Keith L. Phillips, United States Bankruptcy Judge
Before the Court is the motion of the Chapter 13 Trustee, Carl M. Bates, to modify the Chapter 13 plan of debtors Anthony Joseph Swain and Carrie Collins Swain "due to an unanticipated and substantial change in the debtors' circumstances...." The Trustee makes his motion pursuant to § 1329 of the Bankruptcy Code, 11 U.S.C. § 1329.
The Debtors agree that a modification of the plan is appropriate but disagree with the Trustee over the terms of the modification. The Trustee contends that payments under a modified chapter 13 plan for debtors whose income has substantially changed must be determined pursuant to the formula set out in § 1325(b) of the Bankruptcy Code, which necessitates a post-petition recalculation of "current monthly income" in order to ensure that the debtors comply with the requirement of § 1325(b)(1)(B). Under that section, debtors must provide all of their projected disposable income to make payments to unsecured creditors under the plan. The Debtors propose modifications to the plan that disregard the § 1325(b) formula but
The Court agrees with the Trustee that the Debtors' plan should be modified in light of the Debtors' increased income. However, the Court does not agree with the Trustee's position that § 1325(b) applies to plan modifications under § 1329. Therefore, the Debtors are not required to calculate their plan payments according to the terms of § 1325(b)(2) and (3). For that reason, the Court grants the Trustee's motion, with the plan payments to be modified as proposed by the Debtors.
This Memorandum Opinion sets forth the Court's findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure, Fed. R. Bankr. P. 7052.
The Court has subject matter jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157(a) and 1334 and the General Order of Reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. A proceeding regarding the modification of a chapter 13 plan is a core proceeding. 28 U.S.C. § 157(b)(2)(A), and (O). Venue is appropriate in this Court pursuant to 28 U.S.C. § 1409(a).
The Debtors filed a Chapter 13 bankruptcy case on November 13, 2009. On November 19, 2009, the Debtors filed their initial Chapter 13 plan. An order confirming the plan was entered on February 2, 2010.
On February 1, 2012, the Trustee filed a motion to dismiss the Debtors' case for "unreasonable delay that is prejudicial to creditors." Prior to the hearing on the Trustee's motion, the Debtors filed a modified plan. In response, the Trustee withdrew his motion to dismiss.
On March 30, 2012, the Trustee filed an objection to confirmation of the modified plan and scheduled a hearing on the objection for April 11, 2012. The parties continued the April 11 hearing to April 25, May 23, July 18, August 15, September 12, and finally September 25. At the hearing held September 25, 2012, the Trustee's objection to the first modified plan was sustained by the agreement of the parties.
On October 16, 2012, the Debtors filed a second modified plan. The Trustee filed an objection to the confirmation of the second modified plan and scheduled it for a hearing on November 28, 2012. The hearing was continued until December 12, 2012, at which time the Trustee's objection was sustained by agreement.
On January 2, 2013, the Debtors filed their third modified plan. On February 12, 2013, the Trustee filed both an objection to the confirmation of the third modified plan and a motion to modify the Debtors' chapter 13 plan. The Trustee's motion seeks to modify the plan by increasing the plan payment and the percentage distribution to unsecured creditors.
The hearing on the Trustee's objection to confirmation of the third modified plan was scheduled on February 20, 2013, but was continued to March 20, 2013, so that it could be heard simultaneously with the Trustee's modification motion. On March 20, 2013, the hearings on the motion to modify and the objection to confirmation of the third modified plan were continued until May 1, 2013, and both hearings were again continued, this time until August 13,
The day before the continued hearings, the Debtors filed amended Schedules I and J as well as a response to both the motion to modify and the Trustee's objection to the confirmation of the third modified plan. The Trustee filed a memorandum in response immediately prior to the October 10, 2013, hearing.
At the October 10 hearing, the parties asked the Court to sustain by agreement the Trustee's objection to the third modified plan. Both parties offered exhibits, which were admitted into evidence without objection, and agreed to continue the hearing on the motion to modify for a further evidentiary hearing on November 4, 2013. The parties advised the Court that they would attempt to submit factual stipulations prior to that date.
