Surviving the Post-Confirmation Shakedown
Projected disposable income is an issue that arises at the confirmation hearing under 11 U.S.C. § 1325(b)(1)(B), which is analyzed upon a condition precedent of an objection being filed.[1] As the U.S. Supreme Court case of Hamilton v. Lanning case illustrates, the projected disposable income test is as of the “effective date” of the plan, namely the date in which the plan is confirmed.[2] However, since that time certain dicta occurred in the U.S. Supreme Court case of Ransom v. FIA Card Services, N.A. 131 S.Ct. 716, 729 (2011), which made the passing observation that an unsecured creditor may move to modify the plan to increase the amount the debtor must pay if a debtor’s car payment ceased during the life of the plan.
Armed with this Ransom dicta, Chapter 13 trustees may argue that this enables them to request a modification of a debtor’s confirmed chapter 13 plan based upon increases in the debtor’s post-confirmation income. The design is to force a debtor to increase monthly plan payments in a modified plan for a larger dividend for unsecured creditors.
The phenomena that could trigger a Chapter 13 trustee to file a motion to modify a debtor’s confirmed chapter 13 plan would include: wage increases through a promotion, bonuses, new employment that pays higher, taking on a second job, or any other increase in monthly earnings by a debtor through his hard work and the innate perseverance engrained in the human spirit to better oneself and provide for one’s family.
As what may be readily apparent, to permit the reality of a Chapter 13 trustee to file a motion to modify a confirmed plan based upon perceived increased disposable income puts debtor’s counsel in an untenable bind of possibly recommending to the debtor that instead of taking on additional income or accepting that new higher paying job he or she wanted, it may be better just to maintain the status quo until a debtor completes his or her plan payments; or even worse, a unnecessary cautionary that “you now have a confirmed plan, you may not want to do anything exceptional with yourself.” Certainly, this is contrary to the human condition to desire to better oneself and is most likely not contemplated under the Bankruptcy Code.
Under this scenario, one could easily envision a picture of a chapter 13 trustee upending a debtor and shaking a debtor by his or her bootstraps for extra coins to fall out of their pockets for unsecured creditors. Alternatively, another illustration which may come to mind is a debtor walking with a ball and chain shackled around one’s ankle struggling to move onward with the weight of his mutable bankruptcy plan. As one Bankruptcy Court astutely noted, “[i]n 1977, Congress stated explicitly that a mandatory or involuntary Chapter 13 would violate the Thirteenth Amendment’s ban on involuntary servitude.”[3]
Ransom Dicta
The singled out dicta of Ransom is the following: “…[C]reditors may well be able to remedy [the debtor’s] ‘one payment left’ problem. If car payments cease during the life of the plan, just as if other financial circumstances change, an unsecured creditor may move to modify the plan to increase the amount the debtor must repay. See 11 U.S.C. § 1329(a)(1).”[4] Initially, “[t]he United States Supreme Court is not bound to follow its dicta in a prior case in which the point now at issue was not fully debated.”[5] In another U.S. Supreme Court case involving a bankruptcy issue, Justice Thomas delivered a concurring opinion which condoned that the majority opinion had to make “speculations about the desirability of a ‘market test’…are dicta binding neither this Court nor the lower federal courts.”[6]
The singled out dicta in Ransom should not be read to permit a post-confirmation plan modification based solely on perceived increases in disposable income. First, the Ransom case was about the interpretation of a means test for a disposable income analysis for confirmation of a plan; not a modification of a confirmed plan. The Ransom Court’s mere dicta on an unsecured creditor moving for a modified plan post-confirmation when confronted by a debtor who presents a “one payment left” problem was not critical or of any import to its holding as to whether a free and clear vehicle was a permitted deduction on the Means Test.[7] The statutory scheme or design of Section 1329 of the Bankruptcy Code for modifications of a confirmed plan was not before the Ransom Court; but rather, the issue of disposable income as of the effective date of confirming a Chapter 13 repayment plan under Section 1325(b) of the Bankruptcy Code.[8]
Post-Confirmation Modifications under Section 1329(a)(1)
Where the Bankruptcy Code’s language is plain, bankruptcy courts should, absent an absurd result, enforce the terms of the statute.[9] “The rules of statutory interpretation indicate that where the language of the statute is plain, the inquiry is complete.”[10] The plain reading of Section 1329(a) of the Bankruptcy Code does not support a blanket assertion that the Debtors’ monthly plan payments should be generally increased post-confirmation. Section 1329 of the Bankruptcy Code provides:
(a) At any time after confirmation of the plan but before completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to –
(1) increase or reduce the amount of payments on claims of a particular class provided for by the plan…
The plain language indicates that the modification is on account of a particular class of creditors, not a generalized plan payment increase. While it may be true that a generalized plan payment increase may well benefit unsecured creditors by increasing the base amount of the plan, it could also impact other classes as well, such as administrative claimants. A generalized plan payment increase based upon increased disposable income is not, at its core, geared to only paying a particular class of creditors.
