Sikes v. James et al
Filing
18
MEMORANDUM RULING re 1 Bankruptcy Appeal, filed by Lucy G Sikes. Signed by Judge S Maurice Hicks on 09/28/2016. (crt,McDonnell, D)
UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF LOUISIANA
SHREVEPORT DIVISION
LUCY G. SIKES
CIVIL ACTION NO. 15-1865
VERSUS
JUDGE S. MAURICE HICKS, JR.
MICHAEL CHAD JAMES AND
SANTANDER CONSUMER USA, INC.
MAGISTRATE JUDGE HORNSBY
MEMORANDUM RULING
Before the Court is an appeal by appellant Lucy G. Sikes (“Sikes”), the Standing
Chapter 13 Trustee for the Western District of Louisiana, Shreveport Division. For the
following reasons, the Bankruptcy Court’s ruling is AFFIRMED IN PART and REVERSED
IN PART.
PROCEDURAL BACKGROUND
This dispute arises out of a United States Bankruptcy Court decision that Sikes may
not collect a trustee fee under 28 U.S.C. § 586(e)(2) on a payment of insurance proceeds
to the secured creditor, Santander Consumer USA, Inc. (“Santander”). Sikes appealed the
Bankruptcy Court’s decision to this Court, arguing (1) that she is entitled to such a fee and
(2) that she should not be required to receive such insurance proceeds before paying them
to the secured creditor, particularly without compensation through the application of the
statutory fee.
FACTUAL BACKGROUND
Sikes is the Standing Chapter 13 Trustee for the Western District of Louisiana,
Shreveport Division. She is appointed by the United States Trustee’s office to
administer all cases filed under Chapter 13 of the Bankruptcy Code in an eight-
Page 1 of 14
parish area (covering the parishes of Bienville, Bossier, Caddo, Claiborne, DeSoto, Red
River, Sabine and Webster).
Bankruptcy debtor Michael Chad James (“James”) executed a Retail Installment
Sale Contract on June 7, 2013, granting a security interest in a 2013 Chrysler 200 motor
vehicle to Santander. James filed this Chapter 13 case on October 31, 2013, and his
Chapter 13 plan was confirmed on January 28, 2014. Santander began receiving payments
on its secured loan under the terms of the confirmed Chapter 13 plan.
After the confirmation of the plan, the motor vehicle securing Santander’s claim was
involved in an accident. The insurance company insuring the vehicle deemed it a total
loss, meaning the cost of repairs to the vehicle exceeded the vehicle’s value. Therefore,
the insurance company tendered insurance proceeds totaling $16,228.51 to Sikes. At the
time of the accident, the amount of James’ debt to Santander was $24,228.51, entitling
Santander to the entirety of the insurance proceeds. Payment of the proceeds to Sikes
before payment to Santander was in accordance with the Bankruptcy Court’s policy
requiring payment of insurance policy proceeds from destroyed property of the bankruptcy
estate to the Trustee before remittance to the secured creditor.1 See Record Document 1-1.
In a Motion for Relief from Stay and to Apply Insurance Proceeds, Santander
sought payment of the entire amount of the insurance proceeds to Santander without
deduction of the statutory fee for Chapter 13 Trustees. James consented to the lifting of the
stay, but Sikes objected. The Bankruptcy Court (1) granted the Motion for Relief from Stay
and to Apply Insurance Proceeds and (2) ordered Sikes to pay Santander the entirety of
1
Neither the Bankruptcy Court nor the parties to this case cited a standing order or
other document detailing this policy, so it appears that the policy is simply an unwritten rule
of the Bankruptcy Court in the Shreveport Division. See Record Documents 1, 11, 13, 15.
Page 2 of 14
the insurance proceeds without deduction of the statutory fee for Chapter 13 trustees. See
id. Sikes appealed, arguing that she is entitled to the statutory fee and that she should not
be required to receive insurance payments like these in the future if she is not to be
compensated for administering them.
