Commonwealth of Va., Div. of Social Services, Div of Child Support Enforcement v. Beskin

Filing 14

MEMORANDUM OPINION. Signed by Judge Norman K. Moon on 10/19/17. (hnw) (Main Document 14 replaced on 10/19/2017-to insert signature date) (hnw).

10/19/2017

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF VIRGINIA
CHARLOTTESVILLE DIVISION
COMMONWEALTH OF VIRGINIA,
DEPARTMENT OF SOCIAL SERVICES,
DIVISION OF CHILD SUPPORT
ENFORCEMENT,
Appellant,

CASE NO. 3:17-CV-00028
MEMORANDUM OPINION

v.
JUDGE NORMAN K. MOON

HERBERT L. BESKIN, ET AL.,
Appellees.

The debtor in this case, Mr. Webb, voluntarily entered Chapter 13 bankruptcy. Chapter
13 bankruptcy, unlike Chapter 7 bankruptcy, allows an individual to keep his property by
agreeing to repay his debts out of his future earnings. As part of that process, Webb sent a
portion of his income to the bankruptcy trustee. But Webb was unable to develop a satisfactory
bankruptcy plan, and so the trustee prepared to return these payments to Webb. At this point, the
Division of Child Support Enforcement (“the Division”) ordered the trustee to instead give the
Division this prepaid income because Webb had fallen behind on his child support payments.
The trustee, unsure of what to do, asked the Bankruptcy Court to clarify his obligations. The
Bankruptcy Court ruled that he should return the money to the debtor. The Division appealed,
arguing that 11 U.S.C. § 1326(a)(2), which states that these payments should be returned “to the
debtor,” does not require the trustee to return the income to Webb. This appeal concerns the
meaning of that statute. This Court will affirm the Bankruptcy Court and hold that the money
must be returned to the debtor.
I. PROCEDURAL BACKGROUND
Webb filed for Chapter 13 bankruptcy on July 28, 2016. (Dkt. 5 at 3). At that time, he
owed the Division $74,277.32. (Id.). The Division filed a proof of claim for this amount in the

bankruptcy case.

(Id.).

In accordance with Chapter 13’s requirements, Webb paid

approximately $3,000 of his income to the trustee. (Id.). However, Webb was unable to create a
bankruptcy plan that met the statutory requirements, so he abandoned chapter 13 bankruptcy.
(Id.). His case was dismissed. (Id.). Acting in accordance with state law, the Division then
issued and served the Trustee with an order to withhold up to $80,354.59 from Webb. (Id.). The
trustee filed a motion in the Bankruptcy Court asking the court to order him to either disburse the
money to the debtor or to the Division. (Id.). This question was briefed and argued before the
Bankruptcy Court. (Id.). The Bankruptcy Court entered an order overruling the Division’s
objection and instructing the trustee to return the funds to Webb. (Id. at 5). The Division
appealed this final order in a timely manner. (Id. at 1). The Bankruptcy Court granted a stay
pending the appeal; the trustee has retained possession of the money. (Id.).
II. DISCUSSION
The question presented in this case is whether 11 U.S.C. § 1326(a)(2) requires a Chapter
13 bankruptcy trustee to return funds to a debtor after dismissal of the debtor’s bankruptcy case
if a creditor has attempted to levy on the trustee after dismissal of the case. Perhaps because
“many debtors [] fail to complete a Chapter 13 [bankruptcy] plan successfully,” Harris v.
Viegelahn, 135 S. Ct. 1829, 1835 (2015), this question appears to come up with some frequency.
And courts have split, in roughly equal proportion, on the answer. See In re Price, 484 B.R. 870,
872 (Bankr. E.D. Ark. 2013) (“Courts are divided on the effect of a garnishment issued pursuant
to state law and served on the Chapter 13 Trustee after a Chapter 13 case has been dismissed but
before the Trustee has returned funds on hand to the debtor pursuant to 11 U.S.C. §
1326(a)(2).”); In re Bailey, 330 B.R. 775, 776 (Bankr. D. Or. 2005) (“There appears to be a split

