Harris v. Viegelahn

Oral argument transcript · No. 14-400 · October Term 2014 · argued April 1, 2015 · the petitioner won

Decision: votes, opinion and citations · Official transcript (PDF) · Argument audio at the Supreme Court

Advocates

• Matthew M. Madden, Washington, D.C., for the petitioner
• Craig Goldblatt, Washington, D.C., for the respondent

Transcript

From the Court's official transcript; speaker labels as in the transcript, with advocates' full names from its list of appearances.

Chief Justice Roberts: We'll hear argument first this morning in Case 14­400, Charles Harris v. Mary Viegelahn for the Chapter 13 Trustee. Mr. Madden. ORAL ARGUMENT OF MATTHEW M. MADDEN ON BEHALF OF PETITIONER

Matthew M. Madden: Mr. Chief Justice, and may it please the Court: Bankruptcy cases can proceed under only one chapter of the Bankruptcy Code at a time. There are three mains reasons why. When Petitioner converted his case from Chapter 13 to Chapter 7, Respondent was required to return post­petition wages she held as Chapter 13 Trustee. First, the Code says ­­

Justice Scalia: Not just wages, right? I mean, you constantly refer to it as post­petition wages. Anything that went into the pot that was still there.

Matthew M. Madden: That's right.

Justice Scalia: I mean, it would be, you know, lease payments or anything else, right?

Matthew M. Madden: Yes, Your Honor. Any post­petition property, including wages. Now, in the ­­ Alderson Reporting Company Official 1 in the general category ­­ Chapter 13 case, post­petition property held by the Chapter 13 trustee are wages, but because Section 348(f) of the Code speaks to what remains property of the estate in the converted case, that ­­ that section requires that those wages or any other property remain property of the estate only if the ­­ only if the case was converted in bad faith. If the case is converted in good faith, as here, the petitioner gets to keep that property. The second, the Code requires that when a case is converted from Chapter 13 to Chapter ­­

Justice Scalia: Excuse me. It really doesn't say what happens to it, does it? It just says what ­­ what becomes the ­­ the estate of the ­­ of the Chapter 7 bankruptcy.

Matthew M. Madden: That's right.

Justice Scalia: It leaves up in the air what ­­ what happens to the material that is not described in ­­ in that provision, right?

Matthew M. Madden: I think the statute doesn't explicitly say what happens to that ­­ to that material, but what it does say is ­­

Justice Scalia: So why would it go back ­­ why would it go back to the debtor automatically?

Matthew M. Madden: Because there's only one estate Alderson Reporting Company Official 1 in a bankruptcy case that's created at the commencement of the case. And so when Congress decided what will remain in that estate after conversion, and made that decision turn on whether the debtor has acted in good faith or bad faith, Congress has said what should happen in the case going forward. So by creating a penalty for debtors who have converted their case in bad faith, Congress has said that debtors should ­­ should retain the funds if they have converted the case in good faith. Moreover ­­

Justice Scalia: What happens in bad faith?

Matthew M. Madden: In bad faith, under Section 348(f)(2) of the Code, if the debtor has converted his case to Chapter 7 in bad faith, all of the post­petition property remains property of the estate. Effectively ­­

Justice Kennedy: But ­­ but ­­ and it seems to me that that is a statutory argument that cuts against your position, because the Code makes this ­­ makes this distinction.

Matthew M. Madden: Well, no. Respectfully, I disagree, Your Honor. I think the Code cuts in our favor because ­­ because of this distinction. Congress has decided that it's only when ­­ when a debtor converts its case in bad faith that this property should remain property of the estate available to creditors in Alderson Reporting Company Official 1 the case.

Justice Ginsburg: What does that mean? That ­­ Chapter 13 is over, Chapter 7 is underway. Remains in a nonexistent estate ­­ I mean, there's no more Chapter 13. It goes to the creditors, right?

Matthew M. Madden: Not quite, Your Honor. It remains in the estate because a new Chapter 7 trustee takes over as the representative of the estate under the Code. And so it becomes the Chapter 7 trustee's responsibility to administer that estate and make disbursements to creditors according to the Code. Now, here ­­

Justice Kennedy: Incidentally, I must say you are correct, I think this does cut in ­­ in your favor, the idea that a ­­ a bad­faith conversion means that the estate is ­­ is the current one, the current estate.

Matthew M. Madden: Okay.

Justice Kennedy: I think that Code distinction does cut in front of your favor.

Matthew M. Madden: Right, and I think that's what Congress intended when they enacted Section 348 ­­

Justice Breyer: What they said, specifically, is the property of the estate, and that's the property we're talking about, the property of the 13 Alderson Reporting Company Official 1 estate, right? Because it's the property of the 13 estate that goes into 7 at the moment the petition is filed to convert.

Matthew M. Madden: That's right.

Justice Breyer: Okay.

Matthew M. Madden: Section ­­

Justice Breyer: Now, it says which property of the 13 estate that remains in the possession or is under the control of the debtor. Is this money which is in the trustee in the possession of the debtor? No. Is it under the control of the ­­ of the debtor? Well, that depends on the answer to your question. I mean, if you treat it like an escrow, as they want to, it isn't. If you treat it like a, say, a normal trustee, a normal trustee, I'll ask them this, it isn't. And, therefore, it's outside the statute. And there are no other words in this statute that really cut one way or the other. You can make an excellent argument either way as to any other word. So there we are. I read these and I said, I don't know. So ­­

Matthew M. Madden: But ­­

Justice Breyer: So if you're going to point to ­­ if you're going to point to the ­­ to the words, unless I ­­ I really read them several times in the Alderson Reporting Company Official 1 statute. I couldn't say that you're favored or they're favored, because I don't know the answer to that word, control, and I couldn't find anything that really helped.

Matthew M. Madden: Well, Section 348(f) intends essentially two elements to determine whether property is going to remain in the estate. It has to both be ­­ in a good­faith conversion, it has to be property that existed as of the date of the petition, and it still has to exist in the estate. The debtor ­­

Justice Breyer: It doesn't say exist. We got the words that it says.

Matthew M. Madden: That's right.

Justice Breyer: And now, why ­­ why is this ­­ you could ­­ why ­­ why ­­ is it in his possession? What they're thinking about with (f), is they're thinking about the aunt left a legacy which he received after he filed the 13. And what they want to do is make certain that that legacy is counted as part of the 7 estate, isn't that right?

Matthew M. Madden: I think that's part of what Congress intended, but ­­

Justice Breyer: I couldn't find a word that suggests anything else. You point to it.

Matthew M. Madden: Well, there's nothing in Alderson Reporting Company Official 1 Section 348(f) that distinguishes post­petition property that's held by the debtor versus post­petition property that's held by the trustee. When Congress enacted the statute, it intended to define what would remain property of the estate in a case going forward, and it didn't distinguish ­­

Justice Breyer: Well, what's the answer to my first question, where I pointed to two words, possession and control?

Matthew M. Madden: Well, I think when a case ends and the trustee's service is terminated, the property of the estate that the trustee is holding is in the control of the debtor, because it becomes the debtor's property, if it's no longer property ­­

Justice Sotomayor: So is this a revocable or irrevocable trust? If you can convert, you're claiming it's a revocable trust, correct?

