Summary
holding that after the repeal of 11 U.S.C. § 1329(d), the court cannot grant a request to extend a Chapter 13 plan beyond five years
Summary of this case from In re MaldonadoOpinion
Bankruptcy Case No. 18-11913 EEB Bankruptcy Case No. 18-18619 EEB Bankruptcy Case No. 18-20397 EEB Bankruptcy Case No. 19-10971 EEB
2022-06-02
IN RE: Tyrone A. MERCER, Theresa M. Mercer, Debtors. In re: Tonia N. O'Larry, Debtor. In re: Brian J. Warner, Brenda L. Carlson, Debtors. In re: Randal R. Scott, Dawn J. Scott, Debtors.
Nathaniel Thompson, Law Office of Nathaniel J. Thompson, LLC, Greenwood Village, CO, for Debtors Theresa M. Mercer, Tyrone A. Mercer. Chapter 13 Trustee - Goodman, Denver, CO, for Trustee. Elizabeth German, Denver, CO, for Debtor Tonia Nicolette O'Larry. Robert Salter, Centennial, CO, for Debtors Brenda Lee Carlson, Brian James Warner. Jesse Aschenberg, Aurora, CO, for Debtors Dawn Jonae Scott, Randall Robert Scott.
Nathaniel Thompson, Law Office of Nathaniel J. Thompson, LLC, Greenwood Village, CO, for Debtors Theresa M. Mercer, Tyrone A. Mercer.
Chapter 13 Trustee - Goodman, Denver, CO, for Trustee.
Elizabeth German, Denver, CO, for Debtor Tonia Nicolette O'Larry.
Robert Salter, Centennial, CO, for Debtors Brenda Lee Carlson, Brian James Warner.
Jesse Aschenberg, Aurora, CO, for Debtors Dawn Jonae Scott, Randall Robert Scott.
ORDER ON MOTIONS TO MODIFY
Elizabeth E. Brown, Bankruptcy Judge
THESE MATTERS are before the Court on the Debtors’ unopposed motions to modify their plans under 11 U.S.C. § 1329(d). In each, the Debtors contemplate a plan term that exceeds sixty months. The Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116-136, enacted on March 27, 2020, amended § 1329 of the Bankruptcy Code to allow a debtor financially impacted by the coronavirus epidemic to propose up to a seven-year plan. 11 U.S.C. § 1329(d). Originally, Congress provided that this new provision would "sunset" or expire at the end of one year. But in the Consolidated Appropriations Act of 2021, Pub. L. 116-260, Congress extended it for an additional year. The combined two-year period ended on March 27, 2022. The Debtors in these cases filed their motions to modify prior to the repeal of this law, but they did not obtain court approval of the modification before the sunset date. Thus, despite the lack of opposition to these motions, the Court must wrestle with the question of whether filing the motion to modify before the law's repeal is adequate to preserve a debtor's right to propose a plan that exceeds five years or whether a debtor had to also obtain court approval before March 27, 2022.
Prior to its repeal, § 1329(d) provided that:
(1) Subject to paragraph (3), for a plan confirmed prior to the date of enactment of the COVID-19 Bankruptcy Relief Extension Act of 2021, the plan may be modified upon the request of the debtor if –
(A) the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic; and
(B) the modification is approved after notice and a hearing.
(2) A plan modified under paragraph (1) may not provide for payments over a period that expires more than 7 years after the time that the first payment under the original confirmed plan was due.
(3) Sections 1322(a), 1322(b), 1323(c), and the requirements of section 1325(a) shall apply to any modification under paragraph (1).
Together these subsections may be parsed into eight discrete elements:
1. The debtor (and only the debtor) may propose a modification to increase the plan's term beyond five years,
2. The proposed increase may not exceed seven years,
3. The debtor had to have confirmed a plan prior to March 27, 2020,
4. The debtor must have suffered a material financial hardship,
5. That hardship must be directly or indirectly related to the coronavirus pandemic,
6. The modification must comply with the requirements of § § 1322(a), 1322(b), 1323(c), and 1325(a),
7. The debtor must give notice of the opportunity for a hearing on the proposed modification, and
8. The modification must be approved.
The only element at issue in the present cases is the final one. The Debtors did not obtain approval of their latest modification requests before the law's sunset date. Admittedly, nothing in this statute expressly states that approval had to occur before its repeal – only that it must occur at some point in time. But this eighth element is curious.
