Proceeds of settlement of a personal injury claim go to creditors under a chapter 13 plan, even if the commitment period ran out, a district judge in Alabama ruled in reversing the bankruptcy court.
A woman confirmed a five-year plan paying nothing toward more than $62,000 in unsecured claims. Although her income was low enough that she would have qualified for a three-year commitment period, she elected to have a longer plan to keep her car by paying off the auto loan in full.
As luck would have it, she totaled the car and got approval from the bankruptcy court to substitute collateral with proceeds from property damage insurance. About two weeks after the three-year commitment period expired, she got court approval to hire counsel, who quickly won a personal injury settlement for her.
The bankruptcy court approved the settlement, which generated about $12,000 after payment of counsel fees. Because the debtor was still making payments under her five-year plan, the chapter 13 trustee moved to modify the plan and apply the $12,000 toward payment of unsecured claims.
The bankruptcy judge denied the motion to modify the plan, because the three-year commitment period had elapsed.
Chief District Judge W. Keith Watkins of Montgomery, Ala., reversed, effectively giving the net settlement proceeds to unsecured creditors under the plan.
Under the Eleventh Circuit’s Waldron decision, Judge Watkins said that the settlement proceeds were property of the chapter 13 estate because they came in “during” the bankruptcy.
Next, he agreed with the bankruptcy court to the extent that “cause” must be shown under Section 1329(c) for modification of a plan even after the commitment period has run out.
Viewing the totality of the facts, Judge Watkins drew a “definite and firm conviction” that the bankruptcy judge erred in finding no “cause.” He said the debtor took on a five-year plan voluntarily. With the benefit of discharging $62,000 in unsecured debt, the debtor assumed the burden of devoting future earnings to the payment of creditor claims.
Sitting “in equity when reviewing a bankruptcy appeal,” Judge Watkins said that “equity does not countenance a result that allows [the debtor] to gain the benefits of chapter 13 bankruptcy without shouldering its attendant burdens.”
He found “cause” for modification in the “unmistakable lack of balance between benefits and burdens.” He also smelled a “whiff of gamesmanship” given how the debtor waited nine months to disclose that she was contemplating a personal injury suit.
Judge Watkins held that the order denying the trustee’s motion to modify the plan was a final order entailing an automatic right to appeal under 28 U.S.C. § 158(a)(1), even though the Supreme Court held in Bullard that denial of confirmation of a debtor’s plan is not a final order. He reasoned that the debtor’s obligations were “settled” as a consequence of denial of the motion to modify. In Bullard, the debtor’s rights were unsettled because denial of confirmation was only one step toward eventual approval of a plan, he said.
Judge Watkins was the author of EMC v. Acosta-Coniff, which is scheduled for argument next month in the Eleventh Circuit. There, he held that a teacher’s voluntary decision to obtain advanced degrees made her student loans impossible to discharge, even though her income was wholly insufficient to repay the debt. To read ABI’s discussion, click here.