In re Wruck, Bankruptcy No. 93-30999.
| Decision Date | 16 June 1995 |
| Docket Number | Bankruptcy No. 93-30999. |
| Citation | 183 BR 862 |
| Parties | In re Wayne and Lavonna WRUCK, Debtors. |
| Court | U.S. Bankruptcy Court — District of North Dakota |
Sheldon Smith, Bismarck, ND, for debtors.
Wayne Drewes, Trustee, Fargo, ND.
The matter before the court arises by motions filed by the debtors, Wayne & Lavonna Wruck, on April 24 and May 25, 1995, pursuant to 11 U.S.C. § 1229(a). By their motions, the debtors are seeking to modify their second modified plan of reorganization (Plan) under Chapter 12 of the United States Bankruptcy Code in order to alter the manner by which the Plan is administered. The Plan, which was previously confirmed by this court on July 25, 1994, expressly provides that "the Trustee shall be the disbursing agent for all modified claims."1 The debtors, relying on the change that the decision of Wagner v. Armstrong (In re Wagner), 36 F.3d 723 (8th Cir.1994) wrought on the law in this district, are seeking to avoid the payment of the statutorily prescribed trustee's fees by modifying their confirmed Plan in a fashion which would enable them, rather than the standing trustee, to serve as disbursing agent for Plan payments. The proposed modification would allow the debtors to assume direction and control over the administration of the Plan by authorizing them to make payments directly to those creditors whose claims have been modified under the Plan and, consistent with the holding in Wagner, thereby avoid the payment of the trustee's fees. Not surprisingly, both the Chapter 12 Standing Trustee and the United States Trustee (Trustee) object to the debtors' attempted modification. The Trustee contends that, pursuant to 11 U.S.C. § 1227, the debtor is bound by the terms of the confirmed Plan and is, moreover, precluded by the doctrine of res judicata from altering the manner by which the Plan is being administered. The Trustee further asserts that § 1229(a) enumerates the only basis for modifying an already confirmed plan of reorganization.
The issue of whether Chapter 12 debtors may formulate plans of reorganization which allow them to bypass the trustee and make payments directly to secured creditors whose claims are modified under a Chapter 12 plan of reorganization and thereby avoid the standing trustee's percentage fee, sharply divides the courts. Compare Michael v. Beard (In re Beard), 45 F.3d 113 (6th Cir.1995) and Wagner v. Armstrong (In re Wagner), 36 F.3d 723 (8th Cir.1994) (allowing direct payments), with Dunivent v. Schollett (In re Schollett), 980 F.2d 639 (10th Cir.1992) and Fulkrod v. Anabele Savage (In re Fulkrod), 973 F.2d 801 (9th Cir.1992) (prohibiting direct payments). See George H. Singer, Zeroing Out the Standing Trustee's Percentage Fee: The Eighth Circuit Approves "Outside the Plan" Payments for Chapter 12 Debtors, 11 Norton Bankr.L.Adviser 7 (Nov. 1994) (). The long-standing ruling of this court, and the state of the law in this district at the time the debtors in this case achieved confirmation of their Plan, had been that Chapter 12 debtors could not, in the face of an objection, avoid the payment of the standing trustee's percentage fee simply by acting as disbursing agent of the plan payments. See, e.g., In re Oster, 152 B.R. 960 (Bankr.D.N.D.1993); In re Wagner, 150 B.R. 753 (Bankr.D.N.D.1993); In re Rott, 73 B.R. 366 (Bankr.D.N.D.1987) (). This court has never, however, ruled as a matter of law that Chapter 12 debtors could not act as disbursing agents for plan payments. See id. The relatively recent decision of the Court of Appeals for the Eighth Circuit in Wagner v. Armstrong (In re Wagner), 36 F.3d 723 (8th Cir.1994), decided some two months after the debtors in this case achieved confirmation of their Plan, affirmed the district court's reversal of this court's ruling. This court ruled in Wagner that, despite a provision in a confirmed plan to the contrary, Chapter 12 debtors could not avoid the payment of the Congressionally mandated trustee's fees. In reversing, the district court concluded that the plans in question expressly provided for direct payments in avoidance of the trustee's fees and confirmation bound the trustee to their terms. While the district court's holding was specifically limited to Chapter 12 plans which had already achieved confirmation, see Wagner v. Armstrong, 159 B.R. 268, 272 (D.N.D.1993) (), the court of appeals decision was not so constrained. Indeed, the Eighth Circuit expanded on the district court's ruling by concluding that Chapter 12 debtors may formulate plans of reorganization which authorize them to act as disbursing agents and essentially self-administer their plans by making payments directly to creditors whose claims have been modified by operation of Chapter 12 and, moreover, are not required to pay a fee to the standing trustee for any payments which are directly made. In re Wagner, 36 F.3d at 727-28. The circuit's holding significantly alters the state of the law in this district.
Now, armed with court's holding in Wagner, the debtors in this case are attempting to fundamentally alter the method by which their previously confirmed Plan is administered by modifying the Plan in order to remove the Chapter 12 standing trustee from his Plan-designated role as the disbursing agent for all payments on modified claims. By doing so, the debtors are attempting to retroactively apply the holding of the court of appeals in Wagner to a Plan which had already achieved confirmation prior to the court's pronouncement.
Section 1227 of the United States Bankruptcy Code makes the provisions of a confirmed Chapter 12 plan binding on both creditors and debtors. 11 U.S.C. § 1227(a). The confirmation of a plan of reorganization therefore operates as a final judgment and the traditional rules of res judicata become applicable and operate to bar the litigation of any matters that were necessarily determined by the confirmation order or those issues that could have been decided previously. See In re Szostek, 886 F.2d 1405 (3d Cir.1989); In re Wrenn Ins. Agency, 178 B.R. 792 (Bankr.W.D.Mo.1995); In re Clark, 172 B.R. 701 (Bankr.S.D.Ga.1994). See also 5 Collier on Bankruptcy ¶ 1227.01, at 1227-2 (Lawrence P. King et al. eds., 15th ed. 1995). As such, a debtor may not assert rights which are inconsistent with the provisions of a confirmed plan. A confirmed Chapter 12 plan has binding and preclusive effect due to the need for finality in establishing the rights and obligations of the various parties affected by a plan of reorganization. In re Wickersheim, 107 B.R. 177, 181 (Bankr.E.D.Wis. 1989); In re Grogg Farms, Inc., 91 B.R. 482, 485 (Bankr.N.D.Ind.1988). The need for finality is not, however, in all cases paramount. Unanticipated changes in circumstances and unexpected problems associated with the implementation of a plan militate in favor of a certain degree of flexibility to the operation of § 1227 and the doctrine of res judicata. The framers of the Code recognized this need for flexibility and provided for it in § 1229.
11 U.S.C. § 1229(a) permits a Chapter 12 debtor to seek a postconfirmation modification of a plan of reorganization provided that the plan has not been fully consummated. A bankruptcy court should, however, generally approach the issue of postconfirmation modifications cautiously in light of the fact that such modifications cut against the grain of finality and may operate to frustrate the legitimate expectations of parties to the bankruptcy proceeding. In re Grogg Farms, Inc., 91 B.R. at 484-85. Accord 5 Norton Bankruptcy Law and Practice 2d § 111:6, at 111-8-9 (1994). Moreover, the party proposing the modification bears the burden of establishing that the modification is proper. In re Pearson, 96 B.R. 990, 992 (Bankr.D.S.D.1989).
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