Meza v. Truman (In Re Meza) , 467 F.3d 874 ( 2006 )

United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT October 16, 2006
Charles R. Fulbruge III
Clerk
No. 05-10739
In The Matter Of: SERGIO MIGUEL MEZA; SHARON SAUCEDA MEZA,
Debtors.
SERGIO MIGUEL MEZA; SHARON SAUCEDA MEZA,
Appellees,
versus
TIM TRUMAN,
Appellant.
Appeal from the United States District Court
for the Northern District of Texas
(4:04-CV-753)
Before JONES, Chief Judge, and BARKSDALE and BENAVIDES, Circuit
Judges.
RHESA HAWKINS BARKSDALE, CIRCUIT JUDGE:
Chapter 13 Trustee Tim Truman appeals the district court’s
affirming the following bankruptcy court holding: Trustee’s
requested modification of the confirmed plan of debtors Sergio and
Sharon Meza could not be considered because it was untimely,
Debtors having paid the plan balance while the modification motion
was pending. VACATED and REMANDED.
I.
Debtors filed a voluntary petition for chapter 13 bankruptcy
in April 2001. Truman, the standing chapter 13 Trustee for the
Northern District of Texas, was appointed Trustee.
On 17 January 2002, Debtors filed their bankruptcy plan. The
plan, confirmed on 2 April 2002, required Debtors to “pay the sum
of $350.00, per month, ... for 50 months ... for a total of
$17500”. Debtors’ unsecured creditors, owed a total of $23,181.59,
were to receive “approximately .00%” for their claims.
Nearly two years later, on 26 February 2004, Trustee received
Debtors’ 2003 federal income-tax refund, in the amount of $3,029.
Under the plan, “the Trustee [wa]s authorized to receive, endorse,
and apply to any delinquent payments under the Plan, any Income Tax
Refund payable to debtor(s) during the pendency of this case”.
(Emphasis added.) Debtors, however, were not delinquent in their
payments. Nevertheless, Trustee wanted the non-exempt portion of
this refund, $1,545 in disposable income, applied to amounts due
under the plan.
Accordingly, on 23 March, Trustee filed a motion to modify
Debtors’ plan; the requested modification would increase the
distribution to Debtors’ unsecured creditors from zero percent
under the confirmed plan to “approximately 8.40 %”. This would
increase Debtors’ total payment from $17,500 to $19,045. Trustee
provided Debtors 20 days notice, as required by Federal Rule of
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Bankruptcy Procedure 3015(g), and set the motion for pre-trial
conference before the bankruptcy court on 7 May 2004. (As
discussed infra, Debtors do not dispute that the required notice
was given.)
On 7 April, however, approximately a month before the
scheduled hearing, Debtors paid Trustee $5,600, which paid in full
the balance of their confirmed plan. To do so, Debtors refinanced
their home, which was exempt property under the plan. On 3 May,
Debtors filed an objection to Trustee’s proposed modification,
asserting it was untimely. Because they had already completed
payments under the plan, Debtors claimed they were entitled to a
discharge from bankruptcy.
Following a hearing on 7 July 2004, the bankruptcy court ruled
the modification request was untimely: “By the time the
Modification was presented to the Court, the Debtors had completed
all payments required by the terms of the plan. Thus, in
accordance with the unambiguous language of 11 U.S.C. § 1329(a),
the Modification is disapproved as untimely”. In re Meza, No. 01-
42612-BJH-13, slip op. at 8-9 (Bankr. N.D. Tex. Aug. 4,
2004)(emphasis added). The district court affirmed. Truman v.
Meza, No. 4:04-CV-753-Y, slip op. (N.D. Tex. June 7, 2005).
II.
The decision whether to modify a chapter 13 plan is reviewed
for abuse of discretion. In re Mendoza, 111 F.3d 1264, 1269 (5th
3
Cir. 1997). Along that line, legal conclusions of the bankruptcy
and district courts are reviewed de novo. Id. at 1266. Although
we may benefit from the bankruptcy and district courts’ analysis of
the matter, the amount of persuasive weight accorded to the court’s
conclusion is subject to our discretion. In re United States
Abatement Corp., 79 F.3d 393, 397-98 (5th Cir. 1996)(internal
citation omitted).