The moving party bears the burden of showing sufficient facts to indicate that modification of a debtor’s confirmed chapter 13 plan is warranted.[11] Moreover, the plan modification statute of Section 1329(b)(1) incorporates the good faith requirement of Section 1325(a)(3) that the proponent of the modified plan has proposed such modification in good faith and not by any means forbidden by law.[12] Section 1329(b)(1) of the Bankruptcy Code provides that “Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section.” Noticeably absent from this provision is Section 1325(b), which contains the disposable income requirement.[13]
There is an inherent confliction in the Bankruptcy Code regarding the interplay between Sections 1302(b)(4), 1325, 1327, 1329 and 1330 for a request to increase plan payments post-confirmation based upon perceived increased disposable income, which can be summarized as follows:
(a) a Chapter 13 debtor obtains a confirmed plan that is valid as of the effective date and disposable income would have been decided at the confirmation hearing under 11 U.S.C. § 1325(b)(1), which such disposable income analysis must be triggered by an objection to the proposed repayment plan before its confirmation;
(b) a confirmed plan under the Bankruptcy Code binds the debtor and each creditor to its terms under Section 1327(a) and Section 1330(a) provides a limited basis to revoke a confirmation order;
(c) Section 1329(b)(1) of the Bankruptcy limits the requirements to modify a plan post-confirmation, including but not limited to, a plan proposed in good faith (§ 1325(a)(3)), a plan complies with liquidation test (§1325(a)(4)), and a plan is feasible (§1325(a)(6)); and
(d) if the Chapter 13 trustee is the moving party, the trustee has a statutory duty to assist a debtor in making payments under their confirmed plan via Section 1302(b)(4) of the Bankruptcy Code.
What About Finality of a Confirmed Plan
A plan that is confirmed needs finality for the debtor to obtain his or her fresh start. The U.S. Supreme Court has upheld the finality of a confirmed Chapter 13 Plan under Section 1327 of the Bankruptcy Code as a binding contract between the Debtors and their creditors.[14]
Some courts have addressed the above conflicting interests by creating a heightened burden on the moving party to demonstrate substantial and unanticipated post confirmation change in a debtor’s financial circumstances. These courts have upheld a test that the doctrine of res judicata prevents modification “unless the party seeking modification demonstrates that the debtor experienced a substantial and unanticipated post confirmation change in his financial circumstances.[15] “The purpose of this doctrine is to ensure that confirmation orders are accorded the necessary degree of finality to prevent parties from seeking to modify plans when minor and anticipated changes in the debtors’ financial condition take place.”[16] Under the Fourth Circuit test, “[i]f the change in the debtor’s financial condition was either insubstantial or anticipated, or both, the doctrine of res judicata will prevent the modification of the confirmed plan.”[17] The next level of inquiry would then be “whether the proposed modification is limited by to the circumstances provided by § 1329(a).”[18] The last step in the 4th Circuit analysis is “whether the proposed modification complies with § 1329(b)(1).”[19]
However, even this judicially created doctrine may also be contrary to the plain reading of the Bankruptcy Code because the plain language of Section 1329(b)(1) does not make projected disposable income even part of the analysis to modify previously confirmed plans. Several courts have also held that the Chapter 13 Code’s “disposable income” confirmation requirement is not applicable to a request to modify a plan post-confirmation.[20] These holdings suggest that a motion to modify a plan post-confirmation on disposable income is also an attempt to re-litigate plan confirmation.[21]
