A single bankruptcy court may handle hundreds of chapter 13 cases filed each week, and their orderly disposition depends on the finality of confirmed plans.[1] Nevertheless, Congress was aware that chapter 13 debtors frequently encounter turmoil and, less frequently, windfalls in their financial circumstances, rendering modifications of confirmed plans appropriate.
Thus, notwithstanding the binding effect of a confirmed plan on the parties, the Bankruptcy Code provides for a confirmed plan’s modification prior to completion of all plan payments.[2] Consequently, § 1329(a) contemplates three types of modifications (i.e., modification to (1) increase or reduce the amount of payments on claims of a particular class provided for by the plan; (2) extend or reduce the time for such payments; or (3) alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent that is necessary to take account of any payment of such claim other than under the plan). Subsequently, § 1329(b)(1) provides that a requested modification must comply with §§ 1322(a)-(b), 1323(c) and 1325(a). Accordingly, modification is essentially a new plan and must be consistent with the statutory requirements for confirmation.[3]
Despite the fact that § 1329 provides for only three statutorily mandated requirements, a judicially created standard has emerged, which imposes a burden of establishing a substantial, and in some cases, unanticipated change in circumstances in a debtor’s situation.[4] This standard is not applied unanimously to all chapter 13 cases due to a growing minority view’s refusal to impose such a pre-condition on a moving party.[5] Although this division of thought has brought some apparent uncertainty into chapter 13 practice, both views provide interesting reasoning and add to the intellectual challenges created by bankruptcy law.
Necessity of a Particular Change
The changed-circumstances requirement is not explicitly mandated in the Bankruptcy Code; however, the majority view concludes that either res judicata[6] or the effects of confirmation under 11 U.S.C. § 1327[7] dictate that the plan may not be modified simply upon the moving party’s wishful thinking.[8] The origin of this test can be traced back to the 1984 amendments to the Code, when Congress enacted the Bankruptcy Amendments and Federal Judges Act of 1984 (BAFJA) and authorized previously unavailable requests for modifications by parties other than the debtor (i.e., the trustee) or the allowed unsecured claimholders.[9] Interestingly, a chapter 13 debtor’s winning of the Massachusetts State Lottery precipitated one of the first opinions on this issue.[10] Writing on a clean slate, the bankruptcy court observed that such a “dramatic change” created a need for modification to satisfy the debtor’s unsecured creditors in full.[11] From that moment, debtors no longer had the exclusive right to modify chapter 13 plans and had to change gears to defend the enforcement of existing plans.[12] The judicial system was faced with the challenge of evaluating the appropriateness of the requested modifications that were proposed by the trustees and allowed unsecured claimants.[13]
Relying on legislative history, a fraction of bankruptcy courts have held that to modify an existing plan, the nondebtor proponent must establish that the debtor has experienced default or a “change in circumstances”; otherwise, the original plan remains binding.[14] Some bankruptcy courts have found that only a “substantial” change in circumstances post-confirmation would justify modification,[15] while others require an unanticipated substantial change in circumstances,[16] thereby preventing modifications if only minor and anticipated changes in the debtor’s financial condition take place.[17] The practice of halting attempts to re-litigate matters that were known and could have been raised prior to confirmation is justified as a matter of sound public policy and appropriate judicial economy.[18] As a result, this test has proven workable and serves as a practical bar from repetitious litigation of issues by parties hoping to achieve a more favorable plan based on the same facts presented at the original confirmation hearing. Thus, a confirmation order leaves nothing for the court to do but to execute a judgment unless the entire dynamic between the parties is altered and a request for modification advances a legitimate reason for the plan to correspond with the change in circumstances.[19]
In later years, bankruptcy courts began applying this standard to post-confirmation modifications offered by debtors, although a very small fraction of bankruptcy courts have required one measure of changed circumstances from the debtor and a different quantum from creditors.[20] Bankruptcy courts vary widely over what they consider to be a substantial, unanticipated change in circumstances.[21] Generally, bankruptcy courts consider a change in the debtor’s (1) income or expenses, (2) medical condition or (3) post-confirmation conduct in contemplating changed circumstances.[22] For instance, a post-confirmation modification request is justified when (1) the modification will allow a party to take advantage of changes to or clarifications of existing law that occur while his/her case is pending;[23] (2) there is an increase in a debtor’s income due to his/her own efforts;[24] (3) an inheritance is received;[25] or (4) there is a decrease in expenses,[26] but not when the debtor’s assets appreciate or depreciate in value.[27]
Plain-Meaning View
