Laurel M. Isicoff, Judge, United States Bankruptcy Court.
The four cases to which this opinion applies
Ms. Nachon-Torres filed her chapter 13 bankruptcy case on Sept. 22, 2011. She listed the value of her 2006 Hummer H2 on her schedules at $25,000. On June 25, 2013 Ms. Nachon-Torres filed a Motion to Modify.
When Ms. Martinez filed bankruptcy she owned an interest in a time share, which she decided to keep. The chapter 7 test included a $1,000 value attributable to the timeshare, the value of which the chapter 13 Trustee did not dispute. Ms. Martinez filed a bankruptcy plan with an applicable commitment period of forty-four months. Her Second Amended Plan was confirmed on December 31, 2012.
The Trustee objected on several grounds—first, that had Ms. Martinez originally filed a chapter 7 case, the chapter 7 trustee would have had the benefit of the value of the timeshare, so Ms. Martinez's decision to abandon the timeshare post-confirmation shouldn't alter the original chapter 7 calculation; in other words, the chapter 7 test should be calculated as of the original petition date, not the date of the proposed modification.
In one of the two subsequent omnibus objections to Ms. Martinez' proposed modification, the chapter 13 Trustee further argued that the act of abandoning property is not an unforeseen circumstance that would warrant modification, and that when Ms. Martinez filed her motion to abandon she never suggested she would then seek to reduce payments to creditors on account of that abandonment. Finally, "a debtor should not be allowed to waste part of his estate in order to reduce the amount necessary to pay his creditors." The Trustee argues that Ms. Martinez's attempt to modify is in bad faith and modification should be denied.
Mr. and Mrs. Garcia owned a piece of property that apparently appreciated in value during their chapter 13 case. The property was valued at $49,152 as of the petition date, and for purposes of calculating the chapter 7 test, but the property was sold a year after the bankruptcy was filed for $58,655 (the property apparently had no encumbrances). The Garcias proposed to pay off their plan either prior to the expiration of the five year applicable commitment period rather than increase the amount to be paid to their unsecured creditors by the $9,503 increase in the value of the sold property, or keep the proceeds of the sale and continue making the scheduled payments required under the confirmed plan.
The Trustee filed a Motion to Modify the Garcias' plan
Mr. Luyando filed bankruptcy on June 4, 2010. On July 9, 2010, Mr. Luyando filed a plan that proposed to pay all unsecured creditors 100% of their claims over a period of five years. That plan was confirmed on August 26, 2011. Mr. Luyando filed a motion to modify on August 22, 2013, claiming his income had decreased drastically.
Modification of chapter 13 plans is governed by 11 U.S.C. § 1329 which authorizes modification of a plan any time after confirmation but before payments are complete under four circumstances: (a) to increase or reduce payments on claims; (b) to extend or reduce the time for payment (subject to a cap of five years); (c) alter the amount payable to a particular creditor who may have received payments outside of the plan; and (d) to address changes in health insurance costs. Modifications to a plan may be sought by the debtor, the chapter 13 trustee, or any holder of an allowed unsecured claim.
One common question runs through these four cases—when is it appropriate to seek modification of a chapter 13 plan? Notwithstanding that a proposed modification may fit within the four stated statutory purposes, ultimately modification lies within the bankruptcy court's discretion, as section 1329 provides that a plan may be modified, not that a plan shall be modified. Thus, modification "involves a two-step process." In re McAllister, 510 B.R. 409, 413 (Bankr.N.D.Ga.2014). The court must not only consider whether a proposed modification satisfies the "technical requirements" of section 1329, but also whether, under the circumstances of a particular case, the court should allow modification.
There is a split amongst the courts as to how that discretion should be applied—one significant group of courts hold that modification is only appropriate when there has been a change that is both substantial and unanticipated. See, e.g., In re Woodhouse, 119 B.R. 819, 820 (Bankr.M.D.Ala.1990) ("[U]nless there are substantial unanticipated changes in the debtor's ability to pay under a plan already confirmed, the rights of the debtor and his creditors are settled at the date of confirmation."); In re Euler, 251 B.R. 740 (Bankr.M.D.Fla. 2000).
