The United States Bankruptcy Court for the Eastern District of Michigan recently allowed a debtor to modify his confirmed Chapter 13 plan based upon a mistake by the debtor’s counsel. The result of the modification was to reduce the plan to 36 months from 60 and reduce the repayment to unsecured creditors by 80 percent.
A copy of In re Luman is available at: Link to Opinion.
The debtor identified having total unsecured debt of $84,543.08 and mistakenly proposed a plan to pay these unsecured creditors $5,000 over 60 months. However, the Bankruptcy Code would have required a 36-month plan under these circumstances. Some eight months after the plan was confirmed, the debtor attempted to modify his plan to reduce its length to 36 months and reduce the payment to unsecured creditors to $1000.
The Chapter 13 Trustee objected to the proposed modification because the plan’s confirmation bound the debtor to the 60-month plan, there were no changes in the debtor’s financial circumstances to otherwise justify modification and the drastic payment reduction to unsecured creditors was prejudicial. The Court disagreed.
Section 1329(a)(2) allows for modification of a Chapter 13 plan after confirmation but before plan payments commence. The Bankruptcy Court allowed the plan length reduction, finding that a change in financial circumstances need not occur since the modification otherwise complies with sections 1322(a), 1322(b), 1323(c) and 1325(a).
The more difficult issue was that a prior decision from the Sixth Circuit Bankruptcy Appellate Panel (In re Storey, 329 B.R. 266 (B.A.P. 6th Cir 2008)) held that modification of a confirmed plan is limited to matters that arise post-confirmation. Here, the mistake arose pre-confirmation. “Assuming a post-confirmation reason for the modification must be shown, the deterioration of Debtor’s already poor health and his possible inability to keep working for the 60-month commitment period suffice,” the Court concluded, noting that the Sixth Circuit Court of Appeals had not addressed the issue.
The Court also determined that although unsecured creditors will receive less than originally allowed under the confirmed plan, even that lesser amount, the Court found, was more than the unsecured creditors would receive if the debtor’s estate was instead liquidated.
Finally, aside from all these reasons, the Court also added that the modification was permitted by Federal Rule of Civil Procedure 60(b)(1), which allows a court to modify a judgment or order based on mistake, inadvertence, surprise, or excusable neglect.
The bankruptcy courts have addressed issues of mistakes especially in the situations of late filed proof of claims. The courts have found that in the limited circumstance of allowing late filed claims, the mistake must be excusable neglect of counsel. See Pioneer Inv. Servs. v. Brunswick Associates Ltd. P’ship, 507 U. S. 380. This Bankruptcy Court did not reach that issue. Attempts to modify a confirmed plan based upon mistake should require the debtor to satisfy that burden.
This case raises an important issue for creditors. Has a double standard been created? The Supreme Court of the United States in United Student Aid Funds, Inc. v. Espinosa, 553 F. 3d 1193 (2010), held that the confirmation of a Chapter 13 plan constitutes a final judgment. As a result of this ruling, will debtors now have a way to modify their plans, post-confirmation, without providing for a change in circumstances? Will the failure of the debtor to provide for the treatment of certain claims now allow them to be included because they forgot? Will the burden on creditors to object to all provisions of a plan or be bound by the terms of a confirmed plan be reduced?
For creditors, what once seemed like a favorable plan could be changed by the filing of a motion post-confirmation. Basing such a change to the terms of a confirmed plan on non-economic circumstances would seem rather speculative. The ability to pay creditors of the estate has not changed, just the possibility that by extending the plan to a full 60 months, the risk of a potential default over the life of the plan may increase. No longer will confirmation of a plan always be final.
The holding by this Court could open the door for more motions to modify confirmed plans to the detriment of creditors. Creditors will need to review closely every motion to modify as it can impact the amount to be distributed, the terms of secured claims, and the length of a plan. Creditors also will need to weigh the economics of compelling debtors to meet their burden when determining whether to object to modifications that will upend the finality of a confirmed plan.
Alan Hochheiser is a leading practitioner in the areas of creditors’ rights and bankruptcy law. He advises and represents businesses, regional and national banks, credit unions, equipment lessors and other lenders, as well as secured and unsecured creditors. Among his accomplishments, he has successfully resolved non-dischargeable claims based upon fraud conversion and breach of fiduciary issues and has successfully handled the assumption of leases in the bankruptcy of a major airline. Al has been named to ALM’s list of Cleveland’s Top-Rated Lawyers and is peer-rated AV Preeminent by Martindale-Hubbell, the worldwide guide to lawyers.