Kinney v. HSBC Bank USA, N.A. (In re Kinney)

• Decision Date: 23 July 2021
• Docket Number: No. 20-1122,20-1122
• Parties: IN RE: Margaret L. KINNEY, Debtor. Margaret L. Kinney, Appellant, v. HSBC Bank USA, N.A., Appellee. Douglas B. Kiel, Chapter 13 Trustee, Amicus Curiae.
• Court: U.S. Court of Appeals — Tenth Circuit

5 F.4th 1136

IN RE: Margaret L. KINNEY, Debtor.

Margaret L. Kinney, Appellant,

v.HSBC Bank USA, N.A., Appellee.

Douglas B. Kiel, Chapter 13 Trustee, Amicus Curiae.

No. 20-1122

United States Court of Appeals, Tenth Circuit.

FILED July 23, 2021

Stephen E. Berken, Berken Cloyes, Denver, Colorado, for the Appellant.

Jamie G. Siler, Murr Siler & Accomazzo, Denver, Colorado, for the Appellee.

Matthew W. Hoelscher, Greenwood Village, Colorado, for Chapter 13 Trustee, Douglas B. Kiel, Amicus Curiae

Before BACHARACH, EBEL, and EID, Circuit Judges.

BACHARACH, Circuit Judge.

The bankruptcy code provides a five-year limit on payment plans under Chapter 13. 11 U.S.C. § 1322(d). Once a debtor completes payments under the plan, the bankruptcy court must grant a discharge. 11 U.S.C. § 1328(a).

This appeal arises because Ms. Margaret L. Kinney failed to make some of the required mortgage payments within her plan's five-year period. Shortly after the five-year period ended, however, she made the back payments and requested a discharge. The bankruptcy court denied the request and dismissed the case.

The issue on appeal is whether the bankruptcy court could grant a discharge, and the answer turns on how we characterize Ms. Kinney's late payments. She characterizes them as a cure for her earlier default; HSBC Bank characterizes them as an impermissible effort to modify the plan. We agree with the bank and affirm.

1. Chapter 13 plans are limited to five years.

Chapter 13 of the bankruptcy code allows qualifying debtors to cover claims through "plans" that pledge future earnings. 11 U.S.C. §§ 1321, 1322(a) – (c). Upon confirmation, the plans bind the debtors and creditors. 11 U.S.C. § 1327.

But the code also allows modification of the plan. Through modification, a bankruptcy court can

• "extend or reduce the time for ... payments" ( 11 U.S.C. § 1329(a)(2) ) and

• permit the debtor to cure a default on a mortgage payment ( In re Hoggle , 12 F.3d 1008, 1011 (11th Cir. 1994) ).

But modifications cannot provide for payments more than five years after the deadline for the first payment. 11 U.S.C. § 1329(c).

A Chapter 13 bankruptcy case ends in discharge, conversion to Chapter 7, or dismissal. See Part 5(B)(1), below. Dismissals and conversions are governed by 11 U.S.C. § 1307 ; discharges are governed by 11 U.S.C. § 1328.

2. After suffering a car accident, Ms. Kinney missed two mortgage payments to the bank in the final months of her Chapter 13 plan.

Ms. Kinney filed bankruptcy under Chapter 13. Her plan, ultimately confirmed, required monthly mortgage payments to the bank.¹

Ms. Kinney was current with her mortgage payments when she filed bankruptcy, and she made her first post-petition payment in November 2013.² Under the plan, she needed to keep making timely mortgage payments through November 2018.

But misfortune struck: In March 2018, Ms. Kinney suffered a car accident. The accident triggered substantial expenses, and Ms. Kinney missed two mortgage payments in the final months of the five-year plan. (After the plan ended, Ms. Kinney missed two more mortgage payments.)

3. Because Ms. Kinney had not completed her payments within five years, the bankruptcy court concluded that it lacked discretion to grant a discharge.

The missed mortgage payments constituted a material default; so after the five-year plan had ended, the bank moved to dismiss the bankruptcy case. Ms. Kinney objected and tendered the back payments; but the bankruptcy court granted the motion to dismiss, reasoning that a discharge was no longer possible. Ms. Kinney unsuccessfully moved for reconsideration and now appeals.

4. We conduct de novo review of the bankruptcy court's interpretation of the code provision.

The bankruptcy code states that the court "may" dismiss a Chapter 13 case. 11 U.S.C. § 1307(c). Given the word "may," we would ordinarily review the dismissal for an abuse of discretion. See Woodworker's Supply, Inc. v. Principal Mut. Life Ins. Co., 170 F.3d 985, 995–96 (10th Cir. 1999) (applying the abuse-of-discretion standard based on the statutory term "may").

But the issue here is a legal one, and a bankruptcy court abuses its discretion by making a legal error. See Cooter & Gell v. Hartmarx Corp. , 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990). To determine whether the bankruptcy court legally erred in construing the code provisions, we conduct de novo review. In re Scrivner , 535 F.3d 1258, 1262 (10th Cir. 2008).

5. Though the bankruptcy code is ambiguous, its language suggests that discharge is allowable only if the debtor had no ongoing material default when the plan ended.

