Opinion ID: 199203
Heading Depth: 2
Heading Rank: 2

Heading: Modification of a Confirmed Chapter 13 Plan.

Text: 34 Section 1329 of the Code provides that a confirmed plan may be modified at the request of the debtor, the trustee, or the holder of an allowed unsecured claim in order to increase or reduce the amount of payments on claims of a particular class provided for by the plan; [or to] extend or reduce the time for such payments... 11 U.S.C. § 1329(a)(1,2). Any such post-confirmation modifications shall comply with sections 1322(a)-(b) 8 , 1323(c) 9 , and 1325(a) 10 of the Bankruptcy Code. 11 U.S.C. § 1329(b)(1). 35 The Debtors argue that both the bankruptcy court and the district court erred in applying section 1329 of the Code to allow a modification of the confirmed plan at the request of the Trustee and Mellon without their showing a substantial and unanticipated change in the Debtors' financial circumstances from the time of confirmation. They argue that the Property's sale was contemplated by the parties at the time of entering into the Stipulation and by the Court when it confirmed the Plan. Therefore, they aver that the modification requested by the Trustee and Mellon is precluded by res judicata. For that purpose, they allege that the sale was not an unanticipated event, and that the appreciation in value of the property was foreseeable. They do not dispute however, nor can they given the facts, that the change in the Debtors' financial circumstances is substantial. 36 From the start, we note that Debtors' arguments are not grounded on the specific provisions of the Code; since section 1329 does not in itself establish a criterion for granting a modification, other than the plan as modified must comply with all applicable provisions of the Code. 11 U.S.C. § 1329(b), incorporating by reference 11 U.S.C. § 1325(a). This means that the Plan as modified must be proposed in good-faith. 11 U.S.C. § 1325(a)(3). Also, it must comply with the best-interests-of-the-creditors test and the ability-to-pay standard. 11 U.S.C. § 1325(a)(4-6). However, the Code says nothing about the applicability of the doctrine of res judicata or the threshold requirement of unanticipated and substantial change in the debtor's financial circumstances. These are doctrines of judicial origin. See, e.g., In re Witkowski, 16 F.3d 739, 746 (7th Cir. 1994)(The clear and unambiguous language of § 1329 negates any threshold change in circumstances requirement and clearly demonstrates that the doctrine of res judicata does not apply.); In re Than, 215 B.R. 430, 435 (B.A.P.9th Cir 1997)(The unanticipated, substantial change test is judicial gloss to § 1329, ... and the standard was seriously questioned by the Seventh Circuit's 1994 Witkowski opinion.); In re Powers, 202 B.R. 618, 622 (B.A.P.9th Cir. 1996)([W]e decline to hold that the change must be substantial and unanticipated as suggested by various cases in this circuit. The plain language of § 1329 simply does not support a change in circumstances as a prerequisite to modification.); In re Euler, 251 B.R. 740, 744 (Bankr.M.D.Fla. 2000)(recognizing that section 1329 is silent as to whether the court should impose any conditions on a modification ... other than those provided by § 1329(b).); In re Fitak, 92 B.R. 243, 249 (Bankr.S.D.Ohio 1988), aff'd 121 B.R. 224 (S.D.Ohio 1990)(While the legislative history indicates that a post-confirmation modification should be ordered pursuant to § 1329(a) upon a showing of changed circumstances which affect a debtor's ability to pay, the case law suggests that the doctrine of res judicata limits the scope of appropriate post-confirmation modifications.). 37 Some of the stated grounds for the application of the doctrine of res judicata within the context of a modification sought pursuant to § 1329, are: (1) the awkward application of section 1329, In re Euler, 251 B.R. at 744, quoting In re Perkins, 111 B.R. at 673 (Unfortunately... section 1329 is 'somewhat awkward in concept and application.); (2) the apparent inconsistency of sections 1321 and 1329 of the Code; while the first provides that only the debtor shall file a plan, the second provides standing to the trustee and the unsecured creditors to seek to modify it after confirmation, id. at 745-46; (3) the little, if any, guidance as to the standard to be applied by a bankruptcy court in determining