LAUREL M. ISICOFF, Bankruptcy Judge.
This matter came before me on July 27, 2016,
The disputes between the Debtor, Christine Sanchez and Nancy Neidich, the Chapter 13 Trustee (the "Trustee"), revolve around what should be the consequences of a debtor's failure to comply with a plan requirement that tax returns be turned over to the Trustee annually when filed. The Trustee argues the consequence should be modification of the Debtor's Second Modified Plan (the "2MP") which is the last confirmed chapter 13 plan, or dismissal of the Debtor's bankruptcy case because the Debtor breached the 2MP. The Debtor counters that the Debtor's failure to provide the tax returns would not have resulted in plan modification so there should be no consequence for the failure to comply.
For the reasons more fully outlined below, I find that the failure to comply with a plan term may result in dismissal in certain circumstances not present here, but that the failure to comply with a plan term is never free of consequence.
The Debtor filed bankruptcy on May 13, 2010. Her initial confirmed Chapter 13 Plan, her Second Amended Plan (the "first Confirmed Plan") (ECF #49), was confirmed on December 28, 2010. The 2MP was confirmed on June 22, 2012. Both the first Confirmed Plan and the 2MP include the following income verification language ("IVL"):
The Debtor never complied with the IVL and on August 26, 2015, the Trustee filed a Motion to Dismiss (ECF #80) due to the Debtor's failure to provide the tax returns (the "First Motion to Dismiss"). Although, in response, the Debtor's counsel filed all the missing tax returns, the case was ultimately dismissed on November 17, 2015, because the Debtor's counsel failed to file promised amended CMI forms
The Debtor's counsel sought reinstatement acknowledging that the failure to comply was his firm's oversight.
The Trustee argues that the consequence of the Debtor's failure to provide the tax returns should be dismissal because the Debtor is in material default of her plan. At a minimum, the Trustee argues, the Debtor must modify the 2MP to pay what appears to be increased income to the unsecured creditors. The Debtor counters that a change in income alone should never be a basis for modifying a plan, and, moreover, even had the tax returns been timely presented, the Debtor's net income did not increase and, therefore, the failure of the Debtor to provide her tax returns timely should not have any consequence.
11 U.S.C. §1307(c) provides that any party in interest may seek conversion or dismissal of a chapter 13 case "whichever is in the best interests of creditors and the estate, for cause", which includes, in section 1307(c)(6) "material default by the debtor with respect to a term of a confirmed plan." When a court finds that a material default has occurred "dismissal or conversion is not automatic, but rather a matter of the Court's discretion." In re Formaneck, 534 B.R. 29, 32 (Bankr. D.Col. 2015) (citations omitted).
While "material default" is not defined in the Bankruptcy Code, several courts have had the opportunity to consider when a default under a chapter 13 plan warrants dismissal or conversion. In re Formaneck, 534 B.R. at 29 (Debtors in material default because they failed to make monthly payments directly to the mortgage lender as required by the plan — case dismissed); In re Hoyt-Kieckhaben, 546 B.R. 868 (Bankr. D. Col. 2016) (same-except case converted at request of debtor); In re Grant, 428 B.R. 504 (Bankr. N.D. Ill. 2010) (Debtor in material default for failing to make full monthly payments to the trustee, but never seeking to modify the plan, and therefore failing to pay her unsecured creditors in full, with interest, as required by the plan, within the five years of the plan — case dismissed
Thus, while no court has clearly defined "material default"
Because the five years of the Debtor's plan have long expired, there is no basis to modify the 2MP.
In the case In re Nachon-Torres, 520 B.R. 306 (Bankr. S.D. Fla. 2014) I held that determination of whether a chapter 13 plan should be modified involves a three step process
11 U.S.C. §1329 states that the trustee, the debtor, or any holder of an unsecured claim may seek modification up until the time payments are complete to, among other things, "increase or reduce payments on claims." Notwithstanding that, the Debtor argues that 11 U.S.C. §1325(b) does not apply to modified plans, and that because, a debtor's income calculation is addressed in section 1325(b), a change in income alone cannot support a request for modification. While I recognize there is a split of authority on this issue, both I and, more importantly, the Eleventh Circuit, have specifically held to the contrary.
In Whaley v. Tennyson (In re Tennyson), 611 F.3d 873 (11th Cir. 2010) the Eleventh Circuit considered whether the "applicable commitment period" is temporal or a monetary multiplier. In rejecting the "multiplier" line of cases the court noted
611 F. 3d at 879. See In re Rhymaun, 2011 WL 9378787 (Bankr. S.D. Fla. 2011). Accord Waldron v. Brown (In re Waldron), 536 F.3d 1239, 1246 (11th Cir. 2008) (In holding that a debtor must amend his schedules to include property acquired post-confirmation in a chapter 13 case the court noted "[i]f [the debtor] loses a stream of income, a debtor likewise can move to modify his plan to decrease his payments.").
Thus, I hold that a change in income may be the sole basis for modification of a chapter 13 plan.
