Trustee Shortchanged Debtor on His Claim for Back Pay

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By Daniel Gill

A Chapter 7 debtor was entitled to recover more back pay from his employer than the trustee overseeing his case had originally allocated, a Pennsylvania bankruptcy judge held June 6 ( Anderson v. Conway (In re Anderson) , 2017 BL 195098, Bankr. M.D. Pa., No. 5-15-bk-01946-JJT, 6/6/17 ).

Tax withholdings on the payout were not handled correctly before a net amount was paid to the debtor, Judge John J. Thomas of the U.S. Bankruptcy Court for the Middle District of Pennsylvania wrote in his opinion.

Thomas said he believed this was the first time a court had been called on to answer the question presented in this case.

Derek J. Anderson and his wife filed Chapter 7 on May 6, 2015. In Chapter 7, a trustee liquidates a debtor’s assets for the benefit of creditors. But state and federal laws allow the debtor to exempt certain property from the bankruptcy estate administered by the trustee.

Anderson claimed an exemption of $12,725 from more than $30,000 that his employer, the City of Scranton, owed for back pay and interest.

Scranton paid the trustee about $23,500 on June 30, 2016, after subtracting more than $7,500 as “tax withholding,” the court said.

The trustee in turn paid Anderson about $5,100—calculated as his claimed exemption less the tax withholding.

Anderson filed a motion to be paid the full amount of his exemption.

First, the court noted that Scranton acted improperly when it withheld taxes from the payment. “If taxes are to be distributed by reason of the receipt of these funds, they must be done by the trustee whose responsibility it is to address administrative taxes,” it said.

Because the trustee is responsible for those taxes, he should not have surcharged Anderson’s payment for his exemption, the court said.

The debtor could keep his exempt $12,725, and the remainder of the payment—and the tax liability—would be administered by the trustee.

Anderson was represented by Edward J. Kaushas, Pittston, Pa. Mark J. Conway, the Chapter 7 trustee, Dunmore, Pa., represented himself.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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