whether a request for a post-confirmation modification of a Chapter 13 plan should be granted, In re Fitak, 92 B.R. at 248; (4) the legislative history of § 1329, In re Euler, 251 B.R. at 746; (5) the case law, e.g. In re Fitak, 92 B.R. at 249, citing In re Moseley, 74 B.R. 791,799-800 (Bankr.C.D.Cal. 1987) 11 , Anaheim Savings & Loan Ass'n v. Evans (In re Evans), 30 B.R. 530, 531 (B.A.P.9th Cir. 1983) 12 ; and (5) the finality accorded to the confirmed plan, In re Euler, 251 B.R. at 746. Of all these factors, the need to accord a degree of finality to the confirmation order is one of the most weighty for some courts. See, e.g., Witkowski, 16 F.3d at 745, and cases cited therein. 38 However, while the doctrine of res judicata has been applied by some courts in this context, e.g. In re Arnold, 869 F.2d 240, 243 (4th Cir. 1989)(The doctrine of res judicata bars an increase in the amount of monthly payments only where there have been no unanticipated, substantial changes in the debtor's financial situation.); In re Suratt, 1996 WL 914095 at  (D.Or. 1996)(The doctrine of res judicata limits post confirmation modifications to cases in which the change in a debtor's ability to pay was unanticipated at the time of confirmation.); In re Solis, 172 B.R. 530, 532 (Bankr.S.D.N.Y. 1994) quoting 5 L.King, Collier on Bankruptcy ¶ 1329.01 (15th ed. 1994) (A trustee's application 'should be limited to situations in which there has been a substantial change in the debtor's income or expenses that was not anticipated at the time of the confirmation hearing.'); In re Fitak, 92 B.R. at 250 ([T]he doctrine of res judicata operates as a limitation on the ability of parties to obtain a post-confirmation modification under § 1329(a) based upon unanticipated changed circumstances.), it is by no means the uniformly accepted norm. 39 Many other courts have ruled that section 1329(a) allows the parties an absolute right to request a modification (although a modification will not necessarily be granted). Witkowski, 16 F.3d at 745; In re Powers, 202 B.R. at 622 (Although a party has an absolute right to request modification between confirmation and completion of the plan, modification under § 1329 is not without limits.); In re Than, 215 B.R. at 436 (same); In re Trumbas, 245 B.R. at 767 (following In re Barbosa, 236 B.R. at 548, and Witkowski, supra); In re Meeks, 237 B.R. 856, 859-60 (M.D.Fla. 1999)([T]he Debtors need not demonstrate a substantial, unanticipated change in circumstances in order to modify their confirmed chapter 13 plan. However, neither can Chapter 13 debtors simply modify their plans willy nilly.); In re Laye, 1994 WL 905759,  (Bankr.N.D.Ill. 1994)(following Witkowski, supra). This approach is based on the clear language of the statute. In re Witkowski, 16 F.3d at 746; In re Powers, 202 B.R. at 622 ([W]e decline to hold that the change [under § 1329] must be substantial and unanticipated as suggested by various cases in [the Ninth Circuit]. The plain language of § 1329 simply does not support a change in circumstances as a prerequisite to modification.) Also, it acknowledges that section 1329 does provide a criterion for granting a modification. In re Witkowski, 16 F.3d at 745-46. First, modifications are only allowed in [the] three limited circumstances provided by the statute. Id. at 745. Second, as provided by § 1329(b)(1) of the Code, a modified plan is only available if §§ 1322(a), 1322(b), 1325(a) and 1329(c) of the bankruptcy code are met. Id. Third, a modification may only be proposed in good faith. Id. at 746. 13 Fourth, all proposed modifications need not be approved and in practice not all modifications are approved. Id. Moreover, the statutory framework is clear in allowing post-confirmation modifications, a feature that is incongruent with the application of the doctrine of res judicata. Id. at 745. 