Conversely, other courts hold that that since section 1329 does not include any requirement of "substantial or unanticipated" change, courts should not impose such a condition. See, e.g., Matter of Witkowski, 16 F.3d 739, 748 (7th Cir.1994) ("Section 1329 does not require any threshold requirement for a creditor, debtor or trustee to seek modification of an approved bankruptcy plan."); Ledford v. Brown (In re Ledford), 219 B.R. 191, 195
Many courts consider the res judicata effect of a final confirmation order as being dispositive of this issue. See In re Euler, 251 B.R. at 746 (ruling that significant appreciation in an asset owned by the debtor on the petition date did not warrant the modification sought by the trustee because "[a]ll participants in the bankruptcy case are barred by the doctrine of res judicata from asserting matters they could have raised in the bankruptcy proceedings.... Accordingly, principles of claim preclusion or res judicata bar a trustee from raising as grounds for modification facts that were known or could have been raised in the bankruptcy proceedings.").
But what should be the triggering factor? When should the res judicata impact of a confirmation order be modified? Should there be some kind of a threshold before the bankruptcy court will even consider whether the modification sought is otherwise appropriate? Or should a court exercise its discretion without any particular framework?
Interpreting section 1329 to allow modification for any change would be inconsistent with the manner in which chapter 13 is constructed. Modification is not a tool that can or should allow a debtor, the chapter 13 trustee or an unsecured creditor to make an end run around the confirmation process. Consequently, it is not appropriate to consider a modification, even if the modification falls within one of the four stated purposes of section 1329(a)(4), if the relief proposed would not have been permitted at the time the plan was initially confirmed — for example, a creditor's request that property that is not property of the debtor should be used to
The United States Supreme Court has provided a context for this inquiry. In Hamilton v. Lanning, 560 U.S. 505, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010), the Supreme Court resolved the debate about the meaning of "projected disposable income," and how, in the context of confirmation of an original chapter 13 plan, a debtor must account for the income calculation requirements of confirmation. In resolving this dispute, the Supreme Court held that when calculating projected disposable income, the court may account for changes in the debtor's income or expenses that are "known or virtually certain at the time of confirmation." Id. at 524, 130 S.Ct. 2464. Accordingly, in order to give appropriate context to a threshold consideration in any determination whether and when modification is appropriately sought under section 1329, I find that there must have been a change that was neither known nor virtually certain at the time of confirmation. Cf. Waldron v. Brown (In re Waldron), 536 F.3d 1239 (11th Cir.2008) (an asset that the debtor acquired unexpectedly after confirmation was property of the chapter 13 estate); In re McAllister, 510 B.R. 409 (a windfall to the debtor such as winning the lottery or receiving a substantial inheritance might warrant modification of a debtor's chapter 13 plan).
Therefore, in determining whether to grant a motion to modify, I will consider the following — first, whether the proposed modification fits within the statutory prerequisites; second, whether the circumstances giving rise to the proposed modification were either unknown or not virtually certain at the time of confirmation; and finally, whether the circumstances otherwise warrant modification.
Another issue common to each case under my consideration is, if modification is appropriate, what date should be used for determining the chapter 7 test — the original petition date or the modification date?
Section 1329(b) requires that any modified plan satisfy the requirements of section 1325(a)(4)
There is a split of opinion amongst the courts whether, when a chapter 13 plan is modified, the chapter 7 test should be calculated as of the original petition date or as of the date of modification. While there
11 U.S.C. § 1325(a)(4) requires the chapter 7 liquidation value be the value "as of the effective date of the plan." Section 1329(b)(2) specifically states that the modified plan becomes the plan unless the modification is not approved. Taken together with section 1329(b)(1) which provides that any modification must comply with section 1325(a), there should not be any issue that the date as of which the chapter 7 test must be calculated is the date of the modified plan. Nonetheless, some courts have seemingly disregarded the language of section 1329(b)(2) and held that "the plan" is always the original plan. See, e.g., In re Forbes, 215 B.R. 183, 188 (8th Cir. BAP 1997).