Other courts indicate that it is entirely discretionary and point to the First Circuit case of In re Barbosa.[22] The Barbosa case involved real property sold post-confirmation that was subject to a mortgage lien, which was stripped down from $114,000 to $64,000 through a stipulation with the secured lender and through a confirmed plan.[23] The subject real property was subsequently sold post-confirmation for $127,000, which is greater than the crammed down amount.[24] Although the Barbosa Court focused more the effects of Section 1306 (property of estate) as supporting a modification of the confirmed plan from the sale of the real estate, the underlying facts of the Barbosa case supported a plan modification under Section 1325(a).[25] The Barbosa case was more a call for modification of a confirmed plan due to (a) the liquidation value to the unsecured creditor class under Section 1325(a)(4), and (b) the treatment of the secured lender’s claim under Section 1325(a)(5).[26] Although not discussed in the holding, this argument also parallels Section 1330 of the Bankruptcy Code for revoking a confirmation order based upon fraud due to guard against the misrepresentation of an asset at the time of confirmation.
In line in viewing whether to grant a modification as discretionary, the Eckert Court denied a requested modification of a confirmed plan when the Chapter 13 Trustee was unable to meet his burden of proof.[27] In the Eckert case, the Chapter 13 trustee moved to modify the debtors’ confirmed plan and increase plan payments by 200%. At the hearing, the record reflected that only the debtor husband’s increased by the gross amount of 36%. Ultimately, the Eckert Court found that the Chapter 13 trustee did not meet his burden of showing that the debtors would actually be able to make their requested increased plan payments and denied the Chapter 13 trustee’s motion.[28] The Eckert Court also noted that the Chapter 13 trustee failed to introduce any financial projections in support of his requested medication and failed the feasibility test.[29]
Again, there is cause for concern if the Chapter 13 trustee is the moving party seeking to capture additional disposable income of the debtor post-confirmation. One of the statutory duties of the Chapter 13 Trustee is that he shall “advise, other than on legal matters, and assist the debtor in performance under the plan.”[30] “The chapter 13 bankruptcy trustee is a creature of the Bankruptcy Code, which enumerates specific duties, rights, and powers of the bankruptcy trustee.”[31] The basic role of a chapter 13 trustee is to review plans, advise the court with respect to plans, and act as a disbursing agent under confirmed plans.[32] As the Ferrell Court noted:
Under the Bankruptcy Code, a Chapter 13 trustee is directed, that is to say, required, rather than merely permitted, to assist the debtor in performance under the plan. The chapter 13 trustee may not become a mere disinterested bystander once the plan has been confirmed, but is to assist the debtor by advising of the means available to the debtor for facilitating performance under the plan, including advice concerning such matters as reductions and suspensions of payments, post-petition collection efforts by creditors against the debtor and codebtors, payment orders, post-petition credit problems and the assumption or rejection of executory contracts.[33]
The Ferrell Court also noted that “Section 1329(b), by its incorporation of Section 1325(a)(6), requires that any modified plan be feasible.”[34] Section 1325(a)(6) provides that “the debtor will be able to make all payments under the plan and to comply with the plan.” When a Chapter 13 trustee files a motion to modify the Debtors’ confirmed Chapter 13 Plan to re-litigate the disposable income test, he or she is no longer in the position of assisting the Debtors in performance under a confirmed plan; but rather, becomes a stringent adversary hunting to capture any molecule of increase of gross income post-confirmation. This increase in income is brought about through the efforts of debtors to positively restructure their financial affairs for their family’s betterment through hard work.
Conclusion
In sum, a request for a post-confirmation modification of a plan based upon an increase in a debtor’s post-confirmation disposable income is an attempt to rehash and relitigate a matter disposed of at the confirmation hearing. Moreover, it is also dehumanizing to a debtor and contains hints of a return to indentured servitude for the benefit prepetition creditors. Finally, it discredits their ability to obtain a fresh start when the debtors are acting in good faith to better themselves and diligently make their Court approved plan payments.
