In re Murphy, 05-1637.

Citation474 F.3d 143
Decision Date18 January 2007
Docket NumberNo. 05-1637.,No. 05-1844.,05-1637.,05-1844.
PartiesIn re James Owen MURPHY, Jr., Debtor. James Owen Murphy, JR., d/b/a Murphy's Golf Shop, Plaintiff-Appellant, v. Gerald M. O'Donnell, Trustee, Defendant-Appellee. In re Stanley Joseph Goralski; Doris Ann Goralski, Debtors. Gerald M. O'Donnell, Chapter 13 Trustee, Trustee-Appellant, v. Stanley Joseph Goralski; Doris Ann Goralski, Debtors-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)

Bennett Allan Brown, Fairfax, Virginia, for Appellant in No. 05-1637. Gerald M. O'Donnell, Alexandria, Virginia, for Appellee in No. 05-1637/Appellant in No. 05-1844. Timothy John McGary, Fairfax, Virginia, for Appellees in No. 05-1844.

Before WILLIAMS and TRAXLER, Circuit Judges, and HAMILTON, Senior Circuit Judge.

Affirmed by published opinion. Senior Judge HAMILTON wrote the opinion, in which Judge WILLIAMS and Judge TRAXLER joined.

OPINION

HAMILTON, Senior Circuit Judge.

The two cases before the court involve instances in which the Chapter 13 trustee sought to modify a confirmed Chapter 13 plan to increase the amount to be paid to the unsecured creditors.1 In the first case, that of Stanley and Doris Goralski, the Chapter 13 trustee sought to modify the confirmed Chapter 13 plan after the bankruptcy court granted the Goralskis permission to refinance the mortgage on their residence. In the refinancing, the Goralskis received some of the equity in their residence in cash in exchange for a corresponding amount of debt, and the Chapter 13 trustee sought a portion of this money for the further benefit of the unsecured creditors. The Goralskis sought to refinance their mortgage primarily because Stanley Goralski's earned income was cut approximately in half, making it difficult for the Goralskis to make their plan payments and, at the same time, pay their ordinary and necessary living expenses. In the second case, that of James Owen Murphy, Jr., the Chapter 13 trustee sought to modify the confirmed Chapter 13 plan after the bankruptcy court granted Murphy permission to sell his condominium. The Chapter 13 trustee sought a portion of the sale proceeds for the further benefit of the unsecured creditors because, without a modification, Murphy stood to pocket in excess of $80,000, as his condominium had dramatically increased in value post-confirmation. The bankruptcy court granted the motion to modify in Murphy's case, but denied it in the Goralskis' case. See In re Murphy, 327 B.R. 760 (Bankr.E.D.Va.2005). The district court affirmed the bankruptcy court's decisions. Murphy appeals the decision in his case, as does the Chapter 13 trustee in the Goralskis' case. For the reasons stated below, we affirm.

I

The facts and procedural history in these two cases are not in dispute and are set forth separately for the reader's convenience.

A

Stanley and Doris Goralski filed a joint Chapter 13 petition in the United States Bankruptcy Court for the Eastern District of Virginia on April 29, 2003. The schedules filed with the petition reflected that they owned real property located at 13617 Chevy Chase Lane, Chantilly, Virginia, which they valued at $223,000. The schedules further reflected that the property was subject to liens in the total amount of $192,400. The Goralskis listed the sum of $89,438 as the amount of their unsecured debt. The plan filed by the Goralskis with their petition was confirmed without objection on September 18, 2003. It required the Goralskis to pay the Chapter 13 trustee $1,100 per month for thirty-six months and estimated a twenty-eight percent dividend to the unsecured creditors. The Goralskis' confirmed plan provided that, upon confirmation, "[a]ll property of the estate shall revest in the debtor[s]."

On October 21, 2004, approximately eighteen months after the Chapter 13 petition was filed, the Goralskis filed a motion for permission to refinance the mortgage on their residence, which had appreciated significantly in value. As part of the refinancing, the Goralskis sought to obtain a portion of the equity in their residence in cash in exchange for a corresponding amount of debt.2 The primary reason given for seeking to refinance was that Stanley Goralski's earned income had been cut approximately in half, making it difficult for the Goralskis to make their plan payments and, at the same time, pay their ordinary and necessary living expenses.3 In the motion, the Goralskis offered to pay all remaining payments required under the confirmed plan.

