In re Baker

• Decision Date: 29 September 2020
• Docket Number: Bankruptcy Case No. 17-14041 EEB
• Parties: IN RE: Robert William BAKER, Debtor.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

620 B.R. 655

IN RE: Robert William BAKER, Debtor.

Bankruptcy Case No. 17-14041 EEB

United States Bankruptcy Court, D. Colorado.

Signed September 29, 2020

Stephen E. Berken, Sean Cloyes, Denver, CO, for Debtor.

Chapter 13 Trustee-Goodman, Adam Goodman, Denver, CO, for Trustee Adam M. Goodman.

ORDER ON REQUESTED PLAN MODIFICATIONS

Elizabeth E. Brown, Bankruptcy Judge

THIS MATTER is before the Court on two competing motions to modify the Debtor's chapter 13 plan, one filed by the Debtor and one by the chapter 13 trustee (the "Trustee"). Post-confirmation, the Debtor sold his residence and realized net sales proceeds in excess of Colorado's homestead exemption. The Debtor's request to modify seeks to eliminate any further payments to the mortgage holder, whose debt the Debtor repaid from the sales proceeds. The Trustee's request would require the Debtor to segregate the homestead proceeds and agree to restrict their use to only the purchase of a new home, as well as the immediate turnover of the non-exempt portion and the eventual turnover of the exempt proceeds in the event the Debtor does not purchase a new home within two years of the sale date.

To rule on the competing motions, the Court must decide whether the sale proceeds, or any portion of them, constitute post-confirmation property that vested in the Debtor (unfettered by any bankruptcy restrictions) or whether they remain property of the estate (subject to restricted use). While this might appear to be a narrow question, answering it requires the Court to interpret several foundational chapter 13 statutes. Some might argue that these statutes are vague and even contradictory. One thing is certain, court interpretations of them are widely divergent.

I. BACKGROUND

Before engaging in this legal discourse, there are two aspects of this matter that require some background, one involves the value of the Debtor's home and the other applicable state law. When the Debtor filed his chapter 13 case on May 3, 2017, he owned a home he valued at $230,000, encumbered by a first deed of trust in the amount of $196,131. He claimed an exemption for the $34,131 of equity under Colorado's $75,000 homestead exemption statute.¹ But when he sold his home post-confirmation, he realized $86,000 in net sales proceeds, only $75,000 of which is exempt. The Trustee has not disputed or requested an evidentiary hearing on whether the Debtor improperly scheduled the petition date value of his home or whether the increase reflects post-confirmation changes, such as reduction of the mortgage balance or changes in the residential marketplace. In the absence of any challenge to the Debtor's original valuation, the Court assumes the increase in value reflects a post-confirmation change.

Second, according to Colorado law, proceeds up to the amount of the applicable homestead exemption remain exempt:

for a period of two years after such sale if the person entitled to such exemption keeps the exempted proceeds separate and apart from other moneys so that the same may be always identified. If the person receiving such proceeds uses said proceeds in the acquisition of other property for a home, there shall be carried over to the new property the same homestead exemption to which the owner was entitled on the property sold.

Colo. Rev. Stat. § 38-41-207. In this case, the Debtor's two-year reinvestment period will expire on May 17, 2021.

II. DISCUSSION

The Trustee's argument is straight forward. The Debtor can only exempt $75,000. Therefore, the additional $11,000 should be immediately contributed toward the repayment of creditors. The remaining $75,000 only retains its exempt character if the Debtor uses it to buy a new home within two years. Consequently, he should not be able to spend it on anything else. If he loses his exemption, then all the funds must go toward repaying creditors.

This argument requires the Court to interpret three pivotal statutes: 11 U.S.C. §§ 1306, 1327, and 1329.² Section 1306 delineates what is property of the estate in a chapter 13 case. In addition to the property specified in § 541, the chapter 13 estate includes all property the debtor "acquires after the commencement of the case but before the case is closed, dismissed, or converted...." 11 U.S.C. § 1306(a)(1). Section 1327 describes the legal effect of plan confirmation. In subsection (b), it provides that, unless the plan states otherwise, "confirmation ... vests all of the property of the estate in the debtor." Id. § 1327(b). These two statutes appear to be contradictory. Is property acquired post-confirmation property of the estate under § 1306(a)(1) that must be contributed toward plan obligations? Or is it property of the debtor following confirmation as provided by § 1327(b) and, therefore, it is no longer subject to the claims of his creditors, except as provided in the plan?

