07/11/2020
Chapter 13 Plan Need not Be of Fixed Duration
Posted by NCBRC - July 11, 2020
In an important win for debtors, the Ninth Circuit held that “no express provision of Chapter 13, even when viewed in the context of its broader structure, prohibits plans with estimated lengths.” In re Sisk, No. 18-17445 (9th Cir. June 22, 2020) (reported below as In re Escarcega). In an opinion in which the circuit court adopted the bulk of the debtors’ arguments, the court reversed and vacated the BAP’s holding that the Bankruptcy Code imposes an implied temporal requirement on all initial Chapter 13 plans.
Prior to 2016, bankruptcy debtors in the Northern District of California were permitted to maintain chapter 13 plans with an estimated duration. In February, 2016, however, the bankruptcy judges in the district created a Model Plan requiring that chapter 13 plans have a fixed duration. Notwithstanding the model plan, the debtors in this consolidated appeal filed proposed plans with estimated durations. The bankruptcy court held an initial confirmation hearing within 45 days of the meeting of creditors but delayed final disposition until after 45 days had elapsed. Although neither the trustee nor any creditors objected to the plans, the bankruptcy court rejected them. The court found that the plans as proposed were “self-modifying” in violation of sections 1328(a) and 1329(b), and that the plans were proposed in bad faith. The BAP affirmed. On remand, the bankruptcy court confirmed the debtors’ revised plans with fixed durations. The Ninth Circuit granted leave for direct appeal.
Standing
In the wake of Bullard v. Blue Hills Bank, 135 S. Ct. 1686, 1690 (2015), debtors seeking to appeal denial of plan confirmation, have had to take the counter-intuitive tack of amending their plans and then appealing the order of confirmation. On appeal, the circuit court found that it could review the bankruptcy court’s denial of the debtors’ original plans. Before commencing discussion of the substantive issue of whether a chapter 13 plan may be confirmed when it provides for an indefinite duration, however, the court addressed the issue of jurisdiction and standing. In this case, because no party had objected to the original plan and the debtors were appealing the action of the bankruptcy court, no party stood in opposition to the debtor/appellants.
Addressing standing, the court found that the debtors’ suffered a concrete injury consisting of their inability to file, have confirmed, and obtain a discharge upon completion of a plan of their choosing. Because of the requirement that they fix a duration for their plans, the debtors were likely to suffer the burden and expense of seeking modification during their plans or pay more to unsecured creditors than contemplated by their plans. The court concluded, therefore, that the debtors had constitutional standing to proceed.
The court turned to the question of prudential standing under which the appellant must show himself to be an “aggrieved” person, noting that bankruptcy proceedings are unique in that they often involve diverse parties whose interests may be affected by an appeal. But where the “aggrieved person” requirement has been found to be relevant when the appellant is a remote non-party, the test is inapplicable when the appellant is, as here, the party that brought the motion under appeal. In this case, given that the debtors were the only parties to this appeal concerning their own plan proposal, the court found that they did not need to show prudential standing.
Finally, the court found that the lack of an adversarial party to the appeal did not deprive it of jurisdiction. As a practical matter, the court found that “[i]f deprived of appellate jurisdiction here, Debtors would be powerless to vindicate their statutory or constitutional rights from infringement in the lower courts merely because creditors acquiesced to it.”
Plan Confirmation
Addressing the substantive issue of plan confirmation, the circuit court began by noting that section 1322(b)(11) allows a debtor to include any plan provision that does not conflict with the Code. The Court rejected the BAP’s finding of an “implied” requirement for initial Chapter 13 plans, which the BAP acknowledged was not clearly set forth in the Code, and emphasized the need to apply long-established rules for statutory construction – beginning with the plain language of the statute, which the BAP failed to do (as argued by the debtors).
With respect to duration of a chapter 13 plan, section 1322(d) mandates generally that an above-median debtor’s plan not exceed five years, and that a below-median debtor’s plan not exceed three years. Upon objection to a plan by the trustee or a holder of an unsecured claim, section 1325(b)(4) provides that debtors may be required to fix three or five years as minimum plan terms. Within those parameters, however, the Code is silent as to whether plan duration must be fixed or whether, as here, it may be estimated. The court reasoned that, “[t]he clear implication of this framework is that, for plans with no objection, the Code provides no minimum or fixed durations. Coupled with the additional grant allowing debtors to ‘include any other appropriate provision not inconsistent with [Chapter 13]’ in their plans, § 1322(b)(11), we believe the Code permits a debtor to add an estimated term provision, so long as the plan does not draw an objection.”
In further support of this conclusion the court noted that section 1328(a) provides that discharge follows on the heels of completion of plan payments rather than upon expiration of plan duration.