LAW AND ANALYSIS
A.
Jurisdiction
The United States Bankruptcy Court has the authority to issue final orders
pursuant to 28 U.S.C.§157(b). This United States District Court for the Western
District of Louisiana, Shreveport Division has subject matter jurisdiction, pursuant to 28
U.S.C. § 158(a)(1) and 28 U.S.C.§1334(b), to hear appeals from a final order of the
Bankruptcy Court. This is an appeal of the final order entered from the United States
Bankruptcy Court for the Western District of Louisiana, Shreveport Division on May 29,
2015 granting Santander’s Motion for Relief from Stay and to Apply Insurance Proceeds.
See Record Document 1-1.
B.
Standard of Review
There are no factual disputes in this case. The issues presented on appeal are
purely legal issues. A District Court reviews a Bankruptcy Court’s conclusions of law under
a de novo standard of review. See In re Hammons, 614 F.2d 399, 403 (5th Cir. 1980).
C.
Analysis
Under 28 U.S.C. §586(e)(2), governing fees for the Trustee, “such individual shall
collect such percentage fee from all payments received by such individual under plans in
the cases under chapter 12 or 13 of title 11 for which such individual serves as standing
trustee.” The questions in this appeal are (1) whether the Trustee is entitled to this statutory
Page 3 of 14
fee on insurance proceeds owed to a secured creditor when a Bankruptcy Court policy
requires that such proceeds first be paid to the Trustee before disbursement to the secured
creditor, and (2) whether the Court should reverse the Bankruptcy Court’s policy of
requiring the payment of insurance proceeds to the Trustee first.
On the first issue, Sikes argues that she is entitled to the statutory fee on the
insurance proceeds. She relies primarily upon the holding in Nardello v. Balboa (In re
Nardello) 514 B.R. 105 (Bankr. D.N.J. 2014) and on policy reasons to support this
argument. Both James and Santander argue that the Trustee is not entitled to the statutory
fee on these proceeds under the plain language of 28 U.S.C. §586(e)(2), the holding in
McRoberts v. Associates Commer. Corp. (In re Derickson) 226 B.R. 879 (Bankr. S.D. Ill.
1998), and policy reasons. On the second issue, both Sikes and James agree that the
Bankruptcy Court’s policy requiring payment of the insurance proceeds to the Trustee
before disbursement to the secured creditor is not required by the Bankruptcy Code and
is contrary to the weight of authority from courts that have addressed the issue. Santander
takes no position on this issue.
I.
Whether the Trustee Is Entitled to a Fee under 28 U.S.C. § 586(e)
a.
The Trustee Is Not Entitled to a Statutory Fee on the
Insurance Proceeds Paid to the Secured Creditor Under
the Plain Language of 28 U.S.C. § 586(e)(2).
Sikes argues that the statute’s language stating that “all payments received” by the
Trustee “under plans” in cases under Chapter 13 are subject to the Trustee fee mandates
that she receive a fee for all amounts she actually receives, including the insurance
proceeds involved here. 28 U.S.C. §586(e)(2); see Record Document 11 at 8-16.
Unfortunately, neither the Bankruptcy Code nor the legislative history of the Code define
Page 4 of 14
these phrases. See Nardello, 514 B.R. 105 at 110; 8 Collier on Bankruptcy P 1302.05[1][b]
(16th ed. rev. 2012). As this case involves construction of a statute, the Court must resort
to the canons of construction. The most important canon of construction is what is
sometimes referred to as the plain meaning rule: courts must give effect to the clear
meaning of statutes as written. See Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469,
476 (1992).
As James and Santander correctly point out, Sikes’ argument fails to adequately
address the fact that the statutory fee under 28 U.S.C. § 586(e)(2) only applies when
payments are made to the Trustee “under plans.” See Record Document 13 at 8-17. The
terms of James’ Chapter 13 plan do not provide for payment of the insurance proceeds
from the destruction of collateral to the Chapter 13 trustee. Rather, the plan provides that
“the debtor will maintain full coverage insurance against all loss on the property or
properties that the lien or mortgage attaches to, and the lien holder or mortgagee shall be
shown as the loss payee to receive payment in the event of loss.” Record Document 2-2
at 174.
