An unanticipated change in circumstances is not required to justify modifying a confirmed chapter 13 plan, Bankruptcy Judge James R. Sacca of Atlanta held in an opinion differing from the Fourth Circuit’s decisions in In re Arnold, 869 F.2d. 240 (4th Cir. 1989), and In re Murphy, 474 F.3d 143 (4th Cir. 2007).

On an issue where the circuits are split, Judge Sacca sided with the First, Fifth and Seventh Circuits, which hold that res judicata does not preclude modification of a confirmed chapter 13 plan.

The debtor’s counsel had put his client in a pickle by confirming the plan while assuming that the court would later approve a plan modification to pay the fees he incurred in an adversary proceeding with a secured creditor. Judge Sacca was unwilling to punish either the debtor or his counsel because the lawyer chose to accelerate payments to unsecured creditors.

The debtor owned a home with two mortgages. The plan was based on an assumption that the second mortgage was unperfected, thus creating a net of about $20,000 for distribution to unsecured creditors if the case were a chapter 7 liquidation.

To comply with the best interests test, the plan called for paying $450 a month for 60 months, which would give unsecured creditors more than $20,000 and cover counsel’s basic fee of about $4,500.

Without waiting to file a fee application for the $8,000 he had incurred in an adversary proceeding with the lender over the lack of perfection, debtor’s counsel had the court confirm the plan days after the mortgage holder conceded that the lien was invalid. The confirmed plan provided that counsel fees in the adversary proceeding would be paid on an hourly basis on top of the $4,500.

Four months later, debtor’s counsel filed a fee application seeking $8,000 in connection with the adversary proceeding. Counsel also sought confirmation of an amended plan that would pay his additional fees while reducing the distribution to unsecured creditors to $12,000.

The trustee objected to confirmation, contending that the confirmed plan was res judicata and that the additional counsel fees were not unanticipated.

Judge Sacca overruled the objection and confirmed the amended plan in his April 10 opinion.

Res judicata did not apply, Judge Sacca said, because uncontested confirmation of the original plan made no finding that unsecured creditors were entitled to receive $20,000. Rather, confirmation only meant that the plan passed the best interests test, among other things. Therefore, confirmation did not bar the debtor from modifying the plan to reduce the distribution to unsecured creditors.

Even if the original plan had determined what unsecured creditors were entitled to recover, Judge Sacca said that Section 1329, governing amendments to plans, “created an exception to the finality of an order confirming a chapter 13 plan.”

The trustee urged Judge Sacca to follow the Fourth Circuit, which went beyond Section 1329 and held that a debtor must show a substantial and unanticipated change in financial circumstances to justify plan modification. The trustee argued that additional counsel fees were anticipated at the time of confirmation.

Judge Sacca rejected the Fourth Circuit’s approach, saying it was “overly rigid and lacks the very flexibility that Congress implemented in Section 1329.” He said that Sections 1327 and 1329, read together, make it “clear that Congress did not intend for res judicata to be applied to a confirmed plan in certain specified circumstances.”

Although changed circumstances are required for modification, he held that Section 1329 does not require that “changed circumstances . . . were unforeseen at the time of confirmation.”

Stripping away the additional requirement created by the Fourth Circuit, the plan was confirmable because Judge Sacca calculated that creditors were still receiving more than they would have in a chapter 7 liquidation. He was not about to shortchange the lawyer who “created the very distribution that unsecured creditors will get in this case, even at the lower amount in the modification.”