Court Opinion

ID: 46220
Source: CourtListenerOpinion
Date Created: 2010-04-25 22:55:23+00
Date Added: 2024-06-11T17:17:35.394353
License: Public Domain

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

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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

                                     11
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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