Thus, the plan’s provisions actually dictate that in the event of the destruction of any
of the debtor’s property that is subject to the security interest of a secured creditor, the
secured creditor is to receive payment of insurance on the destroyed collateral. The plan
makes no mention of payment of such insurance proceeds to the Trustee. The only reason
the Trustee received the payment of the proceeds is that the Bankruptcy Court has a policy
requiring payment to first be made to the Bankruptcy Trustee for accounting purposes prior
to disbursement to the secured creditor. See Record Document 1-1. Because (1) the plain
language of § 586(e)(2) provides for a fee to the Trustee only when payments are made
Page 5 of 14
“under plans” and (2) this Plan contemplates direct payment to the secured creditor, the
disbursement of the insurance proceeds from Sikes to Santander does not qualify for the
statutory Trustee fee.
b.
Case Law Interpreting 28 U.S.C. § 586(e)(2) Supports the
Conclusion that the Trustee Is Not Entitled to a Fee on the
Insurance Proceeds Paid to the Secured Creditor.
Sikes cites to several cases interpreting 28 U.S.C. § 586(e)(2) to support her
position, particularly to Nardello, 514 B.R. 105 (Bankr. D.N.J. 2014). James and Santander
cite to McRoberts, 226 B.R. 879 (Bankr. S.D. Ill. 1998), to support their position. The Court
finds Nardello to be factually distinguishable and finds its legal conclusion unpersuasive,
and instead finds McRoberts to be both factually similar to the instant case and legally
correct.
Nardello involved a Chapter 13 bankruptcy in which some co-owners of property with
the debtor filed a motion for approval of the sale of real estate with the Bankruptcy Court.
514 B.R. at 106. The court entered an order authorizing the sale of the property and
ordering the trustee to hold the proceeds of the sale pending further order of the court. See
id. After the sale of the property, the Court allowed the debtor to voluntarily dismiss his
bankruptcy case. See id. Eventually, the court allowed the trustee to pay the realtor who
listed the property, the co-owners, and the debtor from these proceeds. See id. at 106-07.
There was also a dispute over fees for the co-owners’ attorney, and the trustee had to
issue a check to the debtor and later request its return. See id. at 107. The trustee had
possession of the funds from the sale for approximately three and one half months. See
id. The Bankruptcy Court allowed the Trustee to collect a 6.6 percent fee on all payments
received by the trustee (including the portion of the proceeds of the sale that belonged to
Page 6 of 14
the co-owners) over the debtor’s objection. See id. On appeal, the district court affirmed the
award of the fee to the trustee. See id. at 106.
Nardello is factually distinguishable from the instant case. There, the trustee was
required to hold the proceeds of the sale of the property for several months, make
distributions to several different parties at different times, and deal with the question of
whether the co-owners’ attorney was entitled to a fee. In the instant case, there are no such
complications: the trustee must simply transfer the insurance proceeds to the secured
creditor. Thus, the situation in Nardello presented a stronger argument from a policy
perspective for payment of the statutory fee to the trustee than does the instant case. See
Section III, infra.
Additionally, to the extent the Nardello court interpreted 28 U.S.C. § 586(e)(2), the
Court finds its analysis unpersuasive. Though the Nardello court did recognize the statute’s
language stating that only payments received by the trustee “under plans” qualify for the
payment of a fee to the trustee, the court never fully addressed this issue. See id. at 11012, 116-17. Instead, though the court quoted the “under plans” language, it concluded that
“amounts received under plans refers to all monies received by the standing trustee,”
essentially ignoring the “under plans” language. Id. at 111. The debtor argued that because
a part of the proceeds of the sale were never the debtor’s property at all but instead
belonged to the co-owners, the payment of these proceeds could not possibly have been
payments “under [a] plan.” Id. at 116-17. The court concluded that the trustee “was entitled
to calculate her percentage fee based on ‘all payments received’ regardless of the fact that
Debtor was only entitled to half of the sale proceeds,” again essentially omitting the “under
plans” language from its consideration. Id. at 116. Thus, because of the factual differences
Page 7 of 14
between this case and Nardello and the fact that the Court finds Nardello’s interpretation
of 28 U.S.C. § 586(e)(2) to be inconsistent with the statute’s plain language, the Court does
not find the Nardello analysis persuasive.