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of authority on this issue.”).1 The Fourth Circuit has yet to speak to this issue. This Court
reviews the Bankruptcy Court’s “conclusions of law de novo.” In re Meredith, 527 F.3d 372,
375 (4th Cir. 2008).
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. NA, 131 S. Ct. 716, 723–24
(2011) (quoting United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989)). Section
1326 provides when and how Chapter 13 debtors should make payments to trustees. Debtors
must start making payments to trustees “not later than 30 days after the date of the filing of the
plan or the order for relief.” 11 U.S.C. § 1326(a)(1). The trustee keeps these payments “until
confirmation or denial of confirmation.” Id. at § 1326(a)(2). Then the road forks: “[i]f a plan is
confirmed, the trustee shall distribute any such payment in accordance with the plan as soon as is
practicable.” Id. Alternatively, “[i]f a plan is not confirmed, the trustee shall return any such

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There are many decisions following the plain language of the 11 U.S.C. § 1326(a)(2) and
returning funds directly to the debtor. See, e.g., Smith v. Strickland, 178 B.R. 524 (M.D. Fla.
1995); In re Garris, 496 B.R. 343 (Bankr. S.D. N.Y. 2013); In re Locascio, 481 B.R. 285
(Bankr. S.D.N.Y. 2012); In re Sexton, 397 B.R. 375 (Bankr. M.D. Tenn. 2008); In re Inyamah,
378 B.R. 183 (Bankr. S.D. Ohio 2007); In re Davis, 2004 WL 3310531 (Bankr. M.D. Ala. 2004);
In re Bailey, 330 B.R. 775 (Bankr. D.Or. 2005); In re Oliver, 222 B.R. 272 (Bankr. E.D. Va.
1998); In re Walter, 199 B.R. 390 (Bankr. C.D. Ill. 1996).
Other courts have treated the trustee as a “debtor of the Debtor” and allowed
garnishments and levies on the trustee. See, e.g., Beam v. IRS (In re Beam), 192 F.3d 941 (9th
Cir.1999); Clark v. Commercial State Bank, 2001 WL 685529 (W.D. Tex. 2001); Massachusetts
v. Pappalardo (In re Steenstra), 307 B.R. 732 (1st Cir. BAP 2004); In re Price, 484 B.R. 870
(Bankr. E.D. Ark. 2013); In re Fischer, 432 B.R. 863 (Bankr. M.D. Fla. 2010); In re Pruitt, 2008
WL 2079145 (Bankr. M.D. Ala. 2008); In re Brown, 280 B.R. 231 (Bankr. E.D. Wis. 2002); In
re Doherty, 229 B.R. 461 (Bankr. E.D. Wash. 1999); In re Mishler, Jr., 223 B.R. 17 (Bankr.
M.D. Fla. 1998); In re Schlapper: 195 B.R. 805 (Bankr. M.D. Fla. 1996). However, many of
these cases involve a levy pursuant to federal law, changing the preemption analysis. See, e.g.,
In re Beam, 192 F.3d 941. Some of these cases do involve a levy pursuant to state law,
analogous to the present case. See, e.g., Clark, 2001 WL 685529 (W.D. Tex. 2001).
At least one court has split the baby—directing the trustee to write a check to the debtor,
but to send it to a state court. In re Shields, 431 B.R. 446 (Bankr. S.D. Ind. 2010).
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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).” Id.
Here, the plan was not confirmed, and so this last sentence governs the trustee’s
disposition of the funds. This sentence contains two exceptions—neither of which is relevant
here.2 Setting these aside, the trustee is left with the simple directive to “return any such
payments . . . to the debtor . . . .” 11 U.S.C. § 1326(a)(2). While the arguments made by the
Division and the disagreeing courts are addressed below, it is ultimately this language that is
determinative. See Hartford Underwriters Ins. Co. v. Union Planters Bank, NA, 530 U.S. 1, 6
(2000) (“[W]hen the statute’s language is plain, the sole function of the courts—at least where
the disposition required by the text is not absurd—is to enforce it according to its terms.”).
The Division’s primary argument starts from the correct premise that “Section 1326(a)(2)
must be interpreted in conjunction and harmonized with the other statutory provisions of title
11.” Dkt. 5 at 5; see, e.g., Food & Drug Admin. v. Brown & Williamson Tobacco Corp., 529
U.S. 120, 132–33 (U.S. 2000) (“The meaning—or ambiguity—of certain words or phrases may
only become evident when placed in context. . . . It is a ‘fundamental canon of statutory
construction that the words of a statute must be read in their context and with a view to their
place in the overall statutory scheme.’”). Building off that premise, the Division first directs the

