In re Terrell
| Decision Date | 03 November 2021 |
| Docket Number | Case No. 18-28674-gmh |
| Citation | 637 B.R. 129 |
| Parties | IN RE: Antonio TERRELL and Angel Marie Terrell, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of Wisconsin |
Rebecca R. Garcia, Oshkosh, WI, Trustee, Pro Se.
Michael J. Watton, Milwaukee, WI, for Debtor.
DECISION AND ORDER GRANTING REQUEST TO MODIFY CONFIRMED PLAN
On the same day they filed their bankruptcy case the debtors filed a chapter 13 plan using this district's mandatory plan form. The plan obligated the debtors to pay the trustee for five years to fund the plan's distributions to creditors holding claims secured by their cars, holders of priority tax and child support debt that the plan paid in full, and administrative expenses. Their plan named the Wisconsin Department of Children and Families as a creditor in § 4.5, a section of the model plan designed for listing domestic support obligations owed to governmental entities—claims the Bankruptcy Code affords priority in 11 U.S.C. § 507(a)(1)(B). (All subsequent references to statutory sections are to the Bankruptcy Code, title 11 of the United States Code, unless otherwise specified.)
The Department filed a proof of claim stating that the debtors owed it more than $29,000 for benefit overpayments and asserting that the claim was entitled to priority under § 507(a)(1)(B). The Department's assertion of priority was contradicted by In re Dennis's holding that benefit overpayments are not domestic support obligations entitled to priority under § 507(a)(1)(B). 927 F.3d 1015, 1017-18 (7th Cir. 2019). Applying Dennis this court sustained the debtors’ objection to the Department's claim and declared that no amount of the claim is entitled to priority. In re Terrell , 633 B.R. 872 (Bankr. E.D. Wis. 2021).
The debtors’ success in obtaining a determination that the Department's claim is not entitled to priority underpins the contested matter at issue here—the Department's objection to the debtors’ request to modify their plan under § 1329(a) to reduce the length of time they must pay the trustee from five years to three. This shortened period is sufficient to fund all distributions required by the plan, except any amount owed to the Department, because the debtors previously surrendered collateral and reduced the plan's distributions to secured creditors.
The Department alone objects to the debtors’ proposed plan modification. The Department contends that the confirmed plan commits the debtors to providing for its claim as one entitled to priority under § 507(a)(1)(B). As a result, the Department argues, the debtors cannot shorten the plan term because they do not propose to pay the Department's claim in full and § 1322(a)(4), made applicable to requests to modify the plan by § 1329(b), requires that "the plan provide[ ] that all of the debtor's projected disposable income for a 5-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan." § 1322(a)(4). The Department insists it must be treated as holding a claim entitled to § 507(a)(1)(B) priority—regardless of Dennis and the September 21, 2021 decision and order ruling to the contrary—because the language of the confirmed plan commits the debtors to that treatment.
As this decision will explain, § 1329(a) authorizes the debtors to modify the plan to shorten the plan term and reduce plan payments, and neither the Bankruptcy Code nor the preclusive effect of the confirmed plan prevents them from doing so.
The original confirmed plan provided that the debtors would pay the trustee an amount approximately equal to their net disposable income for five years (stated in the plan as 60 months), and those payments were about equal to the amount the plan provided to pay creditors who held claims secured by the debtors’ vehicles, administrative expenses, and priority claims for taxes and child support. See ECF Nos. 2, 42, 43 & 45.
Given that the debtors’ net disposable income was roughly equivalent to their payments to the trustee to fund plan distributions to these other creditors, the debtors’ plan could not feasibly promise full payment of the Department's claim. Both the plan and the Department's proof of claim presumed that the claim was entitled to priority under § 507(a)(1)(B), consistent with previous decisions of the district court and this court. The debtors listed the claim in § 4.5, the part of the model plan that gives effect to Bankruptcy Code § 1322(a)'s requirement that a chapter 13 plan either (1) pay a claim entitled to priority under § 507(a)(1)(B) in full or (2) pay "all of the debtor's projected disposable income" in a five-year plan, even if, like the debtors in this case, the Code would otherwise limit the plan term to three years.1 § 1322(a)(4) ; see also § 1322(a)(2).