Chapter 13 of the Bankruptcy Code, 11 U.S.C. § 1301, et seq.,
was created “to address consumer credit loss during the Great
Depression by providing a completely voluntary proceeding for
consumers to amortize their debts out of future earnings”. In re
Nolan, 232 F.3d 528, 530 (6th Cir. 2000). Chapter 13 permits
wage-earning debtors “to reorganize with a repayment plan as an
alternative to seeking a complete discharge of debts through the
Chapter 7 bankruptcy liquidation process”. Id. A confirmed
chapter 13 plan is, of course, binding on all parties. 11 U.S.C.
§ 1327(a). Under 11 U.S.C. § 1329, however, the plan may be
modified by either the debtor, trustee, or an unsecured creditor.
See In re Solis, 172 B.R. 530, 533 (Bankr. S.D.N.Y. 1994)
(“Although section 1327(a) binds the debtor and the creditors, a
confirmed plan may be modified at any time after confirmation
before payment is completed.”). Section 1329 states:
(a) At any time after confirmation of the
plan but before the completion of
payments under such plan, the plan may be
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modified, upon request of the debtor, the
trustee, or the holder of an allowed
unsecured claim, to –
(1) increase or reduce the amount of payments
on claims of a particular class provided
for by the plan;
(2) extend or reduce the time for such
payments; or
(3) alter the amount of the distribution to a
creditor whose claim is provided for by
the plan to the extent necessary to take
account of any payment of such claim
other than under the plan.
(b)(1) Sections 1322(a), 1322(b), and 1323(c)
of this title and the requirements of
section 1325(a) of this title apply to
any modification under subsection (a) of
this section.
(2) The plan as modified becomes the plan
unless, after notice and a hearing, such
modification is disapproved.
11 U.S.C. § 1329 (2004)(prior to 2005 revision, which added another
basis for modification of a confirmed plan) (emphasis added).
Modification is based on the premise that, during the life of the
plan, circumstances may change, and parties should have the ability
to modify the plan accordingly. In re Taylor, 215 B.R. 882, 883
(Bankr. S.D. Cal. 1997).
A.
Some courts have required an unanticipated, substantial change
to occur before permitting such plan modification. See In re
Hoggle, 12 F.3d 1008, 1011 (11th Cir. 1994) (“Congress designed §
1329 to permit modification of a plan due to changed circumstances
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of the debtor unforeseen at the time of confirmation.”); In re
Furgeson, 263 B.R. 28, 37-38 (Bankr. N.D.N.Y. 2001) (citing cases
supporting this view); see also 5 NORTON BANKR. L. & PRAC. 2d § 124:2
(noting several courts require “a substantial or even unanticipated
change in circumstances, or else the creditor is bound by
confirmation of the original plan”) (emphasis in original). A
growing number of courts, however, do not require such a change.
See, e.g., Barbosa v. Soloman, 235 F.3d 31, 41 (1st Cir. 2000)
(“refrain[ing] from adopting the substantial and unanticipated test
for seeking a modification pursuant to § 1329”); In re Witkowski,
16 F.3d 739, 742 (7th Cir. 1994) (emphasizing that, “[b]y its
terms, § 1329 does not provide for any threshold requirement to
modify a bankruptcy plan”); In re Sutton, 303 B.R. 510, 516 (Bankr.
S.D. Ala. 2003) (citing Witkowski for the proposition that § 1329's
plain language imposes no substantial change requirement); In re
Sounakhene, 249 B.R. 801, 803 (Bankr. S.D. Cal. 2000) (“A showing
of substantially changed circumstances is not a prerequisite to
plan modification.”); In re Phelps, 149 B.R. 534, 538 (Bankr. N.D.
Ill. 1993) (noting “Congress specifically provided for a change in
circumstances test under other provisions of the Bankruptcy Code,
including at least one in Chapter 13”). Because we agree with this
latter approach, we need not consider whether Debtors’ income-tax
refund constituted a substantial or unanticipated change.
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B.