Matthew M. Madden: I ­­ I think if any analogy from the common law applies, Justice Sotomayor, it would be that of a revocable trust, because Congress has been very clear in Section 1307(a) that a debtor has the right to convert his case out of Chapter 13 and into Chapter 7 at any time.

Justice Sotomayor: So if it's a revocable trust, what's the trust law in that situation? Alderson Reporting Company Official

Matthew M. Madden: A settler in a revocable trust obtains the corpus of the trust upon revocation. That's effectively what Congress has said here, because when a case leaves Chapter 13 and enters Chapter 7, it's Chapter 7 that governs. A new Chapter 7 trustee is appointed to administer the case and that trustee ­­

Justice Ginsburg: So how is that in practice? Is it ­­ when a 13 gets converted to a 7, so the trustee in the 13 is out, is it common to appoint a different person, or is it the same person with a new hat?

Matthew M. Madden: It's usually a different person. So in this case, when Petitioner converted his case from Chapter 13 to Chapter 7, the court docket reflected that Respondent's service had terminated and an interim Chapter 7 trustee was appointed the very next day.

Chief Justice Roberts: Would your problem, the issue, be moot in 99 percent of the cases if the trustee decided to adopt a procedure which will provide for a distribution at the end of every day?

Matthew M. Madden: If a trustee has already distributed the money to creditors lawfully under a plan, then, yes, that property has left the estate.

Chief Justice Roberts: So it would only be Alderson Reporting Company Official 1 the rare situation when this ­­ even rarer than now, when this arises, and presumably trustees who wish to distribute to creditors can adopt the sort of rule that they desire.

Matthew M. Madden: Yes, but because trustees are fiduciaries of the estate and represent the estate, they're not allowed to dissipate estate assets by making frequent or even constant distributions. And it's ­­ it's because they're the representative of the estate ­­

Chief Justice Roberts: Well, I suppose if there's a particularly difficult ­­ and maybe this is such a case ­­ where the trustee has to take some time to figure it out, perhaps. But in a fortuitous case where the wages arrive on a Wednesday or whatever, it doesn't seem to me that this would raise serious concerns. And the consequence of that is it becomes even more fortuitous when the assets come within the control of the trustee, so that a rule that says there's a huge difference based on the fortuity of the timing might not make much sense.

Matthew M. Madden: Well, I think that's the rule, respectfully, that Congress adopted when they allowed debtors to make the conversion at any time. Congress didn't require a debtor to give notice, and Congress Alderson Reporting Company Official 1 didn't make conversion effective only after disbursements.

Justice Scalia: What about the parties? Can they ­­ can they handle the situation by providing in the ­­ in the Chapter 13 agreement that any funds remaining, if there should be a conversion, will be distributed among the creditors?

Matthew M. Madden: Well, what they can't do is undermine the effects of conversion, because under Section 1307 of the Code, the debtor's right to convert the case at any time is not ­­

Justice Scalia: So your answer is no, the parties could not ­­ could not do that.

Matthew M. Madden: That's right, the answer is no in that the parties can't undermine the effective conversion.

Justice Scalia: Why would Congress adopt a rule that depends so much on happenstance? I mean, you know, if ­­ if the trustee distributes the money promptly, there's nothing there. If he waits three months, the ­­ the debtor gets it all back. It's ­­ it's random, just utterly ­­ why would anybody adopt a rule like that?

Matthew M. Madden: I think the rule is adopted here because Chapter 13 is, in essence, a voluntary Alderson Reporting Company Official 1 proceeding. A ­­ a debtor has to elect to put his future income into the estate in the first place by treating ­­

Justice Scalia: Yeah, but he doesn't know whether this random event is going to happen or not when ­­ when he does that. So you're saying that Congress is forcing the debtor, and the creditors, I suppose, to roll the dice, right? He doesn't know what he's going to get back; it depends on whether the trustee is lazy or not.

Matthew M. Madden: Sometimes, but there are cases like this one, Your Honor, where it's not mere happenstance. Respondent was holding funds in this case, because Chase, the mortgage lender, had received relief from the stay. So funds that had been earmarked for Chase, so that no creditor under the plan was going to get other than Chase, were being held while Chase and the debtor ­­

Justice Breyer: That's ­­ no, that's exactly the question I have that Justice Scalia just raised. And I'd like you to think about that. You practice bankruptcy law, so you're familiar with it in your experience. Now, I ­­ assume with me for the moment that the language does not resolve this. The funds are not in the possession of the debtor. The Alderson Reporting Company Official 1 question is whether he nonetheless still controls them, i.e. gets them back. All right? So that's the assumption. Now, I had exactly the same reaction, I think, the Chief Justice and Justice Scalia had, that in the mine run of bankruptcy cases, whether a trustee at the moment of conversion is holding funds that he should ­­ that will be distributed to creditors, but they haven't been yet is a fluke, chance. Sometimes there might be a lot, sometimes there might be a little. It depends on when the mail went out that day. It depends on unusual circumstances such as the one in this case, and you shouldn't turn a rule of law on that. You'll produce a ­­ you produce gaming and who knows what will happen. Now, you've heard the question. Is the thrust of the question, which I think you've now gotten three times, right or wrong? Is it chance? Is it a fluke? And I've talked very slowly, so I want to be sure that you get this question, because it's important to me how you answer it.

Matthew M. Madden: I think the answer is that, yes, there are some cases in which this will be happenstance, but Congress has spoken to those cases by allowing ­­ Alderson Reporting Company Official

Justice Breyer: Yes, but that isn't my question about what Congress wants. My question is, in your experience, what is it? Is it that happenstance governs, 50/50, almost never, what's your experience?

Matthew M. Madden: I don't know from a survey of the ­­ of the bankruptcy ­­

Justice Breyer: No, from your experience.

Matthew M. Madden: Well, my experience may not be as ­­ as broad as ­­

Justice Breyer: But what is your experience? I would just be curious. I'm trying to get some kind of a rough answer.

Matthew M. Madden: Here's what I can tell you, Justice Breyer. I think that most Chapter 13 cases are converted because the debtor has stopped being able to make his payments. So in the mine run of cases, there's not really funds in the ­­ that the trustee is holding. I think what happens are cases like these, where there ­­ where funds have built up in the trustee's possession for a reason, and that's because the creditor to whom they were earmarked can no longer obtain those funds under the plan. Now, Congress has spoken to this by allowing the debtor in this circumstance, or any other, to make the conversion at any time because Chapter 13 has been a Alderson Reporting Company Official 1 voluntarily proceeding.

Justice Kennedy: I ­­ I don't understand. The three months' wages have ­­ have accumulated in the estate. In the ordinary course, if there's no change, they're going to go out to the creditors. And you just said that the creditors can't get them? I didn't quite get that. They can't get them only because, as the questions have indicated, that the trustee is doing something else for a week.

Matthew M. Madden: Well, they would go to the creditors if, in performing the trustee's service, the trustee, in following the plan, eventually disburses them to creditors. But that's what's important, is that the trustee has to be making ­­ has to be following her service to disburse funds in the case. Now, under Section 348(e) of the Code, the trustee's service ends at conversion. Now, I think both parties agree that a core function of that service ­­

Justice Kennedy: But that doesn't answer the fortuity point, other than what you say the ­­ that's the statute and that's it.