Finally, § 1329 sets forth the requirements for any post-confirmation modification of a plan. It allows for increases and decreases in plan payments but does not specify what constitutes cause for a change in payments. Is it limited to changes in income? Or does a sale of an asset provide grounds for an increase? It also specifies that any modification must satisfy certain confirmation standards, such as the best-interest-of-creditors test (the "BIC"). Id. § 1329(b) (incorporating § 1325(a)(4)). This test requires a showing that the creditors will receive under the modified plan at least as much as they would from a chapter 7 liquidation. Id. § 1325(a)(4). But § 1329(b) does not specify the measuring date on which the BIC test must be applied in a modification context. Should the court measure the hypothetical chapter 7 distribution on the date of the proposed modification or does it remain the date of the plan's effective date as specified in § 1325(a)(4)? The value of the debtor's assets, and even the existence of the assets themselves, may differ significantly on these two dates.

Congress may have left these statutes intentionally vague to allow courts greater flexibility in interpretation but, as a result, courts are sharply divided on how they have filled these gaps. When applicable bankruptcy statutes are subject to varying interpretations, this Court always begins by stepping back and looking at the Bankruptcy Code as a whole. It has provided two different methods by which individual debtors may restructure their finances and obtain a fresh start, one in chapter 7 and the other in chapter 13.³ In chapter 7, the debtor parts with his non-exempt property but keeps his future income and, in exchange, he receives a discharge of his debts. In chapter 13, the debtor retains his property, but to achieve a discharge he agrees to contribute all his disposable income over the life of the plan, which payments must amount to at least as much as his creditors would receive in a chapter 7 liquidation. Thus, the two bargains struck are fundamentally different. David Gray Carlson, Modified Plans of Reorganization and the Basic Chapter 13 Bargain , 83 Am. Bankr. L.J. 585 (2009) ("Carlson"). Either the debtor trades his property or his income for his discharge, but not both. Any interpretation of these chapter 13 statutes must not attempt to blur this fundamental premise. It must recognize that, in chapter 13, the debtor's plan payments substitute for his property, leaving the debtor with the freedom "to treat his ... property as his ... own without court intervention at every turn." Yoon v. Krick (In re Krick) , 373 B.R. 593, 607 (Bankr. N.D. Ind. 2007).

Another bedrock principle of chapter 13 is that a debtor must make his best efforts to repay creditors with his future income. However, often debtors' circumstances change over the three-to-five-year terms of their plans, whether for better or worse. The Bankruptcy Code anticipates this. In § 1329(a), the Code provides for modification of a confirmed plan to request four types of changes: (1) an increase or decrease in payments ( § 1329(a)(1) ); (2) an extension or reduction in the time for payments ( § 1329(a)(2) ), provided that any extension does not cause the plan to exceed five years in length ( § 1329(c) ) or seven years in length if the debtor has experienced material financial hardship due to the COVID-19 pandemic ( § 1329(d) ); (3) an alteration in a creditor's distribution rights under the plan to account for non-plan payments the creditor has received ( § 1329(a)(3) ); and (4) a decrease in payments necessary to allow the debtor to acquire health insurance ( § 1329(a)(4) ).

This statute not only limits the types of permissible modifications, but also standing to request a modification. Requests for post-confirmation modification can be made only by the debtor, the chapter 13 trustee, or the holder of an allowed unsecured claim. Id. § 1329(a). And they must make their requests before the completion of payments under the confirmed plan. Id.

Before approval, the court must determine whether, with the proposed modification, the plan will continue to satisfy many of the original confirmation requirements. In § 1329(b), the Code lists several sections of chapter 13 that "apply to any modification." They are: §§ 1322(a), 1322(b), 1323(c) and "the requirements of section 1325(a)." Id. § 1329(b)(1). By failing to place restrictions on the use of the sale proceeds, the Trustee asserts that the Debtor's proposed modification does not meet two of the requirements of § 1325(a): (1) the BIC test of § 1325(a)(4) and (2) the good faith requirement of § 1325(a)(3).

A. What is the Measuring Date for the BIC Test under § 1329 ?

In the confirmation context, § 1325(a)(4) clearly specifies that the BIC test is to be applied "as of the effective date of the plan." However, § 1329(b) does not state its measuring date. Given its silence in this regard, many courts assume that they should reapply it as of the modification date. Keith M. Lundin, Lundin on Chapter 13 , § 126.2, at ¶ 11 (September 27, 2020 update) ("Lund...