McRoberts is more factually similar to the instant case, and the Court finds its legal
analysis more persuasive. 226 B.R. 879. That case actually addressed two cases giving
rise to the question of whether the Chapter 13 Trustee was entitled to receive the statutory
fee. See id. at 880. Of the two, In re Murray is more factually similar to the instant case.
See id. There, the debtor owned an uninsured vehicle and the trustee force-placed
insurance on it once the debtor filed bankruptcy. See id. at n.2. The debtor totaled the
vehicle in a collision, and the insurance company paid the trustee the insurance proceeds
for the vehicle. See id. at 880. The trustee planned to remit the proceeds to the secured
creditor minus his statutory fee, and the secured creditor objected, arguing that the
proceeds were not subject to the fee. See id. The Court held that the insurance proceeds
were not subject to the trustee’s statutory fee and ordered that they be turned over to the
secured creditor without subtraction of the fee. See id. at 880-82.
The McRoberts court reached this conclusion based primarily upon 28 U.S.C. §
586(e)(2)’s “payment” language and other “payment” language in the Bankruptcy Code
rather than the “under plans” language discussed above, but this rationale provides
additional support for the conclusion that the insurance proceeds in the instant case are not
subject to the Trustee fee. See id. Chapter 13 bankruptcies involve restructuring debt and
establishing a plan to make monthly payments out of the debtor’s future earnings. See id.
at 881. This system revolves around the debtor making these monthly payments of “future
earnings or other income” to the trustee for distribution on creditors’ claims. 11 U.S.C. §
Page 8 of 14
1322(a)(1). Thus, these monthly payments are much different than the payment of
insurance proceeds at issue here; they are regular payments from the debtor’s income
rather than a one-time payment from an insurance company to replace destroyed collateral.
As the McRoberts court stated, “the insurance proceeds are a substitute for the [creditor’s]
collateral, which was, effectively, surrendered upon its destruction.” 226 B.R. 879 at 881.
As such, the proceeds are substantively different from the type of “payments” that give rise
to a fee for the trustee under 28 U.S.C. § 586(e)(2) even if they briefly pass through the
trustee’s hands, as they did in both in McRoberts and the instant case. Id.
c.
Policy Considerations Support the Conclusion That the
Trustee is Not Entitled to a Statutory Fee on the Insurance
Proceeds Paid to the Secured Creditor.
Though the plain language of 28 U.S.C. § 586(e)(2) alone is sufficient to compel the
Court to affirm the Bankruptcy Court’s order with respect to the insurance proceeds at issue
in this case, the parties have also raised policy issues that should be addressed. Sikes
correctly notes that Congress designed the bankruptcy trustee system to be financially selfsufficient, and that the trustee system relies upon the fees in 28 U.S.C. § 586(e)(2) to be
self-sufficient. She also argues that “the ruling by the Bankruptcy Court could result in
thousands of checks which must be held, monitored, and disbursed requiring countless
time and labor for which the Trustee now cannot be compensated.” Record Document 11
at 24. By contrast, James and Santander argue that allowing Sikes to collect the statutory
fee, which is seven percent in this district and division, would result in an inequitable
windfall to the trustee to the detriment of both of them. See Record Document 1-1 at 3.