Matthew M. Madden: I think that's right. I ­­ I think at the end of the day, if a case ­­ if ­­ if funds are in the estate by happenstance, because they just haven't gone out in the next disbursement, that Congress Alderson Reporting Company Official 1 has made the election that the ­­ that the debtor is still entitled to convert this case at any time.

Justice Sotomayor: Could I ­­

Justice Kagan: Mr. Madden.

Justice Sotomayor: ­­ follow up on your statement about in this case, the plan called for the bulk of this money to go to Chase; correct?

Matthew M. Madden: Yes, that's right. Especially early in the plan.

Justice Sotomayor: Early in the plan. And you said Chase couldn't get the bulk of this money, why?

Matthew M. Madden: Because ­­

Justice Sotomayor: It had foreclosed.

Matthew M. Madden: Not yet. They had obtained relief from the automatic stay in the bankruptcy case. So what happened here is the Petitioner was supposed to make his current mortgage payments, what's called outside of the plan or directly to Chase, and because of circumstances, debtor found himself unable to make those payments. And so then when that happened, Chase went to the bankruptcy court and received relief from the automatic stay which allowed them to foreclose. But that didn't resolve their claim in the case. So what the Trustee explains in her brief that she did was to reserve the funds that had been Alderson Reporting Company Official 1 earmarked for Chase, so that ­­ because it's a common circumstance that the mortgage lender and the debtor will then work out a modification of the loan ­­

Justice Sotomayor: But finish this ­­ but she didn't give the money to Chase.

Matthew M. Madden: No. That's correct.

Justice Sotomayor: She decided to distribute it to the other creditors.

Matthew M. Madden: That's exactly right.

Justice Sotomayor: What permitted that in the plan?

Matthew M. Madden: Well, nothing permitted that in the plan until both secured creditors had been paid in full. Now, importantly, in this case, neither of Petitioner's secured creditors under the plan had been paid in full on the day he converted his case from Chapter 13 to Chapter 9. It was only ­­ Respondent ended up filing a document in the bankruptcy court called the trustee's recommendation concerning claims in which the ­­ the treatment of Chase's claims changed, but her service had terminated by that point under Section 348(e) of the Code. And so this case presents an interesting example of what happens if you end up with two trustees performing in the case at the same time. Alderson Reporting Company Official

Justice Ginsburg: There was never any ­­ there was never any distribution for these ­­ these wages that were being collected. They ­­ there was never any distribution. They were just held. Is that ­­

Matthew M. Madden: The funds at issue in this case had just been held. There had been distributions in the case while the case had proceeded, so Chase had received some ­­

Justice Ginsburg: How is that ­­ how is it determined what the frequency of payments will be to the creditors?

Matthew M. Madden: Well, those are determined both in the Trustee's service as the trustee and reading the plan terms and ­­ and the Bankruptcy Code, but it ­­ but it's generally covered by the confirmed plan. And so the confirmed plan in this case required secured creditors to get paid first before any unsecured creditors were paid.

Justice Kennedy: But does the plan say payments will be made once a week, or once a month, or ­­

Matthew M. Madden: To some secured creditors, it suggested the payments will be made monthly, but unsecured creditors aren't entitled to payment at any Alderson Reporting Company Official 1 time during the plan. They're ­­ they're effectively entitled to the funds that are left over after creditors who have higher priority are ­­ are paid first.

Justice Scalia: Mr. Madden, I've been thinking about your response to my earlier question about whether this issue could be covered in the plan if the plan said that, you know, any funds still held by the trustee shall be distributed to the ­­ to the creditors. Your answer was it couldn't because it would contradict the ­­ the statutory requirement, but there isn't any statutory requirement. I mean, that's what we're dealing with. We're dealing with an absolute void. The statute doesn't say what will happen to this money. If a statute doesn't say so, what's wrong with having ­­ having the parties adopt a provision in the plan that says that? And, by the way, in my estimation, this helps your case because I am much more willing to buy onto a random rule of law that the parties can contract out of than a random rule of law that has to be applied in the future. And you're ­­ and what you're urging upon us is a random rule of law. You're just saying, well, you know, Congress wanted randomness. Well, maybe. Alderson Reporting Company Official

Matthew M. Madden: The Third Circuit in deciding this issue did suggest in a footnote that Your Honor's position might be an out the parties could take. I think there would just ­­ there would be two constraints on that issue in another case that isn't presented here. One is that a plan can only provide what The Code allows the plan to provide. So what the Chapter 13 plan can provide is specified in Section 1322 of The Code. And The Code provides that a debtor could vest property of the estate in any other entity, so a debtor could vest property in specific entities. But there's no provision in the Code that allows a debtor to vest property generally in creditors. And the second problem, as I ­­ as I mentioned earlier, I said under Section 1307(a) of the Code, a waiver of the right to convert a case at any time is unenforceable. So if there's a provision in the plan that undermines the natural statutory effective conversion by keeping the ­­ keeping property of the estate larger in a case of good faith conversion or asking the trustee to continue performing the service of the trustee after conversion, those provisions of a plan would be unenforceable.

Justice Kagan: Mr. Madden, there's a ­­ there's a policy argument that cuts against you, which Alderson Reporting Company Official 1 the Fifth Circuit talked about. And, of course, it's only relevant if the statute doesn't say much of anything about this. But let's assume for this purpose that the statute doesn't say much of anything about this, and what the Fifth Circuit said was that Chapter 13 is essentially a quid pro quo, that ­­ the debtor gives up a certain amount of his wages, but in exchange, the debtor gets to keep his assets. And here what the debtor is essentially asking for is to get back the wages, but he's gotten the benefit of having kept his assets. So he's kind of asking for the quid without the quo or the quo without the quid, or whatever it is. So what's your response to that?

Matthew M. Madden: I think there are a number of problems with viewing Chapter 13 through that lens. Chapter 13 is better for debtors and creditors alike, that everyone comes out ahead because no creditor can receive less under a Chapter 13 plan than they would be entitled to receive under a Chapter 7 liquidation. So Congress ­­ and generally, the policy of the Bankruptcy Code is intended to encourage debtors into Chapter 13 because it's better for everyone. The idea that a debtor sort of rents the benefits of Chapter 13 from his creditors who stands to gain from him doing so doesn't make a whole lot of sense under the way the Bankruptcy Alderson Reporting Company Official 1 Code is structured.

Chief Justice Roberts: What about ­­ I gather there can be payments directly to the creditors. What ­­ those, I assume, they get those without having to worry about this problem?

Matthew M. Madden: That's correct. Under Chapter 13, either the debtor or the trustee can be the disbursing agent under the plan, but in either case, it's when the money is disbursed by the disbursing agent that the rights shift to the creditors.

Chief Justice Roberts: No. But in the case of the creditor who is paid directly, that's ­­ there's sort of no middleman, right?

