by Despite agreeing that the Tenth Circuit got it wrong, the Solicitor General for the United States filed a brief opposing certiorari in the case of Kinney v. HSBC Bank USA, No. 21-599 (brief filed Aug. 30, 2022). The issue was a simple one: whether the debtor could receive a completion discharge under section 1328(a) when she missed the final three payments on her mortgage due to a car accident, but made up the payments shortly after her plan expired.
Finding that the debtor’s failure to make the mortgage payments during the plan period was a material default under section 1307(c)(6), the bankruptcy court dismissed her bankruptcy without discharge and denied the debtor’s motion for reconsideration. The Tenth Circuit granted leave to appeal. That court acknowledged ambiguity in the statutory construct and observed that Congress intended to prohibit chapter 13 cases from being extended beyond the five-year time limit. It affirmed.
The debtor petitioned for Certiorari and the Supreme Court invited the United States to present its views. The SG’s comprehensive brief provides a useful roadmap for litigants dealing with the issue.
Under section 1328(a), a debtor is entitled to discharge “as soon as practicable after completion” of “all payments under the plan.” Section 1307(c) provides that a chapter 13 bankruptcy may be dismissed or converted upon a debtor’s “material default” with respect to the plan. In its brief, the SG argued that the Tenth Circuit erred in failing to recognize that not all missed plan payments constitute “material defaults” under section 1307(c). Rather, a court may consider the totality of circumstances to address the specific situation giving rise to the missed payment. The SG listed four factors generally considered by lower courts when addressing the issue: (1) the reason for the missed payment, (2) whether the missed payment was intentional, (3) whether the missed payment would cause creditors to receive less than they would otherwise have received, and (4) whether the debtor “will be able to make up the missing payments over the remaining term of the Plan.”
The SG’s position that the Tenth Circuit was wrong rested in part on the distinction between a plan that provides for a commitment period longer than five years, and plan payments that are made after the conclusion of the plan period. While Congress has clearly prohibited a court from confirming or modifying a plan that extends beyond five years, Congress is silent on treatment of payments that fall after the five-year period. The SG argued that nothing in the statutory text requires the bankruptcy court to treat late payments made after the plan any differently from late payments made during the plan.
The SG noted that section 1328(a) which provides for discharge to be granted “as soon as practicable” after all payments under the plan are made, implicitly contemplates flexibility. The term “under” signifies only that the payment be made by reason of the debtor’s obligations created by the plan. The SG reasoned that a late payment, even one that falls after the plan period has come to an end, is in response to the debtor’s obligations created by the plan, and is therefore a “payment under the plan” for purposes of discharge.
The SG further pointed out the practical absurdity of applying the strict rule adopted by the Tenth Circuit, observing that it is not unusual for unexpected fees, or errors to appear after a plan has been otherwise successfully completed by the debtor. In those cases, debtors who believed they have faithfully complied with all plan obligations may nonetheless be denied discharge due to minor charges that are easily paid.
Despite believing the Tenth Circuit reached the wrong conclusion, the SG opposed certiorari. The SG acknowledged that the Tenth Circuit opinion conflicted from the Third Circuit decision in In re Klaas, 858 F.3d 820 (3d Cir. 2017), where the court found the bankruptcy court had flexibility to allow a post-completion, late payment where the debtor had been unaware of the charge. The SG maintained, however, that the split did not warrant Supreme Court intervention. In fact, the SG argued, in the last 35 years, there have been only 16 cases litigating post-completion plan payments.
The SG further argued that the Tenth Circuit opinion could be read in either of two ways. On the one hand, it could be interpreted merely to state broadly that a debtor may not receive a completion discharge in the face of a material default. On the other hand, it may be read to more specifically create the bright line rule prohibiting any post-completion plan payments. Because of this ambiguity in the Tenth Circuit opinion, the SG argued that the court should be given an opportunity to “clarify the reach” of its decision in future decisions.