Consistent with § 1329’s plain language, it is largely
undisputed “that a plan cannot be modified once all payments have
been made”. In re Moss, 91 B.R. 563, 565 (Bankr. C.D. Cal. 1988).
“[I]f a trustee could amend a Chapter 13 plan after the debtor
completes his or her payments to the trustee, the mandatory nature
of the discharge provision [11 U.S.C. § 1328] would be
eviscerated”. In re Casper, 154 B.R. 243, 247 (N.D. Ill. 1993)
(emphasis added). Accordingly, if a debtor pays his plan balance
and the trustee then seeks to modify the plan under § 1329 to
account for newly-acquired funds, modification is not permitted.
See, e.g., In re Bergolla, 232 B.R. 515, 516 (Bankr. S.D. Fla.
1999) (“lump sum payment was made from the proceeds of the sale of
the Debtors’ exempt homestead property” to complete payments under
the plan before the trustee filed a motion to modify). In such
instances, debtors typically contend a trustee’s “modification is
time-barred because they completed the plan before the
[modification] motion was filed”. In re Sounakhene, 249 B.R. at
802.
On the other hand, it appears a trustee’s motion is timely if
filed before payments are completed. See In re Profit, 283 B.R.
567, 572 (B.A.P. 9th Cir. 2002) (stating relevant issue as
“[w]hether Trustee’s motion to modify the chapter 13 plan was
timely filed before all plan payments had been completed, pursuant
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to § 1329(a)”);In re Sounakhene, 249 B.R. at 804 (“The parties
agree the Trustee must file his motion before all the payments
under the plan are complete.”). Therefore, if the trustee files a
modification motion and the debtor then attempts to complete plan
payments, the debtor appears to unfairly attempt to circumvent §
1329(b)(2)’s plain language that a “plan as modified becomes the
plan unless, after notice and a hearing, such modification is
disapproved”. (Emphasis added.) Whether a debtor may attempt to
avoid increased plan payments by completing payments after a motion
to modify is filed, but before any hearing on that motion can be
held, does not appear, however, to have been addressed by this, or
any other, court.
Plan modification often occurs in the context of debtors who
cannot afford to make the monthly payments under their confirmed
plans. E.g., In re Taylor, 215 B.R. at 883 (seeking to reduce
monthly plan payment). Where a modification is sought because the
debtor can make larger payments to creditors than those imposed by
the plan, courts have still emphasized that a modification may not
be filed after the debtor has completed plan payments. E.g., In re
Sutton, 303 B.R. at 515-16 (asserting “an absolute right to request
modification of the plan between confirmation of the plan and
completion of plan payments”); In re Solis, 172 B.R. at 532 (“A
confirmed chapter 13 plan may be modified ... to increase or reduce
payments after confirmation but before completion of debtor’s
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payments.” (emphasis added)). One bankruptcy court in our circuit,
encountering a creditor who sought plan modification after the
debtor completed payments ahead of schedule, explained: “[Section]
1329(a) clearly requires that any request for a post-confirmation
modification of a confirmed chapter 13 plan must be presented ...
before the completion of payments under such plan”. In re Smith,
237 B.R. 621, 625 n.7 (Bankr. E.D. Tex. 1999) (emphasis added and
internal quotation marks omitted). That court concluded:
“[W]ithout providing advance notice to any party, a Chapter 13
debtor may tender all the payments due and owing under a confirmed
plan on an accelerated basis and thereby create an entitlement to
discharge”. Id. at 626.
This rationale does not, however, extend to a situation where,
as here, the trustee files a modification motion prior to the
debtor’s tendering full payment. In this regard, for a debtor’s
filing a proposed modification under § 1329, at least one court has
held it effective as of the date of filing. See In re Taylor, 215
B.R. at 884 (explaining “that the proposed modified plan becomes
the controlling plan for debtor’s performance upon filing”). The
modified plan “remains the controlling document unless later
disapproved after notice and a hearing”. Id. (internal quotation
marks omitted). The Taylor court noted it was not deciding whether
this same approach would be followed “[w]here the trustee or an
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unsecured creditor moves to modify a plan to increase the amount of
plan payments”. Id.