Conducting de novo review, we consider whether the bankruptcy code permits the court to treat Ms. Kinney's late payments as a "cure" rather than an impermissible "modification" of the plan. On this question, the code itself is ambiguous; but its language suggests that the late payments do not constitute a cure of the default. The statutory language thus supports the bank's position that the court couldn't grant Ms. Kinney a discharge.

A. We consider the code's language.

We start with the language of the code, giving undefined terms their "ordinary meaning." Ransom v. FIA Card Servs., N.A. , 562 U.S. 61, 69, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011) ; Hamilton v. Lanning , 560 U.S. 505, 513, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010) (quoting Asgrow Seed Co. v. Winterboer , 513 U.S. 179, 187, 115 S.Ct. 788, 130 L.Ed.2d 682 (1995) ). To avoid interpretations incompatible with the rest of the code, we read the provisions in the context of each other. United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs ., Ltd., 484 U.S. 365, 371, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988).

The code is ambiguous if it can be "understood by reasonably well-informed persons in two or more different senses." In re Geneva Steel Co ., 281 F.3d 1173, 1178 (10th Cir. 2002) (internal quotation marks omitted). Ambiguity depends on "the language itself, the specific context in which that language is used, and the broader context of the statute as a whole."

Bd. of Cty. Comm'rs of Boulder Cty. v. Suncor Energy (U.S.A.) Inc ., 965 F.3d 792, 804 (10th Cir. 2020) (quoting Ceco Concrete Const., LLC v. Centennial State Carpenters Pension Tr ., 821 F.3d 1250, 1258 (10th Cir. 2016) ). If the code is ambiguous, we can consider congressional intent. In re Geneva Steel Co ., 281 F.3d at 1178.

B. The code's language is ambiguous.

A discharge is necessary upon the debtor's "completion ... of all payments under the plan." 11 U.S.C. § 1328(a). But the code doesn't define this phrase, so we must decide whether payments could contribute to a "completion ... of all payments under the plan" when the payments come after expiration of the plan's five-year term.

On this question, other courts differ based on how they interpret the statutory phrase "completion ... of all payments under the plan."³ These differences are understandable in light of the ambiguity inherent in the combination of §§ 1307(c), 1322, 1325, 1328(a), and 1329.

(1) Sections 1307(c) and 1328(a) don't definitively resolve the extent of discretion over dismissal and discharge, but suggest that discharge is unavailable when the plan ends with an ongoing material default.

The code gives the bankruptcy courts three options:

1. grant a discharge ( 11 U.S.C. § 1328(a) )

2. dismiss the case ( 11 U.S.C. § 1307(c)(6) )

3. convert the case to a Chapter 7 bankruptcy ( 11 U.S.C. § 1307(c)(6) )

The options differ in the extent of discretion that they provide.

Section 1307(c)(6) says that a bankruptcy court "may" order dismissal or conversion if debtors have materially defaulted. 11 U.S.C. § 1307(c)(6). "May" usually implies some discretion. Cortez Byrd Chips, Inc. v. Bill Harbert Const. Co ., 529 U.S. 193, 198–99, 120 S.Ct. 1331, 146 L.Ed.2d 171 (2000) ; see Part 4, above.

But under § 1328(a), a district court "shall" grant discharges to debtors who have completed payments under the plans. 11 U.S.C. § 1328(a).⁴ The term "shall" means that discharges are mandatory if debtors complete the payments under their plans. Forest Guardians v. Babbitt , 174 F.3d 1178, 1187 (10th Cir. 1999) ; see 11 U.S.C. § 1328(a). So § 1328(a) supports a discharge only if the late payments were considered "under the plan."

Ms. Kinney argues that discharge was permissible because the court could regard her payments as "under the plan." She did make the payments, but were they completed "under the plan" if they came after its expiration?

To answer we start with the term "under." The term "under" is a "chameleon," bearing ambiguity in light of its multiple meanings. See Pereira v. Sessions , ––– U.S. ––––, 138 S. Ct. 2105, 2117, 201 L.Ed.2d 433 (2018) ("chameleon"); Fla. Dep't of Revenue v. Piccadilly Cafeterias, Inc. , 554 U.S. 33, 40–41, 128 S.Ct. 2326, 171 L.Ed.2d 203 (2008) (recognizing that "under" bears multiple meanings and "both sides present credible interpretations").⁵ To ascertain the better interpretation of this ambiguous term, we must focus on the context. See Pereira , 138 S. Ct. at 2117 (stating that the Court must draw the meaning of "under" from its context). The context here suggests that the payments are "under the plan" only if they are subject to or under the authority of the plan.

"Under" connects two nouns: "payments" and "plan." 11 U.S.C. § 1128(a). Though "under" bears multiple meanings, a payment "under" a bankruptcy plan is "more natural[ly]" read as something "subject to ... or under the authority of" the plan. Piccadilly Cafeterias , 554 U.S. at 39–41, 128 S.Ct. 2326.

An earlier version of the code used a similar term in a different provision, referring to a transfer "under a plan confirmed." 11 U.S.C. § 1146(c) (2000). To apply this provision, the Supreme Court considered whether a transfer could be "under" a confirmed plan if the transfer had preceded confirmation of the plan. Piccadilly Cafeterias , 554 U.S. at 35, 128 S.Ct. 2326. The Court answered "no," reasoning that

• the "more natural"

...