In its absence, § 1329(b)(2) would control. It states, "[t]he plan as modified becomes the plan unless, after notice and a hearing, such modification is disapproved." Many courts interpreting this provision agree that its purpose is to establish the effective date of a modification. And they agree that the modification becomes effective on the date the movant files the motion to modify, not when it is subsequently approved. As the following cases demonstrate, this may have a significant impact on debtors, with both good and bad consequences.
In In re Meza , 467 F.3d 874 (5th Cir. 2006), the trustee filed a motion to modify about two years into the debtors’ fifty-month plan. The trustee wanted to compel the debtors to contribute their tax refund and thereby increase the dividend to unsecured creditors. The court set a hearing on the motion but, prior to the hearing, the debtors paid off the entire remaining balance of their original plan. They argued that the trustee's proposed modification was untimely under § 1329(a) because it only allows a plan to be modified "before the completion of payments under such plan." The bankruptcy court and the district court on appeal accepted the debtor's argument. But the Fifth Circuit reversed. It held that, if a trustee files a motion to modify and the debtor attempts to complete plan payments before a ruling on the modification, the debtor "appears to unfairly circumvent § 1329(b)(2) ’s plain language that a ‘plan as modified becomes the plan unless, after notice and hearing, such modification is disapproved.’ " Id. at 878. The court ruled that it should not read § 1329(a) in a vacuum, rather it should read §§ 1329 (a) and (b) together.
Read together, both subsections show that, when a modification request is timely filed, the completion of the plan and eventual discharge of the debtor is stayed until the bankruptcy court is allowed to consider the modification on its merits. A contrary result would encourage gamesmanship on behalf of debtors and prevent them from repaying creditors "to the extent of [their] capabilit[ies]"
Id . at 880.
The Seventh Circuit agrees. In Germeraad v. Powers , 826 F.3d 962 (7th Cir. 2016), the trustee filed a motion to modify the debtors' confirmed chapter 13 plan after discovering that their income had increased significantly. The bankruptcy court denied the motion and the trustee appealed. By the time the Seventh Circuit heard the case, the debtors had completed making their plan payments. They then argued the appeal was moot because § 1329(a) would no longer permit modification after the completion of payments. The court of appeals disagreed, explaining that "if we were to vacate the bankruptcy court's order disapproving the modification, then by operation of § 1329(b)(2), the modified plan would be reinstated and deemed effective as of the date it was filed.... The modification ... would have occurred within the time period specified in § 1329(a)." Id. at 969. See also, In re Baxter, 569 B.R. 153, 155 (Bankr. E.D. Mich. 2017) (following Meza and Germeraad and holding that creditor's motion to modify, filed before debtors completed plan payments, was timely).
In In re Taylor , 215 B.R. 882, 883–84 (Bankr. S.D. Cal. 1997), the debtor filed a modified plan to lower her payments and immediately began making payments at the lower rate. The trustee argued that the debtor had to make payments at the rate specified in her original plan until the court approved the modification. The bankruptcy court disagreed. It first admitted that the language of § 1329(b)(2) can be read either way: "that is, a modified plan is the controlling plan upon being proposed, subject to the possible condition subsequent of disapproval, or the modified plan does not become the controlling plan until after notice and an opportunity to object has passed." Id. at 883.
The Taylor court noted that, when § 1329(b)(2) was originally drafted, only a debtor could seek to modify a confirmed plan. It reasoned that the changed circumstances that cause a debtor to request plan modification – normally a decrease in income or increase in expenses -- will have already occurred by the time the motion to modify is filed. Thus, "requiring the debtor to continue to perform at a no longer feasible level of payment would be a recipe for failure of the Chapter 13, which seems contrary to congressional intent." Id. at 884. The court reasoned that its construction of § 1329(b)(2) –that a modified plan is the controlling plan as soon as it is filed, subject only to later disapproval-- was also supported by the language of § 1323(b). Section 1323(b) provides that the preconfirmation modified plan "becomes the plan" upon filing, noting that at least one court has suggested that § 1329(b)(2) and § 1323(b) are functional equivalents. Id. (citing In re Moss, 91 B.R. 563, 566 (Bankr.C.D.Cal.1988) ).
