In re Goethals

Decision Date30 March 2023
Docket Number18-07278-LT13
PartiesIn re: RICHARD ALAN GOETHALS AND ROBIN ELLYN GOETHALS,Debtors.
CourtU.S. Bankruptcy Court — Southern District of California

NOT FOR PUBLICATION

MEMORANDUM DECISION

LAURA S. TAYLOR, UNITED STATES BANKRUPTCY COURT JUDGE

I. [1]
INTRODUCTION

Debtors Richard Alan and Robin Ellyn Goethals defaulted under their chapter 13[2] plan over a 12-month period. In response to the chapter 13 trustee 's motion to dismiss they proposed a new plan that eliminated the amount in default as a plan obligation and, solely as a result of this retroactive change, reduced distributions to unsecured creditors. The Debtors argue that the Bankruptcy Code's plain language requires confirmation of their modified The statutory language allowing cure or waiver through plan modification does not specifically allow cure or waiver of a plan default by elimination of pre-existing plan obligations. And application of the relevant cannons of statutory construction does not support the Debtors' argument either. In short, the Debtors' proposed modified plan cannot be confirmed as it seeks a result inconsistent with the Code.

II. FACTS

The Debtors initiated a chapter 13 case on December 7, 2018. This was not their first bankruptcy. In 2012 they filed a chapter 7 case and discharged over $41,000 in scheduled unsecured debt.

Unfortunately, the 2012 bankruptcy did not provide a solid basis for an improved financial life. Their claims docket in the present case eventually evidenced more than $27,000 in secured debt, more than $19,000 in priority tax debt, and over $30,000 in unsecured debt.

At the time the Debtors initiated this case, chapter 13 was their only option. Because of the previous bankruptcy, they did not qualify for a discharge under chapter 7. Further, because of the tax defaults and defaults on their car loans, they needed the ability to cure that a chapter 13 case provides.

In their initial plan, the Debtors proposed two payments of $504.00 and 58 payments of $975.00. This initial plan paid car loan arrearage and priority debt. The Debtors initially estimated that unsecured creditors would receive nothing.

The chapter 13 trustee filed objections to the initial plan. Among other things, he questioned the Debtors' alleged below median income status noting that their tax deduction was too high and that they had additional disposable income which must be applied to the plan.

The Debtors subsequently modified their plan to satisfy the trustee, providing for two payments of $975.00 and 58 payments of $1,200.00. They agreed to an applicable commitment period of 60 months; thus, payments under this plan totaled $71,550.00 and they estimated a payment to unsecured creditors. The Court confirmed this plan (the "Original Plan") without making a determination on the trustee's objections.

The Debtors made the payments required by the Original Plan for several years. But in 2021, payments ceased. As a result, after 12 months of default, the trustee brought a motion to dismiss the case. The default then totaled $14,400. The Court ordered that the Debtors either file a plan modification or a motion for hardship discharge to avoid dismissal.

In response, the Debtors filed a modified plan (the "New Plan") which is the focus of this decision. They also filed documents explaining that during the period of default they encountered unusual health challenges and expenses related to an unexpected move. They additionally emphasized that life disruptions complicated their ability to make the payments. In particular, the explanation strongly suggests that Ms. Goethal's health challenges left Mr. Goethals with primary responsibility for ensuring that the payments were made; it appears that he was not up to the task.

Typically, in such a situation, a modified plan would attempt to cure the previous plan defaults over the remaining life of the plan. But the Debtors chose another course. Instead of acknowledging the payment defaults, they attempted to alter history. The New Plan changed the amount of payments required by the Original Plan and reduced them to the amount of the payments paid. They then proposed additional payments of $1,400 going forward for the remaining 15 months of their commitment period. The New Plan thus proposed a disguised but substantial reduction in the amount paid to unsecured creditors in their chapter 13 case.

The trustee objected to the New Plan on numerous bases, including that the Debtors could not retroactively modify the Original Plan to change the amount of payments due before the modification date thereby eliminating their plan default.

