Equity Can’t Bar a Chapter 13 Discharge After the Debtor Makes All Plan Payments

Building on Law v. Siegel, a district judge in Kansas upheld Bankruptcy Judge Robert E. Nugent and ruled that the debtors were entitled to chapter 13 discharges because they had completed their plan payments on time, even though the debtors’ misconduct would have resulted in a loss of discharge if the bankruptcy court had a reservoir of equitable power to overcome the command of the statute.

The debtors amended their plan several times after confirmation. In the last year of the plan, the chapter 13 trustee filed a motion to dismiss the case because the debtors were behind in plan payments and had not paid all their income taxes. Before the hearing on the motion to dismiss and before the end of the five-year plan, the debtors had paid their taxes and all plan payments.

At the hearing on the motion to dismiss, Judge Nugent of Wichita, Kan., found “ample cause to dismiss the case under Section 1307(c)” given the debtors’ material defaults and lack of good faith. More particularly, the debtors had misrepresented and concealed a dramatic increase in income, failed to disclose bank accounts, and incurred debt without the trustee’s consent, all in violation of the plan and confirmation order.

If he had discretion, Judge Nugent said, he would deny a discharge and dismiss the case. He nonetheless held that he was compelled to enter the debtors’ discharges because Section 1328(a) provides that “the court shall grant the debtor a discharge” after “completion of all payments under the plan . . . .” District Judge Eric F. Melgren of Wichita upheld Judge Nugent in an opinion on October 31.

The outcome in part was a function of the difference in language between the two pivotal statutes. Where Section 1328(a) says the court “shall” grant a discharge if the debtors complete plan payments, Section 1307(c) says the court “may” dismiss or convert a case for any of several misdeeds, of which these debtors were guilty.

Focusing on the word “shall,” Judge Melgren said that “several courts” have held that the court must grant a discharge once the debtor has completed plan payments. The trustee cited two cases where the court granted dismissal motions after the completion of all plan payments.

Judge Melgren said the cases cited by the trustee were not “persuasive” because neither of them cited Section 1328(a).

Upholding Judge Nugent, Judge Melgren found support by analogy in one of Judge Nugent’s own cases, In re Mills, 539 B.R. 879, 884 (Bankr. D. Kan. 2015). In Mills, Judge Nugent held that “shall,” appearing in Section 1307(b), gives the debtor an absolute right to dismiss because the court only has discretion to dismiss or convert, since Section 1307(c) uses the word “may.”

In Mills, Judge Nugent found support in Law v. Siegel, 571 U.S. 415 (2014), where the Supreme Court held that a bankruptcy court could not exercise equitable powers to invade a debtor’s homestead exemption to pay administrative expenses incurred as a result of the debtor’s misbehavior.

In the case on appeal, there were abundant reasons to deny the debtors’ discharges. According to Judge Melgren, they had not disclosed their increased income, withheld material information, “demonstrated disregard for the bankruptcy process,” and “abused the provisions, purpose and spirit of chapter 13.” Upholding the debtors’ discharges, he said, was “an unsatisfying result as it appears the Debtors gamed the system to their advantage.”

Paraphrasing Judge Nugent, Judge Melgren nevertheless upheld the debtors’ discharges, holding that a court “cannot and should not rewrite the words of a statute even in an effort to obtain an equitable result.”