Legislative history is of limited use and should be referred to only when "(1) the statute's language is ambiguous; (2) applying it according to its plain meaning would lead to an absurd result; or (3) there is clear evidence of contrary legislative intent." Whaley v. Tennyson (In re Tennyson), 611 F.3d 873, 877 (11th Cir. 2010) (quoting United States v. DBB, Inc., 180 F.3d 1277, 1281 (11th Cir.1999)). One could argue that the debate amongst the courts illustrates the statute is ambiguous
Eleventh Circuit case law resolves any lingering doubts about the resolution of this issue. In struggling to determine when and to what extent the value of post-confirmation property should be made available to creditors for distribution (whether by recalculation of the chapter 7 test or otherwise) courts consider, as a determining factor, whether the post confirmation property is property of the estate. There is some debate, as reflected in the case law, as to how courts should
In Waldron, the Eleventh Circuit affirmed the bankruptcy court's decision that a debtor's underinsured motorist benefits for a post-petition automobile accident were property of the estate, and that joint debtors could be compelled to amend their schedules to include this asset. 536 F.3d 1239. In holding that assets acquired after confirmation of the chapter 13 plan are property of the estate,
Thus, if a modification is approved, the chapter 7 test must be recalculated as of the date the modified plan is filed.
Having now set forth a framework for consideration of the specific disputes before me, I now return to address them in turn.
Ms. Nachon-Torres moved to modify her plan because, she claims, she made a mistake when she valued her car at the time she filed and confirmed her original
Ms. Martinez abandoned a non-exempt asset that she owned on the petition date but that she decided she could no longer afford. Her modification seeks to recalculate her original chapter 7 test without including the value of the abandoned asset and pay off her plan earlier than originally proposed.
That a debtor may buy or sell assets after confirmation is not unlikely or unanticipated. In the span of three to five years, peoples' lives do not remain static. Ms. Martinez chose to keep a non-exempt asset. It was her choice to give up that asset post-confirmation but she cannot do so at the expense of her creditors. Because the decision to divest herself of an asset is not an event that was not "virtually uncertain," and because modification would otherwise be inappropriate, Ms. Martinez' motion to modify is denied.
Mr. Luyando's plan obligated him to pay his one unsecured creditor 100% of the allowed unsecured claim. Prior to my ruling on May 6, 2014, I did not have any information regarding how much Mr. Luyando's income had changed, and so I advised the parties that an evidentiary hearing was necessary, and that the change in income would need to be significant in order to meet the threshold requirement of being unknown or not virtually certain. Ultimately Mr. Luyando withdrew his motion to modify.
The Garcias sold a piece of property post-confirmation. The proceeds were enough to pay in full the balance of their plan in June 2011, three years before the expiration of the plan term and 18 months prior to the three year anniversary of the petition date. The Trustee argued that instead of early payoff the Debtors should modify their plan to pay more to their unsecured creditors.
The Garcias' applicable commitment period in the original plan was five years. I already ruled in In re
The Trustee filed a motion to modify, arguing that the plan could not be paid off prior to expiration of the original applicable commitment period, and, that the additional money should be used to increase the distribution to unsecured creditors. However, the Trustee never pursued, and ultimately withdrew, her motion to modify. In June, the Garcias filed a motion to modify which was denied. However, the Garcias have reached the end of their plan term and it appears they are ready to receive their discharge. Thus, this dispute has been resolved by the passage of time.
In chapter 13, the Bankruptcy Code creates a balance between certainty and flexibility— recognizing that debtors and creditors need to know as early as possible how the creditors will be repaid, but creating a framework where a change in circumstances, positive or negative, can give debtors, the trustee, or unsecured creditors an opportunity, where appropriate, to take advantage of that change. And where change is not possible for a chapter 13 debtor, the Bankruptcy Code even gives the ultimate out—the hardship discharge under 11 U.S.C. § 1328(b).
Nonetheless, the ability to request that change, like the ability to seek hardship discharge, is not unlimited, and the Court serves as the gatekeeper. In this role, the Court must ensure that the ultimate goals of the Bankruptcy Code—a fresh start for debtors and fair distributions to creditors—are balanced and acknowledged throughout the bankruptcy process.
(4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date...."