to Withhold nor mandates that the Chapter 13

trustee return payments to a debtor whenever a Chapter 13 plan is not confirmed.

Instead, according to the Division, requiring return of the post-petition payments would

                                             10
lead to an absurd result by forcing the trustee to return funds to the debtor even when the

debtor contemplates submitting an amended plan. We disagree.

       The Division’s argument simply ignores the plain statutory direction that the

trustee “shall return any [post-petition] payments . . . to the debtor[.]” 11 U.S.C. §

1326(a)(2) (emphasis added). And there is nothing at all absurd about returning the funds

to the debtor. Besides being Congress’ specific choice, it follows Congress’ direction in

§ 349(b)(3) that the effect of dismissal of a case “revests the property of the estate in the

entity in which such property was vested immediately before the commencement of [a

bankruptcy case].” 11 U.S.C. § 349(b)(3). Here, that “entity” is Webb. Id. This result

“follow[s] directly from Congress’ decisions” to have these payments returned to the

debtor after a confirmation of his plan is denied and particularly when the case is also

dismissed. Harris, 135 S. Ct. at 1839. That outcome is not “demonstrably at odds with

clearly expressed congressional intent.”     RCI Tech. Corp. v. Sunterra Corp. (In re

Sunterra Corp.), 361 F.3d 257, 265 (4th Cir. 2004) (quoting Sigmon Coal Co., Inc. v.

Apfel, 226 F.3d 291, 304 (4th Cir. 2000)). Neither is the outcome “so gross as to shock

the general moral or common sense.” Id. (quoting Sigmon Coal Co., 226 F.3d at 304). If

anything, the absurd result would be to ignore the plain statutory direction and create the

“race to the trustee” that the bankruptcy court rejected.        Thus, we agree with the

bankruptcy and district courts that the Division’s absurdity argument is without merit.

       Second, the Division argues that the Court should read § 1326(a) in conjunction

with §§ 349 and 362, the provisions of the Bankruptcy Code governing, respectively,

                                             11
dismissal and the automatic stay. But following the plain language of § 1326(a)(2)

creates no conflict with these other provisions of the Bankruptcy Code.

      The Division’s reference to § 349 is puzzling. As pointed out above, § 349(b)(3)

“revests the property of the estate in the entity in which such property was vested

immediately before the commencement of [a bankruptcy case]” upon dismissal of the

case. 11 U.S.C. § 349(b)(3). That clear language simply reinforces the district court’s

determination that the payments be returned to Webb as the debtor whose case has been

dismissed.

      The Division’s § 362 argument fares no better; under that statute, the automatic

stay shielded Webb’s post-petition payments from the Division or any other creditors

during the Chapter 13 proceeding. Once the bankruptcy court dismissed the case, the

automatic stay was lifted. The Division contends that it now should be able to pursue its

remedies available in state court against Webb and directly levy on the Trustee as a

stakeholder of Webb’s assets.

      As the district court pointed out, the Division’s approach would generally be

applicable to persons who possess Webb’s property. But doing so in this particular

instance would require the Trustee to relinquish post-petition payments to an entity other

than the one designated by the statute—the debtor. See 11 U.S.C. § 1326(a)(2). The

Division’s § 362 argument is simply unrelated to the clear requirement of § 1326(a)(2).

As the district court noted: “Section 362’s description of a stay’s conclusion does not

contradict or muddle Section 1326(a)(2)’s statement about who gets the funds, it only

addresses when those funds are available.” J.A. 248.

                                           12
       Further, the Division contends that because funds the Trustee now holds did not

exist before Webb filed his petition, revesting that money in him unfairly enhances his

financial position. The Division posits that without the bankruptcy case, the money

would not have been available to him because the Division could have garnished or

levied upon it. Thus, according to the Division, the plain language of § 1326(a)(2)

affords him greater protections than the Bankruptcy Code intends by protecting his

money even after the stay expires. Whether that is true or not, that is the choice Congress

has made and “follow[s] directly from Congress’ decisions to shield postpetition wages

from creditors” during the pendency of a Chapter 13 proceeding and to return the

debtor’s post-petition payments to him. Harris, 135 S. Ct. at 1839.

       Lastly, the Division argues that reading § 1326 to bar levy on the Trustee through

the Order to withhold overrides Virginia Code § 63.2-1929. The Division asserts that this

violates a presumption that Congress did not intend to preempt state law by enacting a

federal statute. The Division contends that § 1326(a)(2) and state laws allowing levy or

garnishment are easily reconciled—if § 1326(a)(2) does not require the Trustee to refund

the post-petition payments to Webb.

       We are not persuaded. The Court is not at liberty to ignore the plain text of §

1326(a)(2): “Under the Supremacy Clause of the Constitution, U.S. Const. art. VI, cl. 2, a

state law which conflicts with federal law is preempted.” Cox v. Shalala, 112 F.3d 151,

154 (4th Cir. 1997). Thus, if “the federal statute dictates one result and the state statute

another, the state statute is preempted to the extent that it directly conflicts with federal

law.” Id. Here, any state authority under Virginia Code § 63.2-1929 for levy on the

                                             13
Trustee directly conflicts with the federal statutory mandate in § 1326(a)(2) that the

Trustee refund the post-petition payments to Webb.           Thus, § 1326(a)(2) preempts

Virginia Code § 63.2-1929 and requires that the Trustee return the post-petition payments

to Webb.

                                             III.

       As the bankruptcy and district courts found, the plain language of § 1326(a)(2)

resolves this case and requires the Trustee return the post-petition payments to Webb.

Once the Trustee returns the funds to Webb, the Division, or any other creditor, is free to

levy upon Webb or others who possess his property. Section 1326(a)(2) simply prevents

the Division from levying upon the Trustee when he is in possession of the post-petition

payments.

       Thus, for all the foregoing reasons, the judgment of the district court is

                                                                               AFFIRMED.

                                             14