Though the Court recognizes that the Bankruptcy Court’s holding required the
trustee to perform some administrative acts without compensation, the Court finds that the
Page 9 of 14
better policy in this instance weighs in favor of holding that the trustee is not entitled to a
statutory fee on this insurance payment. From the limited information available to the Court
from the record regarding the Bankruptcy Court’s requirement that such insurance
proceeds first be paid to the trustee, it appears that the trustee’s duties regarding this
insurance payment under the Bankruptcy Court’s policy and order are rather limited. In fact,
it appears that the trustee received the insurance payments and simply disbursed them to
the secured party, making note of their receipt and reducing the amount owed to the
secured creditor accordingly. Thus, though the Bankruptcy Court’s order with respect to this
case certainly increased costs to the trustee, it appears that these costs were minimal.
By contrast, the size of the fee that the Trustee would receive in this case appears
to be drastically high compared to the amount of work involved in the administrative tasks
required of the trustee. The amount of insurance proceeds is $16,228.51. Seven percent
of $16,228.51 is $1,136.00. The Court cannot hold that performing these administrative
tasks cost the trustee $1,136.00.2 Additionally, this large windfall to the trustee would be
inequitable to both the secured creditor and the debtor. Obviously, Santander would
immediately receive $1,136.00 less if the Court were to hold that the trustee is entitled to
the statutory fee. James would also be adversely affected by the payment of the Trustee’s
fee, as the amount of Santander’s unsecured deficiency claim against him would be
2
James argues that the payment of such a large fee to the Trustee violates 11
U.S.C. § 506(c)’s provision that “the Trustee may recover from property securing an
allowed secured claim the reasonable necessary costs and expenses of preserving, or
disposing of, such property to the extent of any benefit to the holder of such claim.” Record
Document 13 at 22. He argues that because there is no benefit to the secured party from
the Trustee’s administration of the insurance proceeds, payment of such a fee would
exceed what is allowed by this statute. Though this may be a legitimate argument, the
Court need not address it as it has based its decision on other grounds.
Page 10 of 14
$1,136.00 greater. Therefore, the Court finds that public policy also favors affirming the
Bankruptcy Court’s holding that the trustee is not entitled to collect a fee on this one-time
payment of insurance proceeds even though the trustee was required to briefly administer
these funds.
II.
The Bankruptcy Court’s Policy Requiring Payment of Insurance
Proceeds for Destroyed Collateral to the Trustee Is Not
Necessary Under the Bankruptcy Code.
The second issue in this appeal is Sikes’ challenge to the Bankruptcy Court policy
giving rise to the question of the trustee’s entitlement to the statutory fee.3 As discussed,
the debtor’s plan itself mandates that secured creditors be the designated payees of
insurance on collateral and that they are “to receive payment in the event of loss.” Record
Document 2-2 at 174. Thus, without the Bankruptcy Court’s policy requiring payment of the
proceeds to the trustee for accounting purposes first, the issue of the trustee’s entitlement
to a fee would never have arisen.
In its decision, the Bankruptcy Court stated that this policy “ensures that all parties,
including the debtor, secured creditors and unsecured creditors, only receive funds to which
they are entitled . . . [and] ensures accurate record keeping to which the Court, creditors
and the debtor may access and on which they may rely.” Record Document 1-1 at 4. The
Bankruptcy Court emphasized that “having a centralized database which can be easily
3
The Bankruptcy Court’s order does not actually order the trustee to receive the
proceeds of the insurance policy, as the trustee had already received these payments
pursuant to the Bankruptcy Court’s longstanding policy requiring the trustee to receive
them. See Record Document 1-1. However, the Trustee has challenged this policy and
argues that it should be reversed. See Record Document 11 at 21-25. Therefore, the Court
considers the challenge to the policy itself to be the second issue presented on appeal
even though the trustee was never directed to receive the proceeds in the actual order from
which this appeal is being taken.
Page 11 of 14
accessed, and which is accurate, is of the utmost importance to the Court in both reviewing
and evaluating cases.” Id.
