Trustee May Modify Plan to Capture Proceeds from Sale of Employee Stock Options

Posted by NCBRC - April 28, 2020

The bankruptcy court did not abuse its discretion in permitting the chapter 13 trustee to modify the debtor’s plan to capture proceeds from the sale of stock options that the debtor received as part of his employment compensation. Berkley v. Burchard (In re Berkley), No. 19-1197 (B.A.P. 9th Cir. April 17, 2020).

Mr. Berkley’s chapter 13 plan was confirmed in April, 2015. In 2016, he became CEO of Antares Audio Technologies. Part of his compensation was receipt of stock options in the company. After he had completed 57 months of payments on his chapter 13 plan, Mr. Berkley notified the trustee that Antares was being sold and that his stock options would be bought out for $3.8 million. The trustee moved to modify the plan to incorporate a portion of the sale proceeds to pay off Mr. Berkley’s creditors at 100%. The bankruptcy court granted the motion to modify and Mr. Berkley appealed.

The bankruptcy appellate panel for the Ninth Circuit began with section 1329(a) which provides that a plan may be modified “at any time before completion of plan payments” to increase or reduce payments to a class of creditors. Citing Fridley v. Forsythe (In re Fridley), 380 B.R. 538, 543 (B.A.P. 9th Cir. 2007), the panel found that modification is a matter for the court’s discretion and that an unanticipated increase in the debtor’s income may constitute valid reason to modify a plan and increase payments to unsecured creditors. In fact, the court in Danielson v. Flores (In re Flores), 735 F.3d 855 (9th Cir. 2013) (en banc), specifically contemplated this type of modification when it declined to allow an above-median debtor with no disposable income to confirm a thirty-six month plan because that would reduce the time a creditor might be able to capture an unanticipated increase in the debtor’s income.

Based on these findings, the panel concluded that the debtor’s increase in income by reason of the buyout of his stock options, was a valid basis for modification and the bankruptcy court did not abuse its discretion in granting the trustee’s motion.

The panel went on to dispose of the debtor’s arguments to the contrary.

Mr. Berkley first contended that, because all estate property revested in him upon confirmation by operation of section 1327(b), the sale proceeds did not enter the estate and therefore were not available for distribution to creditors.

Rather than treat the issue as an examination of the interaction between section 1306(a), which treats a debtor’s post-petition earnings as property of the estate, and section 1327, which revests all estate property in a debtor after confirmation, the panel stated: “Mr. Berkley’s arguments, and the cases cited above, all rest on the unstated assumption that, unless the postconfirmation income is property of the estate, the debtor cannot be compelled to devote it to his plan.” The panel avoided the issue of what approach to take with respect to the effect of section 1327’s revesting (i.e. the “estate termination approach”), with the dubious conclusion that it simply does not matter whether the property becomes part of the bankruptcy estate.

In support of this conclusion, the panel went on to state: “Nothing in the Code provides that plan payments may only be funded by estate property.” The panel pointed to cases where, in order to create a confirmable plan, debtors voluntarily committed non-estate property such as family contributions or withdrawals from pension plans. Based on this reasoning, the panel concluded that “[u]nder § 1329, the bankruptcy court can approve a plan modification that increases the debtor’s plan payments due to a postconfirmation increase in the debtor’s income, whether or not the additional income is property of the estate.”

The panel went on to differentiate this case from Black v. Leavitt (In re Black), 609 B.R. 518 (B.A.P. 9th Cir. 2019), where the debtor committed a specific amount of the proceeds from the anticipated sale of estate property during the course of his plan. In Black, the panel held that the debtor could not be compelled to commit the entire sale amount to the plan when it exceeded the amount promised. The panel here distinguished Black as involving the sale of prepetition property, unlike the debtor’s post-petition property here. The panel rejected Mr. Berkley’s attempt to liken the stock options to appreciation of a pre-petition asset rather than an increase in income which the trustee could capture under section 1322(a)(1). The panel stated: “Because the stock options were postconfirmation income that Mr. Berkley earned as part of his compensation package, the bankruptcy court properly committed their proceeds to the Plan.”

It also rejected Mr. Berkley’s related argument that, because he earned the stock prior to the trustee’s motion to modify, the funds could not be considered “future income” under section 1322(a)(1). The panel found that a requirement that a debtor disclose anticipated sale of stock to allow a trustee to move for modification prior to its actual sale would be “unsound policy” because it would depend on a debtor’s promptness in disclosure. Nor was the trustee required to attempt to access the stock options prior to their reduction to a monetary amount. Until the stocks were sold, the trustee could not value them.

The panel affirmed the decision below.

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