On November 1, 2013, the parties filed a stipulation of facts with the Court. In lieu of conducting a further hearing on November 4, 2013, the Court established a briefing schedule on the Trustee's motion to modify. A hearing on the motion to modify was scheduled for December 16, 2013, in the event the parties desired to offer additional evidence and arguments. On November 18, 2013, the parties submitted an amended stipulation. The Court cancelled the hearing scheduled for December 16, 2013, upon the joint request of the parties. The parties now seek a ruling on the motion to modify based upon the existing record.
The evidence consists of the amended stipulation and the exhibits entered into evidence on October 10, 2013. The amended stipulation includes the following:
The Exhibits (Nos. 1 through 4, submitted by the Trustee, and A and B, submitted by the Debtors) include the Trustee's proposed Revised Form 22C (Exhibit 1), pay advices for Mr. Swain for the period from June, 2012, through September, 2013 (Exhibit 2), pay advices for Mrs. Swain for the period from December, 2012, through September, 2013 (Exhibit 3), a copy of 11 U.S.C. § 1329 (Exhibit 4), Amended Schedules I & J dated October 9, 2013 (Exhibit A) and pay advices for Mr. Swain for the period from March 1, 2013, through August 31, 2013, together with pay advices for Mrs. Swain for the period from July 28, 2013, through September 21, 2013 (Exhibit B).
A confirmed Chapter 13 plan may be modified pursuant to 11 U.S.C. § 1329(a) if the debtor experiences a "substantial" and "unanticipated" post-confirmation change in financial circumstances. Murphy v. O'Donnell (In re Murphy), 474 F.3d 143, 149 (4th Cir.2007) (citing Arnold v. Weast (In re Arnold), 869 F.2d 240, 243 (4th Cir.1989)). The parties are in agreement that the Debtors' increased income constitutes a substantial and unanticipated change to their financial condition since the confirmation of their chapter 13 plan.
The Trustee is seeking a modification of the plan, and the Debtors do not oppose modification. In fact, the Debtors have sought on three occasions to modify the plan by filing modified plans pursuant to the Court's applicable Local Rule.
The Fourth Circuit in Murphy acknowledged that a bankruptcy court has discretion to grant a motion to modify a confirmed plan pursuant to 11 U.S.C. § 1329(a)(1) or (2) so long as the proposed modification does not seek to relitigate issues which were decided in the confirmation order or which were available at the time of confirmation but not raised by the parties. 474 F.3d at 149 (citing In re Butler, 174 B.R. 44, 47 (Bankr.M.D.N.C. 1994)). In this case, the record supports the joint contention of the parties that the Debtors experienced a substantial, unanticipated change in their financial condition after plan confirmation. The Debtors' combined average monthly income, as set forth in their original Schedule I (Docket No. 1), and relied upon at the time their plan was confirmed, was $6712.65. Their Amended Schedule I (Docket No. 72) dated October 9, 2013, states that the Debtors' combined average monthly income is now $9938.68, which represents an increase of nearly 50% since the plan was confirmed, an amount the Court finds to be substantial. There is no indication that this increase in combined average monthly income was, or should have been, anticipated at the time of confirmation. Therefore, this Court finds that under the criteria established by the Fourth Circuit in Murphy and Arnold, modification of the plan is appropriate.
"Disposable income" is defined in § 1325(b)(2) as "current monthly income received by the debtor ... less amounts reasonably necessary to be expended ... for the maintenance or support of the debtor...." "Current monthly income" is defined in § 101(10A) as "the average monthly income from all sources that the debtor receives ... derived during the 6-month period ending on ... the last day of the calendar month immediately preceding the date of the commencement of the case...." (emphasis added). Section 1325(b)(3) requires that an above-median income debtor use the "means test" of § 707(b)(2) to calculate "amounts reasonably necessary" for maintenance or support of the debtor. Section 707(b)(2)(ii) provides that certain monthly expenses shall be limited to the amounts specified under the National Standards and Local Standards issued by the Internal Revenue Service. See Mort Ranta v. Gorman, 721 F.3d 241, 250-51 (4th Cir.2013) (includes a discussion of "projected disposable income" in the context of plan confirmation).
