Modification Based on Increased Ability to Pay

Posted by NCBRC - July 13, 2016

The trustee may modify a chapter 13 plan based on the debtor’s post-confirmation increase in ability to pay. Germeraad v. Powers (In re Powers), No. 15-3237 (7th Cir. June 23, 2016). Elvie Owens-Powers and Myrick Powers had a confirmed plan under which they would pay off their secured creditors and pay $22,000 toward their unsecured debts. Upon receiving their tax return during the plan, the trustee noticed a $50,000 increase in Mr. Powers’ income and sought an order requiring them to modify their plan under section 1329 to increase their monthly plan contributions. The bankruptcy court denied the motion to modify on the basis that it was not supported by any provision of the Code, and, alternatively, that the facts did not support modification. In re Powers, 507 B.R. 262 (Bankr. C.D. Ill. 2014). The district court affirmed on the basis that the Code did not permit the modification. It did not address the alternative factual basis for the bankruptcy court’s decision. In re Powers, __ B.R. __, 2015 WL 5725701, at *2 (C.D. Ill. Sep. 30, 2015).

On appeal the trustee argued that the lower courts erred in finding that the Bankruptcy Code does not permit the trustee to obtain a plan modification based on post-confirmation increase in income.

The court began by addressing Ms. Owens-Powers’ (Mr. Powers did not take part in the appeal) jurisdictional argument based on Bullard v. Blue Hills Bank, __ U.S. __, 135 S. Ct. 1686 (2015), that denial of a motion to modify is not a final, appealable order. The court observed that in bankruptcy, unlike other civil proceedings, the requisite finality need not dispose of the entire case, but may merely resolve an individual controversy within the case. It distinguished denial of plan confirmation, which is a process continuing until the case is either dismissed or a plan is confirmed, and denial of a motion to modify. Resolution of the latter motion terminates a discrete dispute: “whether the debtor’s plan may be modified for the reasons the trustee cites.” Denial of a motion to modify precludes the trustee from seeking modification on the same grounds.

Because the bankruptcy court denied the motion to modify on the basis that it could not be justified under the Code, the decision was final and appealable. The fact that the trustee could still move to modify the plan on different grounds did not change the final nature of the denial on the grounds he actually proposed.

Ms. Owens-Powers next argued that there was no “case or controversy” over which the court could exercise jurisdiction because more than five years had elapsed since the Powers began making payments into their plan. Section 1329(c) provides that a plan may not be modified in such a way that it would require a debtor to make payments extending beyond five years from the date of the first plan payment.

The court disagreed with Ms. Owens-Powers’ interpretation of what the modification would mean if granted. It found that rather than extending the payments beyond five years, the increased payment amounts would be retrospective, representing the 38th through the 60th month of the plan. Moreover, the fact that section 1329 requires that a motion to modify must be made before the debtor has completed plan payments, also did not render the appeal moot as the date of the trustee’s motion would be the original filing date.

The court acknowledged that because those months had come and gone, the impact of a ruling permitting the modification would have the practical effect of putting the debtors in default for which they could be denied discharge, have their case dismissed, or be converted to chapter 7. Or the bankruptcy could permit the Powers to remedy the default by paying the amount owed as payments under the plan rendered to cure a default. The court found, however, that any perceived inequity in the result would not affect the matter of whether the issue was moot.

Turning to the merits, the court looked to whether a bankruptcy court may grant a trustee’s motion to modify based on a post-confirmation increase in income. The court found the trustee’s modification satisfied the three requirements set forth in section 1329 in that it would: 1) increase the plan payments, 2) comport with section 1322(a) – (c) and section 1325(a), and 3) not provide for payments beyond five years.

In so holding, the court rejected the bankruptcy court’s finding that a modification could not be equitably based, but must be supported by one of the provisions listed in section 1329(b)(1). The court found that a post-confirmation change in a debtor’s ability to pay is adequate justification for modification and, in fact, harmonizes with the dual purpose of chapter 13 of giving the debtor an opportunity for a fresh start while maximizing payments to creditors. It noted that it had previously rejected the notion that an increase in post-confirmation income could only support a modification if it was substantial and unanticipated.

The court found the bankruptcy court’s decision was based on a misinterpretation of its decision in Witkowski, 16 F.3d 739 (7th Cir. 1994), under which the ability to modify was limited by a requirement that the modification be consistent with sections 1322(a), 1322(b), and 1323(c) and the requirements of section 1325(a). While a modification must not conflict with those provisions, they do not establish requirements upon which modification must be based. Rather, the court found that the question of whether to grant a motion to modify was one of discretion and a balance of equities.

Finally, the court rejected the debtor’s argument that while a plan may be modified upon a change in the debtor’s financial circumstances, section 1325(a)(3) imposes a requirement that the modification be granted only if “good faith . . . required the increase.” Section 1325(a)(3) requires that the proposed modification not be made in bad faith but the good faith requirement applies to the debtor when he proposes a plan and is inapplicable to a trustee-proposed modification. The court disagreed with Ms. Owens-Powers that the bankruptcy court actually found the proposed modification to have been made in bad faith.

The court turned to the bankruptcy court’s alternate reason for denial: that the Powers’ actual financial circumstances did not support the modification. Because the district court did not address this factual claim the court remanded for review.

Powers 7th Cir opinion June 2016


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