In Re: Willard

Background

Lucille S. Willard appealed a Bankruptcy Court distribution order entered during her Chapter 13 case. The order required Willard to turn over $354,333.77 in net proceeds from the sale of an investment property to Chapter 13 Trustee Krista Preuss. It also denied Willard’s request to have her attorneys’ fees paid directly from the sale proceeds.

Willard filed for Chapter 13 bankruptcy on February 12, 2020. Her proposed repayment plan stated that she was trying to sell the property and that secured creditors would be paid from the sale. The plan was never amended and remained unconfirmed when Willard later sought approval for a sale under Section 363 of the Bankruptcy Code, which governs certain sales of bankruptcy-estate property.

The Bankruptcy Court initially ruled that professional fees associated with the sale could be paid from the sale proceeds, while other fees would be handled through the repayment plan. At a later hearing, however, it stated that Willard’s counsel could not be paid from the sale and that the proceeds had to be turned over to the trustee before plan confirmation. The Bankruptcy Court entered the challenged order on October 20, 2021.

Sale proceeds

On appeal, Willard argued that the Bankruptcy Court could not compel her to turn over proceeds from property she owned before filing bankruptcy. She argued that Chapter 13 permits a debtor to keep pre-filing property and generally requires commitment of post-filing disposable income to the repayment plan. The trustee conceded that the proceeds were not “disposable income” under the relevant Bankruptcy Code provision, but argued that the Bankruptcy Court had authority under Section 105(a) to require turnover so the proposed plan could be feasible.

Judge Roman rejected that argument. He relied on Chapter 13’s structure, which allows debtors to keep pre-filing property while paying creditors from future income under an approved plan. He concluded that a debtor cannot be compelled to turn over a pre-filing asset, whether before or after plan confirmation, simply because the plan may otherwise be infeasible. He stated that the plan might be denied confirmation if it could not work without the proceeds, but the Bankruptcy Code did not authorize the Bankruptcy Court to require turnover of the property for that reason.

The District Court therefore vacated the Distribution Order to the extent it required Willard to turn over the sale proceeds and held that Willard was entitled to keep them.

Attorneys’ fees

The District Court separately addressed Willard’s request to pay her attorneys from the sale proceeds. The Bankruptcy Court’s order denied the request under Section 506(c), which permits a trustee to recover reasonable and necessary costs of preserving or disposing of property securing a secured claim when the costs benefit the secured-claim holder.

Judge Roman found the Bankruptcy Court’s use of Section 506(c) unexplained. Willard’s counsel had stated that the fee request was made under Sections 363(b) and 105, not Section 506(c), and the trustee had not argued that Section 506(c) supplied the applicable standard. The District Court stated that, if the Bankruptcy Court had deliberately applied Section 506(c), it needed to explain the reasoning supporting that decision. The District Court did not decide whether Willard’s attorneys were ultimately entitled to payment from the proceeds.

Disposition

The Distribution Order was VACATED as to both issues on appeal. The matter was REMANDED to the Bankruptcy Court for further consideration, clarification, or proceedings consistent with the opinion and order. The District Court directed the clerk to close the case.