The court turned to the BAP’s concern that allowing chapter 13 plans of no fixed duration would render section 1329’s modification rights and requirements a nullity. As an initial matter, the court disagreed with the BAP’s reasoning that the fact that section 1329 includes the possibility of modifications to a plan’s length suggests that the length must be fixed ab initio. The court also disagreed with the BAP’s conclusion that the estimated duration essentially permits debtors to make modifications without adhering to the requirements of section 1329. The court found that once the debtor completes all plan payments under the plan, section 1328’s discharge provision is triggered. “Discharge of a plan and modification of a plan are governed by different provisions with different purposes. In this way, a debtor who seeks a discharge earlier than previously estimated after paying off all listed creditors’ claims is not requesting a modification at all.” The court observed that until such time as the debtor receives a discharge any party may move for modification.
Adopting the arguments put forth by the debtors, the court went on to discuss and distinguish cases relied on by the BAP.
In In re Fridley, 380 B.R. 538 (B.A.P. 9th Cir. 2007), the BAP held that when a confirmed plan specifies a fixed term, the debtor seeking to prepay in order to obtain an early discharge, must first modify the plan under section 1329. The court here emphasized that the holding in Fridley was dependent upon the fact that the plan itself included a temporal requirement which had to be fulfilled before the debtor was entitled to discharge. “So, as relevant here, Fridley merely tells us that a debtor who commits to a fixed duration is committed to the fixed duration.”
In In re Flores, 735 F.3d 855, 856 (9th Cir. 2013) (en banc), the court read a temporal requirement into section 1325(b)(1)(B) under which a plan could be confirmed after objection only if its length was “at least equal to the applicable commitment period under § 1325(b)(4)” of three or five years. The Flores court reasoned that the temporal requirement protected the creditor’s right to seek modification should the debtor’s ability to pay improve during the life of the plan.
In finding that Flores did not support the BAP’s decision below, the court here stressed that the temporal requirement set forth in Flores was triggered by a party’s objection to the debtor’s plan and the application of section 1325(b)(1)(B). The court explained that “[n]othing in Flores’ text or rationale compels the conclusion that a fixed duration must be included in all plans. If Congress intended this end, it could have easily said so by removing the objection trigger of § 1325(b)(1)(B).”
The court likewise rejected the BAP’s expansive interpretation of In re Anderson, 21 F.3d 355 (9th Cir. 1994), which held that the chapter 13 trustee could not compel a plan provision allowing the trustee to adjust the periodic plan payments without a court order. The Ninth Circuit clarified that Anderson prohibits imposing greater burdens on a chapter 13 debtor than those imposed by the Code. In this case, however, the Code does not prohibit estimated plan duration, and therefore, imposition of that requirement would contravene the holding in Anderson.
Finally, the court turned to the BAP’s reliance on the supposition that Congress intended BAPCPA to benefit unsecured creditors and that a requirement that a chapter 13 plan be of a specified duration would further that policy. Noting that the BAP relied on one cherry-picked comment in the legislative history, the court found that, even if creditor partiality were the driving force behind BAPCPA—a proposition it found dubious—Congress could have included a requirement for fixed duration had it chosen to do so.
Having concluded that the bankruptcy court erred in declining to confirm the debtors’ plans including the provisions for estimated duration, the court reversed that portion of the BAP decision.
The court next turned to the BAP’s finding that the debtors proposed their plans in bad faith in violation of section 1325(a)(3). The court noted that the only specific instance of bad faith was the estimated plan duration and that the BAP had failed to undertake a fact-based analysis as required by long-established precedent. Having found that that plan provision was permitted by the Code, the court found that it could not form the basis for a finding of bad faith. The court noted that, until February, 2016, the plan provision at issue was expressly permitted by the district’s model plan. To the extent indefinite plan durations could negatively impact unsecured creditors, the court left that issue for Congress to address. The court vacated the BAP holding on this issue.
Procedural Issue
Finally, the court rejected the debtors’ argument that by not concluding the confirmation hearing more than forty-five days after the conclusion of the creditor’s meeting was a violation of local rules and section 1324(a) – (b) which requires a court to hold a confirmation hearing within 20 to 45 days of the meeting of creditors. The court held that the bankruptcy court was required only to hold a confirmation hearing within that time frame, but that the hearing need not necessarily be concluded within that time. A bankruptcy court has discretion to maintain its docket to address issues pertaining to confirmability even if some delay in confirmation results. The court affirmed the BAP on this issue.
Congratulations to Norma Hammes and Ike Shulman on this fantastic win!
Sisk 9th CIr June 2020
Tags: Plan confirmation
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