Official Form 22C calculates a debtor's monthly disposable income by subtracting the allowed § 707(b)(2) deductions, and other allowed expenses, from the debtor's current monthly income. This amount is described on Form 22C as the "Monthly Disposable Income Under § 1325(b)(2)" ("MDI") and represents the amount required to be paid to unsecured creditors pursuant to § 1325(b)(1)(B) in order to obtain confirmation of the plan.
11 U.S.C. § 1329(a) and (b).
The Trustee argues that all of the requirements of § 1325 for confirmation of a chapter 13 plan are also applicable to the modification of a plan, including the requirement of § 1325(b) that all the Debtors' projected disposable income be applied to make payments to unsecured creditors. Therefore, the Trustee proposes that the Debtors' payments under the modified plan be calculated based upon the Trustee's proposed Revised Form 22C.
Courts have split over whether 11 U.S.C. § 1325(b) applies to chapter 13 plan modifications.
In re Heideker is representative of the line of cases applying § 1325(b) to plan modifications. In that case, in which the bankruptcy court addressed plan modifications proposed by four separate debtors, the debtors sought to reduce the terms of the plans below the applicable commitment period without paying unsecured creditors in full. In each case, the trustee objected to the proposed modification. The court, citing the Eleventh Circuit decision of Whaley v. Tennyson (In re Tennyson), 611 F.3d 873 (11th Cir.2010), held that the language of § 1329(b) requires the application of the applicable commitment period of § 1325(b) to a plan modification. It therefore determined that the applicable commitment period is a durational requirement and the above-median income debtor must present a plan with a term of no less than five years unless his unsecured debts are paid in full. Although Tennyson involved plan confirmation rather than modification, the bankruptcy court in Heideker concluded that the Eleventh Circuit would apply the same rationale to plan modifications and that to hold otherwise "would contravene the plain meaning of Sections 1325(b) and 1329, as well as Congress' intent in enacting BAPCPA." 455 B.R. at 272.
The weight of authority is that § 1325(b) does not apply to § 1329 plan modifications.
In In re Davis, 439 B.R. 863 (Bankr. N.D.Ill.2010), the Bankruptcy Court for the Northern District of Illinois reviewed the reasons many courts have given when holding that § 1325(b) is inapplicable to plan modifications. In Davis, an above-median income debtor with a confirmed plan paying 100% of unsecured claims was permitted to modify her plan after losing her job, with the result being that unsecured creditors would not be paid in full.
The Fourth Circuit has not directly addressed whether § 1325(b) applies to plan modifications, although the case of Murphy v. O'Donnell (In re Murphy), 474 F.3d 143 (4th Cir.2007) provides some insight. In Murphy, the court reversed the bankruptcy court's decision to grant a trustee's motion to modify the chapter 13 plan of one pair of joint debtors and affirmed the granting of a similar motion with respect to another pair of joint debtors. Each instance dealt with the joint debtors' desire to pay off a confirmed chapter 13 plan early with a less than 100% distribution to unsecured creditors.
The first debtors, who had experienced a substantial postpetition reduction in income, sought an early payoff through the refinancing of a mortgage. The court, finding that the refinancing did not alter the financial condition of the debtor and, therefore, did not establish a basis for plan modification, observed that the early payoff benefitted creditors by eliminating the risk that the debtors may be unable to make future payments. Id. at 151. In refusing to grant the trustee's request that the Debtors utilize sufficient proceeds from the refinance to pay 100% of their debts, the court noted that its decision struck "the right balance between debtors on the one hand and creditors on the other." Id. Though the case was decided prior to the implementation of BAPCPA, it illustrates the harsh results that would
By contrast, the second pair of joint debtors in Murphy, who had benefitted from an unanticipated, substantial postpetition increase in the value of their real property, was required to pay 100% to unsecured creditors pursuant to a modified plan. Id. at 152. The court reached this result solely by implicating the standards set forth in § 1325(a)(3) ("good faith"), (4) ("best interests of creditors") and (6) ("ability to pay"). Id. at 153.
