11th Circuit Resolves Conflict Among Federal Appellate Courts Regarding Bankruptcy Plan Modifications Under 11 Usc 1329

11th CIRCUIT RESOLVES CONFLICT AMONG FEDERAL APPELLATE COURTS REGARDING BANKRUPTCY PLAN MODIFICATIONS UNDER 11 USC § 1329

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The US Court of Appeals for the 11th Circuit, whose jurisdiction includes the federal district courts of Florida, Georgia and Alabama, accepted jurisdiction to resolve a conflict between multiple bankruptcy courts over whether a “threshold showing” of a change in circumstances was necessary before a bankruptcy court could modify a confirmed Chapter 13 bankruptcy plan under 11 U.S.C. § 1329. In Re Guillen, 17-13899, 2020 WL 5015287 (11th Cir. Aug. 25, 2020).

In Guillen, the debtor filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code. She submitted a Chapter 13 plan concurrently with a petition filed against one of her creditors, Wells Fargo, challenging the validity of Wells Fargo’s second mortgage lien. Guillen and Wells Fargo resolved the dispute via a consent judgment wherein Wells Fargo agreed its second mortgage was an unsecured claim. The bankruptcy court confirmed Guillen’s proposed Chapter 13 plan which required Guillen pay her unsecured creditors $20,172 and $4,900 in attorneys’ fees “along with any approved fees incurred in connection with an adversary proceeding.”

Four months later, Guillen’s counsel submitted a modified Chapter 13 plan under 11 U.S.C. § 1329(a)(1) to reduce the pool of funds “available to unsecured creditors from $20,172 to $11,877” to allow for the payment of Guillen’s attorneys’ fees incurred in the adversary proceeding against Wells Fargo. The bankruptcy trustee, Nancy Whaley, objected to the proposed modification arguing the modified plan “violated the best interests of creditors test.” She also argued the modification was barred by the doctrine of res judicata.

The bankruptcy court confirmed the modification over the bankruptcy trustee’s objections and certified its order for direct appeal to the 11th Circuit. The 11th Circuit accepted jurisdiction to “answer a question of first impression” that divided the 1st, 4th, 5th and 7th federal appellate circuits. Except for the 4th Circuit, each agreed that 11 U.S.C. § 1329 created “an exception to the finality of confirmed Chapter 13 plans…”

On appeal, the 11th Circuit acknowledged the finality of Chapter 13 plans, comparing them to “final judgments of district courts, immune from collateral attack.” However, the Court looked to the plain language of §1329 and noted it carved out “a limited exception” to the general rule of finality. The pertinent portion of §1329 reads:

“At any time after confirmation of the plan but before completion of payments under such plan, the plan may be modified…to – – (1) increase or reduce the amount of payments on claims of a particular class provided for by the plan…” Despite the lack of language in the statute itself, the trustee argued that §1329 also required the debtor to demonstrate that a change in circumstances occurred that warranted the modification.”

The 11th Circuit rejected the “circumstances requirement” proposed by the trustee noting the plain language of §1329 included no such requirement and it was important in the “field of statutory interpretation” to “respect not only what Congress wrote but, as importantly, what it didn’t write.” The Court elaborated that “the broader statutory scheme” also weighed against such a requirement referencing several bankruptcy statutes that incorporated “a circumstantial showing” into their text while §1329 did not. The Court concluded if “…Congress intended to oblige individual debtors to show some change in circumstances before modifying confirmed plans it presumably would have done so expressly just as it did in § 1127(b).”

The Court also addressed two of the 4th Circuit’s decisions wherein that Court found res judicata barred modification of a confirmed plan unless there was “an unanticipated, substantial change in the debtor’s financial condition.” The 4th Circuit reasoned without this requirement judicial economy would be threatened by an “onslaught of modifications motions.” The 11th Circuit labeled these as “general policy concerns” and explained that such concerns could not “overcome the plain language of the statute.” The Court elaborated there were multiple checks built into the bankruptcy code to prevent abusive behavior and the decision to modify a plan remained a discretionary decision of the bankruptcy courts.

The Court further explained: “[A]n unforeseen change in circumstances is a good reason to permit a modification that otherwise satisfies §1329. But that is not to say it is the only reason.” Notably, the Court included in a footnote that President Trump enacted a law which amended §1329 in March of this year “to permit debtors to request modification of confirmed plains if ‘the debtor is experiencing or has experienced a material financial hardship due…to the coronavirus disease 2019 (COVID-19) pandemic.’” With the recent economic disruption caused from COVID-19, we anticipate this decision will impact multiple debtors and encourage many to seek plan modifications at least until the COVID-19 amendment to §1329 sunsets in March 2021.