Of course, the Taylor court's interpretation will not always benefit debtors. The law now provides that persons other than the debtor may propose a modification. If, for example, the chapter 13 trustee proposed a modification to increase payments due to an alleged increase in the debtor's income, then under the Taylor court's reasoning, the debtor would have to immediately begin making the increased payment upon the trustee's filing of the motion to modify. What is sauce for the goose is sauce for the gander.
But not all courts agree with the Taylor court's decision. In In re Santillan , 2018 WL 4674573 (Bankr. S.D. Tex. Sept. 26, 2018), the court held that, upon approval of the modified plan, it only becomes "retroactively effective," as of the date it was filed. Thus, under the Santillan approach, the debtor would not have to increase his payments until approval, but then he would have to catch up on payments to account for the increase that is retroactively applied to the date of the motion's filing. While the Court finds the Santillan interpretation more persuasive, it does not have to decide this issue to resolve the pending motions.
Yet an analysis of § 1329(b)(2) is relevant here. This statute stands in direct contrast to § 1329(d) ’s eighth element. This does not mean that § § 1329(b)(2) and (d) contradict one another. Section 1329(b)(2) is the more general statute that applies to all kinds of modifications. Section 1329(d) is a more specific statute and it trumps § 1329(b)(2) whenever the proposed modification is one that seeks to extend a plan's term beyond five years. At least it did until the law's repeal.
In the absence of § 1329(d) ’s eighth element, § 1329(b)(2) would specify that the debtor's proposed modification to exceed sixty months would be immediately effective upon the filing of a motion to modify. That would mean in each of the present cases that filing the motion before the sunset date was enough to preserve the debtor's ability to propose a longer plan term, regardless of the fact that the Court had not yet approved it by March 27, 2022.
But Congress’ inclusion of the eighth element changes this result. It is hard for this Court to imagine what other meaning to give to this eighth element than to hold that § 1329(d) motions to modify are not effective until they are approved. Holding otherwise would render this element superfluous. So, the Court must acknowledge that § 1329(d), unlike § 1329(b)(2), requires approval and not merely a filing that is not later disapproved. Accord In re Sykes , 638 B.R. 578 (Bankr. E.D. Mich. 2022) ; In re Bohinski , 638 B.R. 870 (Bankr. E.D. Mich. 2022). And under this interpretation, a debtor's failure to obtain court approval before § 1329(d) ’s repeal is fatal to his cause.
This leaves one further wrinkle to consider. In two of these cases, the Debtors had already obtained approval of a longer plan term before the statute's repeal. In Warner/Carlson, the Court had approved a sixty-three-month term and then the Debtors filed a further modification to extend to sixty-seven months. The Court had not yet approved the later request before March 27, 2022. In Scott, the Court had approved a seven-year term with their first plan modification. But shortly before March 27, 2022, the Debtors sought a further modification to adjust the payment amount to creditors, while keeping the plan term at seven years.
It is this Court's view that any plan extension beyond five years that this Court approved before the sunset date should remain in effect despite a subsequent modification to the plan after the sunset date. But any request to further extend a plan's term post-repeal should not be approved. In the Warner/Carlson case, this means that they cannot extend their plan by modification to sixty-seven months, but their previously approved sixty-three-month term may remain in any further modification they propose, if they so choose. In Scott, the Debtors may modify their plan to change the payment amount to creditors without losing their previously approved eighty-four-month-plan term.
For these reasons, the Court hereby GRANTS the Motion to Modify in the Scott case but DENIES the pending motions to modify in the other cases. In each of the remaining cases, the Court will set a further hearing to determine how each Debtor wishes to proceed in light of this ruling.