Section 1325(b) Requirements Not Applicable to Plan Modification

Posted by NCBRC - April 10, 2012

The Ninth Circuit BAP found that the requirement of section 1325(b) that all of the debtor’s projected disposable be paid into the plan during the applicable commitment period, is not incorporated into section 1329 for plan modification. In re Mattson, No. 11-1478 (B.A.P. 9th Cir. April 5, 2012).

Mattson involved above-median debtors with positive disposable income. They had a confirmed plan with an applicable commitment period of five years. When their income increased, debtors moved to amend their plan to increase the plan payments. They also sought to decrease the plan period from five years to three. The trustee objected and the bankruptcy court sustained the objection finding that although the debtors demonstrated a substantial and unanticipated change in circumstances, they did not meet a second requirement that the proposed modification correlated with the change in circumstance.

Although the court affirmed the bankruptcy court’s order, it did so for reasons not relied upon by the bankruptcy court. Specifically, the court rejected both requirements set forth by the lower court. Noting that the requirement that the modification be a result of substantial and unanticipated change in circumstances arose out of judicial imposition of res judicata, the court joined the First, Fifth and Seventh Circuits in finding that res judicata does not apply. Therefore, it found that there is no threshold requirement that the catalyst for plan modification be a substantial and unanticipated change in circumstances. See Barbosa v. Soloman, 235 F.3d 31, 41 (1st Cir. 2000), Meza v. Truman (In re Meza), 467 F.3d 874, 878 (5th Cir. 2006), and In re Witkowski, 16 F.3d 739, 746 (7th Cir. 1994). Contra, Murphy v. O’Donnell (In re Murphy), 474 F.3d 143, 149 (4th Cir. 2007). Second, the court rejected the Bankruptcy Court’s imposition of an additional requirement that the proposed modification to the plan correlate with the change in circumstances.

Instead, the court said that, under its holding in  Sunahara v. Burchard (In re Sunahara), 326 B.R. 768 (B.A.P. 9th Cir. 2005), plan modifications must be addressed in terms of good faith using the framework set forth in Goeb v. Heid (In re Goeb), 675 F.2d 1386 (9th Cir. 1982). Under that test, a change in circumstances is a consideration to be entered in the analysis. The court affirmed the Bankruptcy Court on the basis that the facts in the case, and the bankruptcy court’s analysis of those facts, followed a good faith analysis in which the modified plan was found wanting.

The court suggested that possible justifications for a shortened plan period might be retirement, leaving the employment market, changing jobs, or anticipated health issues justifying a shorter plan.

Mattson opinion

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