In re Escarcega

• Decision Date: 26 September 2016
• Docket Number: Case No.: 16-50368 SLJ, Case No.: 16-50548 SLJ, Case No.: 16-50659 SLJ, Case No.: 16-50651 SLJ, Case No.: 16-50401 MEH
• Citation: 557 B.R. 755
• Parties: In re Dennis Michael Escarcega, Debtor In re Eugene Edward Vick, Debtor In re Nanette Marie Sisk, Debtor In re Jeri Lyle Saldua Mercado, Debtor In re Mark Irvin Candalla, Debtor
• Court: U.S. Bankruptcy Court — Northern District of California

557 B.R. 755

In re Dennis Michael Escarcega, Debtor

In re Eugene Edward Vick, Debtor

In re Nanette Marie Sisk, Debtor

In re Jeri Lyle Saldua Mercado, Debtor

In re Mark Irvin Candalla, Debtor

Case No.: 16-50368 SLJ

Case No.: 16-50401 MEH

Case No.: 16-50548 SLJ

Case No.: 16-50651 SLJ

Case No.: 16-50659 SLJ

United States Bankruptcy Court, N.D. California.

Signed September 26, 2016

Norma L. Hammes, Law Offices of Gold and Hammes, San Jose, CA, for Debtor.

CASES CONSOLIDATED FOR DECISION

M. Elaine Hammond

, United States Bankruptcy Judge and Stephen L. Johnson, United States Bankruptcy Judge

MEMORANDUM DECISION REGARDING CONFIRMATION OF CHAPTER 13 PLANS USING ADDITIONAL PROVISIONS VIOLATING BANKRUPTCY CODE

In February 2016, the judges of the San Jose Division required chapter 13 debtors to adopt the Chapter 13 Model Plan (“Model Plan”), which had been adopted by the remainder of the district in August 2013. In certain cases filed in the San Jose Division, counsel have modified the terms of the newly implemented Model Plan. The cases covered by this order include modified Model Plans.

The unvarnished purpose behind the proposed modifications is to perpetuate the apparently long-standing practice in the San Jose Division that permits confirmation of chapter 13 plans without a defined term,¹ that allows no possibility of distribution on allowed claims of general unsecured creditors,² and that permits Debtors to obtain a discharge prior to the end of the estimated term without further court order.³ All in all, these provisions are intended to authorize debtors to pay off their plans and obtain a discharge at any time after confirmation without having to go through the plan modification process and without having to pay allowed unsecured claims in full.

Because the additional provisions are inconsistent with the plan in use in the remainder of the district and are contrary to the Bankruptcy Code⁴ in application, they cannot be approved. This decision explains why.

I. THE BANKRUPTCY COURT DECIDES THESE CASES INVOLVING MODIFICATIONS TO A FORM PLAN EN BANC

The cases covered by this decision involve issues that commonly arise in chapter 13 cases filed in the court's San Jose Division. Because of the wide application of this decision, the judges who preside over chapter 13 cases in San Jose have determined to act jointly in deciding these matters. The judges have either heard testimony in the submitted cases or have reviewed transcripts of trial proceedings and are familiar with the facts and arguments presented therein.

The court's authority to decide these cases jointly is found in Federal Rule of Civil Procedure 42

, which permits the trial court to consolidate for hearing or trial matters that involve a common question of fact or law. Fed. R. Civ. P. 42, made applicable by Fed. R. Bankr. P. 7042. See

In re Iron

–

Oak Supply Corp. , 162 B.R. 301, 304 (Bankr.E.D.Cal.1993) ; In re Postconfirmation Fees , 224 B.R. 793, 794 (E.D.Wash.1998) ; 9A Fed. Prac. & Proc. Civ. § 2381 (A. Wright, A. Miller et al. 3d ed.) (“[the] objective [of Rule 42 ] is to give the district court broad discretion to decide how cases on its docket are to be tried so that the business of the court may be dispatched with expedition and economy while providing justice to the parties”).

II. BACKGROUND

A. Chapter 13 Cases and Plans

Chapter 13 of Title 11 of the United States Code spells out the requirements, process, and rewards of a chapter 13 case. A debtor achieves the most significant benefits of chapter 13—such as, obtaining a discharge of most unsecured debt and elimination of underwater liens on a residence and other property—by filing, confirming, and completing a chapter 13 plan. See 11 U.S.C. §§ 1321

, 1322, and 1325.

In the chapter 13 plan, a debtor agrees to submit some or all of his or her future earnings or other future income to a standing chapter 13 Trustee (“Trustee”). The Trustee accumulates this money and uses it to pay creditors' claims. § 1321(a)(1)

. The plan serves as the mechanism by which the debtor can alter certain contractual obligations such as, for example, modifying the rights of a secured creditor, curing a default on a home loan, or assuming an unexpired lease. § 1322(b). A chapter 13 debtor must begin making the payments called for in his or her plan to the Trustee within 30 days. § 1321.