At the hearing on the motion, the Chapter 13 trustee took the position that, to the extent the proceeds of the refinancing were sufficient to pay all filed claims in full, the Goralskis should be required to pay the filed claims at a rate of 100 percent. The bankruptcy court overruled the Chapter 13 trustee's objection and granted the motion to refinance. The next day, the Chapter 13 trustee filed a motion to reconsider, as well as a motion to modify the confirmed plan, asking that the Goralskis' confirmed plan be modified to require $64,365 from the refinancing be paid to the Chapter 13 trustee to allow for the payment of all filed claims at a rate of 100 percent.

After the bankruptcy court refused to grant the Chapter 13 trustee's motion for modification and motion for reconsideration, the Chapter 13 trustee appealed. Following the district court's affirmance of the bankruptcy court's decision, the Chapter 13 trustee appealed to this court.

B

On December 15, 2003, Murphy filed a voluntary Chapter 13 petition in the United States Bankruptcy Court for the Eastern District of Virginia. On his schedules, he indicated that he owned a condominium located at 10125 Oakton Terrace Road, Oakton, Virginia, which he valued at $155,000, subject to a lien of $121,000. Murphy's schedules also listed $52,374 of unsecured debt. Murphy's plan, which was confirmed on April 29, 2004, required him to pay the Chapter 13 trustee $700 per month for thirty-six months and projected a thirty-seven percent dividend to the unsecured creditors. Like the Goralskis' confirmed plan, Murphy's confirmed plan provided that, upon confirmation, "[a]ll property of the estate shall revest in the debtor."

On November 8, 2004, Murphy filed a motion for authority to sell his condominium for $235,000, explaining that he had obtained a new job in Pennsylvania and needed to move.4 In the motion, Murphy indicated that he was willing to tender a sum to the Chapter 13 trustee sufficient "to complete the payment of debtor's chapter 13 payments." The Chapter 13 trustee did not object to the sale, but stated at the hearing that he needed approximately $30,000 from the sale to pay the filed unsecured claims in full. Murphy objected to paying the Chapter 13 trustee anything more than the approximately $12,000 still owed under the confirmed plan. The bankruptcy court preliminarily ruled that the sale proceeds constituted income that had to be applied to the plan and directed that $30,000 be turned over to the Chapter 13 trustee. Because Murphy's counsel stated that he intended to appeal the ruling, and so that there could be a final order to allow the contract to go to settlement, the order entered by the bankruptcy court simply approved the sale and stated that disposition of the $30,000 would be the subject of a further order. The bankruptcy court's ruling allowed the Chapter 13 trustee to disburse up to $11,973 of the proceeds (the amount needed to complete the scheduled plan payments) but required the Chapter 13 trustee to hold the balance of the $30,000 pending further order of the court.5 Although the ruling technically favored the Chapter 13 trustee, the Chapter 13 trustee moved for reconsideration and, contemporaneously, moved to modify the plan payments to allow for payment of all pending unsecured claims at a rate of 100 percent.

In its decision, the bankruptcy court modified the confirmed plan to provide for full payment of the pending unsecured claims. On appeal to the district court, the district court affirmed the bankruptcy court's ruling. Murphy now appeals to this court.

II

In contrast to a Chapter 7 bankruptcy, which involves the liquidation of a debtor's assets, a Chapter 13 bankruptcy allows the debtor to keep his assets. In a typical Chapter 13 bankruptcy, the debtor submits for bankruptcy court approval a plan to pay the debtor's creditors his disposable income over a period of three years. 11 U.S.C. §§ 1321, 1322, and 1325. In exchange for the debtor's commitment to part with all of his disposable income, the debtor is given a discharge of his remaining dischargeable debts if he successfully complies with the terms of the plan. In re Crawford, 324 F.3d 539, 541 (7th Cir.2003). Although secured claims in a Chapter 13 bankruptcy must be paid in full, unsecured creditors need not be paid in full, provided, among other things, the plan is proposed in good faith and the present value of what the unsecured creditors receive under the plan is at least as much as they would receive in a Chapter 7 liquidation. 11 U.S.C. §§ 1325(a)(3), (a)(4).

Generally, there are two types of Chapter 13 plans. "Percentage" plans designate what percentage each unsecured creditor will receive without specifying an exact amount the debtor must pay into the plan. In re Golek, 308 B.R. 332, 335 (Bankr.N.D.Ill.2004). In contrast, "pot" plans set the exact amount the debtor must pay into the plan, leaving in question the percentage each unsecured creditor will receive until all claims are approved. Id. Both of the plans in this case are pot plans.

A confirmed Chapter 13 plan is "a new and binding contract, sanctioned by the court, between the debtors and their pre-confirmation creditor[s]." Matter of Penrod, 169 B.R. 910, 916 (Bankr.N.D.Ind. 1994); see also 11 U.S.C. § 1327(a) ("The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such...

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