If the law changes dramatically after confirmation of a plan, the Seventh Circuit tells us that the debtor must move within one year of confirmation to amend the plan. Otherwise, the debtor will be stuck with the original plan and a provision no longer reflective of the law.
The debtors confirmed a 60-month chapter 13 plan that dealt with a $30,000 claim by the state for overpayment of public assistance. The plan treated the state’s claim as having Section 507(a)(1)(B) priority as a “domestic support obligation.” Owing secured debt and unpaid taxes, the plan would have paid little of the state’s priority support claim.
Four months after confirmation, the Seventh Circuit handed down In re Dennis, 927 F.3d 1015 (7th Cir. 2019). In Dennis, the Chicago-based appeals court held that overpayments of public assistance are not entitled to Section 507(a)(1)(B) priority as a “domestic support obligation.” To read ABI’s report on Dennis, click here.
Had Dennis been the law when the debtors confirmed their plan, the duration of the plan would have been only 36 months, saving them considerable amounts. However, the debtors and their counsel did not become aware of Dennis until more than one year after the plan was confirmed.
Finally aware of Dennis, the debtors filed a motion objecting to the state’s priority claim about 17 months after confirmation. According to the July 12 opinion by Circuit Judge Frank H. Easterbrook, the bankruptcy court “sensibly treated” the application as a motion to amend the plan, not as a claim objection.
Over the state’s objection, the bankruptcy court eliminated the state’s priority status and shortened the duration of the plan from 60 to 36 months. The state appealed, and the Seventh Circuit agreed to hear a direct appeal.
The eight-page opinion by Judge Easterbrook is largely an exploration of the grounds for not allowing the bankruptcy court to amend the plan. We will mention just a few. So our readers will not be held in suspense, Judge Easterbrook saw no basis for amending the plan and reversed.
Judge Easterbrook found his own reasons for reversal, not those proffered by the state.
First, the state argued that the confirmed plan was binding on the debtors under Section 1307(a). Judge Easterbrook said it was proper to say that the plan was binding on the debtors “unless modified.”
Although binding, Judge Easterbrook said that confirmation orders “like other kinds of judicial orders . . . may be revisited and changed through authorized means.”
Judge Easterbrook said that Section 1329 did not supply grounds for amending the plan, “for good reason.” That section, he said, contains “a lengthy list of authorized changes, but eliminating the priority of a claim . . . is not among the sorts of changes covered by Section 1329.”
Nonetheless, Section 1329 was not the debtor’s only potential salvation. Judge Easterbrook identified Civil Rule 60(b)(1), made applicable by Bankruptcy Rule 9024. The rule allows relief from a judgment attributable to a “mistake,” among other grounds. As Dennis demonstrated, belief that the claim was entitled to priority was a mistake.
Judge Easterbrook said that the debtors “could have sought timely relief under Rule 60(b)(1) . . . when Dennis was decided,” but they did not. They did not move to modify the plan until more than one year had elapsed since confirmation, and Rule 60(b)(1) has a time limitation of one year under Rule 60(c)(1).
Bankruptcy Rule 9024(1) provides that the time limitations in Rule 60(c) do not apply to a motion to reopen a case or to reconsider allowance of a claim that had been allowed without contest, but Judge Easterbrook said it was no help for the debtors.
The debtors’ best hope might have been the catch-all in Rule 60(b)(6), which allows relief from a judgment for “any other reason that justifies relief.” However, Rule 60(c) requires that the motion be made “within a reasonable time.”
Judge Easterbrook said it was “hard to see” how 17 months was “reasonable.”
Judge Easterbrook ended his opinion by considering whether the state had waived its right to rely on the time limitations governing Rule 60(b).
In the court below and in briefing in the circuit, neither party had mentioned Rule 60(b). Indeed, the rule wasn’t mentioned until questions from the bench at oral argument. Judge Easterbrook said that the state could not forfeit a right “by remaining silent about a topic to which its adversary and the judge never adverted.”
“A bankruptcy court needs authority from a statute, rule, or the litigant’s consent to modify a confirmed plan of reorganization,” Judge Easterbrook said. Reversing, he said, “Modification is possible in principle, but the [debtors] acted too late to use Rule 60(b), the best if not the only source of authority for the relief they were seeking.”
Observation
Assuming other courts would agree with Judge Easterbrook, the opinion seems to mean that a change in decisional law would similarly require modification of a chapter 11 plan within one year of confirmation.
If the law changes dramatically after confirmation of a plan, the Seventh Circuit tells us that the debtor must move within one year of confirmation to amend the plan. Otherwise, the debtor will be stuck with the original plan and a provision no longer reflective of the law.
The debtors confirmed a 60-month chapter 13 plan that dealt with a $30,000 claim by the state for overpayment of public assistance. The plan treated the state’s claim as having Section 507(a)(1)(B) priority as a “domestic support obligation.” Owing secured debt and unpaid taxes, the plan would have paid little of the state’s priority support claim.