A plan can be confirmed or approved by the court only if it meets stringent requirements. A chapter 13 plan must be proposed in good faith and must comply with applicable provisions of chapter 13 and the Bankruptcy Code. In addition, the plan must provide for full payment of all claims entitled to priority under § 507 (unless the claim holder otherwise agrees).⁵ The plan also must provide for equal treatment of claims by class (i.e., a debtor must treat all unsecured claims equally whether the holder of the claim is a credit card company or a relative). § 1322(a)(2) and (3)

. Importantly, the debtor must demonstrate that the plan meets the “liquidation test,” in that unsecured creditors will receive no less through the chapter 13 plan than they would receive in a chapter 7 liquidation. Finally, the debtor must prove “feasibility” by showing that he or she can make all the payments called for under the plan. § 1325(a).

The length of a chapter 13 plan varies. See § 1325(b)(1)(B)

and (b)(4). When the Trustee or a creditor objects to confirmation, the plan length depends on debtor's income level after payment of certain expenses. Id . A “below median” debtor cannot be compelled to have a plan that extends past 36 months; while a plan proposed by an “above median” debtor must be no longer than 60 months.⁶ A below median debtor may propose a plan that lasts longer than 36 months if desired. See § 1322(c). The Debtors in the cases at bar argue that because there was no objection by the Trustee or creditors in these cases, that no minimum plan length is required. We address—and reject—that point later in this opinion.

After a plan has been served on all creditors, it is set for a confirmation hearing. § 1324. If the plan satisfies all applicable requirements, then the court will confirm it.

Most plans last three to five years. It is commonly the case that circumstances arise which affect a debtor's ability to perform under his or her confirmed plan. For that reason the Bankruptcy Code provides a means to modify a plan after confirmation. § 1329. Plans may be modified to change the amount of a payment, the time for making payments, or to alter the amount of the distribution to a creditor whose claim is provided for in the plan. § 1329(a). A debtor is not the only party who is authorized by the Bankruptcy Code to seek modification of the plan. Both the Trustee and unsecured creditors also can request modification if circumstances warrant. Id. Alternatively, a debtor may receive a hardship discharge without completion of a plan if the debtor's “failure to complete payments is due to circumstances for which the debtor should not justly be held accountable.” § 1328(b).

Once a debtor completes the required payments under the confirmed plan, the debtor is entitled to a discharge. The chapter 13 discharge provides greater protection against creditors than is obtained in a chapter 7 liquidation. Compare § 1328(a) with § 727; United Student Aid Funds, Inc. v. Espinosa , 559 U.S. 260, 268, 130 S.Ct. 1367, 1376, 176 L.Ed.2d 158 (2010)

(“A discharge under Chapter 13 ‘is broader than the discharge received in any other chapter.’ ”). It is against this statutory background that we review the additional provisions proposed by Debtors.

B. History of the Northern District of California's Model Plan

Pursuant to Bankruptcy Local Rule 1007-1, the court may approve and require the use of practice forms. Practice forms may be adopted on a district-wide or division-wide basis. As the name suggests, practice forms are used to regularize practice and foster consistency throughout the district or division. Predictability as to where and how information is presented assists the court and the parties. Debtors do not challenge the court's ability to adopt a practice form or the process by which the Model Plan was created or adopted. But they argue that the Model Plan is a de facto local rule that abridges a debtor's rights and enlarge a creditor's rights.⁷

In order to provide context to our discussion of the Model Plan we now address the history and adoption of the Model Plan. This discussion is not relevant to the holding and references information that is not part of the record.

The judges of this court determined to draft a model chapter 13 plan for the entire district in 2012. They sought to move away from the three forms and assorted individual plans then in use. During 2012 and 2013, three judges drafted the Model Plan for the Northern District. In the process, they solicited and received written comments on the draft Model Plan from the three chapter 13 trustees in the district, as well as from members of the debtor and creditor bar. The judges then met with members of the bar and interested trustees and received additional comments. A number of the recommendations received were incorporated into the Model Plan. The court designed the Model Plan with the goal of creating a practical, efficient, and effective plan.

In August 2013, the Oakland and San Francisco Divisions implemented the Model Plan. At the same time, the Santa Rosa Division allowed, but did not require, its use. The San Jose Division did not adopt the plan at that time.

In late 2015, the judges in the San Jose Division announced that they would adopt the Model Plan. Doing so was important for two reasons. First, one of the bankruptcy judges assigned to the San Jose Division has retired and is not going to be replaced immediately. By regularizing the chapter 13 practice throughout the district, along with altering judicial assignments, the court is better able to provide parties with equal access to courts and judges' calendars....