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The first, the trustee need not return “payments not previously paid and not yet due and
owing to creditors pursuant to paragraph (3),” was added in 2005. See Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005, PL 109–8, April 20, 2005, 119 Stat 23.
Commentators have remarked that this language is not crystal clear, but “it appears that the
trustee is obligated to make payments to creditors, and withhold those payments from the
debtor’s refund, only if a specific order modifying payments to those creditors has previously
been entered by the court and the trustee has not made any payments the trustee was ordered to
make.” Collier on Bankruptcy ¶ 1326.02 (16th 2017). No such previous order is at issue here.
The second condition states that the trustee is not to return to the debtor “any unpaid claim
allowed under section 503(b).” Section 503(b) allows the payment of various administrative
expenses associated with the bankruptcy process. No administrative expenses are at issue here.
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Court’s attention to the Code’s treatment of the automatic stay imposed during bankruptcy.
(Dkt. 5 at 7–8 (discussing 11 U.S.C. §§ 362, 349)). During the pendency of the Chapter 13
proceeding, a stay is imposed that protects the debtor’s estate from creditors’ claims. 11 U.S.C.
§ 362. The stay terminates when the case is closed, and the protected property revests into the
debtor’s estate. Id. at §§ 362(c), 349. The Division argues that because the debtor no longer has
any special protection, the Division should be able to levy on the trustee directly. (Dkt. 5 at 8).
The Division’s desired approach does apply generally; when a stay ends the Division is
welcome to levy on other individuals who possess the debtor’s property or income (for example,
an employer). But Congress changed the default situation in Section 1326(a)(2) by directing the
trustee to give the funds to the debtor. 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. The context provided by Section 362 does not provide a
convincing reason to depart from the plain language of Section 1326(a)(2).
The Division’s second argument is that the plain meaning of Section 1326(a)(2) leads to
absurd results. (Dkt. 5 at 9–10). The Division’s most-developed example is that the plain
meaning of the statute would allegedly force a trustee to return funds to a debtor when the
confirmation of a bankruptcy plan is denied, but the debtor anticipates submitting a new plan.
(Id. at 9). A leading treatise recommends that trustees can avoid this problem by simply “first
ascertain[ing] whether the debtor seeks to modify the plan and again seek confirmation.” Collier
on Bankruptcy ¶ 1326.02 (16th 2017). If the debtor is going to apply again, the trustee should
simply keep the income. Id. This common sense approach does not deviate from the text’s
mandate about who should receive the funds—it only affects when the debtor gets them. But
more fundamentally, even if the Division was correct about a required return of funds, it is not

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clear that this outcome is “absurd”—Congress could decide that the funds should return to the
debtor between proposed plans and that funds return to a debtor at the end of an unconfirmed
plan. Thus, the Division’s second argument is also ultimately unconvincing.
Third, the Division argues that because 28 U.S.C. § 959(b) mandates that trustees manage
the property according to the laws of the state, the trustee must submit to the state levy. (Dkt. 12
at 4–5). But this catch-all provision is best read as allowing state law to fill in responsibilities
left unaddressed by the Code, not as overruling the Code’s plain meaning sub silentio. See
Saravia v. 1736 18th St., N.W., Ltd. P’ship, 844 F.2d 823, 826 (D.C. Cir. 1988) (“[S]ection
959(b) does not constitute a blanket statement by Congress that state laws are never preempted
by the bankruptcy laws. On the contrary, it seems clear that if a state law unduly impeded the
operation of federal bankruptcy policy, the state law would have to yield.”). Here the Code
mandates who should receive the funds, state law contradicts that mandate, and so the Division’s
third argument fails.
Contrary to the Division’s arguments, the context provided by the Bankruptcy Code
supports the plain meaning of Section 1326(a)(2). In 2015, the Supreme Court emphasized that
the “wholly voluntary” process of Chapter 13 bankruptcy is meant to “benefit debtors and
creditors alike.” Harris v. Viegelahn, 135 S. Ct. 1829, 1835 (2015). Section 1326(a)(2) furthers
these overarching purposes by returning the funds to the debtor and refusing to penalize the
debtor for entering this voluntary proceeding. Last term, the Supreme Court emphasized that
dismissal of a bankruptcy case “aims to return to the prepetition financial status quo.” Czyzewski
v. Jevic Holding Corp., 137 S. Ct. 973, 979 (2017). Before the petition, Debtor was receiving
this income. If the Division can levy on the trustee for those funds now, the Bankruptcy Code
would allow the Division to improve on its pre-petition position. It makes more sense to respect

