A chapter 13 bankruptcy allows a defaulted homeowner the unique benefit of saving real property, along with other secured debt. Given the benefits of chapter 13, this particular type of bankruptcy has the ability to help a large mass of people, and as such requires an orderly administration. Chapter 13 Trustees — guided by Code provisions and bankruptcy rules — are the gatekeepers for this administration. While these trustees do a remarkable job in ensuring that debtors, creditors and other entities comply with procedural requirements, occasional oversights are expected.
The case of In re Carter, No. 17BK03367, 2022 WL 953495, at *16–17 (Bankr. N.D. Ill. Mar. 30, 2022), serves as a cautionary tale for chapter 13 trustees (as well attorneys representing interested parties in chapter 13 cases). In considering competing motions from the chapter 13 trustee (a motion to dismiss) and a debtor’s motion to modify, the Carter court applied equitable principles to address a difficult scenario. The Carter debtor navigated his way through the entirety of a chapter 13 case, and, prior to the completion and closure of the case, the chapter 13 trustee sought dismissal of the case on the grounds that the debtor was in default under the confirmed plan in the amount of $15,800.58.
The trustee’s motion was premised on an alleged failure by the debtor to submit tax returns and tax refunds during the debtor’s case. The chapter 13 confirmation order included a “tax turnover commitment” provision requiring the debtor to submit tax refunds (each year) to the chapter 13 trustee. The debtor argued (and filed a modified plan to combat the trustee’s motion) that the trustee’s enforcement of the tax turnover commitment had been inequitable. The debtor claimed that the trustee lulled the debtor into believing that only the tax returns were required, and not tax returns and tax refunds. Furthermore, the debtor argued that it was manifestly unfair for the trustee to wait until the debtor was at the end of a 60-month plan to raise the issue, especially in light of the trustee’s earlier failures to act. The trustee relied on the terms of the plan and confirmation order and asserted that the debtor must correct the underpayment or forfeit a discharge.
In ruling in the debtor’s favor, the court indicated that the debtor’s opposition to the trustee’s motion to dismiss addressed an understandable confusion that could arise when a chapter 13 neglects, over an extended period, to act in a way consistent with a debtor’s plan obligations. Rule 60 presented an equitable avenue to relieve the debtor from the confirmation order. The court explained that the trustee’s oversight in waiting to enforce the tax turnover provision until the end of the plan was both unreasonable and inexcusable. The court also explained that the debtor was significantly prejudiced and “cannot now solve the conundrum he faces.”
Based on this reasoning, the court analyzed how (and if) the debtor’s motion to modify could be approved. Rule 60(b)(5) invokes principles of fairness, referring to “just terms,” where applying an order is no longer equitable. The court concluded that the debtor acted within a reasonable time in seeking relief through the motion to modify, and as it relates to “just terms,” the court held that applying the tax turnover provision prospectively — so as to deny the debtor completion of the plan — is no longer equitable. In denying the trustee’s motion, the court found that dismissal would be inequitable (and forgiveness not inequitable). As a result, the court determined that the requirements of Rule 60(b)(5) were met and granted the debtor’s motion to modify, and the debtor’s failure to perform the tax turnover provision was forgiven.
Carter was the right result in light of many years of failed monitoring, but it also should be a difficult lesson for everyone. Diligent observation on all sides ensures that all results are equitable without any judicial involvement.