Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Daniel Gill
June 28 — A Chapter 13 bankruptcy trustee can move to modify a debtor's plan to call for increased payments by the debtor, because of the debtor's increased earnings, the Seventh Circuit held June 23 ( Germeraad v. Myrick Powers, 2016 BL 201326, 7th Cir., No. 15-3237, 6/23/16 ).
The Seventh Circuit overturned the district court and bankruptcy court for the Central District of Illinois and held that there is a statutory basis for a trustee to amend a Chapter 13 plan based on an increase in the debtor's income.
The court found that the appeal was not rendered moot by the fact that the debtor had completed her five years of plan payments to the trustee, despite the plain language of Bankruptcy Code Section 1329(c).
Judge Lynn Adelman of the U.S. District Court for the Eastern District of Wisconsin, sitting by designation, wrote the opinion.
“The bankruptcy court and district court took a strict textual approach without regard to the over-arching purpose of the interrelated statutes governing confirmation,” Jan Hamilton told Bloomberg BNA on June 27. Hamilton is a long-serving Chapter 13 trustee in Kansas and has lectured on various topics related to the law and practice of the chapter on hundreds of occasions.
The circuit court, on the other hand, examined the question more broadly. The court considered the interplay between Sections 1329, 1322, 1323 and 1325 and concluded that nothing in those statutes prohibits the trustee's motion.
Hamilton told Bloomberg BNA that he was surprised that in none of the decisions did any of the three courts mention 11 U.S.C. §521, which explicitly authorizes Chapter 13 trustees to obtain the tax returns of debtors post-petition. What would be the purpose of such a statute, Hamilton asked, if a trustee cannot seek a modification based on the information obtained from such returns?
Also, Bankruptcy Code Section 1329(a) provides that not only the debtor, but also a creditor or the trustee, can seek to modify the plan. Hamilton suggested that it is very unusual and unlikely that a creditor or trustee would seek to amend a plan to reduce the payments to be made by the debtor.
Married debtors Myrick Powers and Elvie Owens-Powers filed a Chapter 13 bankruptcy case on May 24, 2010. Chapter 13 allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three to five year period.
In this case, the bankruptcy court confirmed (i.e., approved) the debtors' plan which called for paying creditors significantly more than what might have been required of them if their disposable income were the only measure for constructing payouts to creditors. But because these debtors wanted to protect equity in their real property, they had to pay to creditors at least what their creditors would have received if the case were in Chapter 7 instead of Chapter 13. In Chapter 7, a debtor's nonexempt assets are liquidated by a trustee, and the proceeds are distributed to creditors.
In 2013, the trustee received a copy of the debtors' income tax return for 2012, reflecting a $50,000 increase in the debtors' income, the court said. The Bankruptcy Code specifically authorizes the trustee to demand copies of Chapter 13 debtors' post petition tax returns (11 U.S.C. §521).
The trustee moved to modify the debtors' plan to require greater monthly payments. The bankruptcy court denied that motion, finding that the Bankruptcy Code did not authorize the trustee to amend the plan based on an increase in their income. The bankruptcy court also found that, even if the Code did authorize such a modification, “the facts of the case did not support the trustee's request,” the Seventh Circuit said.
The trustee appealed the bankruptcy court's decision to the Central District of Illinois, which agreed with the bankruptcy court that the Code did not authorize the trustee's motion. The district court did not consider the bankruptcy court's alternative finding — that if the trustee was authorized to modify the plan, the facts nevertheless did not support modification in this case.
The Seventh Circuit disagreed with the district court and held that the Bankruptcy Code did authorize the trustee's attempt to modify a plan to increase payments. Because the district court did not consider the bankruptcy court's alternative finding — that the modification was not appropriate under the facts of the case — the circuit court remanded the matter for the district court to examine that question.
The court wrestled with the timing of the modification. Section 1329(a) states that the plan can be modified “at any time after confirmation of the plan but before the completion of payments under such plan.” Here, by the time the circuit court considered the case, the debtor had completed her payments over the five year period of the plan.
(By the time the matter was before the circuit court, the debtors had divorced, and only debtor Owens-Powers was involved in the appeal.)
Perhaps the most striking aspect of the court's decision was its rejection of the debtor's argument that the appeals were mooted by the expiration of the five year plan payment period. 11 U.S.C. §1329(c) provides that a modified plan “may not provide for payments over a period that expires after the applicable commitment period” unless the court finds cause. However, that section also provides that although a court can extend the plan commitment period in some cases, it “may not approve a period that expires after five years after” the first plan payment was due.
The debtor therefore argued that the appeal was moot, because no effective relief could be granted in the appeal. The debtor's argument was based on the conclusion that an order requiring more money to be paid to the trustee would necessarily require payments to be made after the five year maximum period established in Section 1329(c).
The court rejected that argument. Instead, it found that relief could be granted by the court. If the plan were modified requiring larger payments, the order would be retroactive at least to the date the trustee filed his motion, and the debtor would be deemed in default. The bankruptcy court could then allow the debtor to cure the default, or could disallow the debtor's discharge and/or dismiss or convert the case to Chapter 7 because of it.
Now the case is returning to the U.S. District Court for the Central District of Illinois, which will be charged with examining the second finding of the bankruptcy court it previously elected not to address: whether the bankruptcy court erred when it “determined that the trustee had failed to show that the debtors' financial circumstances had changed such that it was now equitable to require higher payments.”
To answer the question, the court should consider not only the debtors' increased income, but also their increased expenses. In her brief filed in the circuit court appeal, the debtor noted that she had divorced her husband and co-debtor and had moved to Florida in separate households, and consequently her expenses had increased substantially.
Senior Judge William J. Bauer and Judge Ann Claire Williams joined in the decision.
Debtor Elvie Owens-Powers was represented by Eugene R. Wedoff, Oak Park, Ill (a retired bankruptcy judge now representing, on a pro bono basis, parties in bankruptcy-related appeals). The Chapter 13 trustee John H. Germeraad was represented by Kenneth T. Siomos, Springfield, Ill.
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