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the voluntary nature of the proceeding and allow the parties to proceed as if the petition had not
occurred. In sum, the plain language of Section 1326(a)(2) should be read as stating that the
trustee must “return any such payments . . . to the debtor . . . .”3
But what then of the state law? The Division “is authorized to issue to any person . . .
orders to withhold and to deliver property of any kind including, but not restricted to, income of
the debtor, when the Commissioner has reason to believe that there is in the possession of such
person . . . property that is due, owing, or belonging to such debtor.” Va. Code § 63.2-1929(A).
The levied property “shall be withheld immediately upon receipt of the order to withhold” and
the “property shall be delivered to the Commissioner upon receipt of an order to deliver.” Id. at
§ 63.2-1929(D). Failure to withhold and deliver the property gives rise to civil penalties. Id. at §
63.2-1930.4

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In its clear and well-reasoned opinion, the Bankruptcy Court also expressed concerns that
allowing parties to levy on the trustee would create a “race to the trustee.” (Dkt. 1-2 at 4).
Amicus raised similar concerns here. (See generally dkt. 11). This Court acknowledges that
Congress may have attempted to avoid these potentially problematic outcomes in drafting the
statute, and does not disagree with the Bankruptcy Court’s reliance on this argument.
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The trustee argues that the Division did not have jurisdiction to engage in these
proceedings under the Barton doctrine. (Dkt. 8 at 11). This argument is briefly addressed
because it would offer a non-constitutional grounds of decision. See Ashwander v. Tennessee
Valley Auth., 297 U.S. 288, 347 (1936) (Brandeis, J., concurring) (“The Court will not pass upon
a constitutional question although properly presented by the record, if there is also present some
other ground upon which the case may be disposed of.”). The Barton doctrine originated from
Barton v. Barbour, 104 U.S. 126 (1881), and holds that “before another court may obtain
subject-matter jurisdiction over a suit filed against a receiver [including trustees] for acts
committed in his official capacity, the plaintiff must obtain leave of the court that appointed the
receiver.” McDaniel v. Blust, 668 F.3d 153, 156 (4th Cir. 2012). The Fourth Circuit’s
formulation focuses on whether “another court may obtain subject-matter jurisdiction over a suit
filed against a receiver,” and here no other court has attempted to obtain subject-matter
jurisdiction over the trustee. McDaniel, 668 F.3d at 156 (emphasis added). This Court is
reluctant to expand the doctrine beyond instances where another Court has attempted to exert
subject-matter jurisdiction over the trustee, and so will not apply the Barton doctrine here.
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If these two statutes contradict each other, the federal statute must “preempt” the state
statute. See U.S. Const., art. VI, cl. 2; Cox v. Shalala, 112 F.3d 151, 154 (4th Cir. 1997); Caleb
Nelson, Preemption, 86 Va. L. Rev. 225, 264 (2000) (“The simple fact is that if a federal statute
establishes a rule, and if the Constitution grants Congress the power to establish that rule, then
the rule preempts whatever state law it contradicts.”). “[A]ny state legislation which frustrates
the full effectiveness of federal law” leads to a conflict and “is rendered invalid by the
Supremacy Clause.” Perez v. Campbell, 402 U.S. 637, 649, 652 (1971) (quoting Hines v.
Davidowitz, 312 U.S. 52, 67 (1941)); see also Nw. Cent. Pipeline Corp. v. State Corp. Comm'n
of Kansas, 489 U.S. 493, 509 (1989) (“In the absence of explicit statutory language signaling an
intent to pre-empt [state law], we infer such intent where . . . the state law stands as an obstacle
to the accomplishment and execution of congressional objectives . . . .”). These statutes conflict
because they tell the trustee to do opposite things. Compare 11 U.S.C. § 1326(a)(2) (telling the
trustee to “return any such payments . . . to the debtor.”) with Va. Code. § 63.2-1929 (telling the
trustee that the “property shall be delivered to the Commissioner.”).

Accordingly, the

Supremacy Clause mandates that Section 1326(a)(2) prevails over the Virginia statute.
III. CONCLUSION
For the foregoing reasons, this Court will affirm the Bankruptcy Court and hold that the
money must be returned to the debtor because 11 U.S.C. § 1326(a)(2) preempts state law.
An appropriate Order will issue, and the Clerk of the Court is hereby directed to send a
copy of this Memorandum Opinion to Plaintiffs, Defendants, and all counsel of record.
19th
Entered this _____ day of October, 2017.

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