Laches Forecloses Trustee’s Motion to Dismiss

Posted by NCBRC - September 8, 2022

Where the Trustee slept on her right to challenge the debtor’s method of calculating her plan payments until shortly before the debtor completed her plan, the doctrine of laches compelled denial of the trustee’s motion to dismiss. In re Melcher, No. 16-21536 (Bankr. E.D. Ky. Aug. 30, 2022).

The debtor and the chapter 13 Trustee negotiated a 60-month plan in which the debtor agreed to commit one third of her annual gross income over $120,000 to the plan (“excess income payments”). The debtor calculated her first excess income payment by taking the income from Box 1 of her W-2 form, subtracting $120,000 and multiplying the result by .33. After discussion with the Trustee and one of her creditors, the debtor’s payment was accepted as correct. The debtor used the same method of calculation for the following years’ excess income payments.

Forty-seven months into her 60-month plan, the trustee filed a motion to dismiss, challenging for the first time the debtor’s method of calculating the excess income payments. In the motion, the trustee asserted that, rather than being slightly ahead of her scheduled payments as the trustee had previously stated, the debtor was behind by over $5,000, due in large part to insufficient excess income payments. Because the trustee sought continuations for negotiations, the motion did not come before the court until 57 months into the debtor’s plan at which time the claimed debt had grown to approximately $10,000.

In addressing the trustee’s motion to dismiss the debtor’s bankruptcy, the court found it did not have to decide the correct method of calculating the excess income payments as the trustee’s contention was foreclosed by the doctrine of laches. That doctrine “requires proof of (1) lack of diligence by the party against whom the defense is asserted, and (2) prejudice to the party asserting the defense.”

In this case, the debtor made her excess income payment the same way throughout her plan and supplied her W-2 to the trustee to show how the calculations were made. At no time prior to the motion to dismiss did the trustee raise any issues with the calculation before the court. In fact, up until the motion, the trustee’s accounting records as well as her discussions with the debtor’s counsel, indicated that the debtor was current on her payments.

The court found the necessary lack of diligence on the part of the trustee, finding that the delay “became both unreasonable and inexcusable, when Trustee did not seek a substantive hearing on the Motion until month 57 of the 60-month plan.”

The court next found the trustee’s unreasonable delay prejudiced the debtor. By the time the Trustee filed her motion, the alleged deficiency was $9,894.91, and the debtor had only a few weeks before the end of her plan period to make up that deficiency. The court found that even this might not be enough to defeat the trustee’s motion to dismiss had the debtor knowingly failed to comply with plan obligations. But in this case, the debtor had good reason to believe that she was in full compliance. The court agreed that the time left in the plan would not give the debtor sufficient time to make up any deficiency.

The court closed with the caveat that “[t]his decision should not be broadly construed. The peculiar facts presented here compel the Court’s decision. . . . Trustee slept on her right to enforce her interpretation of the non-standard plan provision regarding the calculation of Debtor’s Excess Income Payments.”

The court denied the trustee’s motion to dismiss.

Melcher Bankr ED Ky Aug 2022

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