“Good Reason” Required to Not Revest Property in Debtor after Plan Confirmation

Posted by NCBRC - July 14, 2020

Finding that “[a] bankruptcy court may confirm a plan that holds property in the estate only after finding good case-specific reasons for that action,” and signaling exasperation with the whole topic, Judge Easterbrook of the Seventh Circuit reversed the bankruptcy court’s order of confirmation of the debtors’ plan in which they opted not to have their vehicles revest in themselves post-confirmation. Cherry v. City of Chicago, No. 19-1558 (7th Cir. July 6, 2020).

In this consolidated appeal, the debtors, Kiera Cherry and Lucinda Davis, proposed chapter 13 plans in which they selected the option on the form plan used by the bankruptcy courts in the Northern District of Illinois, allowing them to retain certain assets—in this case their vehicles—in the bankruptcy estate rather than have those assets revest in them post-confirmation. Both debtors had accumulated fines issued by the City of Chicago related to their vehicles. The bankruptcy court confirmed both plans over objection by the City.

After accepting the case on direct appeal, Judge Easterbrook discussed two previous cases arising out of the same set of circumstances: In re Steenes, 918 F.3d 554 (7th Cir. 2019) (Steenes I), and In re Steenes, 942 F.3d 834 (7th Cir. 2019) (Steenes II).

Steenes I involved interpretation of section 1327 which creates a presumption that upon confirmation, estate property reverts to the debtor. At the time Steenes I was decided, the Northern District of Illinois used a form chapter 13 plan which overrode that presumption and retained property in the estate after confirmation. When the issue of outstanding traffic fines arose, the bankruptcy court determined that the automatic stay applied to prohibit collection efforts and that, because the fines were not listed in the chapter 13 plan as payable debts, the confirmation order relieved the debtors of paying those fines after discharge. The Seventh Circuit reversed, finding that, when exercising its discretion in the matter, a bankruptcy court must state a reason for sidestepping section 1327’s presumption of estate property revesting in the debtor.

After that case, the bankruptcy courts in the district changed the model plan to remove the automatic retention of estate property after confirmation, but included that option for debtors to affirmatively select. The debtors in this case selected that option and the bankruptcy court found that the holding in Steenes I was inapplicable because the provision was selected by the debtors and, therefore, the issue was not a matter of bankruptcy court discretion.

Meanwhile, the use of the new model plan was before the Seventh Circuit in Steenes II. That case interpreted section 507(a)(2), which provides that bankruptcy estates must pay defined administrative expenses even if not listed on the debtor’s schedules or provided for in the plan. In that case, the circuit court held that vehicular fines are among those administrative expenses. Under this holding, even when debtors select the option of retaining property in the estate post-confirmation the fines must be paid.

However, because the City still had to rely on the estate to remit the payments and was blocked by the bankruptcy stay from pursuing its own collection remedies such as towing or booting, it pursued the current appeal seeking a finding that the vehicles were not part of the bankruptcy estate despite the debtors’ selection of that option.

The court found that the bankruptcy court’s distinction between plans where the debtors select the option of altering the vesting presumption of section 1327, and plans where the court itself demanded such alteration, was illusory. It held that in either case, retaining property in the estate post-confirmation required articulation of a good reason. And the desire to avoid paying traffic fines did not qualify. As the debtors here did not provide any reason other than avoidance of fines, the court reversed.

Cherry 7th Cir July 2020


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