First, the Court notes that the Bankruptcy Code allows for a direct payment of
collateral from a debtor to the holder of the security interest in the collateral. 11 U.S.C. §
1325(a)(5)(C) (“the court shall affirm a plan if . . . with respect to each allowed secured
claim provided for by the plan . . . the debtor surrenders the property securing such claim
to such holder”). Obviously, in the instant case it is the insurance company that would
actually make the payment of the insurance proceeds to Santander, but such a payment
would be at the direction of James under his Chapter 13 plan. See Record Document 2-2
at 174. Thus, under these circumstances, the Code imposes no requirement that the
trustee first receive collateral before it is turned over to a secured creditor.
Second, many courts that have addressed the argument that the trustee is required
to receive insurance payments for destroyed collateral before the payments are relayed to
the correct parties have held that there is no such requirement. The trustee in McRoberts
argued both that he should receive the statutory fee as discussed above and that it was
necessary for the insurance proceeds for the destroyed collateral to be paid to the trustee
first. 226 B.R. 879 at 882. He argued that “if creditors are permitted to receive the
insurance proceeds without trustee intervention, there will be no way of monitoring what
creditors have received, and this could result in overpayments.” Id. The court rejected this
argument, stating that this concern could “be easily remedied by requiring creditors to
provide an accounting to the trustee of any insurance proceeds they receive.” Id. This
policy would ensure that the creditors receive no more than they are entitled to receive
without creating any unnecessary costs. Id.
Page 12 of 14
The trustee in In re Gregory made a similar argument, which that court also rejected.
143 B.R. 424 (E.D. Tex. 1992). There, the Chapter 13 debtors sought to sell their home to
satisfy a nondischargeable tax debt owed to the IRS and directly pay the amount of the tax
debt to the IRS. See id. at 425. The trustee objected to this plan, arguing in part that
“absent his control of the receipt and disbursement of the payment to IRS, he will never be
in a position to certify to the court that payments under the plan are complete and that all
priority claims are paid.” Id. at 427. The Court rejected this argument, stating that the
trustee had not demonstrated how the administration of the bankruptcy estate would be
assisted in any way by requiring the debtors to funnel their payment to the trustee. See id.
at 428. Rather, considering the sophistication of the creditor receiving the payment, the fact
that the payment was a single payment from one source, and the lack of impairment of the
trustee’s ability to perform his role, the court held that it was unnecessary to require the
trustee to receive the payment first. See id. at 427-28.
The instant case similarly demonstrates that the Bankruptcy Court’s policy, while
well-intentioned, actually gives rise to more problems than it solves. Though the costs
involved for the trustee are relatively low, they are unnecessary. As the McRoberts court
pointed out, the accounting concerns behind this policy can be remedied by requiring
secured creditors like Santander to provide an accounting to the Bankruptcy Court of any
insurance proceeds received. 226 B.R. 879 at 882. Santander, like most secured creditors,
is a sophisticated party that is certainly capable of providing such an accounting. Unlike the
trustee in In re Gregory, Sikes actively supports this solution and makes no argument that
this method of paying insurance proceeds to secured creditors impairs her ability to perform
her role. 143 B.R. 424 at 427; see Record Document 11 at 23-24. Therefore, the Court
Page 13 of 14
finds that the Bankruptcy Court’s finding/requirement that the trustee must receive
insurance proceeds before paying them to creditors, which was based on the policy that
required payment of the secured creditor’s portion of the insurance proceeds to Sikes,
should be reversed. This matter is remanded such that a written policy consistent with the
instant opinion shall be implemented by the Bankruptcy Court.
CONCLUSION
For the reasons set forth above, the ruling issued May 29, 2015, by Bankruptcy
Judge Jeff Norman is AFFIRMED IN PART and REVERSED IN PART. This matter is
remanded to the Bankruptcy Court for the purpose of implementing a written policy
consistent with the instant opinion.
THUS DONE AND SIGNED at Shreveport, Louisiana, this 28th day of September,
2016.
Page 14 of 14
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?