In re Guernsey, Bankruptcy No. 3-90-2429.

• Decision Date: 11 December 1995
• Docket Number: Bankruptcy No. 3-90-2429.
• Citation: 189 BR 477
• Parties: In re Patrick J. GUERNSEY, Diane K. Guernsey, Debtors.
• Court: U.S. Bankruptcy Court — District of Minnesota

189 B.R. 477 (1995)

In re Patrick J. GUERNSEY, Diane K. Guernsey, Debtors.

Bankruptcy No. 3-90-2429.

United States Bankruptcy Court, D. Minnesota, Third Division.

December 11, 1995.

Ian Traquair Ball, Minneapolis, MN, for Debtors.

Stephen Creasey, Minneapolis, MN, for Trustee J.J. Mickelson.

Lee Mosher, Golden Valley, MN, for Objecting Party to Modification of Chapter 13 Plan.

ORDER

DENNIS D. O'BRIEN, Chief Judge.

This matter came on for hearing on September 18, 1995, on Debtors' motion to further modify their Modified Chapter 13 Plan, dated July 7, 1992, and confirmed September 11, 1992. An objection was filed by City-County Federal Credit Union, an unsecured creditor. The Court, having heard and considered the evidence and arguments presented at the hearing; having reviewed the post-hearing briefs filed by the parties; and, being fully advised in the matter; now makes this Order pursuant to the Federal and Local Rules of Bankruptcy Procedure.

I.

The Debtors filed their petition under Chapter 13 on June 4, 1990. An order confirming their initial 5-year plan was entered on August 9, 1990. That plan provided for monthly payments to be made by the Debtors in the amount of $550.00. Unsecured creditors were to be paid a stated "Undet." percent of their claims, which was estimated at $25,033. The amount to be paid to secured and priority creditors was estimated at $16,429. The total stated amount to be paid into the plan was $33,000.

The initial plan was modified by the Modified Chapter 13 Plan dated July 7, 1992, confirmed by order entered September 11, 1992. The Modified Plan reduced the monthly payments to $180.00; and, it was a "percentage plan," with respect to unsecured creditors, that was to pay 14 percent of the allowed amounts of the filed claims. The stated amount to be paid the unsecured class was $4,210. The stated amount to be paid secured and priority creditors was $12,861. The total amount stated to be paid under the Modified Plan was $17,071.

All payments were made as scheduled under the confirmed Modified Plan, but the Trustee allocated the payments to a secured debt in excess of the amount stated. That resulted in a potential shortfall from the 14% required to be paid to unsecured creditors. The Debtors discovered the situation in May, 1995. The last payment under the Modified Plan was due two months later, in July. The Debtors filed their motion to further modify the Modified Plan on May 25, 1995. The new proposed modification simply provides that the last two scheduled payments be made in the scheduled amounts of $180.00 each; and, that the total amount to be paid to unsecured creditors be reduced to $2,127, or a 7% distribution.

City-County Federal Credit Union, an unsecured creditor, objected to the proposed modification. The Credit Union's objections were based on its assertions that: no amended schedules had been filed; the moving papers contained insufficient information to allow the Court and interested parties to make an informed determination whether the proposed modification was justified; and, issues of good faith and "best interests of creditors" arising under 11 U.S.C. § 1325(a)(3) and (a)(4), could not be determined.

Hearing was initially held on August 10, 1995. No significant current financial information was filed or served by the Debtors prior to the hearing.¹ The Court ordered the matter continued for evidentiary hearing, which was then held on September 18. No amended schedules were filed prior to that hearing, either. Patrick Guernsey testified, generally, that he was unable to pay the additional $2083, necessary to consummate the 14 percent Plan. He offered little specifics regarding his income and expenses, and presented no balance sheet information. Diane did not appear at the hearing, and filed nothing.² The parties were allowed additional time to file briefs, all of which have now been submitted.

II.

The Debtors' 1992, Modified Plan is a percentage plan. Their obligation under the Modified Plan is to pay unsecured creditors 14% of the allowed amounts of the claims. See: In re Jordan, 161 B.R. 670, 671 (Bankr.D.Minn.1993). The fact that the Debtors have made all monthly payments in the scheduled amounts does not result in full performance of the obligation.

