FILED
APR 17 2020
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
ORDERED PUBLISHED
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. NC-19-1197-FBTa
STEPHEN WILLIAM BERKLEY, Bk. No. 14-30941
Debtor.
STEPHEN WILLIAM BERKLEY,
Appellant,
v. OPINION
DAVID BURCHARD, Chapter 13 Trustee,
Appellee.
Argued and Submitted on March 26, 2020
Filed – April 17, 2020
Appeal from the United States Bankruptcy Court
for the Northern District of California
Honorable Dennis Montali, Bankruptcy Judge, Presiding
Appearances: Thomas P. Kelly III argued on behalf of appellant;
Brisa C. Ramirez on the brief for appellee.
Before: FARIS, BRAND, and TAYLOR, Bankruptcy Judges.
FARIS, Bankruptcy Judge:
INTRODUCTION
As chapter 131 debtor Stephen William Berkley neared the successful
completion of his chapter 13 plan, he received an unexpected windfall:
stock options he had earned for postconfirmation services became worth
about $3.8 million. His chapter 13 trustee, appellee David Burchard
(“Trustee”), thought that Mr. Berkley should use about $202,000 of his
windfall to pay his creditors in full. The bankruptcy court agreed and
modified the plan accordingly.
On appeal, Mr. Berkley argues that the court could not force him to
commit any of the stock proceeds to the plan because the estate terminated
at confirmation and the proceeds were not property of the estate.
The bankruptcy court was correct, so we AFFIRM. We publish to
clarify that a revesting provision in a confirmed chapter 13 plan does not
prevent modification of the plan to capture increases in the debtor’s
postconfirmation compensation.
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.
2
FACTUAL BACKGROUND
A. Mr. Berkley’s chapter 13 petition and plan
Mr. Berkley commenced his chapter 13 case in June 2014. His
proposed second amended plan (“the Plan”) provided that he would pay
$1,233.02 per month for sixty months. The nonpriority unsecured creditors
would receive one percent of their allowed claims. The Plan provided that
“[p]roperty of the estate will revest in Debtor upon confirmation.”
The bankruptcy court confirmed the Plan in April 2015. Mr. Berkley
faithfully made his monthly payments for over four years.
B. The Trustee’s motion to modify the Plan
When Mr. Berkley filed his petition, he was a self-employed software
developer earning $5,000 per month. In 2016, after the court confirmed the
Plan, Mr. Berkley was hired as CEO of Antares Audio Technologies
(“Antares”). In 2018, he began receiving stock options from Antares as part
of his compensation package. In late 2018 or early 2019, Antares received a
buyout offer, under which Mr. Berkley would receive about $3.8 million for
his stock.
In March 2019, the fifty-seventh month of the Plan, Mr. Berkley
disclosed to the Trustee the pending sale and the potential receipt of $3.8
million. However, he asserted that the money was not property of the
bankruptcy estate, so the Trustee could not force him to devote it to his
creditors.
3
The Trustee disagreed. He asserted that, under § 1329(a),
“Mr. Berkley’s post-petition acquired stock and increased income are
changed circumstances” warranting modification of the Plan.
The Trustee filed a motion to modify the Plan (“Motion to Modify”).
He argued that Mr. Berkley’s receipt of $3.8 million from the stock sale
necessitated an increase in payments to general unsecured creditors. He
proposed that Mr. Berkley make a lump-sum payment of $202,603.80
before the end of the plan term so that unsecured creditors would receive
100% payment on their allowed claims.
Mr. Berkley opposed the Motion to Modify and argued that, because
all estate property revested in him upon confirmation, the Trustee could
not require him to increase his Plan payments due to his receipt of the stock
proceeds.
In a supplemental brief, Mr. Berkley added the argument that the
Motion to Modify was untimely because it sought past income (that he
began accumulating between 2017 and 2018, when the stock options were
issued), not “future income” under § 1322(a).
The bankruptcy court agreed with the Trustee. The court observed
that Mr. Berkley’s argument would effectively nullify §§ 1306 and 1329:
“You’re trying to say we can ignore 1306 and . . . if a Plan gets confirmed
with revesting, you can’t file a modification – ever – and 1329 is
meaningless, and that’s just not the law.” The court further noted that, if
4
Mr. Berkley did not want to contribute the extra $202,000 to the Plan, then
he was free to dismiss his case.
The bankruptcy court issued an order granting the Motion to Modify.
Mr. Berkley timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334
and 157(b)(2)(A), (L). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Whether the bankruptcy court abused its discretion in granting the
Motion to Modify.