Matthew M. Madden: That's right. But the question is whether the ­­ when they've been paid, the property leaves the estate and becomes property of the creditors. Now ­­

Chief Justice Roberts: No. But, I guess, I'm just trying to highlight another randomness in fortuity in that some creditors will be ­­ get their money directly, others it will go through the estate, and if you get your money directly, you're not going to have to worry about this.

Matthew M. Madden: That's true if the debtor keeps up his payments. The reason why ­­ I think most Alderson Reporting Company Official 1 creditors like the trustee to be holding funds in the estate, subject to future disbursements as appropriate, is that that increases the likelihood of success of the plan.

Chief Justice Roberts: How does that work as a practical matter? Is there direct deposit of a portion of wages with a creditor?

Matthew M. Madden: It varies from case to case. In this case, Respondent effectively had ­­ it was called a wage order. So Petitioner's employer sent a portion of his income directly to the Trustee every month. Now ­­

Justice Ginsburg: What ­­ what would happen ­­ let's suppose you're right. The trustee has given this money to the creditors, and she wasn't supposed to do that. The debtor was supposed to get them. What happens now? How do we undo what has already been done?

Matthew M. Madden: Well, Respondent may be able to get the money back from the creditors with whom she has relationships and rights. Ultimately, the liability is the trustee's for ­­

Justice Ginsburg: So it would be personal liability on the part of the trustee?

Matthew M. Madden: That's right. And so the order Alderson Reporting Company Official 1 in the bankruptcy case is that in order for Respondent to ­­ to pay this sum of money to the Petitioner. Now, that's because when trustees act outside their service, that's how the liability works in the Bankruptcy Code. And I think both parties agree that it's a core function of the trustee's service in a bankruptcy case to make disbursements to creditors. Under Section 348(e) of the Code, that service has to end at conversion.

Justice Scalia: I assume that trustees have insurance, right?

Matthew M. Madden: That's right.

Justice Scalia: So we don't have to feel sorry for this lady. (Laughter.)

Matthew M. Madden: Yes. They have what's called errors and omissions insurance that covers this sort of thing.

Justice Kennedy: I assume there would also be a right to recoup from the creditor if the creditor has received something improperly paid.

Matthew M. Madden: There may be. I think ­­

Justice Kennedy: Like standard recoupment principles.

Matthew M. Madden: I think that may ­­ may well be true, Your Honor. I think returning to the point about Alderson Reporting Company Official 1 the ­­ the ending of the trustee's service, the practical significance of that is that Congress didn't want two trustees functioning in a case at the same time. Once the case had been converted, all of the claims against the estate in the Chapter 13 case automatically became claims against the estate in the Chapter 7 case. And so what happened here is you had a Chapter 13 trustee still acting on and paying claims as though Chapter 13 was still going. All the while, a Chapter 7 trustee had taken over the reins of being the representative of the estate and dealing with claims.

Justice Breyer: But the ­­ the money that's in the hands of the trustee at the moment that the Chapter 7 petition is filed will probably be wages that, under the 13 plan, were to be distributed to creditors. And the trustee has to make out a check to somebody. So the only question is: Is the name of the trustee X, which is the creditor to which it has gone, or is the name Y, which is the debtor or the equivalent? So I don't see how we get very far saying that the trustee's services have ended at that point. No one thinks the trustee would keep the money. And, again, six of one, half a dozen of the other.

Matthew M. Madden: But I think there's a Alderson Reporting Company Official 1 difference here because the trustee's core function, while serving as trustee and while serving as the representative of the estate under the Code, is to disburse funds to creditors.

Justice Breyer: Why do you think that the trustees have filed a brief on the other side? I'm ­­ I'm not ­­ I ­­ I read the brief; it makes a series of legal arguments. But they must ­­ what do they care? They obviously care, and I don't ­­ I'll ask, perhaps, them the question. But what's your view of that? Why do they care, since it's just a matter of writing what name to write in?

Matthew M. Madden: I ­­ I think that may be a better question for my ­­ my colleague, but ­­

Justice Breyer: Well, what's your view of it? I don't want to ask them without getting your view.

Matthew M. Madden: I ­­ I think the trustee is attempting to ­­ to send funds to whoever the trustee is supposed to send funds to, and many ­­

Justice Scalia: Well, it's easy to see why they care in this case, isn't it?

Matthew M. Madden: Well, in ­­ in this case, some of the funds ­­

Justice Scalia: The trustee doesn't want to be liable for the money that she has turned over. Alderson Reporting Company Official

Matthew M. Madden: Right. The trustee does ­­

Justice Scalia: It's an easy answer.

Chief Justice Roberts: That ­­

Justice Breyer: According to his ­­ I mean, it's the whole group.

Matthew M. Madden: Right. I agree with that. And some of the funds that were disbursed here were funds that were paid to the Trustee as ­­ as her ­­ her percentage fee in the case, as well. If there are no other questions, I'd like to reserve the balance of my time for rebuttal.

Chief Justice Roberts: Thank you, counsel. Mr. Goldblatt. ORAL ARGUMENT OF CRAIG GOLDBLATT ON BEHALF OF RESPONDENT

Craig Goldblatt: Mr. Chief Justice, and may it please the Court: The funds at issue here were held by the Trustee under the terms of a confirmed plan that obligated her to distribute those funds to creditors. Petitioner does not ­­

Justice Sotomayor: Now, you did not ­­ the court below said ­­ rejected your argument that when the money was paid to the Trustee or the Trustee got it, that it vested in the creditors. It ­­ Alderson Reporting Company Official

Craig Goldblatt: Yes, Justice Sotomayor.

Justice Sotomayor: ­­ rejected that part of your argument, correct?

Craig Goldblatt: That ­­ that's right, Justice Sotomayor, and ­­

Justice Sotomayor: So if you don't have a vested right to the money, then what gives you the right?

Craig Goldblatt: Well ­­

Justice Sotomayor: It's the plan, right?

Craig Goldblatt: It's the plan and the backdrop against which the ­­

Justice Sotomayor: Well, but ­­

Craig Goldblatt: ­­ plan is written.

Justice Sotomayor: ­­ the problem is that upon conversion, it nullifies the plan.

Craig Goldblatt: Justice Sotomayor ­­

Justice Sotomayor: So what's the remaining power that you have to distribute the funds to creditors?

Craig Goldblatt: So, Justice Sotomayor, that is a problem that arises not just in bankruptcy, but under the common law all the time. A trust can terminate, and a trustee can be holding funds and is left with the question of do these go back to the Alderson Reporting Company Official 1 grantor? Do I pay them backwards, or do I pay them forwards? And long before there was a Bankruptcy Code, there was an established common law principle that says, first, the trust pays the obligations of the trust, and the obligations of the trust include matured claims of beneficiaries. That's the rule that ­­ that comes out of Section 235(a) in the Second Restatement and Section 89 of the Third Restatement, and the Bankruptcy Code was written against that common law backdrop. And ­­ and where the Code ­­ there are indications in the Code ­­ we think those indications support the ­­ the notion that it's consistent with the common law that they be paid forward. But to the extent the Court were to conclude that nothing in the Bankruptcy Code helps answer the question, there is surely no reason to think that Congress intended to abrogate that established common law ­­

Justice Sotomayor: Well, it ­­

Craig Goldblatt: ­­ backdrop.