Here, Trustee filed a proposed modification prior to Debtors’
attempt to pay the plan balance. Obviously Debtors’ making their
final payment did not nunc pro tunc make untimely that modification
filing. Because the modification was timely filed, and would
become effective after the notice period unless disapproved, it
precluded Debtors from making their final payment under the earlier
confirmed plan.
Rule 3015(g) requires “not less than 20 days notice by mail of
the time fixed for filing objections” to a proposed modification.
FED. R. BANKR. P. 3015(g). Because documents providing the hearing
notice and number of days to file an objection to Trustee’s
modification were provided in the record on appeal, we do not know
what time period the parties fixed for objections to the
modification motion. Trustee, as appellant, had the burden of
providing a complete record on appeal. FED. R. APP. P. 10(b).
Although they made final-plan payment within 20 days of the
modification motion, Debtors did not file an objection to the
modification until almost six weeks after the motion was filed.
Nevertheless, the parties agree Debtors timely objected to
Trustee’s proposed modification. (Along that line, at oral
argument, Trustee’s counsel stated that Debtors timely objected
within 20 days to Trustee’s modification. The bankruptcy court’s
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docket reflects, however, that the modification motion was filed on
23 March and no objection was made until 3 May.)
In sum, we cannot conclude from this record that Debtors’
objection was untimely. In any event, as discussed below, instead
of holding Trustee’s modification motion untimely, the bankruptcy
court should have considered it on its merits.
In concluding that Debtors were permitted to complete plan
payments after Trustee had filed his proposed modification, but
before a hearing on it was held, the bankruptcy court relied in
part on a treatise which noted: “[T]he literal language of section
1329(a) would appear to permit a debtor to complete payments during
the 20 days that a request to modify must be pending under Federal
Rule of Bankruptcy Procedure 3015(g) and thereby deprive the court
of the power to modify the plan”. 8 COLLIER ON BANKRUPTCY ¶ 1329.08
(15th ed. 2004). Section 1329(a), when viewed alone, could be
interpreted in this fashion. But, when § 1329 is read in its
entirety, within the context of chapter 13, it is improbable this
is the correct or intended result. Section 1329(a) provides a plan
may be modified “upon request” and “before the completion of
payments”; but, § 1329(b)(2) provides that the modified plan
“becomes the plan unless, after notice and a hearing, such
modification is disapproved”. (Emphasis added.) Read together,
both subsections show that, when a modification request is timely
filed, the completion of the plan and eventual discharge of the
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debtor is stayed until the bankruptcy court is allowed to consider
the modification on its merits. A contrary result would encourage
gamesmanship on behalf of debtors and prevent them from repaying
creditors “to the extent of [their] capabilit[ies]”. In re Arnold,
869 F.2d at 242 (“Certainly Congress did not intend for debtors who
experience substantially improved financial conditions after
confirmation to avoid paying more to their creditors.”).*
Therefore, rather than disapproving it as untimely, the bankruptcy
court should have considered Trustee’s proposed modification on its
merits.
III.
For the foregoing reasons, the judgment is VACATED and this
matter is REMANDED to district court for remand to bankruptcy court
for further proceedings consistent with this opinion.
VACATED AND REMANDED
*
Related to this, before refinancing their exempt homestead,
Debtors did not — but should have — received permission from the
bankruptcy court. See, e.g., In re Bergolla, 232 B.R. at 516 n.1
(authorizing the debtors’ sale of their exempt homestead). A
debtor may sell or lease property of an estate, but only after
“notice and a hearing”. 11 U.S.C. § 363(b); see 11 U.S.C. § 1303
(explaining that a debtor has all rights and powers of a trustee
under § 363). Although Debtors’ homestead was exempt property and
thus not part of the estate under 11 U.S.C. § 541, it is
sufficiently analogous — and apparently required by bankruptcy
judges in the Northern District of Texas — such that Debtors should
have sought court approval before refinancing their home. Had they
done so, this would have given Trustee an opportunity, before any
refinancing occurred, to object to Debtors’ avoiding making
payments to their unsecured creditors.
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