“Effective Date of the Plan” for Best Interests Test upon Modification

Posted by NCBRC - July 28, 2021

The best interests test does not provide authority to compel turnover through plan modification of settlement funds from the debtor’s post-petition personal injury case where that money would not be available to unsecured creditors in a case converted from chapter 13 to chapter 7 under section 348(f). In re Taylor, No. 16-40873 (Bankr. D. Kans. July 21, 2021).

After the debtor’s chapter 13 plan was confirmed, she sustained a personal injury for which she filed a lawsuit. The case settled, and the trustee moved to modify her plan to incorporate $20,000 of the settlement, arguing that the money became property of the bankruptcy estate under section 1306 and, under the best interest of creditors test, should be paid to unsecured creditors. The debtor objected.

The best interest of creditors test, codified in section 1325(a)(4), provides that unsecured creditors in a chapter 13 case should receive no less than they would have received in a chapter 7 liquidation based on the value of estate property “as of the effective date of the plan.” That test is incorporated into section 1329(a) which provides that at any time during the pendency of a chapter 13 case, the trustee, debtor, or unsecured creditor may move to modify the plan to increase or reduce plan payments. Section 1306(a) provides that “property of the estate includes, in addition to the property specified in section 541” all property specified by section 541 “that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted.”

Because the phrase “effective date of the plan” in section 1325(a)(4) is not defined in the Code, some courts, such as Forbes v. Forbes (In re Forbes), 215 B.R. 183 (8th Cir. BAP 1997) and Sanchez v. Sanchez (In re Sanchez), 270 B.R. 322 (Bankr. D.N.H. 2001), have found the effective date to be the original date of the chapter 13 petition. These cases dealt with property newly acquired post-petition. The Forbes court found that “the effective date of the plan is not altered by plan modification,” noting that a modified plan does not need to be confirmed but may replace the original plan “if it is not disapproved.” That court was further convinced by the fact that the chapter 7 estate is governed by section 541 and section 1306 does not come into play in determining the chapter 7 estate property.

Other courts, such as In re Barbosa, 235 B.R. 540, 552 (Bankr. D. Mass. 1999), aff’d, Barbosa v. Solomon, 243 B.R. 562 (D. Mass. 2000), aff’d, 235 F.3d 31 (1st Cir. 2000), In re Villegas, 573 B.R. 844 (Bankr. W.D. Wash. 2017) and In re Nott, 269 B.R. 250 (Bankr. M.D. Fla. 2000), have found the effective date to be the modification date. In each of these cases, the court addressed a post-petition change in value to pre-petition property. The Barbosa court reasoned that using the modification date as the effective date gives effect to section 1325(a)(4). That court relied in part on “Keith Lundin’s Chapter 13 treatise and the 1977 legislative history of § 1325(a)(4), which states ‘the application of the liquidation test must be redetermined at the time of the confirmation of the modified plan.’”

The court here noted that other bankruptcy courts in Kansas have relied on Barbosa to find that “the effective date of the plan” for the best interests calculation is the date of plan modification. In In re Auernheimer, 437 B.R. 405 (Bankr. D. Kan. 2010), the debtor sought reduction of plan payments to reflect reduced value of personal assets and uncollectible receivables. That court found that using the modification date as the effective date dovetailed with section 348(f) which provides that the original chapter 13 valuations do not carry over to a converted chapter 7 case.

Likewise, in In re Davenport, No. 08-41213, 2011 WL 6098068 (Bankr. D. Kan. Dec. 7, 2011), the court granted the trustee’s motion for modification to capture proceeds from property the debtor sold for fifteen times its value as appraised on the petition date. The court found using the modification date as the effective date would allow unsecured creditors to receive what they would get if the case were converted under section 348(f) at that time.

The court agreed with those courts finding that the “effective date” was the date of plan modification, finding that the debtor’s position would render the best interests test meaningless in the context of modification.

Turning to the calculation of best interests using the modification date as the effective date, the court looked to section 348(f) to compare what unsecured creditors would receive in a hypothetical chapter 7 case converted at that time and what they would receive under the proposed modification. Section 348(f) provides that the “property of a Chapter 7 estate resulting from a good faith conversion from Chapter 13 consists of property of the estate as of the date of filing of the petition that remains in the debtor’s possession or control at the time of conversion.” The converted estate does not include property acquired during the pendency of the chapter 13 case under section 1306(a). Because unsecured creditors would not receive after-acquired property in a converted chapter 7 case, the court found they were not entitled to it in a modified chapter 13 case.

The court was further persuaded by tenets of statutory construction under which the specific applies over the general. Here, section 1306 is a general provision supplementing estate property under section 541, while section 348(f) specifically addresses property belonging to an estate converted from chapter 13 to chapter 7. For that reason, for purposes of the best interest test, the modified plan should be compared to the property that would be included in the hypothetical converted chapter 7 case.

The court denied the trustee’s motion to modify the debtor’s plan.

Taylor Bankr D Kans

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