When a chapter 13 debtor has excess disposable income not being paid to creditors every month, some courts in Texas have been imposing a so-called Molina provision on the plan that bars the debtor from receiving a discharge if unsecured creditors are not paid in full.
The Fifth Circuit held on June 8 that including so-called Molina language in a plan violates the debtor’s right to modify the plan under Section 1329.
The debtor had less than $7,800 in unsecured claims. He proposed a five-year plan to pay his secured and unsecured creditors in full with payments of about $1,000 a month through the chapter 13 trustee.
After the monthly payments, the debtor had excess disposable income of about $1,100 a month. The trustee therefore urged the court to deny confirmation unless the debtor acceded to including Molina language in the plan.
In substance, a Molina provision provides that a debtor may not modify his or her plan unless unsecured creditors are paid 100%. It further provides that the debtor will not receive a discharge unless unsecured creditors are paid in full.
The debtor reluctantly included a Molina provision in the plan, but he appealed confirmation. The district court certified the case for a direct appeal to the Fifth Circuit. The appeals court accepted the appeal.
Circuit Judge Leslie H. Southwick vacated the confirmation order. He explained that the Molina provision derives its name from a district court opinion in the Western District of Texas: Molina v. Langehennig, 14-926, 2015 WL 8494012, at *1 (W.D. Tex. Dec. 10, 2015). The district court had upheld confirmation of a 100% plan that included language preventing the debtor from receiving a discharge unless unsecured creditors were paid in full, because the debtor had excess monthly disposable income. To read ABI’s report on Molina, click here.
The appeal turned chiefly on Sections 1325(a), 1325(b)(1), and 1329. Section 1325(a) provides that the court “shall” confirm the plan if it complies with chapter 13 and with applicable provisions in the Bankruptcy Code.
Of particular significance, Section 1325(b)(1) provides that the court may not confirm a plan unless it (1) pays unsecured claims in full, or (2) devotes all of the debtor’s projected disposable income to the payment of unsecured claims.
Even though he was not paying all of his disposable income to the trustee each month, the debtor argued that he was entitled to confirmation because he satisfied Section 1325(b)(1)(A) by promising to pay unsecured creditors in full.
Judge Southwick agreed. Because Section 1325(b)(1) uses the disjunctive “or,” the debtor was not required in addition to comply with 1325(b)(1)(B) by paying all of his disposable income to creditors every month. In other words, the debtor was entitled to stretch out payments, so long as unsecured creditors are ultimately paid in full.
The trustee contended that the Molina provision was designed to prevent creditors from bearing the risk that the debtor will retain some of his disposable income but default on the plan and not pay everyone in full.
Judge Southwick responded by saying that the court could not impose the Molina provision by exercising equitable powers under Section 105(a), because equity cannot override explicit provisions of the Bankruptcy Code, citing Law v. Siegel, 571 U.S. 415, 421 (2014). He buttressed his conclusion by saying that a chapter 13 trustee has no statutory power to control the debtor’s use of excess disposable income.
Significantly, Judge Southwick rejected the trustee’s contention that a debtor’s retention of excess disposable income “is inherently bad faith and manipulation of the Code.” He also rejected the trustee’s argument that Section 1325(b)(1)(A) specifies the minimum that a debtor must pay.
Judge Southwick rested his conclusion on the plain language of the statute and Section 1325(b)(1)’s use of “or.” In other words, “a debtor does not need to comply with both subsection[s] (b)(1)(A) and (b)(1)(B).”
Although he was tempted to do so, Judge Southwick did not rest the decision on Section 1325(b)(1). Instead, he decided that the “Molina language violates Section 1329.” That provision entitles a debtor to amend a plan after confirmation, so long as the amended plan complies with confirmation standards.
However, Judge Southwick added a caveat. If “a debtor in bad faith requests a modification of the plan, it is within the bankruptcy court’s discretion to deny that request,” he said.
Judge Southwick vacated the confirmation order and remanded the case for the court to make findings of fact required for confirmation, such as good faith.
When a chapter 13 debtor has excess disposable income not being paid to creditors every month, some courts in Texas have been imposing a so-called Molina provision on the plan that bars the debtor from receiving a discharge if unsecured creditors are not paid in full.
The Fifth Circuit held on June 8 that including so-called Molina language in a plan violates the debtor’s right to modify the plan under Section 1329.
The debtor had less than $7,800 in unsecured claims. He proposed a five-year plan to pay his secured and unsecured creditors in full with payments of about $1,000 a month through the chapter 13 trustee.
After the monthly payments, the debtor had excess disposable income of about $1,100 a month. The trustee therefore urged the court to deny confirmation unless the debtor acceded to including Molina language in the plan.
In substance, a Molina provision provides that a debtor may not modify his or her plan unless unsecured creditors are paid 100%. It further provides that the debtor will not receive a discharge unless unsecured creditors are paid in full.
The debtor reluctantly included a Molina provision in the plan, but he appealed confirmation. The district court certified the case for a direct appeal to the Fifth Circuit. The appeals court accepted the appeal.