The Seventh Circuit handed down a decision creating long-lasting uncertainty in the lives of chapter 13 debtors with increasing income. The June 23 opinion can result in requiring chapter 13 debtors to make payments for more than five years and gives a narrow reading to the Supreme Court’s Bullard decision on finality of bankruptcy court orders.
The Seventh Circuit’s opinion means that chapter 13 debtors cannot rely on orders denying increases in plan payments. In this case, the debtors face a potential loss of discharge even though they paid more than $40,000, having relied on the bankruptcy court’s order saying they were not required to pay an extra $15,000.
The Facts
A couple confirmed a chapter 13 plan calling for payments of $670 a month, paying unsecured creditors and providing $22,000 in distributions to unsecured creditors.
About two years after confirmation, the trustee got a tax return showing that the debtors’ annual income had increased $50,000 in the year following plan approval. The trustee filed a motion asking the bankruptcy court to require an increase in the monthly payments to $1,416 for the remaining two years in the plan.
In opposition, the debtors argued that their expenses also had increased.
The bankruptcy judge denied the trustee’s motion, saying that the Bankruptcy Code has no provision allowing an increase in payments for the reasons given by the trustee. Even if there were power to increase payments, the bankruptcy judge said that the facts did not support the trustee’s motion.
On the first appeal, the district court affirmed the bankruptcy court, finding no statutory authority to increase the payments. The district judge did not reach the question of whether the facts supported an increase.
The debtors appealed to the Seventh Circuit.
Appealability
In Bullard, the Supreme Court held in 2015 that denying confirmation of a chapter 13 plan is not a final order giving a right to appeal, unless the bankruptcy judge also dismisses the case. The debtors therefore contended that denial of the trustee’s motion to modify the plan was not a final order giving the Seventh Circuit appellate jurisdiction under 28 U.S.C. Section 158(d)(1).
In his June 23 opinion for the circuit court, District Judge Lynn S. Adelman of Milwaukee, sitting by designation, held that denial of a plan modification motion is a final order.
He said that denial of plan modification was a final order because it was not based on a technical mistake or some other factor that could be cured by an amended motion. In other words, if denial of the motion precludes filing a new motion on the same grounds, the order is final. The circuit court’s opinion endeavored to explain why the same analysis does not apply to denial of confirmation orders.
Although the opinion in this instance was anti-debtor, the finality reasoning can be helpful for debtors in other cases. If, for example, a debtor’s motion to lower plan payments is denied, denial of the motion would be appealable in a circuit that follows the Seventh.
The opinion suggests that courts will read Bullard narrowly when convinced that the bankruptcy court made a mistake.
Mootness
The debtors next argued that the appeal was moot because it came to the circuit court after the debtors had made all payments under their five-year plan. They relied on Section 1329(c), which provides that the court may not approve a plan modification calling for payments over a period exceeding five years.
There was a live dispute, and no mootness, Judge Adelman said, because the bankruptcy court on remand could still find the debtors in default and deny their discharges.
The opinion throws the debtors a lifeline by saying that the bankruptcy court “might allow” the debtors to cure the default by paying the extra $15,000 that creditors would have received had the bankruptcy judge granted the trustee’s motion initially.
Although the debtors would be making payments outside the five-year commitment period, Judge Adelman said that those payments would not be “provided for” by the modified plan, thus not bringing Section 1329(c) into play. Rather, he said, the payments would be made to cure default. In that respect, the opinion cites cases allowing chapter 13 debtors to cure payment defaults after the five-year period has expired.
The debtors next argued that the appeal was moot because Section 1329(a) provides that a plan may only be modified “before the completion of payments.” Judge Adelman interpreted the section to mean, however, that the bankruptcy court may approve a modification outside the five-year period so long as the motion to modify was made within the period.
Again, the ruling on mootness can benefit debtors in other cases, for instance, if the bankruptcy court denies a motion to lower payments and an appellate court reverses after plan payments were completed. In the meantime, however, the debtors have been making payments they cannot afford, or they might have seen their case dismissed if they did not pay. And if the debtors win on appeal, must the trustee recover payments from creditors, or is the trustee personally liable? A prudent trustee might hold back the excess payments pending appeal.
The Merits
Reaching the merits, the appeals court noted how the debtors conceded that the bankruptcy court has power to increase plan payments in a proper case.
The circuit court said that Section 1329, on plan modifications, does not contain “explicit standards” for deciding when a plan can be modified. Instead, Congress “left the development of those standards to the courts.” Here, the trustee sought modification because the debtors’ income had increased “substantially.”
In its holding on the merits, the Seventh Circuit said that a bankruptcy court has discretion to raise plan payments if “a change in the debtor’s financial circumstances makes an increase in payments affordable.” The appeals court preceded the holding by citing cases that permit alteration of plan payments when the debtors’ financial circumstances have changed.
On Remand
Because the district court had not decided whether an increase in payments was factually warranted, the circuit court remanded, presumably for the district judge to decide whether the bankruptcy court’s findings of fact were reversible.
Reversing and remanding does not necessarily mean that that the debtors will be required to pay the additional $15,000 because the holding on the merits appears to enable the debtors to argue that an increase is not “affordable.”
The Debtor’s Counsel
On appeal, the debtors were represented pro bono by former Bankruptcy Judge Eugene R. Wedoff. Retired from the bench, Judge Wedoff is taking cases without fee that raise important issues in bankruptcy law.