JOSEPH M. MEIER, CHIEF U. S. BANKRUPTCY JUDGE.
Before the Court are two motions filed by the debtors in this case, James Michael Lovey and Julia Danielle Kinsey ("Debtors"). The first is titled "Second Corrected Amended Chapter 11
The Court conducted hearings on January 15, 2019, and then, following the filing of the motion to modify the plan, on March 28, 2019. Dkt. Nos. 158, 174. After the most recent hearing, the motions were deemed under advisement.
The Court has now considered the motions, briefs, and oral argument presented,
This chapter 11 case was filed on June 21, 2012. Dkt. No. 1. On August 14, 2013, Debtors' amended plan was confirmed ("Plan"). Dkt. Nos. 79, 100. Relevant here, the Plan listed U.S. Bank, N.A. ("US Bank") as a Class 5 creditor, and provided:
Dkt. No. 79 at p. 7. US Bank has filed a total of eight proofs of claim in this case, and the confirmed Plan did not distinguish between them.
The Plan also stated in Class 6 that general unsecured creditors were entitled to the following under the Plan:
Id.
Debtors made Plan payments and returned the property to US Bank as contemplated in the Plan. On August 10, 2018, Debtors filed a chapter 11 final report in which they reported that US Bank was paid $6,257.47, as well as 23% of each unsecured creditor's claim. Dkt. No. 131. The report indicates that only student loans and mortgage indebtedness remain, which extend beyond the life of the Plan. Id. That same day, Debtors filed a motion seeking entry of a discharge prior to the conclusion of the 126 months specified in the Plan, on the grounds that they had made all payments except for the student loans and mortgage debts. Dkt. No. 130. The UST objected to the motion because it was filed improperly under negative notice when the Code requires a hearing. Also, relevant to the issue currently before the Court, the UST stated the amount actually paid to US Bank, and to which US Bank claims the payments were applied, was unclear. Dkt. No. 137.
Debtors thereafter withdrew the motion for entry of discharge and filed an amended final report which indicated that US Bank's debt was "[p]aid in full by return of property," Dkt. No. 144, as well as a second motion for entry of discharge, Dkt.
Thereafter, Debtors filed a second amended chapter 11 final report. Dkt. No. 149. In that report, Debtors stated again that US Bank was paid in full via a return of property, and that unsecured creditors received a total of $ 50,024.24. Id. The report also clarified that "[i]nstead of naming U.S. Bank with the amount of $ 30,000 and a payment to such, unconnected to any claim of $ 9,605.60, the amount actually paid was paid to EdFinancial services, a non-dischargeable student loan and the date of the report is changed to July 6, 2018." Dkt. Nos. 149, 150. This final report was followed by the amended motion for entry of discharge currently before the Court today. Dkt. No. 150. Debtors thereafter filed a motion to modify the Plan, apparently after some discussion with the UST. Dkt. No. 161.
While Debtors' motion to modify their Plan was filed subsequent to the motion for entry of discharge, the Court will consider it first, as it may have bearing on Debtors' motion for entry of discharge. By this motion, Debtors seek to modify their Plan to delete the requirement to make any further payments to unsecured creditors after July 2018, with the exception of EdFinancial Services, because that debt is for a student loan. The basis for the modification sought by Debtors is, as stated above, US Bank had a lien on office supplies, equipment, inventory, and accounts receivable totaling $ 38,300, which assets were turned over to US Bank as payment for the debts they owed to it. Debtors contend that US Bank accepted that property as payment in full for their debt. Moreover, Debtors assert that:
Dkt. No. 161 at 2-3.
Based on these assertions by Debtors, the Court assumes they are referring to Proof of Claim No. 12, which is the only US Bank proof of claim to have been amended in this case. The amended proof of claim, filed December 5, 2013, indicates that a vehicle was sold, netting $ 2,175 toward the claim. Claims Reg. No. 12-2. The fact that US Bank filed an amended proof of claim following the sale of the vehicle seems at odds with Debtors' assertion that US Bank deemed its claim paid in full when the property was turned over to it. On the other hand, US Bank has not objected to the motion for entry of an early discharge or to the motion to modify the Plan, nor has it responded to Debtors' objection to its proof of claim.
