Plan May Be Modified to Incorporate HAVEN Act Veteran’s Benefits Exclusions

Posted by NCBRC - March 23, 2020

The Bankruptcy Court for the Eastern District of Michigan found that the debtor may modify her chapter 13 plan to reduce her plan payments based on the post-confirmation enactment of the HAVEN Act, which provides for exclusion of veteran’s disability benefits from CMI. In re Gresham, No. 18-56289 (Bankr. E.D. Mich. March 10, 2020).

In August, 2019, Congress enacted the Honoring American Veterans in Extreme Need Act (HAVEN), which articulates an “express exclusion to CMI for certain compensation, pension, pay, annuity, or allowance paid ‘in connection with a disability, combat-related injury or disability, or death of a member of the uniformed services.’” The stated purpose of the amendment was to correct an “obvious inequity” in section 101(10A) which excludes social security benefits from CMI but not similar veteran’s benefits. As a result of the new legislation, the chapter 13 debtor here sought to modify her 100% chapter 13 plan to exclude those benefits from her CMI and reduce her monthly plan payments. The trustee objected, seeking the court’s direction as to the appropriate application of the HAVEN Act in light of the fact that it was enacted after the debtor’s plan was confirmed without objection.

The bankruptcy court separated the issue into three questions: 1. Does HAVEN apply to ongoing cases that were filed prior to its enactment? 2. Does HAVEN apply retroactively to alter a pre-HAVEN confirmed plan? 3. If not, does HAVEN apply to the question of plan modification? The Act itself is silent as to these issues.

With respect to the first question, the court cited Bradley v. School Board of Richmond, 416 U.S. 696, 711 (1974), for the principle that, in the absence of legislative direction otherwise, a court is to apply the law as it stands at the time the court renders its decision unless doing so would result in manifest injustice. Here, the court found no such injustice. Rather, the court found that the Act was intended to correct an injustice. In addition, the Judicial Conference changed its forms to incorporate the change, indicating the understanding that the change was to apply to all cases going forward without regard to the petition filing date. The parties cited no manifest injustice to counter these findings and, therefore, the court concluded that it must apply the Act to its decisions rendered post-enactment.

Turning to whether the Act should be applied retroactively to the debtor’s confirmed plan, the court cited Landgraf v. USI Film Products, 511 U.S. 244 (1994), for the general rule that laws are not to be applied retroactively where such application would impair the rights of any party. The court found that the unsecured creditors in this case did not object to the debtor’s confirmed plan. The proposed modification, however, would remove the debtor’s veteran’s disability benefits from her CMI and lower her plan payments. Therefore, unsecured creditors would no longer receive a 100% payback. For that reason, the court found that retroactive application of the Act would impair the rights of the parties. The court rejected the debtor’s argument that the Act merely worked a procedural change to correct what was essentially a drafting error and that it could therefore be applied retroactively without offending the proscription set forth in Landgraf.  The court found that, in correcting an inequity, the Act made a substantive change in the law. The court concluded, therefore, that the Act could not be applied retroactively.

Finally, the court addressed whether the debtor could modify her confirmed plan to recalculate her CMI and reduce her plan payments, reiterating that the Act applies to all decisions rendered after its enactment. The court looked to standards for determining whether to exercise its discretion to allow a plan modification under section 1329(a). Noting that the Sixth Circuit has not articulated a standard for determining whether a plan modification should be allowed, the court pointed out that some circuits require a party to demonstrate a substantial and unexpected change in circumstances, while others make no such demand. In Storey v. Pees (In re Storey), 392 B.R. 266, 272 (B.A.P. 6th Cir. 2008), the Sixth Circuit appellate panel stated merely that a modification may not be made “to address issues that were or could have been decided at the time the plan was originally confirmed.” Applying that caveat to the case before it, the bankruptcy court found that the change in law was an external circumstance that could not have been anticipated at the time of the debtor’s plan confirmation, and that the change in the law established a reasonable basis for the debtor’s proposed plan modification. Furthermore, the court noted that a finding to the contrary would create the scenario where, in order to avail herself of the equitable change in the law, the debtor would have to dismiss and refile her case, thus wasting time and resources.

The court returned the plan modification to the debtor and the Trustee to resolve any remaining issues, or for the Trustee to submit an order approving the plan modification.

Gresham Bankr ED Mich

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