Justice Sotomayor: ­­ certainly did, because it ­­ it ­­ it has said upon conversion, you have to give everything to the Chapter 7 trustee ­­

Craig Goldblatt: So if I could ­­ Section ­­

Justice Sotomayor: ­­ that's in the control Alderson Reporting Company Official 1 or possession of the debtor. But if it hasn't vested in the creditors, then ­­

Craig Goldblatt: So, Justice Sotomayor ­­

Justice Sotomayor: ­­ how ­­ how ­­ what remains to ­­

Craig Goldblatt: So if I ­­ if I can explain, Section 348(f), which is the provision I believe you're referring to, says the following. It says that upon the conversion of the case, the Chapter ­­ the Chapter 7 estate is made up of the assets that the debtor had on the petition date that they still have on the conversion date. So there's the question ­­ the question Congress was dealing with is ­­ is exactly the question that Justice Breyer was referring to, which is, let's say during the course of the 13, there's some sort of windfall that comes into the estate. Does that become part of the Chapter 7 estate? And the answer to that is no. But that ­­ that ­­ that determination says nothing about funds that the debtor already paid out to the trustee at a time when the debtor was required to pay those funds to the trustee in order to obtain the benefits of being in Chapter 13 at that time.

Justice Kagan: Well, it ­­ it at least Alderson Reporting Company Official 1 raises the question why you should treat differently the ­­ let's say the inheritance from the new wages. In other words, say, the new wages come in. They're garnished. It goes straight to the trustee. But that's also a fortuity. You know, why should you treat the wages different from the inheritance?

Craig Goldblatt: So ­­ so, Justice Kagan, the ­­ the answer is because the ­­ the debtor made a decision to pay these funds over to the trustee. Here the decision was done through a garnishment order, but that itself is, of course, itself a fortuity. What we're talking about are funds that a debtor made a voluntary decision to pay over to a trustee in order to remain in Chapter 13. If the debtor ­­

Justice Kagan: Well, until he decided to switch the petition to a Chapter 7.

Craig Goldblatt: That ­­ that's right. He could have done that at ­­ at any time. So the debtor here had the ability, as soon as Chase received relief from the stay, to convert at that time. The debtor didn't make that decision. The debtor instead decided, for the remaining 12 months, to remain in Chapter 13 and to obtain the benefits of being in Chapter 13, precisely the quid pro quo that Your Honor was describing and that the Court described in Alderson Reporting Company Official 1 Ranta.

Justice Breyer: How does it work in a revocable trust, a revocable trust?

Craig Goldblatt: So ­­

Justice Breyer: Let's imagine that on ­­ on ­­ under the terms of the trust on February 1, Joe Smith gets a $100. All right. On March 1, the settlor revokes the trust. There is money in the trust that would pay his monthly payment on February 1, on March 1, on April 1. That's $300 that he has, $100 after it's revoked and $100 before it's revoked.

Craig Goldblatt: So ­­

Justice Breyer: How does it work under the law of revocable trust?

Craig Goldblatt: So, Justice Breyer, Section 235(a) of the Second Restatement of Trusts deals exactly with this question. The answer is the revocation here ­­ the ­­ the debtor's decision to convert effectively operated as a revocation. Because of that, the remaining three years' worth of payments that he otherwise would have been obligated to pay, he didn't have to pay. But as to the funds that were already in the trust as ­­ where the obligations have matured, the ­­ the ­­ the trustee is required to pay those Alderson Reporting Company Official 1 matured obligations. The situation that's in ­­

Justice Breyer: In other words, in my example, the January money which is owed before the revocation goes to the beneficiary.

Craig Goldblatt: That's exactly ­­

Justice Breyer: But the March money goes back to the settlor.

Craig Goldblatt: That's exactly right.

Justice Breyer: And you're saying the same is true here, that the pre­petition 7 money that was owed and not paid should, if in the hands of the ­­ of the trustee, go to the creditor; that any money that he has, which is for the creditors, where they are not yet entitled to it ­­ say, like, an early payment of the next month's ­­ they go back to the ­­ to the debtor.

Craig Goldblatt: Justice Breyer, I think that's exactly right. Section 235(a) of the ­­ the Second Restatement of Trusts talks about the life beneficiary who is entitled to all of the income of a trust during their life. Income comes in while they're alive, but before it's paid, they die. The question is does that ­­ where does that go? Does it go back to the grantor, or does it go to the estate of the life beneficiary? And the answer that Section 235(a) says is Alderson Reporting Company Official 1 it goes to the ­­ to the estate of the life beneficiary because that obligation matured under the terms of the trust before the revocation. That same principle, I think, is fully applicable here for exactly the reasons that ­­

Chief Justice Roberts: When ­­

Craig Goldblatt: ­­ Your Honor describes.

Chief Justice Roberts: ­­ when we talk ­­ maybe this is too abstract a way to envision of it, but when we talk of an estate, it's somebody's estate, right? John Smith dies. He leaves an estate.

Craig Goldblatt: Yes.

Chief Justice Roberts: We call it John Smith's estate. Here, you know, we call this Mr. Harris's estate, at least more naturally than we would call it, you know, Consumer Electronics's, Chase Manhattan's whatever's, estate. And isn't that a ­­ a fairly strong signal of who should get the stuff that's kind of left in the middle?

Craig Goldblatt: Mr. Chief Justice, the ­­ the ­­ the Bankruptcy Code ­­ it ­­ it is his estate, but it's his estate in ­­ in ­­ to ­­ to be paid in ­­ consistent with the terms of the plan.

Chief Justice Roberts: No. I ­­ I understand that. As I said, just sort of looking at it Alderson Reporting Company Official 1 from a more conceptual level, it does seem that it's ­­ it's ­­ well, I guess I can't say it more than that. It's his estate, so stuff that you can't decide where it goes ought to go to him.

Craig Goldblatt: I don't think that nomenclature should overtake the ­­ the ­­ the structure and purpose of ­­ of the Code. And if I ­­ if I may, while it's ­­

Justice Scalia: Is it normally called the debtor's estate or is it called the Chapter 13 estate?

Craig Goldblatt: I ­­ I ­­

Justice Scalia: I would normally say the Chapter 13 estate.

Craig Goldblatt: In fairness, Justice Scalia, I've heard it used both ways colloquially. Before abandoning the text, though, in fairness, this is not a case in which the language of the Code is entirely ­­ there are clear indications from the text of the Code that do help answer the question, and are consistent with the common law backdrop. For example, under Section 1328(a) of the Bankruptcy Code, it says, the debtor is entitled to the discharge upon the debtor's completion of the payments he's required to make under the plan. It doesn't say when the trustee distributes Alderson Reporting Company Official 1 that money to creditors. It says when the ­­ when the debtor makes the last payment he's required to make under the trustee, which is at least a signal that the legally operative moment within ­­ that Congress was contemplating, was the debtor making the planned payment.

Justice Breyer: What about ­­ back to the trustee, just for a moment, of a revocable trust.

Craig Goldblatt: Yes.