As noted above, through this motion, Debtors seek to eliminate all future payments on unsecured debts under the Plan, and to discharge those debts. Only the payments on the student loan would continue to be paid. Although § 1127(e) is not a cause-based provision, Debtors have nonetheless stated no grounds in support of their position, and it is clear Debtors are proposing the modification as a means to an end—to line the Plan up with the entry of an early discharge.
Deciding a motion to amend a confirmed individual chapter 11 plan is in this Court's discretion. In re Mattson, 468 B.R. 361, 367 (9th Cir. BAP 2012).
Next, the Code requires that §§ 1121 through 1128, as well as the requirements of § 1129, apply to any modification under subsection (e). § 1127(f)(1). Those sections require, inter alia, that disclosure under § 1125 and balloting take place. See In re Hanson, No. 4:17-BK-15656-SDR, 2018 WL 4674592, at *9 (Bankr. E.D. Tenn. Sept. 26, 2018) (a modified plan is subject to the voting requirements of § 1129(a)(8)); In re McMahan, 481 B.R. 901, 920-21 (Bankr. S.D. Tex. 2012) ("Under § 1127(f)(2), an individual debtor's Chapter 11 plan `as modified, shall become the plan only after there has been disclosure under § 1125 ... notice and hearing, and such modification is approved.'").
When Congress passed § 1127(c), which provides that the proponent of a modified plan must comply with § 1125, which in turn requires disclosure and balloting, the House Report indicated a possible relaxation of those requirements when it wrote: "Of course, if the modification were sufficiently minor, the court might determine that additional disclosure was not required under the circumstances." H.R. Rep. No. 595, 95th Cong., 1st Sess. 411; see also 7 Richard Levin & Henry J. Sommer, Collier on Bankruptcy ¶ 1127.LH[1][a] (16th ed). In response, there are cases holding that if only one creditor is affected by a proposed modification, then further disclosure under § 1125 is unnecessary. In re Temple Zion, 125 B.R. 910, 914 (Bankr. E.D. Penn. 1991) (citing In re Am. Solar
The Court concludes that disclosure and balloting are required in this instance. The proposed modification would affect the entire class of unsecured creditors as well as US Bank specifically. Debtors' proposed modification would reduce the number of payments to unsecured creditors from 126 to approximately 60, and the total payments to that class from $ 63,000 to $ 30,000.
Because the Court concludes Debtors have not complied with the requirements for modification, Debtors' motion to modify is denied.
Debtors move for entry of discharge pursuant to § 1141(d)(5), which provides, in relevant part:
Although Debtors contend in their motion that they have completed all payments due under the Plan, that is not accurate. The Plan obligates Debtors to pay unsecured creditors $ 500 per month for a period of 126 months beginning August 15, 2013, whether any unsecured portion of US Bank's Claim No. 12 is included in that class or not. Dkt. No. 79 at p. 7. A confirmed plan is binding on all parties and is essentially a contract between debtors and their creditors. Miller v. United States, 363 F.3d 999, 1004 (9th Cir. 2004); In re Yett, 540 B.R. 445, 449-50 (Bankr. D. Idaho 2015). As such, Debtors are contractually bound to make all 126 monthly payments unless they receive a discharge prior to completion of those payments.
There is scant case law interpreting § 1141(d)(5)(B). However, giving the text its plain meaning, see Lamie v. U.S. Trustee, 540 U.S. 526, 536, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004), Debtors need only demonstrate that their unsecured creditors have received at least as much as they would have had the debtor's estate been liquidated under a chapter 7 bankruptcy case, and that modification of their chapter 11 Plan is not practicable.
