Bankruptcy Judge Henry A. Callaway of Mobile, Ala., ruled last year that settlement proceeds resulting from postpetition personal injury claims were not disposable income and should not increase creditors’ recoveries in chapter 13 cases.
On appeal, a district judge in Alabama disagreed, concluding that settlement proceeds from postpetition personal injury claims are “additional disposable income” that will ordinarily enhance creditors’ recoveries in chapter 13.
Although the district judge differed with the bankruptcy judge’s general rationale, he allowed the debtors to retain settlement proceeds, finding no abuse of discretion by Bankruptcy Judge Callaway in denying motions by the chapter 13 trustee to modify the debtors’ confirmed plans.
The Postpetition P.I. Claims
Two chapter 13 debtors had confirmed their plans. More than six months after filing, both were injured. One had a slip-and-fall claim, and the other had a claim after merchandise fell on her head.
The net settlement proceeds were about $20,000 for one debtor and less than $8,000 for the other. Both had already exhausted their personal property exemptions, so the net proceeds were not exempt.
The chapter 13 trustee filed motions to modify both debtors’ plans. In one case, applying the net proceeds to plan payments would raise the recoveries by unsecured creditors from 40% to 77%. For the other debtor, the recoveries would rise from 62% to 77%.
Bankruptcy Judge Callaway allowed the debtors to keep the recoveries resulting from their postpetition personal injury claims, although he structured the payments so creditors would be assured of receiving their originally promised distributions. See In re Hill, 652 B.R. 212 (Bankr. S.D. Ala. May 30, 2023). To read ABI’s report, click here.
A Reversal, Almost
The chapter 13 trustee appealed, and District Judge Kristi K. DuBose almost reversed in an opinion on January 12, 2024.
On the merits, everyone agreed that the settlement proceeds were estate property under Section 1306(a). The trustee’s motions to modify the plans were subject to the best interests test in Section 1325(a) and to the notion of projected disposable income in Section 1325(b)(1)(B).
The best interests test means that distributions under the plan must be at least what creditors would receive “if the estate of the debtor were liquidated under chapter 7 of this title on” the filing date. Judge DuBose said that the “issue in dispute is what assets are included in the liquidation analysis under Chapter 7.”
Bankruptcy Judge Callaway decided that the settlement proceeds would not be included in the liquidation analysis because they would not be included in a hypothetical chapter 7 liquidation under Sections 541(a) or 348(f). The latter says that “property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.”
In the opinion of Judge Callaway, the settlement proceeds would not be included in the liquation test because the settlement proceeds did not exist on the chapter 13 filing date and, thus, would not be included in the estate on conversion to chapter 7.
On appeal, the trustee argued that Section 348(f) did not apply because the case was not actually converted. Judge DuBose agreed. She followed the majority of courts, which have held that the “effective date of the plan” means the date of the plan’s modification, not the original filing date.
When an asset comes into the estate after confirmation, Judge DuBose said that it “must be valued as of the date of modification for purposes of 11 U.S.C. § 1325(a)(4) and the value should be added to the previously calculated ‘best interests of creditors’ test result at confirmation.”
Alternatively, Bankruptcy Judge Callaway believed that the settlement proceeds were an asset, not projected disposable income. Judge DuBose “agree[d] that the settlement proceeds do not meet the definition of ‘disposable income’ as used in an initial plan confirmation, but nevertheless may be considered as additional disposable income.” She followed In re Peebles, 500 B.R. 270 (Bankr. S.D. Ga. 2013).
Discretion
By this point, Judge DuBose had disagreed with the grounds on which Bankruptcy Judge Callaway had denied the motions to modify the plans, but Judge DuBose was not through. Next, she analyzed the exercise of Judge Callaway’s discretion, saying that “the statute reserves to the discretion of the bankruptcy court whether to confirm a modified plan.”
Bankruptcy Judge Callaway had seen the settlements as compensation for the loss of good health and the ability to live pain-free and thus were not new assets coming into the estates.
Although Judge DuBose did not agree with the idea that the settlements amounted to a substitution of assets, she “[did] not find that the Bankruptcy Court abused its discretion.” Reviewing the debtors’ overall financial conditions, she saw no abuse of discretion and affirmed denial of the motions to modify the plans.
Observations
What if the debtor had a postpetition auto accident, “totaled” the car and received $10,000 from insurance to buy another car? Would the $10,000 go to creditors? Wouldn’t the $10,000 be nothing more than a substitution of assets that did not improve the debtor’s financial condition?
This writer doubts that a court would take away the $10,000 and leave the debtor without a car.
Why is compensation for personal injury any different?
Bankruptcy Judge Henry A. Callaway of Mobile, Ala., ruled last year that settlement proceeds resulting from postpetition personal injury claims were not disposable income and should not increase creditors’ recoveries in chapter 13 cases.
On appeal, a district judge in Alabama disagreed, concluding that settlement proceeds from postpetition personal injury claims are “additional disposable income” that will ordinarily enhance creditors’ recoveries in chapter 13.
Although the district judge differed with the bankruptcy judge’s general rationale, he allowed the debtors to retain settlement proceeds, finding no abuse of discretion by Bankruptcy Judge Callaway in denying motions by the chapter 13 trustee to modify the debtors’ confirmed plans.