The debtors now request to modify their confirmed chapter 13 plan under § 1329 to shorten the plan term to three years. Before the court sustained the debtors’ objection to the Department's claim, the trustee objected to the debtors’ request to modify the plan, principally citing § 1322(a)(4) () and stating, "the debtors must provide all projected disposable income for a 5-year period as the debtors have a section 507(a)(1)(B) claim that will not be paid in full." ECF No. 72, at 1. After the court ruled that the Department's claim is not entitled to priority, the trustee withdrew her objection to plan modification. ECF No. 103. The Department, which did not timely object to the debtors’ request to modify the plan, seeks to continue the trustee's objection, and, under the circumstances, the court permits the Department to stand in the trustee's shoes.2
The Department principally argues that the court's determination that its claim is not entitled to priority has no impact on the debtors’ request to modify the confirmed plan. The Department contends that (1) the confirmed plan, which § 1327(a) makes binding on the debtors, established that the Department's claim is one entitled to priority under § 507(a)(1)(B), and (2) § 1329 does not authorize the debtors to "reclassify" the claim; thus, (3) §§ 1322(a)(4) and 1329(b) prevent the debtors from modifying the plan to shorten the plan term. The linchpin in this argument is that because the debtors listed the Department in § 4.5 of the plan form, which states that creditors listed there have an "allowed priority claim[ ] ... based on a domestic support obligation that is owed or assigned to a governmental unit as provided by 11 U.S.C. § 507(a)(1)(B)", the confirmed plan precludes any later determination of the amount, if any, to which the Department's claim is entitled to priority under § 507(a)(1)(B). ECF No. 2, at 5.
The Department's construction of the plan's formulaic text is incorrect. As this decision will explain, the confirmed plan does not establish that the Department's claim is irrefutably entitled to priority in the amount stated in its proof of claim, and it does not foreclose a party in interest from requesting after plan confirmation that the court determine the extent to which the claim is entitled to priority.
Before turning to plan construction, a point of necessary clarification on the difference between claim allowance and priority. The Department's objection to plan modification repeatedly contends that confirmation of the debtors’ plan provided the Department with "an allowed priority claim". See, e.g., ECF No. 107, at 3-4, & 6-7. But neither the debtors’ confirmed plan nor their proposed modification determines the allowed nature of the Department's claim or the amount of the claim that is entitled to priority.
Allowance and priority both affect whether and how a chapter 13 plan must provide for a claim. See, e.g., §§ 1322(a)(2) (), 1325(a)(4) (), 1325(a)(5) (), and Fed. R. Bankr. P. 3021 (). But the concepts are distinct-claim "[a]llowance", as the Seventh Circuit has observed, "has nothing to do with priority", In re Altheimer & Gray , 601 F.3d 740, 741 (7th Cir. 2010) -and they are governed by different Bankruptcy Code sections and Bankruptcy Rules.
Allowance of claims is governed by § 502 of the Bankruptcy Code and various rules that, read together, provide as follows: A proof of claim must be filed for the claim to be allowed (except in certain circumstances that do not apply here). Fed. R. Bankr. P. 3002(a). If a proof of claim is filed, then the claim "is deemed allowed" unless someone objects. § 502(a). A properly executed and filed proof of claim is "prima facie evidence of the validity and amount of the claim." Fed. R. Bankr. P. 3001(f). And "[a]n objection to the allowance of a claim", Fed. R. Bankr. P. 3007(a)(1), obligates the court to "determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition" and then "allow such claim in such amount, except to the extent that" one or more bases for disallowing the claim apply, § 502(b).
Priority, on the other hand, is governed by § 507, and requests to determine "the amount of a claim entitled to priority under § 507" are governed by Rule 3012. Fed. R. Bankr. P. 3012(a)(2). Rule 3012 provides that such a request may "be made ... by motion after a claim is filed" or "may be made ... in a claim objection", Fed. R. Bankr. P. 3012(b), as the debtors did here. Rule 3012 also governs a debtor's "request to determine the amount of a secured claim" and such request may also be made in a claim objection. Fed. R. Bankr. P. 3012(b). The rules thus contemplate two types of claim objections, those requesting that the court disallow a claim (in whole or in part) and those requesting that the...
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