Bankruptcy Court May Not Limit Debtor’s Right to Modify as Condition of Confirmation

Posted by NCBRC - June 30, 2020

The Fifth Circuit held that the bankruptcy court improperly required a chapter 13 debtor to amend his plan to pledge 100% payment to unsecured creditors with no right to modify unless the modification likewise paid 100% or the debtor relinquished his right to discharge. Brown v. Viegelahn (In re Brown), No. 19-50177 (5th Cir. June 8, 2020).

The debtor’s chapter 13 plan proposed to pay 100% of secured debt and “approximately 100%” of unsecured debt. The trustee objected to the plan on the bases that it was infeasible, that the debtor had overstated his income, and that he had failed to list benefits he received from the Department of Veterans Affairs. At the confirmation hearing, the court offered the debtor two unappetizing choices for amendment to his plan. The debtor selected the option modeled after language established in Molina v. Langehennig, No. SA-14-CA-926, 2015 WL 8494012, at *1 (W.D. Tex. Dec. 10, 2015):

“The plan as currently proposed pays a 100% dividend to unsecured claims. The Debtors shall not seek modification of this Plan unless said modification also pays a 100% dividend to unsecured claims. Additionally, should this Plan ever fail to pay a 100% dividend to unsecured claims the Debtors will modify the Plan to continue paying a 100% dividend. If the Plan fails to pay all allowed claims in full, the Debtors will not receive a discharge in this case.”

The debtor appealed confirmation of the amended plan to the district court, and that court certified the case for direct appeal to the Fifth Circuit. On appeal, the debtor argued that the bankruptcy court lacked the power to impose the Molina conditions because they violated other sections of the Code, specifically sections 1325 and 1329.

The circuit court began with section 1325(a) which mandates that a court confirm a plan that complies with the Code. The trustee argued that the debtor’s plan did not comply with various Code sections and, therefore, the bankruptcy court was not required to confirm his plan under section 1325(a). The trustee pointed to section 704(a)(2), which provides that a trustee be accountable for all property received by the bankruptcy estate, and argued that the Molina conditions furthered her ability to fulfill that duty. The court rejected this argument finding that a debtor is not necessarily required to commit all his disposable income into the plan, and the trustee is accountable only for that which is received. Where, as here, the debtor’s proposed plan was 100%, the trustee had no duties with respect to the debtor’s excess income that the debtor’s original plan failed to consider.

The trustee next argued that the debtor proposed his plan in bad faith under section 1325(a) because he did not commit all of his disposable income to the plan. Further, the trustee argued that the debtor concealed his veteran’s benefits. On review, however, the circuit court noted that the bankruptcy court’s decision did not address the issue of good faith at all. It further found that a debtor’s failure to commit all of his disposable income is not, by itself, bad faith.

The court turned to the trustee’s argument that the debtor’s plan as originally proposed was infeasible under section 1325(a)(6), noting that the bankruptcy court made no finding with respect to this argument either. Without elaboration, the circuit court rejected the cited shortcomings in the debtor’s proposed plan.

The court went on to address whether, after the trustee objected, the plan should have been confirmed under section 1325(b). That two-part section provides that if a party objects to the proposed plan, the court may confirm only if it pays 100% of claims (section 1325(b)(1)(A)), or commits all the debtor’s disposable income to repayment of unsecured debts (section 1325(b)(1)(B)). The trustee argued that even if the plan pays 100% of claims, it must still devote all of the debtor’s disposable income to the plan. The court disagreed finding that because subsections (b)(1)(A) and (b)(1)(B) are written in the disjunctive, if subparagraph (A) is met, the debtor need not also comply with subparagraph (B).

The trustee next glommed onto the word “approximately” in the debtor’s proposed plan to argue that the debtor had not committed to a 100% plan. The court found the plan language was “as close to ‘in full’ as the standing order allows a plan to state.” Therefore, the use of the word “approximately” did not render section 1325(b)(1)(A) inapplicable.

The court turned next to whether the bankruptcy court exceeded its equitable powers under section 105(a) by imposing the Molina conditions on the debtor’s plan.

Expressing discomfort with the bankruptcy court’s imposition of conditions on an otherwise conforming plan, the circuit court bypassed the section 1325(a) issue altogether and ruled on the “firmer footing” of Molina’s interaction with section 1329. Section 1329(a) provides that, at any time before completion of plan payments, a party may move to amend the plan to adjust payments. The trustee argued before the bankruptcy court that the Molina language does not prevent a debtor from modifying a plan, it only limits the modification available to one which continues to pay 100%. On appeal, the trustee altered her argument to an equally untenable position: that the Molina language does not limit a debtor’s right to modify to less than 100%, it merely prevents the debtor from receiving his discharge if he does so. In either case, the court found that the Molina language violates Code provisions either by limiting the debtor’s right to modify under section 1329, or by depriving a debtor of discharge as promised by section 1328(a), upon completion of payments under the plan. The court noted that a debtor’s right to modify is always subject to good faith.

Concluding that the Molina language exceeded the bankruptcy court’s power by restricting the debtor’s right to modify, the court vacated and remanded.

Brown 5th Cir. June 2020


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