Trustees’ Role in Changes to Model Plans Unfair to Creditors

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By Diane Davis

Changes that five California debtors made to their Chapter 13 plans from their district’s mandatory model plan unfairly manipulated bankruptcy law to avoid paying unsecured creditors, the U.S. Bankruptcy Appellate Panel for the Ninth Circuit held ( In re Escarcega , 2017 BL 314337, B.A.P. 9th Cir., BAP Nos. NC-16-1333-JuFB, 9/6/17 ).

The Chapter 13 plans weren’t proposed in good faith and were a “blatant attempt” to avoid the consequences of modification that would require them to pay creditors what they were able to afford during the plan’s term, Judge Meredith A. Jury wrote Sept. 6.

The bankruptcy court below was correct in concluding that these plans were inconsistent with the Bankruptcy Code’s requirements, the appellate panel said.

The panel questioned the tactics of the Chapter 13 trustee who “essentially colluded with the debtors’ bar to avoid the consequence that filing an objection would have under controlling Ninth Circuit case law.” Her role insuring that unsecured creditors wouldn’t receive a dividend is “inconsistent with the diligence required of such trustee,” the panel said.

The changes included allowing debtors to pay off their plans and obtain a discharge at any time after confirmation without having to go through the modification process and without having to pay allowed unsecured claims in full. The debtors’ plans didn’t have a fixed term but would be for an indefinite duration.

The trustee avoided filing an objection to the plan by providing debtors’ attorneys with a “draft objection” that allowed them to make amendments outside of court. This was a “workaround” to the impact of Danielson v. Flores (In re Flores), so that the debtors could avoid paying unsecured creditors what they might be entitled to receive.

A Chapter 13 trustee is charged with serving the interests of all creditors, and must make a recommendation either for or against a plan’s confirmation, the panel said. The bankruptcy court can’t effectively carry out its responsibilities without the trustee’s assistance, the panel said.

The early termination language that the debtors used in their plans “effectively cuts off the rights” of the trustee and unsecured creditors to seek a modification to the plan if the debtors’ income should increase post-confirmation, the panel said.

Judges Robert J. Faris, and Julia W. Brand joined the opinion.

James J. Gold of Gold and Hammes represented Escarcega, Sisk, and Candalla; James S.K. Shulman of Law Offices of James S.K. Shulman represented Vick and Mercado; Ben A. Ellison of Cairncross & Hempelmann, P.S. represented National Association of Consumer Bankruptcy Attorneys, as amicus curiae, in support of appellants.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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