14 40 The legislative history of section 1329(a) is not conclusive on this issue either, and if anything, it supports the inference that res judicata should not be applied. Section 1329(a) was amended in 1984 to provide standing to the trustee and the holders of unsecured claims to move to amend the confirmed bankruptcy repayment plan. Consumer Credit Amendments, Section 319, Title III of the Bankruptcy Amendments and Federal Judgeship Act of 1984 (BAFJA), Publ. L. No. 98-353; 8 Collier on Bankruptcy ¶ 1329.03 (Lawrence P. King, chief ed., 15th ed. 2000). Prior to the amendment, only the debtor was authorized to request a modification of the plan. Id.; see also William L. Norton Jr., Bankruptcy Law and Practice 2d, Bankruptcy Code 1270, eds.' comm. (1998-1999). However, Congress saw fit to allow the trustee and holders of unsecured claims to seek an amendment to the confirmed plan in order to carry the ability-to-pay standard forward in time, allowing upward or downward adjustment of plan payments in response to changes in the debtor's financial circumstances which affect his/her ability to make payments. See Oversight Hearings on Personal Bankruptcy Before the Subcommittee on Monopolies and Commercial Law of the Committee on the Judiciary, House of Representatives, 97th Cong., 1st and 2nd Sess. 22-23 (1981-1982). 15 41 There was an indication at the Congressional Oversight Hearings on Personal Bankruptcy that the standing conferred to the trustee and the unsecured creditors would serve to accommodate any changes in the financial circumstances of the debtor (either adversely or favorably), which substantially affect his ability to make future payments under the plan. Oversight Hearings, supra, at 215-216, 221-222 (1981-1982) (statement of the Hon. Conrad K. Cyr, Bankruptcy Judge for the District of Maine, speaking on behalf of the National Bankruptcy Conference and the National Conference of Bankruptcy Judges); Arnold & Porter, BANKR84, Hearings(21). However, the reference to a substantial change was never accompanied by the requirement that the change be unanticipated. 16 Moreover, the legislative history indicates that the application of the doctrine of res judicata was never discussed, considered, or contemplated by Congress. Oversight Hearings, supra. 42 Faced with this legislative intention, and the plain language of the statute, we are compelled to concur with the district court and the bankruptcy court that the Witkowski approach is the more sensible one. In re Barbosa, 236 B.R. at 547. However, the bankruptcy judge was careful to note that motions to modify cannot be used to circumvent the appeals process for those creditors who have failed to object confirmation of a Chapter 13 plan or whose objections to confirmation have been overruled. Id. Moreover, the bankruptcy judge noted that §§ 1327 and 1330 accord significant finality to confirmation orders in Chapter 13 cases. Id. Accordingly, the court concluded that while Witkowski may be a correct statement of the law, as a practical matter, parties requesting modifications of Chapter 13 plans must advance a legitimate reason for doing so, and they must strictly conform to the three limited circumstances set forth in § 1329. Id. at 548. 43 Upon a close analysis, the bankruptcy court's conclusions of law do accord significant finality to confirmed plans without requiring specific threshold tests not contemplated by the statute. Therefore, we adopt the Witkowski approach as modified by the bankruptcy court and refrain from adopting the substantial and unanticipated test for seeking a modification pursuant to § 1329. Accordingly, we find that the Trustee and Mellon were not precluded by res judicata from seeking an amendment to the plan. In addition, given the factual circumstances of this case -- where the Debtors realized through the sale an appreciation in value of almost 215% of the stipulated value of the property at confirmation -- we find that the bankruptcy court did not abuse its discretion in granting the amendment. Witkowski, 16 F.3d at 746 (Because modification under § 1329 is discretionary, our review is limited to a determination of whether the district court abused its discretion in modifying the plan.). 44 Finally, as the bankruptcy judge said, it is antithetical to the bankruptcy system to allow a debtor to strip down a mortgage, underpay the unsecured creditors, and obtain a super discharge under section 1328(a) of the Code, while selling the property mortgaged for a price of two times its estimated value for purposes of the strip down, and keeping to himself the excess of the proceeds. In re Barbosa, 236 B.R. at 552. In fact, to allow the Debtors to keep the proceeds of the sale in such circumstances effectively defeats Congress' intention to extend the application of the ability-to-pay standard forward throughout the duration of the plan. Oversight Hearings, supra.