Recognizing this, the Debtors seek further modification at the end of the Plan to simply make it conform to the Trustee's actual distributions. They seek the modification based on their assertion that the Trustee misapplied a portion of their payments, or that the Debtors miscalculated the amount due the secured creditor; and, that there is insufficient time left under the Plan to make up the resulting shortfall to the unsecured class.³ The Debtors claim they are unable to make the lump sum payment that would be required to satisfy the amount due the unsecured class, which is $2083.⁴

11 U.S.C. § 1329 provides:

§ 1329. Modification of plan after confirmation.

(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be 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.

(c) A plan modified under this section may not provide for payments over a period that expires after three years after the time that the first payment under the original confirmed plan was due, unless the court, for cause, approves a longer period, but the court may not approve a period that expires after five years after such time.

It has been held in this district that debtors must show an adverse change in financial circumstances to obtain approval of proposed plan modification that seeks to reduce confirmed plan payments over the objection of the affected class or classes of creditors. See: In re Mary Boerbon Nelson, 189 B.R. 748 (Bankr.D.Minn.1995). The Debtors argue that § 1329 does not provide any threshold requirements for plan modification, and that they have an absolute right to request modification between confirmation and completion of a plan. Accordingly, the Debtors claim that § 1329(a) allows them to amend their plan, to reduce their obligations, for reasons unrelated to any change in their financial circumstances. They cite Matter of Witkowski, 16 F.3d 739 (7th Cir.1994).

The Witkowski court ruled that a trustee could obtain modification of a debtor's percentage plan, where the allowed amounts of unsecured claims were substantially less than anticipated, thereby justifying an increase in the percentage to be paid. The debtor had objected to the proposed modification, arguing that the trustee was required to show substantial change in the debtor's financial circumstances to obtain approval of the modification; and, that there had been no change. The court disagreed, stating:

By its terms, § 1329 does not provide for any threshold requirement to modify a bankruptcy plan. In re Powers, 140 B.R. 476, 478 (Bankr.N.D.Ill.1992); In re Perkins, 111 B.R. 671, 673 (Bankr.M.D.Tenn. 1990) ("changed circumstances, unanticipated or otherwise, is not imposed by the code as a threshold barrier to access to modification under § 1329"). See also In re Larson, 122 B.R. 417, 420 (Bankr.D.Idaho 1991) (refusing to impose a threshold requirement on the similarly worded modification statute which applies to Chapter 12 bankruptcies). Rather, according to the terms of § 1329, the debtor, the trustee or an unsecured claimholder has an absolute right to request modification of the plan between confirmation of the plan and completion of the plan payments. § 1329(a)(2). Powers, 140 B.R. at 478; Perkins, 111 B.R. at 673. Further, § 1329 allows the trustee to do exactly what he did in this situation — increase the amount of payments on claims of a particular class. § 1329(a)(1); Powers, 140 B.R. at 478. "Where, as here, the statute\'s language is plain, `the sole function of the courts is to enforce it according to its terms.\'" Matter of Sinclair, 870 F.2d 1340, 1341 (7th Cir.1989) (quoting Burlington North. R.R. v. Oklahoma Tax Comm., 481 U.S. 454, 461, 107 S.Ct. 1855, 1860, 95 L.Ed.2d 404 (1987)).

Witkowski, 742.

It has been said that Witkowski is contrary to the law of the Fourth Circuit, stated in In Re Arnold, 869 F.2d 240 (4th Cir.1989). In that case, the court held that a substantial change in financial circumstances justified a plan modification sought by an unsecured creditor, that would increase payments under a previously confirmed plan over the objection of the Debtor. The holdings in Witkowski and Arnold are not irreconcilable.⁵

The two cases, and the cases that support the respective positions,⁶ implicitly recognize that the proponent of a modified Chapter 13 plan must demonstrate cause to obtain approval of a proposed plan modification over the objection of adversely affected parties. In Witkowski, where the proponent was the trustee, the cause justifying the increased dividends to creditors (without any change in the amount of payments by the debtor) was the unexpected low filings of claims. In Arnold, where the proponent was a creditor, the cause that justified increasing the amount of the debtor's payments to be made to the plan, was the substantial increase in the debtor's annual income from $80,000 to $200,000.

In Witkowski, change in financial circumstances of the debtor was an irrelevant...