The Court notes that there are numerous hurdles which the Debtors must overcome in order to stay in this chapter 13 case. First is the question of good faith. The Court requires an evidentiary hearing on this point. Second, if a hardship discharge is requested, the Debtors must meet the stringent standards for such extraordinary relief. There are also substantial questions about the correct payment amount under the New Plan. The information provided supports a payment in excess of the $1,400.00 payment they now propose. Again, an evidentiary hearing may be required.[3]

In the interest of avoiding resolution of these evidentiary issues at potentially high expense, the Court has focused on the Debtors' treatment of the Original Plan default. To the extent the Debtors cannot simply eliminate the consequences of default as they attempt, the New Plan is unconfirmable. As a result, the Court turns to the Debtors' arguments on this point.

III. ANALYSIS

Bankruptcy courts "apply the traditional tools of statutory interpretation in construing the Code." In re Sisk, 962 F.3d 1133, 1145 (9th Cir. 2020). When interpreting a statute, "[f]he plain meaning of the text controls unless it is ambiguous or leads to an absurd result." United States v. Pacheco, 977 F.3d 764, 767 (9th Cir. 2020). Further, the plain and unambiguous meaning only controls if "the statutory scheme is coherent and consistent." Robinson v. Shell Oil Co., 519 U.S. 337, 340 (1997). Whether a statute is ambiguous "is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole." Id. at 341. Further, "[w]hen construing a statute, courts should avoid any statutory interpretation that renders any section superfluous." Tulelake Irrigation Dist. v. United States Fish & Wildlife Serv., 40 F.4th 930, 936 (9th Cir. 2022) (internal citations omitted). If a statute is ambiguous, courts may look to legislative history and the purpose of the statute. United States v. LKAV, 712 F.3d 436, 440 (9th Cir. 2013).

At bottom, Debtors' argument is that § 1322(b)(3) plainly and unambiguously permits the curing or waiving of a plan default through a retroactive plan modification. The Debtors start with the plain language of § 1329, which governs post-confirmation plan modifications. Section 1329(a)(1) permits plan modifications to increase or reduce the payment amount, and § 1329(a)(2) permits such modifications to extend or reduce time for such payments up to five years from the time the first payment under the original confirmed plan was due. Section 1329(b)(1) also provides that § 1322(b), among other statutes, applies to plan modifications. Section 1322(b)(3), in turn, states that a plan may "provide for the curing or waiving of any default." The Debtors also cite § 1322(b)(l 1), which states that the plan may "include any other appropriate provision not inconsistent with this title," and argue that no provision of the Code prohibits retroactive modifications. Thus, under the Debtors' interpretation of these statutes, they are permitted to modify their plan to retroactively reduce the payments required by a confirmed plan because "any default" in § 1322(b)(3) unambiguously includes a plan default. The Court disagrees.

As one court noted: "The Code is unclear on whether a plan requiring payments may, after the debtor's payment obligation arises, be modified to relieve the debtor of that duty." In re Alonso, 570 B.R. 622, 630 (Bankr. D. Idaho 2017). This Court agrees that, in isolation, § 1329(a)(1) and 1322(b)(3) are ambiguous on this point. But when they are examined in context, it becomes clear that the Code does not permit such retroactive modification.

A. The Debtors' interpretation of § 1322(b) and § 1329(a) to permit retroactive plan modification to cure or waive a plan default is inconsistent with other Code sections, limiting their meaning or rendering them superfluous.

The Code delineates specific outcomes in chapter 13 proceedings related to debtors' performance under their bankruptcy plan. Debtors either: (1) complete all plan payments and receive a § 1328(a) discharge; (2) fail to complete all plan payments but move for and meet the requirements of a § 1328(b) hardship discharge; (3) fail to complete all plan payments and face conversion or dismissal under § 1307(c)(6) for material default; or (4) in those cases where a discharge is not available because the chapter 13 occurs less than four years after discharge in an earlier bankruptcy, complete the payments required to cure an arrearage or reach other appropriate goal and the case closes without discharge. Here, the Debtors attempt to avoid completing all plan payments under their confirmed plan, to avoid the hardship discharge analysis, to evade conversion or dismissal, and to, nonetheless, receive a discharge. Such a result is not plainly allowed by the Code, and such a construction does violence to the statutory scheme.

1. The Debtors have failed to meet the requirements for a § 1328(a) standard discharge and have not attempted to meet the requirements of a ...

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