The Court acknowledges the parallels between the early discharge provisions in chapter 11 for individual debtors and those in chapters 12 and 13. In crafting the requirements for such a discharge in an individual chapter 11 case, however, Congress did not entirely import the existing language from chapters 12 or 13, both of which require a showing that the "debtor's failure to complete [payments under the plan] is due to circumstances for which the debtor should not justly be held accountable." §§ 1228(b)(1), 1328(b)(1). The absence of a comparable "hardship" provision in § 1141(d)(5)(B) suggests that an early discharge for an individual in a chapter 11 case hinges only on payment of at least liquidation value to unsecured creditors under the plan, and the practicality of a later plan modification. 8 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 1141.05[2][b] (15th ed.).
The Court finds this omission curious, because potentially, individual chapter 11 debtors, upon finding themselves in more difficult circumstances than anticipated, could simply move for early discharge as soon as they have paid sufficient amounts to unsecured creditors to meet the best interest of creditors test, but ignore the number of months that have either elapsed or remain under the chapter 11 plan. This appears to be exactly what Debtors are attempting in this case. On the other hand, reading the requirements too strictly could gut the rule. As one court put it:
In re Belcher, 410 B.R. 206, 217 (Bankr. W.D. Va. 2009). If the Court considers whether modification could ever be practicable, then few cases would ever qualify.
Regardless, this Court need not struggle with these legal and philosophical issues under the facts presented here. Initially, the Court acknowledges that Debtors have demonstrated that unsecured creditors have received at least as much as they would in a chapter 7 liquidation case. Dkt. No. 150-1 Ex. A. To confirm their chapter 11 Plan in the first place, they had to prove this would be the case, see § 1129(a)(7)(A)(ii), and Debtors have indicated in their motion that they have paid enough to reach the 23% threshold they promised to pay unsecured creditors upon completion of their Plan payments. That threshold was enough to satisfy the test for confirmation.
The Court's first concern is whether simply reaching the 23% marker is sufficient, when the Plan suggests that "at least" 23% of the total unsecured claims will be paid. Is merely reaching that percentage enough? The Court finds this an easy question to answer, under the facts presented here, as Debtors are obligated under the Plan to pay towards the debt of the unsecured class for 126 months. They established a minimum percentage those creditors would be paid, but the Plan indicated continuing payments for a specified period of time. Simply reaching the minimum percentage of payment does not obviate the duty to make payments for the entire 126 months.
The second issue is related to the first. Debtors must show that modification of the Plan is not practicable. They have made no such showing. While the Plan binds them to pay $ 500 per month toward unsecured creditors, Debtors have not shown the Court that they are unable to pay a lesser amount in order to reach the full 126 months.
When questioned by the Court on this issue during the hearing, Debtors' counsel merely stated that his clients had given up their business in Idaho and moved to New Jersey, where they now have salaried positions and cannot afford to continue to make their Plan payments. It is the Debtors' burden to prove that all required conditions are met to qualify for an early discharge. In re Fisher, 91 I.B.C.R. 192, 193 (Bankr. D. Idaho 1991). This Court has previously considered a case in which no submissions were made to establish that some sort of modification would not be practicable, and the Court in that case accepted debtor's counsel's representation that his client lacked sufficient income generating ability to meet his obligations under the plan. In re Milburn, No. 96-20046, 1999 WL 33490231, at *2 (Bankr. D. Idaho Sept. 16, 1999). However, notably different in that case was the fact that there were no objections to the debtor's motion. Here, the UST has objected, and during the hearing, he specifically cited the fact that there had been no evidence presented that Debtors could not modify the Plan in some way so as to be able to continue to make payments. As such, the Court finds Milburn to be distinguishable.
Because Debtors have not complied with the requirements for modification of a chapter 11 plan, namely disclosure and balloting, their motion is denied. Additionally, Debtors have not shown that modification of the Plan is impracticable, and thus their motion for entry of a discharge prior to completing all Plan payments is likewise denied.
A separate order will be entered.
Claim No. Date Filed Reason Amount 4 07/05/2012 Loan $55.90 5 07/06/2012 Loan $142.12 6 07/06/2012 Loan $12,575.01 7 07/06/2012 Loan $7,915.48 8 07/12/2012 Loan $4,113.19 9 07/12/2012 Loan $2,404.71 12 12/05/2013 (amended) Loan $48,665.44 15 09/17/2012 Loan $14,773.15