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[1] See Hamilton v. Lanning, 130 S.Ct. 2464 (2010) (court may take into account known or virtually certain information about debtor’s future income or expenses in determining ‘projected disposable income.” The “effective date” of the plan is the date on which plan is confirmed and becomes binding).
[2] Id.; see also 11 U.S.C. § 1325(b)(1).
[3] In re Lampman, Case No. 1:09-bk-09623 (Bankr. M.D.Pa. June 21, 2013).
[4] Ramson, supra, at 729 [emphasis added].
[5] Cent. Va. Cmty. College v. Katz, 126 S.Ct. 990, 996 (2006).
[6] Bank of Am. Nat’l Trust & Sav. Ass’n v. 203 N. Lasalle St. P’ship, 119 S.Ct. 1411, 1425-26 (1999).
[7] See Ransom, at 729.
[8] See Id., at 721-22.
[9] Lamie v. U.S. Trustee, 540 U.S. 526, 534 (2004).
[10] Schwab v. Peddinghaus Corp. (In re Excel Storage Prods., L.P.), 458 B.R. 175, 181-82 (Bankr. M.D.Pa. 2011).
[11] In re Hall, 442 B.R. 754, 758 (Bankr. D. Idaho 2010); In re Eckert, 485 B.R. 77, 80 (Bankr.M.D.Pa. 2013).
[12] See Hall, at 761.
[13] Eckert, supra, at 82.
[14] See United Student Aid Funds, Inc. v. Espinosa, 130 S.Ct. 1367 (2010); In re Szostek, 886 F.2d 1405 (3d Cir. 1989).
[15] In re Boykin, 428 B.R. 662, 665 (Bankr. D.S.C. 2009) (citing to In re Murphy, 474 F.3d 143, 149 (4th Cir. 2007); see e.g., In re Arnold, 869 F.2d 240 (4th Cir. 1989) (creditors could not be expected to have anticipated that debtor’s income would increase by $120,000 per year in the 2 year period following plan confirmation).
[16] Id.
[17] In re Murphy, 474 F.3d at 150.
[18] Id.
[19] Id.
[20] See e.g., In re Turek, 346 B.R. 350, 355-56 (Bankr. M.D. Pa. 2006) (“A Chapter 13 plan is essentially a new and binding contract, sanctioned by the court, between debtors and their pre-confirmation creditors”); In re Hall, 442 B.R. 754, 760 (Bankr. D. Idaho 2010) (by its express language, Section 1329(b) omits the disposable income requirement of Section 1325(b) and limits allowed modification to only Section 1325(a)); In re Grutsch, 453 B.R. 420, 426-27 (Bankr. D. Kan. 2011) (the projected disposable income test is inapplicable outside the plan confirmation context to seek a modification of a confirmed plan because it implicitly excludes other provisions, namely that of Section 1325(b)).
[21] See Id.
[22] 235 F.3d 31 (1st Cir. 2000).
[23] Barbosa, 235 F.3d at 32.
[24] Id., at 33.
[25] See Id., at 41 (“…it is antithetical to the bankruptcy system to allow a debtor to ‘strip down’ a mortgage, under pay the unsecured creditors, and obtain a super discharge under section 1328(a) of the Code, while selling the property mortgaged for a price of two times its estimated value for purposes of the ‘strip down’ and keeping to himself the excess of the proceeds.”).
[26] See Id.
[27] In re Eckert, 485 B.R. 77 (Bankr. M.D.Pa. 2013).
[28] Id., at 85-86.
[29] Id.
[30] 11 U.S.C. § 1302(b)(4).
[31] In re Castillo, 297 F.3d 940, 949 (9th Cir. 2002).
[32] In re Bowker, 245 B.R. 192, 195 (Bankr. D.N.J. 2000).
[33] Ferrell v. Countryman, 398 B.R. 857, 867 (E.D. Texas 2009)[internal citations omitted].
[34] Id., at 864-65 (debtor filed motion to modify confirmed plan).