Justice Breyer: Now, the standard trust law, CJS, when the grantor exercises a power of revocation, the interest of the beneficiary ceases, and the assignee of the grant or namely the grantor, takes the corpus of the trust free from the trust. But what you are saying is, if I look further into that, I will discover that if the grantor revoked the trust on February 1, and if under the trust documents, a $100 is due to a beneficiary on January 1, and on March 1, standard trust law is the beneficiary gets the $100 from January and does not get the $100 from March.

Craig Goldblatt: That ­­ that's exactly right, I ­­

Justice Breyer: All right. And the thing that I will look up in the trust law to show that, you gave me the cite, and I lost it. Alderson Reporting Company Official

Craig Goldblatt: It's Section 89 of the third restatement ­­

Justice Breyer: And you're saying that's precisely how we should treat this?

Craig Goldblatt: That is correct. That there is nothing in the Bankruptcy Code that is inconsistent with that ­­

Justice Breyer: That's how you want to treat it?

Craig Goldblatt: We think that's ­­ that's correct, yes. In addition to the provision regarding the ­­

Justice Sotomayor: Has anyone else, any other circuit, bankruptcy court, treated your function as that of a typical trustee? I mean ­­

Craig Goldblatt: Well ­­

Justice Sotomayor: So, you're not a typical trustee, you're ­­ you're ­­ of an escrow account.

Craig Goldblatt: That's correct.

Justice Sotomayor: You're a trustee for the estate or for the debtor.

Craig Goldblatt: So it's a creature created by the Bankruptcy Code that is in some ways a hybrid of ­­ of escrow law and trust law. We think that's the best way to think about it. As between the two, they Alderson Reporting Company Official 1 both point the same direction, so I don't think a great deal turns on whether the lens of the common law here is that of escrow or that of trust. There are cases, a number of them, that have talked about the role of the trustee by reference to the common law of trust. Congress did, after all, use the term trustee, which is some indication that it was drawing on the common law backdrop of trust in thinking about this question.

Justice Scalia: Mr. Goldblatt, what do you do about the argument that what you're asking to be done cannot be done, because immediately upon the conversion, the Chapter 13 Trustee no longer has any powers?

Craig Goldblatt: So, Justice Scalia, that ­­ that argument from Section 348(e) of the Bankruptcy Code simply proves too much, as was suggested earlier. The trustee clearly has to distribute the money to someone. They have to write a check either to the debtor or to creditors. The question is to ­­ who is legally entitled to the funds? And that is the answer that drives the resolution of this case. The notion that ­­ no one is suggesting the trustee keeps the money herself. She obviously needs to distribute it, and that common law with trusts terminate, and there is a doctrine about the wind up obligations of the trustee upon termination. Alderson Reporting Company Official

Justice Kennedy: So I suppose you're saying that ­­ that the service of the trustee is owed both to the debtor and the creditors. If it were to the creditors, then you would have a weaker position.

Craig Goldblatt: In fairness, Justice Kennedy, the ­­ the obligation that the trustee has to carry out the terms of the plan. That includes obligations that run for the benefit of creditors and some that run ­­

Justice Kennedy: What about the provision that if the conversion is made in bad faith, then the estate consists of the property as of the date of the conversion.

Craig Goldblatt: Right, so Justice Kennedy, that deals ­­

Justice Kennedy: So the statute appears to make it ­­ a specific requirement for that, but not for ­­ for the case we have.

Craig Goldblatt: So, Justice Kennedy, that provision of 348, of 348(f), deals with the situation that Justice Breyer was referring to, which is, what if the debtor during the life of the Chapter 13 case received an inheritance? So money that the debtor still had, hadn't yet voluntarily paid over to the trustee, received an inheritance, but she converted in an act of Alderson Reporting Company Official 1 gamesmanship.

Justice Kennedy: Well, but I would suppose it would apply to your case, too. Property of the estate as of the date.

Craig Goldblatt: So if ­­ the language of 348(f) does the following: It says that the ­­ the property of the Chapter 7 estate is the property that ­­ the question that Congress had when it dealt with 348(f) is the debtor files a Chapter 13 case on day one, lives in Chapter 13 for some period of time, and then converts. So the question is: Okay, what universe of property is in the Chapter 7 estate? Is it all the property the debtor had at the beginning of the case or is it the property the debtor had on the day of conversion? That was a fair question and there was disagreement in the courts on that question until 1994. Congress answered that question by saying, the property of the 13 estate is the property that the debtor had on the petition date, the original petition date, that they still have as of the date of conversion. And the reason that makes sense is for the reason Justice Breyer identified. Because otherwise, someone who came into some sort of windfall during that period of time would essentially have to turn that all Alderson Reporting Company Official 1 over to creditors instead of keeping it. So the ­­ so the ­­ or actually, even ­­ even more directly and the Third Circuit talks about this, in the In ReMichael decision, if the debtor's home reacquired equity during the course of the bankruptcy, or if the debtor just saved a lot ­­ worked hard and saved money, the notion is by defining the estate that way, it allowed the debtor to keep what the debtor had obtained during the life of the Chapter 13, even when it converts. But that doesn't say a word about what happens to funds that the debtor paid during the bankruptcy in order to obtain the benefits of being in Chapter 13. There is a clear quid pro quo here. The cost of being in Chapter 13, as this Court explained in Ransom v. Lanham, and in Ransom ­­ I'm sorry, and in the Lanning case, is that the cost under Section 325(a)(2) is the debtor is required to pay all of his projected disposable income for the benefit of his unsecured creditors, that is the cost. The benefit the debtor obtains on the other side is he gets to keep his assets ­­

Justice Kagan: But there's also a policy argument, Mr. Goldblatt, that works against you, which is that one of the things we know is that Congress didn't want to disincentivize debtors from using Chapter Alderson Reporting Company Official 1 13. And essentially, if you win, under your argument, the debtor is worse off for having tried Chapter 13 than if he had gone into Chapter 7 initially, because he's now being put to paying down debt that would have been discharged under Chapter 7, and why should we give him that kind of double whammy, given Congress's view that we should want people to try Chapter 13 first.

Craig Goldblatt: So, Justice Kagan, a few different answers, if I may. First, under Section 707(d)(2)(A), a debtor with above median income may not ­­ is presumptively abusive if they file for Chapter 7 in the first instance. And here the ­­ the record which includes the description at Joint Appendix Page 37, shows that this debtor's income was $49,000 a year, so I understand the question.

Justice Kagan: That is a very case­specific answer.

Craig Goldblatt: No, I understand that, so ­­ but not every ­­ the point being that not every debtor is eligible to file for 7 to begin with. There are some who must file for Chapter 13, including, we believe, this debtor. More broadly, because of the happenstance of this case, it is indeed fanciful to believe that any debtor is going­in decision about whether to file for Chapter 13 is going to be affected. The debtor of Alderson Reporting Company Official 1 course has no control over when the trustee makes payments, and he ­­

Justice Scalia: Well, wait. It seems to me it is always a disadvantage to the debtor who converts to have begun in Chapter 13. Whether there is any money left in the pot or not, he will have paid his wages to his creditors, whereas if he had filed for Chapter 7 immediately, he wouldn't have had to do that.

Craig Goldblatt: Justice Scalia, that's ­­ in fairness, that's probably right, that after the ­­ viewed after the fact ­­

Justice Kagan: Well, it is absolutely right, but your exacerbating the effect of that under your proposed rule.