STANDARDS OF REVIEW
“The confirmation of a modified plan is reviewed for an abuse of
discretion.” Profit v. Savage (In re Profit),
283 B.R. 567, 572 (9th Cir. BAP
2002) (citing Max Recovery, Inc. v. Than (In re Than),
215 B.R. 430, 433 (9th
Cir. BAP 1997)). To determine whether the bankruptcy court has abused its
discretion, we conduct a two-step inquiry: (1) we review de novo whether
the bankruptcy court “identified the correct legal rule to apply to the relief
requested” and (2) if it did, we consider whether the bankruptcy court’s
application of the legal standard was illogical, implausible, or without
support in inferences that may be drawn from the facts in the record.
United States v. Hinkson,
585 F.3d 1247, 1261-62 & n.21 (9th Cir. 2009) (en
banc).
5
We review de novo the bankruptcy court’s interpretation of the
applicable Code provisions. Dernham-Burk v. Mrdutt (In re Mrdutt),
600 B.R.
72, 76 (9th Cir. BAP 2019) (citing Mattson v. Howe (In re Mattson),
468 B.R.
361, 367 (9th Cir. BAP 2012)). “De novo review requires that we consider a
matter anew, as if no decision had been made previously.” Francis v.
Wallace (In re Francis),
505 B.R. 914, 917 (9th Cir. BAP 2014) (citations
omitted).
DISCUSSION
A. The bankruptcy court did not abuse its discretion in modifying the
Plan to increase Mr. Berkley’s plan payments.
The bankruptcy court granted the Motion to Modify to take into
account Mr. Berkley’s unexpected receipt of $3.8 million from the sale of
stock that he obtained as part of his postconfirmation compensation
package. It correctly held that § 1329 allows the Trustee to modify a
confirmed plan to increase payments to unsecured creditors in these
circumstances.
Section 1329(a) provides that, “[a]t any time after confirmation of the
plan but before the completion of payments under such plan, the plan may
be modified” to “increase or reduce the amount of payments on claims of a
particular class provided for by the plan[.]” § 1329(a).
Section 1329 specifies the ways in which confirmed chapter 13 plans
may be modified, but it does not state the circumstances in which a
6
modification is proper. We have repeatedly held that “the bankruptcy
court may consider a change in circumstances in the exercise of its
discretion.” In re
Mattson, 468 B.R. at 369 (citing Powers v. Savage (In re
Powers),
202 B.R. 618, 623 (9th Cir. BAP 1996)). An unexpected increase in
income is one such change that could warrant a plan modification to
increase payments. See Fridley v. Forsythe (In re Fridley),
380 B.R. 538, 543
(9th Cir. BAP 2007) (“Subsequent increases in actual income can be
captured for creditors by way of a § 1329 plan modification, which motion
the debtors are entitled to oppose.” (citing Anderson v. Satterlee (In re
Anderson),
21 F.3d 355, 358 (9th Cir. 1994))); In re
Powers, 202 B.R. at 623
(affirming the bankruptcy court’s modification of plan to take into account
the debtor’s nearly fifty percent salary increase).
The Ninth Circuit has held that creditors can seek increased
payments from debtors whose income increases during the term of the
plan. In Danielson v. Flores (In re Flores),
735 F.3d 855 (9th Cir. 2013) (en
banc), the Ninth Circuit considered whether above-median income debtors
with no projected disposable income could confirm a plan for only thirty-
six months. In holding that the debtors must commit to a plan for the full
sixty months in the event their income increases, the court expressed
concern for creditors’ ability to modify the plan to receive greater recovery
in the event of a change in the debtor’s circumstances:
7
A minimum duration for Chapter 13 plans is crucial to an
important purpose of § 1329’s modification process: to ensure
that unsecured creditors have a mechanism for seeking
increased (that is, non-zero) payments if a debtor’s financial
circumstances improve unexpectedly. . . . [U]nsecured creditors
may request a later modification of the plan to increase the
debtor’s payments if the debtor acquires disposable income
during the pendency of the applicable commitment
period.
735 F.3d at 860 (emphasis added). The Court of Appeals further explained
the policy rationale behind its ruling:
The policy justification for looking to future earnings is that a
failure to do so “would deny creditors payments that the debtor
could easily make.” In other words, the statute is meant to
allow creditors to receive increased payments from debtors
whose earnings happen to increase. . . . Congress intended
§ 1325(b)(1)(B) to ensure a plan duration that gives meaning to
§ 1329’s modification procedure as a mechanism for
post-confirmation adjustments for unforeseen increases in a
debtor’s income.