Bankruptcy courts that reject utilizing the change-of-circumstances test begin and end their analysis with the language of § 1329, which provides that the proponent of a modified plan must simply satisfy the tests in §§ 1322(a), (b) and (c) and 1325(a).[28] This view reasons that the language of § 1329 is unambiguous and none of the sections mentioned above includes the change-of-circumstances test.[29] However, changed circumstances or unanticipated events after confirmation may be relevant to one or more of the listed standards.[30] This line of cases observes that res judicata on its own does not create a requirement for a showing of a substantial change in circumstances, and § 1329(a) specifically permits debtors, trustees and unsecured creditors to modify the plan for the three limited purposes listed therein without any additional hurdles.[31] It is not in the bankruptcy court’s province to expand § 1329 beyond what Congress contemplated or enacted.[32]
The majority view observes that the rules of statutory construction provide certain limitations upon the application of the Bankruptcy Code’s literal interpretations.[33] Specifically, the statute’s plain language controls the court’s analysis “unless its application leads to ‘unreasonable or impracticable results’”[34] or is rebutted by a contrary clearly-expressed legislative intent.[35] The majority view concludes that when § 1329 is viewed in the context of the purposes of chapter 13, the “plain-meaning” approach can lead to results that are inconsistent with the purpose of chapter 13.[36] Chapter 13’s primary goal is a debtor’s financial rehabilitation through making monthly payments during the plan’s commitment period while keeping the assets that the debtor does not intend to surrender.[37] Section 1321 provides the debtor with the exclusive right to file a plan dealing with the debtor’s assets and liabilities existing as of the date of confirmation because chapter 13 cases can only be initiated voluntarily.[38]
Although a chapter 13 trustee is allowed to advise a debtor on the preparation of the plan or his/her performance under the plan, there is no authority for either a chapter 13 trustee or a creditor under any circumstances to file a plan.[39] Authorizing the chapter 13 trustee to amend the plan without any threshold requirements would allow the trustee to accomplish by amendment what he/she could not accomplish in the first instance. Consequently, mindful of the rules of statutory construction, the majority view concludes that such a result is at odds with congressional intent, which clearly gave the debtor the exclusive right to propose a plan dealing with the debtor’s assets and liabilities existing as of the date of confirmation.[40] As a result, literal interpretation of § 1329 would make chapter 13 ambiguous as to whether a debtor has an exclusive right to file an initial plan.[41]
Furthermore, according to this line of cases, it is appropriate to resort to legislative history in order to reconcile §§ 1321 and 1329, which otherwise achieve contradictory results.[42] Bankruptcy courts following the majority view have found that the legislative history of § 1329 reconciles these provisions.[43] Specifically, while § 1329 was amended in 1984 to give to chapter 13 trustees and holders of unsecured creditors the right to request modification, the drafters’ work on this amendment preceded the enactment of BAFJA by several years.[44] Section 1329 was the subject of the “Oversight Hearings on Personal Bankruptcy Before the Subcommittee on Monopolies and Commercial Law of the House Committee on the Judiciary in 1982,”[45] and was originally envisioned to extend the right to modify to holders of unsecured creditors and permit them to request modification of a plan “in response to changes in circumstances substantially affecting the ability of the debtor to make future payments under the plan.”[46]
Conclusion
The parties to a bankruptcy proceeding often express frustration with the process with its ultimate result. Frequently, unsecured creditors give up their right to any recovery by failing to file a claim in order to even signal their interests. Thus, inconsistency among existing case law casts doubt on the predictability of the bankruptcy process, fosters confusion and fuels distrust toward the judicial system. However, bankruptcy judges must exercise their discretion during the decision-making process and express their well-informed judgment regarding thorny legal issues.
Armed with rules of statutory construction, judicial officers attempt to rely on the language of the Bankruptcy Code that is “somewhat awkward in concept and application.”[47] Consequently, practitioners should thoroughly study the case law in a particular district prior to any formal attempt to modify a confirmed plan, as bankruptcy courts routinely address such motions. However, in the absence of binding precedent, one should cautiously proceed with the motion, include persuasive and in-depth reasoning supporting the request, and outline a compelling story to justify it, because while the parties have a right to request a modification, such request will not necessarily be granted. Of overriding importance, bankruptcy participants should be mindful that the existing law is undeniably intended to force the parties and their attorneys to be diligent in prosecuting their cases and to avoid generating time-consuming litigation.
[1] Piedmont Trust Bank v. Linkous (In re Linkous), 990 F.2d 160, 166 (4th Cir. 1993) (Chapman J. dissenting).
[2] 11 U.S.C. § 1329.
[3] In re Than, 215 B.R. 430, 434 (B.A.P. 9th Cir. 1997).
[4] Arnold v. Weast (In re Arnold), 869 F.2d 240, 243 (4th Cir. 1989); In re Euler, 251 B.R. 740, 743-47 (Bankr. M.D. Fla. 2000) (Williamson, J.); Collier v. Valley Fed. Sav. Bank (Matter of Collier), 198 B.R. 816, 816 (Bankr. N.D. Ala. 1996); In re Pearson, No. 9D-41550, 1995 WL 17005062, at *4-5 (Bankr. S.D. Ga. May 4, 1995); In re McCray, 172 B.R. 154, 158 (Bankr. S.D. Ga. 1994); In re Duke, 153 B.R. 913, 918-19 (Bankr. N.D. Ala. 1993).