Craig Goldblatt: But, Justice Kagan, not in a way that ­­ that could possibly provide a material effect on anyone's incentives. After all, the debtor ­­

Justice Kagan: No, possibly. But it's at least an extra penalty that you are imposing on him, and ­­ and, you know, one way to look at what Congress wanted to do here is in terms of incentives. Another way is just to say, we shouldn’t penalize people for going into Chapter 13 first.

Craig Goldblatt: Right. But ­­ but, Justice Kagan, in fairness, this isn't a penalty. After all, Alderson Reporting Company Official 1 had the Trustee distributed these funds to creditors before the date of conversion, no one would say that that operated to penalize the debtor. So viewing it as a penalty, I think, begins with the conclusion that there's a baseline entitlement to these funds to begin with. And that assumption is ­­ is incorrect and inconsistent with the structure of the Code.

Justice Kagan: Well, but I thought that Congress's baseline is to the extent possible to make ­­ to ­­ to encourage Chapter 13 and not to impose extra costs on the people who go there.

Craig Goldblatt: Right. But ­­ but it's ­­ with respect, it's not an extra cost. It is clear that the cost of being in Chapter 13 by the function of the statute is the debtor is obligated to pay all of his projected disposable income to the plan for the benefit of his unsecured creditors as the price of being in Chapter 13. Here the Debtor obtained those benefits. He was able to keep his property throughout the time he was in Chapter 13. To address Justice Sotomayor's question, he also was able to seek to negotiate with Chase the effort to modify his mortgage. So what happened in this case Alderson Reporting Company Official 1 is he reached the conclusion that he couldn't keep his house under the monthly payments on the mortgage as it existed, but as commonly occurs, particularly since the financial crisis, he then undertook to negotiate with Chase for a modification of the mortgage; could he reduce the plan payments. If ­­ if he could have gotten to a mortgage modification, that would have been implemented by a modified plan. Here he ­­ they tried. They tried for a year. They were ultimately unsuccessful. But ­­ but ­­ but the opportunity to try is the benefit of Chapter 13, and it can't be the case that because he was ultimately unsuccessful you can say that he didn't obtain the benefit during the period in which he was trying to do that. That was a voluntary decision on his part. He ­­ as ­­ as the Petitioner explains, could have converted any time. So if he didn't want to continue to devote his projected disposable income under the terms of the plan while he was doing so, he had every right to convert as soon as Chase receives stay relief.

Justice Scalia: Could ­­ could I ask you the same question I asked your friend on the other side? Assuming we find against you and ­­ and for the Petitioner on the issue of ­­ of who gets this money, Alderson Reporting Company Official 1 would the parties be able to alter that disposition in the plan?

Craig Goldblatt: So, Justice Scalia, that's a really good question and one with which we have struggled. We believe that the indications of congressional intent, that Congress did not mean to permit this.

Justice Scalia: Okay. So you agree with your ­­ with the other side on that point?

Craig Goldblatt: Well, we ­­ on the ­­ on the flip side, we ­­ we think that the better view of the Code is that ­­ let me ­­ let me enter, if I can, there were two different questions; right? One is if there was language in a plan that did that and that language ­­ that plan was confirmed, would it govern? The answer to that, under Espinosa, is obviously yes. The ­­ the question I think Your Honor intends to ask is if a plan said that and someone objected, could that properly be confirmed? And our view is that while that's a close question and thankfully not the one presented here, that the better view is that a plan that said the money goes back to the debtor is sufficiently inconsistent with the structure of the Code that ­­ that ­­ that such a plan couldn't be confirmed, but that is a much closer question than the Alderson Reporting Company Official 1 one you have here where there is no language. And so the language of the plan should be read against the common law backdrop, which answers this question decisively in our favor.

Chief Justice Roberts: Typically, how ­­ how often are distributions made? Every three months? Every ­­

Craig Goldblatt: So in ­­ in the ordinary case, my understanding and experience is that trustees will make monthly distributions. Here ­­ as long as sufficient funds have accumulated to make that worthwhile ­­ here, what the Trustee did ­­ what the Trustee did here makes good sense. So when Chase got stay relief, the Trustee was holding money. Once it got relief ­­ and, again, this is in response to Justice Sotomayor's earlier question, the ­­ the plan says what happens there ­­ it's on the Joint Appendix on pages 34 and 35, and it sets out a priority of payment under the plan. And Chase, when it got stay relief, that ­­ that satisfied in full its secured claim. Just the ­­ anytime a secured creditor gets back its collateral, that satisfies the secured claim of the secured creditor. So then just going through, to use the bankruptcy vernacular, the waterfall created by the Alderson Reporting Company Official 1 plan, the funds flowed according to ­­ thereto, to the unsecured creditors after the payment of administrative claims. That's a very common feature of plans, and typically trustees, when there are material funds to be distributed, will distribute on a monthly basis. Here, the Trustee didn't distribute those funds because the Debtor presumably wanted the opportunity to take this time to try to save their house. So the Trustee was facilitating the Debtor's efforts to save their house by holding those funds to see if a modification could be reached. And when it wasn't reached, the Trustee said, okay, now, under the plan, this money goes to unsecured creditors.

Chief Justice Roberts: It sounds like ­­ sounds like she's acting in the interests of the Debtor then.

Craig Goldblatt: She ­­ she was seeking to serve the objectives of the Code and the plan. Chapter ­­ the reason people file for Chapter 13 primarily is to save their house. And so that was why the Debtor filed and the Trustee was trying to do, consistent with the plan, what the purpose of the case was. When those efforts failed ­­ the Trustee can't, obviously, cause that to succeed. When it Alderson Reporting Company Official 1 failed, the Trustee then did what the plan obligated her to do.

Justice Breyer: At that moment ­­ at that very moment when ­­ think of the instant when he filed the conversion. As of that particular moment, had the efforts failed?

Craig Goldblatt: Yes. By ­­ by ­­ by converting what the ­­ in Chapter 7, the debtor is required to turn over all of their nonexempt assets to ­­

Justice Breyer: What I'm wondering is that as of that instant, is it the case that under the 13 plan, as of that instant the funds were already ­­ there was already on the Trustee, at that instant, a fixed obligation to write a check to the creditors.

Craig Goldblatt: So ­­

Justice Breyer: Then and there.

Craig Goldblatt: Certainly by no later than the moment of conversion, there was a ­­ there was a fixed obligation.

Justice Breyer: All right. So that's right. But if there had been money in that pile which she was simply keeping for the fulfillment of an obligation that came up later, that would have under the plan, that she would have had to return, you concede. Alderson Reporting Company Official

Craig Goldblatt: So the question of ­­ of prepayments is ­­ is more complicated, and ­­ and I think a fair ­­

Justice Breyer: It wouldn't exactly have been prepayments. There would have been money there because of the situation you describe. And ­­ and if there was not an obligation as of the Section 7 filing instance to pay the money then and there to the unsecured creditors, then I think, under your view of the case, that money would and should have gone to the Debtor.

Craig Goldblatt: So ­­

Justice Breyer: For the same reason as you've just said it would occur ­­

Craig Goldblatt: So ­­

Justice Breyer: In a ­­ in a revocable trust.