Id. at 861-62 (citations omitted) (bolded emphasis added).
Similarly, the bankruptcy court’s decision comports with In re
Escarcega,
573 B.R. 219 (9th Cir. BAP 2017). In that case, we rejected a
chapter 13 plan with an indefinite duration, which would have allowed the
debtor to “complete” his plan whenever he paid off all priority and secured
claims. We stated that “payments under a plan have to continue for the
duration provided for in the initial plan, absent modification, before being
8
considered ‘complete’ for purposes of modification and
discharge.” 573
B.R. at 239 (citing In re
Fridley, 380 B.R. at 543-44). Our reasoning is
instructive: unless the debtor successfully modifies the plan to shorten its
duration, the debtor is exposed to the possibility of continuing to commit
his income and property to plan payments, even in excess of the original
amount provided for under the plan. See
id. at 240 (“The possibility of
capturing increases in income necessitates that the chapter 13 trustee or
unsecured creditors are apprised of the term of the plan so that they can
seek modification if the Debtor’s income increases.”); In re
Fridley, 380 B.R.
at 544 (“In exchange for a § 1328(a) discharge of more debts than can be
discharged in chapter 7, the debtor’s increases in income are exposed to the
risk of being captured by way of § 1329 modifications proposed by the
trustee or an unsecured creditor.” (footnote omitted)).
Further, the bankruptcy court’s decision is consistent with the
Bankruptcy Abuse Prevention & Consumer Protection Act of 2005’s
primary goal of helping “ensure that debtors who can pay creditors do pay
them.” Ransom v. FIA Card Servs., N.A.,
562 U.S. 61, 64 (2011).
In other words, confirmation does not shield increases in the debtor’s
postconfirmation income from the reach of the chapter 13 trustee or
creditors. It is well accepted that § 1329 permits the trustee and creditors to
modify the plan to capture postconfirmation increases in the debtor’s
income. As such, the bankruptcy court did not abuse its discretion in
granting the Motion to Modify.
9
B. Mr. Berkley’s arguments concerning revesting and the termination
of the estate are unavailing.
Mr. Berkley argues that his creditors were not entitled to any portion
of his $3.8 million windfall because that money was not property of his
estate after plan confirmation. His conclusion does not follow from his
premise.
Mr. Berkley’s premise is that the $3.8 million was not property of the
estate. He argues that, under binding Ninth Circuit precedent, “the
bankruptcy estate in this case ceased to exist upon plan confirmation with
the exception of any property the plan or confirmation order clearly
reserved for the bankruptcy estate.” Because the estate terminated, the
Trustee could only exercise control over his income “as is necessary for the
execution of the Plan.” In other words, after confirmation, the Trustee had
no right to any income above the $1,233.02 monthly payments specified by
the Plan.
Mr. Berkley is correct that we have adopted the so-called “estate
termination approach,” which recognizes “the vesting of all estate property
in the debtor at confirmation (unless the plan or confirmation order
provides otherwise) and the concomitant termination of estate
property . . . .” Cal. Franchise Tax Bd. v. Jones (In re Jones),
420 B.R. 506, 515
(9th Cir. BAP 2009), aff’d on other grounds,
657 F.3d 921 (9th Cir. 2011). The
Ninth Circuit affirmed our decision, declining to adopt a particular
10
approach but holding that, under § 1327(b), “property of the estate revests
in the debtor upon plan confirmation, unless the debtor elects otherwise in
the plan. Because [the debtor] did not elect otherwise, she once again
became the owner of her property at confirmation, except as to those sums
specifically dedicated to fulfillment of the
plan.” 657 F.3d at 928.
Most recently, in Black v. Leavitt (In re Black),
609 B.R. 518 (9th Cir.
BAP 2019), we reaffirmed our view that the estate terminates at
confirmation. We stated that “the revesting provision of the confirmed plan
means that the debtor owns the property outright and that the debtor is
entitled to any postpetition
appreciation.” 609 B.R. at 529 (citing In re
Jones,
420 B.R. at 515).
We acknowledge that the bankruptcy court in this case, and some
other bankruptcy courts within our circuit, take the view that
postconfirmation windfalls become property of the estate upon receipt,
even if the plan provides for revesting. See, e.g., In re Shay,
553 B.R. 412, 418
(Bankr. W.D. Wash. 2016) (holding that “[a] plan provision that
automatically vests post-petition property with the debtor without ever
becoming property of the estate, as proposed by the debtors in their
amended plan, is inconsistent with the Code”); In re Jackson,
403 B.R. 95, 100
(Bankr. D. Idaho 2009) (rejecting the estate termination approach and
holding that an inheritance received postconfirmation was property of the
estate).
