Seventh Circuit Requires Court Findings for a Plan Provision the Code Allows

The Seventh Circuit, per Circuit Judge Frank Easterbrook, has issued the third in a series of opinions emphatically requiring bankruptcy courts to make case-specific findings of fact when a chapter 13 plans calls for assets to be retained in the estate until the entry of discharge.

The new decision from the Chicago-based appeals court raises the question of whether courts may impose limitations on the inclusion of provisions in a chapter 13 plan that Section 1322(b) permits. The Seventh Circuit evidently believes courts have that power, even when the plan satisfies the statutory requirements for confirmation.

Chicago Parking Ticket Cases

The latest opinion on July 6 again deals with the quest by the city of Chicago to collect parking fines from individuals who file bankruptcy. Parking fines are important because Chicago generates about 7% of the city’s annual income from parking fines and traffic tickets.

Chapter 13 debtors in Chicago had been routinely confirming plans that would retain assets in the estate after confirmation. Before the Seventh Circuit began handing down its decisions, the city could not tow and impound a car with outstanding parking fines since a car would be an estate asset protected by the automatic stay in Section 362.

Revesting in the debtor entails the loss of significant protection because a revested asset is no longer sheltered by the automatic stay. Retaining assets in the estates continues the protection of the automatic stay until discharge.

Retaining estate assets in the estate after confirmation is permitted by statute. Section 1322(b)(9) provides that a plan may “provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity.” Part 7 of the national form of a chapter 13 plan allows a debtor to check a box about the revesting of assets. One box revests on confirmation and the other on the entry of discharge.

The Trilogy of Seventh Circuit Decisions

The progression of decisions in the Seventh Circuit went like this: First, the appeals court held in In re Steenes, 918 F.3d 554 (7th Cir. March 14, 2019) (“Steenes I”), that bankruptcy courts may not, as a general practice, approve chapter 13 plans providing for debtors’ cars to remain estate property after confirmation.

In Steenes I, Judge Easterbrook said the bankruptcy judge must enter a “case-specific order, supported by good case-specific reasons,” to retain an asset in the estate after confirmation. Id. at 558. To read ABI’s report on Steenes I, click here.

Because the appeals court had not answered one of the questions on appeal in Steenes I, the Seventh Circuit granted panel rehearing and reversed the two lower courts in November on the additional question of administrative priority. In re Steenes, 942 F.3d 834 (7th Cir. Nov. 12, 2019) (“Steenes II”). To read ABI’s report, click here.

In Steenes II, Judge Easterbrook held that vehicle fines on an estate-retained car are administrative expenses that must be paid in full. If not paid, the chapter 13 case can be dismissed or the debtor may be denied a discharge even if all other plan payments were made.

While Steenes II was pending, two other Chicago parking ticket cases were percolating to the court of appeals and would become the third opinion by Judge Easterbrook on July 6.

The Third Opinion

The third appeal dealt with a pair of confirmation hearings held five days after Steenes I. Judge Easterbrook characterized the bankruptcy judge as interpreting the statute to allow “debtors to keep assets in the estate without reasons.” According to Judge Easterbrook, the bankruptcy judge “added that the judiciary need not justify approval of a plan reflecting a debtor’s choice.”

When the two plans were confirmed, the city appealed. The circuit court accepted a direct appeal.

In the third appeal, Judge Easterbrook set aside the confirmation orders in both cases. Whether the debtor checks a box in the plan to retain assets or the bankruptcy court uses a form order, he said “there must be a good case-specific reason for” not having the assets revest in the debtor on confirmation.

Judge Easterbrook added, “a desire to obtain free parking . . . is not a good reason.”

Observations

Questions: Does the new opinion require specific findings about all estate assets or only automobiles? What reason is good enough? Is it proper to retain assets in the chapter 13 estate to prevent attachment by creditors with nondischargeable claims? Will other circuits agree?

Although the issue was briefed, the appeals court did not discuss the significance of Section 1322(b)(9), which allows a plan to call for revesting sometime after confirmation.

In the Seventh Circuit, it appears that the court must make specific findings of fact regarding an alternative that the statute gives debtors with regard to the revesting of assets. Although the statute lays out no guidelines for the adequacy of the debtor’s reason about revesting other than the general good faith test, the new opinion is calling on courts to establish standards.

One wonders: How many other permissible provisions in a plan will require bankruptcy courts in the Seventh Circuit to make specific findings of fact alongside confirmation?

This writer is aware that bankruptcy courts in some other circuits allow revesting to occur on the entry of discharge. Perhaps there will be a circuit split one day.

The latest decision from the Seventh Circuit raises the question of whether courts may impose restrictions on the invocation of plan provisions that Section 1322 (b) allows. The case could also be understood to mean that bankruptcy courts in some circumstances must make findings of fact when there is no objection. Cf. United Student Aid Funds Inc. v. Espinosa, 559 U.S. 260 (2010), where the Supreme Court suggested that a bankruptcy court should not confirm a plan that violates a provision in the Bankruptcy Code even in the absence of objection.