Craig Goldblatt: So, Justice Breyer, just in fairness ­­

Justice Breyer: Yes.

Craig Goldblatt: I think there's a difference between when the creditors right to payment attaches and when the debtor's obligation to make the payment is. And what ­­ what would happen if a debtor pre­funds the plan strikes me, just without having thought about it as Alderson Reporting Company Official 1 hard as perhaps I should have before today, as a different and perhaps more complicated ­­

Justice Breyer: No.

Craig Goldblatt: ­­ case.

Justice Breyer: Not at all. You've provided an easy principle. The principle is as in a revocable trust, the money that is in the trust that is already under an obligation then and there at the matter of revocation to go to the beneficiary goes. But where that obligation under the trust document has not yet arisen, it goes back to the settlor. That's what you've told me ­­

Craig Goldblatt: I agree with that principle 100 percent.

Justice Breyer: And it would apply the same here?

Craig Goldblatt: If ­­ if that's how that principle plays out, then ­­ then I agree.

Justice Sotomayor: But I still have problems, which is if you're talking about the Fifth Circuit saying you don't have a vested right, where does the ­­ until you're paid by the trustee, and the trustee hasn't paid you, so where is the preexisting obligation coming from?

Craig Goldblatt: So, Justice Sotomayor, the Alderson Reporting Company Official 1 language ­­

Justice Sotomayor: Or right of the creditor.

Craig Goldblatt: So, Justice Sotomayor ­­

Justice Sotomayor: An insured right of the creditor.

Craig Goldblatt: Yes. Exactly. So the ­­ the language of vested rights is ­­ is fraught. And if ­­ if what is meant by a vested right ­­

Justice Sotomayor: You ­­ you made the argument so ­­

Craig Goldblatt: Right. And if what is meant by vested right is there is a matured obligation of the trust, if ­­ if that's what is meant by vested right, then the ­­ the court below was wrong in that regard. If it meant by vested right something beyond that, may ­­ maybe it was right. I think the legal standard is there a matured obligation of the trust? And that clearly did exist. Whether that does or doesn't give rise to a vested right under some different definition of vesting is unclear to me. But what is clear is that the ­­ the trust had a matured obligation to pay the funds over to the beneficiary of the trust.

Justice Sotomayor: That's what I've always Alderson Reporting Company Official 1 thought of as a vested right.

Craig Goldblatt: Well, then the Fifth Circuit, in saying there wasn't a vested right, was incorrect. So if that is what is meant by vested ­­

Justice Kagan: Mr. Goldblatt, you might not be able to answer this question, but I take it from the fact that the solicitor general is not here in this case, the government ­­ the Trustees don't care who they pay this money to as long as they have a clear rule; is that correct?

Craig Goldblatt: I ­­ I don't think that that's right, Justice Kagan. Here the National Association of Chapter 13 Trustees has come in, in support of ­­ of our position. The Executive Office of the United States Trustee plays a very different role in bankruptcy cases, and so their absence, I think, is ­­ is evidence that the role of that office ­­

Justice Kagan: I see.

Craig Goldblatt: ­­ is different.

Justice Kagan: And do you think that it matters to the trustees, to any of them, whether we view this as a role rule or only as a default rule that can be changed by the plan? Is there any reason why they would care about that question?

Craig Goldblatt: I don't ­­ I ­­ in fairness, Alderson Reporting Company Official 1 I don't know the answer to that. It seems ­­ it seems clear to me that in the absence ­­ that as a default rule, this is the right answer. I ­­ I think the prudent thing to do would be to wait for a case in which someone sought to change the default to address the next question of, can you change the default or ­­ or ­­ my answer ­­ my ­­ I believe that the better view is probably that you cannot, because there are indications in the Code that suggest that Congress intended the application of what we're calling the default rule. But whether that's right or wrong, it seems to me, should properly await a case in which it's ­­ it's actually presented. In sum, the ­­ the question here is, the debtor is entitled to convert his case to Chapter 7 at any time. Everyone agrees that when he does, that terminates his obligations to make payments into the trust. The question is whether the decision to terminate essentially is retroactive, that by terminating ­­ by ­­ by making the decision to convert, he not only excuses himself of future obligations, but is able to undo payments he previously made when he enjoyed the benefits. And for those reasons, the judgment should be affirmed. Alderson Reporting Company Official

Chief Justice Roberts: Thank you, counsel. Mr. Madden, you have four minutes remaining. REBUTTAL ARGUMENT OF MATTHEW M. MADDEN ON BEHALF OF PETITIONER

Matthew M. Madden: Thank you. Two main ­­ two main points on rebuttal, Your Honor. First, this case isn't one where you can make a ­­ a jump to trust law in the restatements, because to make that jump, Respondent requires the Court to declare that a Chapter 13 trustee doesn't hold property of the estate and isn't a representative of the ­­ of the estate, but, instead, holds a new species of property as a bankruptcy trustee that already belongs to creditors and acts as an escrow agent to creditors as a representative ­­ instead of a representative of the estate. In our reply brief, pages 6 to 7, we point to a number of indications in the Code where that would be inconsistent with the way the Bankruptcy Code is structured. To take just one example, the Code gives a trustee the right to deposit money of the estate in an interest­bearing account, but in the Respondent's view, after a confirmation of the plan, a Chapter 13 trustee Alderson Reporting Company Official 1 holds property of the creditors and lacks statutory authorization to make that deposit. It would do violence, I think, to the basic structure of Chapter 13, which would have a number of implications in other cases, to declare that a Chapter 13 trustee is no longer a representative of an estate and a fiduciary of an estate, but, instead, is an agent of the creditors. Second, I ­­ the service of the trustee point which involves Section 348(e) of the Code, Congress didn't intend to tell a trustee that they can do nothing at all, and they ­­ they lack any other powers in a case on how to dispose of money. For example, in Bankruptcy Rule 1019, paragraph 4, a Chapter 13 trustee, upon conversion to Chapter 7, is required to turn over property of the estate to the new Chapter 7 trustee. It's no more a service that the trustee performs, as the trustee in the case, to turn over property that is no longer property of the estate to the debtor. The service that the trustee performs is to take possession of property of the estate, to examine and object to claims, and when appropriate, to pay ­­ to pay creditors according to the chapter of the Code under which the trustee operates. Alderson Reporting Company Official 1 Now, here, that's apparent, because to make the payments the trustee made in this case, Respondent had to file a document with the bankruptcy court to recommend how to treat claims. As we explained in the reply brief, Respondent had to tell the court that we should treat Chase's $5500 claim as being allowed only in the amount of a thousand dollars, because that renders Chase paid in full and allows unsecured creditors to obtain payments under the plan. But all of that only happened after the ­­ after the debtor converted his case to Chapter 7. And what Congress is intending to prevent is to have two trustees operating in the same bankruptcy case on the same estate dealing with the same creditors' claims. That's what the termination of the service of a trustee upon conversion means. Unless there are further questions.

Chief Justice Roberts: Thank you, counsel. The case is submitted. (Whereupon, at 11:05 a.m., the case in the above­entitled matter was submitted.)