11
In our view, these decisions reach the right result for an incorrect
reason. Mr. Berkley’s arguments, and the cases cited above, all rest on the
unstated assumption that, unless the postconfirmation income is property
of the estate, the debtor cannot be compelled to devote it to his plan. This
assumption is incorrect. Nothing in the Code provides that plan payments
may only be funded by estate property. In fact, debtors are often compelled
(in order to formulate a confirmable plan) to fund the plan from non-estate
sources (family contributions, loans or withdrawals from pension plans,
sale of exempt assets, etc.). See, e.g., In re Deutsch,
529 B.R. 308, 312 (Bankr.
C.D. Cal. 2015) (“Reliance on contributions from family is disfavored, but
not prohibited.” (citation omitted)); In re Feiling, Case No. 11-71474 MEH,
2013 WL 2451333, at *5 (Bankr. N.D. Cal. June 6, 2013) (confirming plan
funded by gifts and non-estate property). Under § 1329, the bankruptcy
court can approve a plan modification that increases the debtor’s plan
payments due to a postconfirmation increase in the debtor’s income,
whether or not the additional income is property of the estate.
This result is consistent with our precedent. Jones was concerned with
whether a creditor could maintain a postconfirmation tax claim if the
prepetition property of the estate revested in the debtor at confirmation. In
Black, we held that, where the confirmed plan provided that the debtor
would pay a specified amount when the debtor sold or refinanced a
particular piece of prepetition property, the debtor could not be forced to
12
pay more when he sold the property for a greater amount.2 The revesting
provision was the key to those cases because they both dealt with property
that the debtor owned on the petition date. This case, however, is solely
concerned with postconfirmation wages.3 Because the stock options were
postconfirmation income that Mr. Berkley earned as part of his
compensation package, the bankruptcy court properly committed their
proceeds to the Plan. See In re
Fridley, 380 B.R. at 543.
Also, as the bankruptcy court correctly observed, Mr. Berkley’s
argument would effectively nullify § 1329. Under Mr. Berkley’s theory,
once the property revests in the debtor at confirmation, the trustee would
never be able to modify the plan to increase plan payments due to a
postconfirmation increase in the debtor’s income. As discussed above, the
Ninth Circuit recognizes that the trustee and creditors may modify a plan
to increase plan payments based on a debtor’s unexpected
postconfirmation increase in income.
Mr. Berkley also argues that the $3.8 million represents past earnings
2
Additionally, in Black, the debtor agreed to commit to the plan a specific dollar
amount from the sale of prepetition
property. 609 B.R. at 521. Here, the Plan contained
no such limitation.
3
Mr. Berkley takes the position on appeal that the stock options were not wages
or compensation. This is the exact opposite of the position he took in the bankruptcy
court: Mr. Berkley repeatedly represented to the Trustee and the bankruptcy court that
the stock options were “income” and that “[a]s part of his compensation package, in
2018 he began receiving stock options in the company . . . .” We reject his attempt to
reverse ground on appeal.
13
and future appreciation. He contends that he had already earned the stock
before the Trustee’s Motion to Modify, so it could not be “future income”
under § 1322(a).4 We disagree. Under Mr. Berkley’s logic, the Trustee
would never be entitled to capture stock, a cash or non-cash bonus, or other
lump-sum postconfirmation payment unless the trustee somehow learned
about the money in time to file a plan modification before the debtor
received it. As a practical matter, chapter 13 trustees are highly unlikely to
learn of such developments unless the debtor discloses them. Thus, if Mr.
Berkley were correct, the rights of the trustee and creditors would depend
entirely on the debtor’s promptness in notifying them prospectively of a
change in circumstances. We reject this unsound policy.
Similarly, Mr. Berkley’s argument implies that the Trustee should
have acted sooner to take control of the stock options as Mr. Berkley earned
them, and, by not acting until the options had ascertainable value, the
Trustee waited too long. Neither the Code nor sound policy compels
trustees to expend resources on assets that may or may not ever have any
value.
Therefore, we reject Mr. Berkley’s argument that the revesting
provision bars the plan modification.
4
Section 1322(a)(1) provides that the chapter 13 plan “shall provide for the
submission of all or such portion of future earnings or other future income of the debtor
to the supervision and control of the trustee as is necessary for the execution of the
plan[.]” § 1322(a)(1).
14
CONCLUSION
The bankruptcy court did not abuse its discretion in granting the
Motion to Modify. We AFFIRM.
15
