In a chapter 13 case, the local rules barred chapter 13 debtors’ plans from revesting estate property in the debtor until final decree. The bankruptcy court refused to confirm a plan with a provision contrary to the local form that revested estate property in the debtor on confirmation.

The Fourth Circuit reversed and allowed the plan to revest property on confirmation, because “the Code doesn’t permit the bankruptcy court to reject a plan’s vesting provision just because the court’s practice is to require a different provision.”

The Statute and the Forms

For chapter 13 plans, Official Form 113, paragraph 7.1, gives the debtor the option of revesting  estate property on confirmation, on discharge or “other.”

In the district in question, the local rules required using the district’s chapter 13 plan. The required plan provided that “[a]ll property of the Debtor remains vested in the estate and will vest in the Debtor upon entry of the final decree.”

Section 1327(b) provides that “the confirmation of a plan vests all of the property of the estate in the debtor” except “as otherwise provided in the plan or the order confirming the plan.”

The Debtor’s Plan

According to the Fourth Circuit’s opinion on August 13 by Circuit Judge Albert Diaz, the chapter 13 debtor struck out the standard revesting provision in the local form plan and instead included a nonstandard provision revesting on confirmation.

The debtor gave no reason for deviating from the local form and for revesting property on confirmation. The chapter 13 trustee objected to confirmation on account of the deviation.

Judge Diaz said that the bankruptcy court refused to confirm the plan because “a debtor can’t propose a plan that contradicts the local form’s default vesting provision.” The debtor revised the plan to revest on final decree but appealed.

The district court upheld the bankruptcy court’s refusal to confirm the nonstandard plan. The district court also held that the debtor had no standing to appeal because the debtor could show no injury from the standard vesting provision.

The debtor appealed to the circuit.

Standing

Because appellate standing affects jurisdiction, Judge Diaz first analyzed the debtor’s standing to appeal. He noted the Bankruptcy Code’s “default” provision revesting on confirmation and mentioned how revesting gives estate property to the debtor free and clear of claims and interests under Section 1327.

Judge Diaz first covered constitutional standing and decided that the debtor had sustained “an injury in fact” because the debtor’s “property remains encumbered by the interests and claims of her creditors, and her ability to use it outside the ordinary course of business depends on her seeking leave of court.”

The debtor had constitutional standing, Judge Diaz said, given the “risk of increased burdens and her loss of control over her estate.”

The chapter 13 trustee contended that the debtor must also have “prudential standing” on appeal by showing herself to be a “person aggrieved” as a result of being “directly and adversely affected” by the bankruptcy court’s order.

Judge Diaz said that the debtor had prudential standing for the same reasons she had constitutional standing, but he went on to discuss whether “person aggrieved” survived Lexmark International, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014). He described the Supreme Court as having “held that lower courts shouldn’t limit their jurisdiction for prudential reasons.”

Citing the Fifth, Ninth and Eleventh Circuits, Judge Diaz said that “several of our sister circuits have held that the person-aggrieved test survived Lexmark.” For his circuit, he left “person aggrieved” as an “open question.”

The Merits

Turning to the merits, Judge Diaz first analyzed whether delayed revesting under the district’s local form was per se invalid. He noted that rules promulgated under 28 U.S.C. § 2075 may not “abridge, enlarge, or modify any substantive right.”

Although local rules cannot prohibit use of official forms, Judge Diaz said that chapter 13 is “the exception” and that local rules may require use of a local form plan. However, he said that “any rules included in the local form must be procedural . . . . In other words, the form plan can dictate how a debtor proposes her plan, but not what she proposes in it.”

Judge Diaz said that Section 1322(b) means that the debtor was not required to provide for revesting but that revesting on confirmation was one of three alternatives. The local form, he said, “stripped [the debtor] of her right to propose a plan of her choosing with a tailored vesting provision.” Furthermore, he said, the “Code doesn’t require that the debtor justify her plan’s permissive provisions.”

Judge Diaz went on to say that the debtor was not required to give reasons for her election and was not required to defend her choice unless there was a “substantive objection.” In the case on appeal, the only objection was based on nonuse of the local form.

Judge Diaz therefore held that the bankruptcy court erred in precluding the debtor from confirming a plan “of her choosing” in respect of revesting.

Splitting with the Seventh Circuit

Judge Diaz ended his opinion by splitting with two Seventh Circuit opinions on revesting in chapter 13 plans, In re Steenes, 918 F.3d 554, (7th Cir. 2019), and In re Cherry, 963 F.3d 717 (7th Cir. 2020). In the two opinions, Circuit Judge Frank Easterbrook emphatically required bankruptcy courts to make case-specific findings of fact when a chapter 13 plans calls for assets to be retained in the estate until the entry of discharge. To read ABI’s reports, click here and here.

Unable to agree with the Seventh Circuit, Judge Diaz said, “it’s the debtor’s right alone to file for bankruptcy and propose a plan” and “the grounds on which the bankruptcy court can reject her plan are limited.” He interpreted “§ 1327(b) as preserving the debtor’s right to propose her own vesting provision, without having to justify it.”

Judge Diaz held “that the bankruptcy court can’t reject a plan’s vesting provision other than for the reasons allowed by the Code. And the Code doesn’t permit the bankruptcy court to reject a plan’s vesting provision just because the court’s practice is to require a different provision.” To reject a plan, he said that Section 1327(b) requires a “case-specific order, supported by good case-specific reasons.”

Judge Diaz reversed and remanded for the bankruptcy court to decide whether the vesting provision should be rejected “for a reason permitted by the Code.”

Concurrence

Circuit Judge J. Harvie Wilkinson, III concurred in the remand and agreed that a plan can be rejected only for reasons contained in the Bankruptcy Code, but he said that “courts must have some discretion in assessing whether those requirements are met.”

Observation

Revesting on final decree is a provision that aids the debtor by continuing the automatic stay’s protection of estate property until the case is over. However, continuation as estate property does impose limitations on a debtor’s actions without court approval.

The Seventh Circuit virtually prohibited delayed revesting, reasoning that creditors should not be barred from taking action against a debtor based on claims arising after confirmation.