Fourth Circuit Stands Alone in Limiting Chapter 13 Plan Modifications

Taking sides with the majority on a circuit split, the Eleventh Circuit upheld the bankruptcy court by ruling that an unanticipated change in circumstances is not required to justify the modification of a confirmed chapter 13 plan.

In the August 25 opinion, the appeals court found no “reason to add gloss to the statute Congress wrote” by imposing a condition to plan modification not contained in Section 1329.

Parting company with the Fourth Circuit, the Eleventh Circuit took sides with the First, Fifth and Seventh Circuits in holding that res judicata does not preclude modification of a confirmed chapter 13 plan.

Plan Modification to Lower Payments to Unsecured Creditors

The debtor owned a home with two mortgages. The chapter 13 plan was based on an assumption that the second mortgage was unperfected, thus creating a net of about $20,000 for distribution to unsecured creditors if the case were a chapter 7 liquidation.

To comply with the best interests test, the plan called for paying $450 a month for 60 months, to give unsecured creditors more than $20,000 and cover counsel’s basic fee of about $4,500.

However, counsel for the debtor did not file a fee application before confirmation to cover the additional $8,000 spent in voiding the second mortgage for lack of perfection.

After confirmation, the debtor’s counsel filed a motion to modify the plan along with a fee application for the $8,000 in post-petition fees. To pay the extra $8,000, the plan modification lowered the unsecured creditors’ distribution to $12,000.

The chapter 13 trustee objected to confirmation, contending that the confirmed plan was res judicata and that the additional counsel fees were not unanticipated.

Bankruptcy Judge James R. Sacca of Atlanta overruled the objection and confirmed the amended plan. In re Guillen, 570 B.R. 439 (Bankr. N.D. Ga. April 10, 2017). Click here to read ABI’s report on Judge Sacca’s opinion.

Given the circuit split on a pure issue of law, Judge Sacca sua sponte certified a direct appeal to the circuit court. The Eleventh Circuit accepted the appeal.

The Res Judicata Exception for Plans

Writing for the court of appeals, Circuit Judge Stanley Marcus began by saying that confirmed chapter 13 plans are treated like final judgments under Section 1327. However, he said that Section 1329 “carves out a limited exception to this general rule” by allowing plan modifications “so long as they satisfy certain statutory requirements.”

Section 1329 specifies four permissible modifications to a plan. Applicable to the case on appeal, subsection (a)(1) permits modification to “increase or reduce the amount of payments on claims of a particular class. . . .”

Judge Marcus said that the chapter 13 trustee wanted the court “to read one additional requirement into Section 1329 — that debtors show some change in circumstances before modifying confirmed plans.”

Judge Marcus declined “to graft this requirement onto the statute.” He said the court could end its analysis with the “plain text” of Section 1329.

However, Judge Marcus went on to buttress his conclusion “by reference to the broader statutory scheme.” He listed several instances in the Bankruptcy Code where the statute requires the court to consider “circumstances.”

‘Circumstances’ Not in Section 1329

Using the term elsewhere shows that Congress knew how to require consideration of “circumstances,” but the concept is not contained in Section 1329. He alluded to the chapter 11 counterpart in Section 1127(b), where a plan may be modified “only if circumstances warrant such modification.”

For individuals in chapter 11, however, the “circumstances” condition is omitted in Section 1127(e). Judge Marcus observed that Section 1127(e) is “virtually identical to Section 1329(a).”

Judge Marcus answered the Fourth Circuit’s argument that courts would be swamped with modifications if there were no requirement for unanticipated, changed circumstances.

Being “unpersuaded,” Judge Marcus said that “general policy concerns cannot overcome the plain language of the statute.” In addition, “Congress built ample safeguards into Section 1329 that stand in the way of frivolous modifications.”

Judge Marcus had one final hurdle to overcome: dicta in a prior Eleventh Circuit opinion.

In In re Hoggle, 12 F.3d 1008, 1011 (11th Cir. 1994), the Eleventh Circuit said that “Congress designed § 1329 to permit modification of a plan due to changed circumstances of the debtor unforeseen at the time of confirmation.”

Hoggle was construing a different provision, Section 1322(b)(5). In addition to the fact that the statement was dicta, Judge Marcus said that an “unforeseen change in circumstances is a good reason to permit a modification that otherwise satisfies § 1329. But that is not to say it is the only reason.”

Judge Marcus affirmed Bankruptcy Judge Sacca, holding that “a debtor need not make any threshold showing of a change in circumstances before proposing a modification to a confirmed plan under § 1329.”