Debtors May Not Modify Plan to Deprioritize State’s Claim

Posted by NCBRC - July 15, 2022

The bankruptcy court erred in permitting the debtors to modify their chapter 13 plan to deprioritize the State of Wisconsin’s claim based on a public assistance overpayment, where the only authority for such modification would come from Rule 60(b)(1) and the debtors sought the modification too late to rely on that Rule. In the Matter of Terrell, No. 21-3059 (7th Cir. July 12, 2022).

When the chapter 13 debtors filed for bankruptcy, they owed the State of Wisconsin approximately $30,000 as a result of an overpayment of public assistance benefits. Their original 60-month plan, confirmed in February, 2019, prioritized the debt to the State under section 507(a)(1)(B). In December, 2020, the debtors filed an objection to the State’s claim which the bankruptcy court interpreted as a motion to modify their plan to reduce the repayment period to 36 months and deprioritize the State’s claim. The debtors’ motion was based on a June, 2019, decision, In re Dennis, 927 F.4th 1015 (7th Cir. 2019), where the Seventh Circuit held that excess public assistance payments are not entitled to priority under section 507(a)(1)(B).

Without naming its source of authority to do so, the bankruptcy court granted the modification over the State’s objection. The Seventh Circuit granted the State of Wisconsin leave to appeal.

In arguing that the bankruptcy court erred by permitting the plan modification, the State relied on section 1327(a), which provides that parties are bound to the terms of a confirmed plan. The court disagreed, finding that while the terms of a plan are indeed binding on the parties, they are not immutable. Like other judicial orders, confirmation orders may be revisited and changed through authorized means.

The court also rejected the State’s argument that, under section 1330, a plan may be revoked only in the case of fraud. Here, the bankruptcy court modified but did not revoke the debtors’ plan.

The court turned to possible sources of the bankruptcy court’s authority to modify a plan for the purpose of deprioritizing a claim. It found that section 1329 which deals directly with plan modifications supplied no such authority. That section delineates the circumstances under which a plan many be modified and those circumstances do not include deprioritizing a claim.

The court next addressed Rule 60(b)(1) which permits a court to rescind an order that was based on mistake, inadvertence, surprise, or excusable neglect. In Kemp v. United States, 142 U.S. 1856 (2022), the Supreme Court decided that Rule 60(b)(1) includes legal errors, as in this case where the mistake was the parties’ belief that a claim for public assistance was entitled to priority. But Rule 60(c) gives a party one year to seek rescission of an order under Rule 60(b)(1) and, in this case, the debtors did not seek to change the terms of their plan until more than one year after Dennis was decided.

The court noted that, in her concurring opinion in Kemp, Justice Sotomayor opined that Rule 60(b)(6) allows an order to be changed in “extraordinary circumstances” notwithstanding the lapse of time. But the court here held that the debtors had ample opportunity to seek modification within one year of the Dennis decision. Furthermore, the court found that the appellate decision in Dennis would not be an “extraordinary circumstance” justifying an extension under Rule 60(b)(6) as that decision did not create new law.

The court concluded that the debtors acted too late, and the bankruptcy court therefore lacked authority to grant modification of their plan. It reversed.

Terrell 7th Cir July 2022

On remand, the Bankruptcy court pointed out that, in fact, the decision on appeal here did not deal with its order granting modification which was issued on November 3, 2021. In re Terrell, No. 18-28674 (Bankr. E.D. Wisc. July 19, 2022). Go here, to read about the bankruptcy court’s discussion of this issue.


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