The confirmation of a chapter 13 plan contemplates that a debtor's income may vary from the median income reflected in the initial CMI form, and the time to address that fluctuation is at the time of the confirmation hearing. However, there are circumstances that would warrant a modification — such as a debtor losing his or her job, or a debtor winning the lottery, or the debtor earning income well in excess of what the debtor had made historically or well below what the debtor had earned historically (e.g. a real estate investor who experienced an unprecedented increase or decrease in real estate investments — such as the 2008 financial crisis or the real estate boom that preceded it).
At the time of confirmation of the first Confirmed Plan, the Trustee had the Debtor's 2008 and 2009 tax returns. The Debtor's 2008 tax return showed an income of $98,479.00. The 2009 tax return showed an income of $46,344.00.
Moreover, even if the pre-confirmation tax returns had not shown a significant fluctuation in the Debtor's income, the increased income numbers reflected in the Debtor's finally revealed tax returns cannot be viewed in a vacuum. They must be considered in the context of any allowable expenses incurred at the same time. Thus, I must also look at the amended CMIs that Debtor's counsel finally, and belatedly, filed, which show that the Debtor's net changes in income were not such that modification would be warranted, which ties into the final consideration for modification of a chapter 13 plan.
Accordingly, I find that even had the Debtor timely turned over her tax returns to the Trustee, and had the Trustee sought modification, I would not have ordered the Debtor to modify the 2MP. Consequently, the Debtor's failure to timely turn over the tax returns is a default under the 2MP but it is not a material default.
The Trustee argues that the Debtor was required to submit an amended CMI with each tax return. The 2MP had no such requirement. In the absence of such a requirement the Debtor is not obligated to do so. If the Trustee, either in a Chapter 13 plan, or otherwise, requests a debtor submit tax returns during the pendency of a chapter 13 case, the Chapter 13 Trustee may, based on the tax returns, either file a motion to modify, or may request a debtor's counsel to prepare an amended CMI so the Chapter 13 Trustee may determine whether to file a motion to modify. If a debtor declines to do so, then, when the Chapter 13 Trustee files a motion to modify, the debtor will still have to produce some evidence that modification is not required, so ultimately preparing an amended CMI may be in the debtor's best interest.
The Trustee has asserted the reinstatement should be revoked because the Debtor promised to file a 100% plan if the case was reinstated. The Joint Stipulation lists as an undisputed fact the following:
However, neither the transcript nor the order reinstating says any such thing and Debtor's counsel vehemently disputed this at the trial. I find that the Debtor's counsel did not make any such representation and that the failure to file a 100% plan should not be a basis for dismissal or vacating the order of reinstatement.
The Chapter 13 Plan is a contract between a debtor and his or her creditors. There is no question that the Debtor breached the contract by failing to provide the tax returns to the Trustee in the manner required by the contract. The Debtor's first argument is that there are no "damages" because the performance of the contract would not have resulted in an increase of payments to the unsecured creditors. The Debtor also argues it is the Trustee's fault that all of this came up at the end of the five year period — the Trustee should have asked for the missing returns earlier.
No doubt it would have been better if the Trustee had advised the Debtor early in the case that she had failed to comply with the 2MP. However, it is not the Trustee's responsibility to make sure the Debtor meets her obligations.
As for damages, unlike a regular contract, the breach of a Chapter 13 plan also involves the integrity of the bankruptcy system. A failure by a debtor or a creditor to abide by that system must carry consequences. Indeed, the provisions of the Bankruptcy Code that outline grounds to deny a debtor his or her discharge reflect Congress' expectation that a debtor in bankruptcy is required to perform his or her obligations as a condition to receiving his or her discharge.
In the absence of specific provisions of the Bankruptcy Code that set forth consequences for acts that violate the general purposes of the Bankruptcy Code, Congress has given the Bankruptcy Court the general authority to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. §105(a). Thus, while I will not dismiss this case, or deny the debtor her discharge for breaching the 2MP, I find that, because the Debtor failed to comply with an order of the Court — that is, the Order confirming the 2MP, which Order bound the Debtor to the provisions of the 2MP — the Debtor will be required to pay a sanction to the Clerk of the Bankruptcy Court in the amount of $2,500, or, alternatively, may make a tax deductible donation to the 501(c)(3) entity of her choice in the same amount, which entity provides legal services to the poor in the Southern District of Florida.
It is therefore ORDERED as follows:
A) Whether the order of reinstatement must be vacated and the case dismissed as the reinstatement was predicated on the debtor's representation that a plan paying 100% of the allowed unsecured creditors would be filed.
B) Whether the debtor is bound to propose a plan paying 100% to the allowed unsecured creditors as the case was reinstated upon the understanding that the debtor's plan would pay 100% to the allowed unsecured creditors.
C) Whether the debtor must provide the Trustee with the evidence and calculation of expenses contemporaneously with the filing of the amended Schedules.
D) Whether it is bad faith for the debtor to wait until after the case has been pending for 60 months to file amended Schedules to reinstate her case.
E) Whether the Bankruptcy Code requires modification of a bankruptcy plan due to increased income.