Murphy and its predecessor, Arnold, suggest that it is not likely that the Fourth Circuit would apply § 1325(b) to a proposed plan modification. A review of Hamilton v. Lanning, 560 U.S. 505, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010), leads to the conclusion that the Supreme Court would also recognize the impracticality of applying the strict standards imposed by § 1325(b) to plan modifications after BAPCPA, particularly given the absence of a clear intent on the part of Congress.
In the present case, the Trustee is seeking to modify the Debtors' plan to increase the remaining monthly payments
It is not necessary for the Court to pass upon which period of time should be used to calculate the Debtors' current monthly income because the Court has determined that § 1325(b) is not applicable to chapter 13 plan modification. Recalculation of MDI by the use of Form 22C is unnecessary, as is the application of § 707(b)(2) as incorporated by § 1325(b)(3). However, the parties are in agreement that Debtors' plan should be modified, so the Court must now decide how the plan should be modified.
The Trustee's request for modification of the plan and the Debtors' proposed modifications both seek to increase the amount of payments on claims held by unsecured creditors, a modification permitted under 11 U.S.C. § 1329(a)(1) and justified under the "substantial and unanticipated change in the debtor's financial condition" test adopted by the Fourth Circuit in In re Arnold and In re Murphy. The proposed modifications must be assessed under the requirements of 11 U.S.C. § 1325(a), including good faith and feasibility. 11 U.S.C. § 1329(b)(1); 11 U.S.C. § 1325(a); see In re Murphy, supra at 152-153; In re Davis, supra at 869.
The Trustee's sole criteria for determining the modified monthly payment amount is to apply § 1325(b) and a "revised" Form 22C, which the Court has found is inapplicable to plan modification.
In evaluating the Debtors' proposed modification, the Court notes that on October 9, 2013, the Debtors filed an amended Schedule I, which reflects a substantial increase in their average monthly income since the confirmation of the plan, as well as an increase in the Debtors' household size from three to four. (Amended Stipulation No. 8). At the same time, the Debtors filed an amended Schedule J, which includes changes in the Debtors' average monthly expenses.
As noted above, modification of a chapter 13 plan pursuant to 11 U.S.C. § 1329 requires that the Court apply standards of good faith, best interest of creditors and feasibility pursuant to 11 U.S.C. § 1325(a)(3), (4) and (6). The Court finds that modification of the plan, as proposed by the Debtors, meets these standards. The current income and expenditures of the Debtors, as set forth in the amended Schedules I & J, establish the feasibility of the proposed payments, including the adjustment proposed in connection with the anticipated increase in health insurance premiums. The increased payments will generate greater distributions to the unsecured creditors without prejudicing creditors holding administrative, secured and priority claims; therefore, the modification is in the best interest of creditors. Finally, there is no evidence to indicate that the Debtors are not proceeding in good faith.
11 U.S.C. § 1325(b)(1) (emphasis added).
"Current monthly income" ("CMI") is defined in the Bankruptcy Code as "average monthly income ... derived during the 6-month period ending on ... the last day of the calendar month immediately preceding the date of the commencement of the case...." 11 U.S.C. § 101(10A). CMI is established at the time of commencement of the case and, by definition, does not change according to postpetition fluctuations in a debtor's income. The Bankruptcy Code does not contemplate that CMI will be recalculated after plan confirmation and provides no means, or formula, for doing so. Submission of a revised Form 22C, such as that offered by the Trustee, is not a prerequisite to a plan modification.
The Court notes with concern that the Debtors have failed to pay various postpetition tax obligations, which have resulted in supplemental priority tax claims that the Debtors propose to pay over the remaining term of their bankruptcy out of their future income. The Trustee's position is that the payment of the tax obligations should not be at the expense of unsecured creditors who would otherwise stand to receive a larger share of the increased monthly payments. The reasons why the Debtors incurred these obligations have not been provided and, therefore, the Court is unable to include them in its good faith analysis.