[5] Barbosa v. Solomon (In re Solomon), 235 F.3d 31, 38-41 (1st Cir. 2000); In re Witkowski, 16 F.3d 739, 748 (7th Cir. 1994); Ledford v. Brown (In re Brown), 219 B.R. 191, 195 (B.A.P. 6th Cir. 1998); Powers v. Savage (In re Powers), 202 B.R. 618, 622 (B.A.P. 9th Cir. 1996); In re Meeks, 237 B.R. 856, 859-60 (Bankr. M.D. Fla. 1999) (Jennemann, J.) (finding that “[d]ebtors need not demonstrate a substantial, unanticipated change in circumstances in order to modify their confirmed chapter 13 plan”).
[6] Comm’r of Internal Revenue v. Sunnen, 333 U.S. 591, 597 (1948) (stating that in general, doctrine of res judicata bars “repetitious suits involving the same cause of action”).
[7] Section 1327(a) provides as follows: “The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.”
[8] Keith Lundin, Chapter 13 Bankruptcy § 257.1, at 257-1 (3d ed. 2000 and Supp. 2004); see, e.g., In re Arnold, 869 F.2d at 243 (“The doctrine of res judicata bars an increase in the amount of monthly payments only where there have been no unanticipated, substantial changes in the debtor’s financial situation.”).
[9] In re Perkins, 111 B.R. 671, 673 (Bankr. M.D. Tenn. 1990); In re Boone, 53 B.R. 78, 80 (Bankr. E.D. Va. 1985) (stating that prior to 1984 amendments, trustee had no standing to modify confirmed plan).
[10] In re Koonce, 54 B.R. 643, 645 (Bankr. D.S.C. 1985).
[11] Id.
[12] In re Perkins, 111 B.R. at 673.
[13] Id.
[14] Id.
[15] Id. (citing In re Euerle, 70 B.R. 72 (Bankr. D.N.H. 1987); In re Gronski, 86 B.R. 428, 432 (Bankr. E.D. Pa. 1988)).
[16] In re Perkins, 111 B.R. at 673 (citing In re Fitak, 92 B.R. 243 (Bankr. S.D. Ohio 1988)); In re Arnold, 869 F.2d at 243.
[17] In re Murphy, 474 F.3d 143, 149 (4th Cir. 2007).
[18] Id. (internal quotations omitted).
[19] See In re Hughes, No. BKR 08-24736, BKR 08-29072, 2009 WL 2252181, at *5 (Bankr. D. Utah July 17, 2009).
[20] See Lundin, § 257.1 (citing In re Gronski, 86 B.R. 428 (Bankr. E.D. Pa. 1988)); see also In re DeMoss, 59 B.R. 90, 95 (Bankr. W.D. La. 1986); In re Jourdan, 108 B.R. 1020, 1021 (Bankr. N.D. Iowa 1989).
[21] 7 Norton Bankruptcy Law and Practice § 150:2 (3d ed. 2014).
[22] In re Nelson, 189 B.R. 748, 751 (Bankr. D. Minn. 1995).
[23] In re Jourdan, 108 B.R. at 1021.
[24] Arnold, 869 F.2d at 243.
[25] In re Euerle, 70 B.R. at 73-74.
[26] In re Gronski, 86 B.R. at 432-33 (debtor’s monthly rent and electric service expenses decreased from $370 to $225).
[27] In re Jacobs, 263 B.R. 39, 46 (Bankr. N.D.N.Y. 2001); In re Beam, 510 B.R. 399, 402 (Bankr. N.D. Ga. 2014).
[28] In re Euler, 251 B.R. at 744.
[29] Id.
[30] Id.
[31] In re Meeks, 237 B.R. 856, 859 (Bankr. M.D. Fla. 1999).
[32] Id.
[33] In re Euler, 251 B.R. at 744.
[34] Valladolid v. Pac. Operations Offshore LLP, 604 F.3d 1126, 1133 (9th Cir. 2010) (internal quotation marks omitted).
[35] Ardestani v. I.N.S., 502 U.S. 129, 136 (1991).
[36] In re Euler, 251 B.R. at 744.
[37] Id.
[38] Id.
[39] Id. at 745 (citing 11 U.S.C. § 1302).
[40] Id.
[41] Id.
[42] In re Euler, 251 B.R. at 745-76 (citing Oklahoma v. New Mexico, 501 U.S. 221, 236 (1991) (“[W]e repeatedly have looked to legislative history and other extrinsic material when required to interpret a statute which is ambiguous.”)).
[43] Id. at 746.
[44] Id.
[45] Id.
[46] Id. (quoting Oversight Hearings on Personal Bankruptcy Before the Subcommittee on Monopolies and Commercial Law of the House Committee on the Judiciary, 97th Cong., 1st and 2d Sess., 215, 221 (1981-82)).
[47] In re Perkins, 111 B.R. at 673.