The following is a case summary written by Kathleen A Cashman-Kramer analyzing Berkley v Burchard (In re Berkley),613 B.R. 547 (9th Cir. BAP 2020).
Frequently, a court of appeals decides to publish a case because it clarifies a split in the case law, or decides an issue not previously decided. Sometimes, it publishes a decision merely to remind everyone that the law as decided has not changed. In this case, the Ninth Circuit Bankruptcy Appellate Panel (“BAP”) published a decision confirming a well-settled area of chapter 13 case law, to clarify an issue regarding increases in a chapter 13 debtor’s post-confirmation compensation. To view the opinion, click here.
Specifically, the BAP affirmed a decision of the bankruptcy court in the Northern District of California, which granted the chapter 13 trustee’s motion to modify the debtor’s chapter 13 plan in the 57th month to capture sufficient funds from a $3.8 million payment received by the debtor in order to pay all of the chapter 13 creditors in full.
In In re Berkley, the BAP affirmed the bankruptcy court’s granting of the chapter 13 trustee’s motion to modify the debtor’s chapter 13 plan to require the debtor to pay $202,000 from a $3.8 million payment the debtor was receiving in the 57th month of the plan, so that his creditors could be paid in full. The $3.8 million payment was for stock options that the debtor earned for post-petition services acquired prior to the Trustee’s motion to modify. His confirmed plan had only provided for a dividend of approximately 1% to unsecured nonpriority claims. The chapter 13 trustee brought the motion to modify under section 1329(a) as “changed circumstances” that warranted modification of the plan. The debtor opposed, on the grounds that the money he received from the stock options was not property of the estate and, as a result, he could not be forced to pay any of it into his plan. The bankruptcy court disagreed, overruled the debtor’s opposition, and granted the chapter 13 trustee’s motion. The debtor appealed.
In affirming the modification of the chapter 13 plan and the grant of the Chapter 13 trustee’s motion, the BAP found that the bankruptcy court did not abuse its discretion when it granted the trustee’s motion to modify the plan under Section 1329. It first considered the debtor’s argument that his post-petition payment of $3.8 million in stock options could not be used to increase payments to his creditors under the confirmed plan. Specifically, the BAP noted Ninth Circuit case law construing modifications of chapter 13 plans under Section 1329, including significant authority for the proposition that the court “may consider a change in circumstances” as a basis to modify a confirmed plan and that an unexpected increase in income is one such change. Id.at 7.
The BAP then based its affirmance on two separate but related grounds. It first dealt with the debtor’s argument that confirmation of his plan meant that any increase of his earnings after that time was his and his alone, and he could not be compelled to turn any of it over to his creditors by way of a modified plan. In concluding that plan confirmation did not shield increases in his income, the BAP discussed Ninth Circuit decisions construing section 1329, including those that specifically stated that the trustee could capture post-petition increases in income. Id. at p. 7. It also reminded the debtor that the Bankruptcy Code required debtors to pay into their plans for their applicable commitment period (i.e., 36 months for below median and 60 months for above median debtors), and that modifying plans under section 1329 was consistent with this mandate. Iid., at 8. It also referred to the fact that the bankruptcy court’s decision is consistent with BAPCPA’s primary goal of helping “ensure that debtors who can pay creditors do pay them.” Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 64 (2011).” Id. at 9.
The debtor also raised the argument that, because confirmation of his plan vested property of the estate back in him, since the $3.8 million windfall was post-petition, it therefore was not property of the estate. On the one hand, the BAP agreed with the initial premise, saying that:
Mr. Berkley is correct that we have adopted the so-called “estate termination approach,” which recognizes “the vesting of all estate property in the debtor at confirmation (unless the plan or confirmation order provides otherwise) and the concomitant termination of estate property . . . .” Cal. Franchise Tax Bd. v. Jones (In re Jones), 420 B.R. 506, 515 (9th Cir. BAP 2009), aff’d on other grounds, 657 F.3d 921 (9th Cir. 2011).
Id. at 9-10.
The BAP cited additional authority, as well as contrary authority. It ultimately concluded that “these decisions reach the right result for an incorrect reason”:
Mr. Berkley’s arguments, and the cases cited above, all rest on the unstated assumption that, unless the postconfirmation income is property of the estate, the debtor cannot be compelled to devote it to his plan. This assumption is incorrect. Nothing in the Code provides that plan payments may only be funded by estate property. In fact, debtors are often compelled (in order to formulate a confirmable plan) to fund the plan from non-estate sources (family contributions, loans or withdrawals from pension plans, sale of exempt assets, etc.). See, e.g., In re Deutsch, 529 B.R. 308, 312 (Bankr. C.D. Cal. 2015) (“Reliance on contributions from family is disfavored, but not prohibited.” (citation omitted)); In re Feiling, Case No. 11-71474 MEH, 2013 WL 2451333, at *5 (Bankr. N.D. Cal. June 6, 2013) (confirming plan funded by gifts and non-estate property). Under § 1329, the bankruptcy court can approve a plan modification that increases the debtor’s plan payments due to a postconfirmation increase in the debtor’s income, whether or not the additional income is property of the estate.
Id. at 12 [emphasis added]. The BAP then concluded that there was no inconsistency between this authority and its affirmance of the bankruptcy court’s decision.
The BAP further noted that the lower court correctly found that debtor’s arguments would render section 1329 meaningless. Id. at p. 13. It also dismissed the debtor’s argument that the Chapter 13 trustee was required to move quickly to capture the increased income:
He contends that he had already earned the stock before the Trustee’s Motion to Modify, so it could not be “future income” under § 1322(a). [footnote omitted] We disagree. Under Mr. Berkley’s logic, the Trustee would never be entitled to capture stock, a cash or non-cash bonus, or other lump-sum postconfirmation payment unless the trustee somehow learned about the money in time to file a plan modification before the debtor received it. As a practical matter, chapter 13 trustees are highly unlikely to learn of such developments unless the debtor discloses them. Thus, if Mr. Berkley were correct, the rights of the trustee and creditors would depend entirely on the debtor’s promptness in notifying them prospectively of a change in circumstances. We reject this unsound policy.
Similarly, Mr. Berkley’s argument implies that the Trustee should have acted sooner to take control of the stock options as soon as Mr. Berkley earned them, and, by not acting until the options had ascertainable value, the Trustee waited too long. Neither the Code nor sound policy compels trustees to expend resources on assets that may or may not ever have any value.
Id. at 14. In sum, the BAP rejected the debtor’s argument that the revesting provision barred any modification of the plan.
This author, after having served as a staff attorney for a chapter 13 trustee for several years (and after having made use of Section 1329 on numerous occasions) believes that this case was properly decided. The Berkley BAP court chided the debtor at one point in the decision when it noted that the debtor had originally taken the position in the bankruptcy court that the $3.8 million windfall was income as it represented post-confirmation wages that he was entitled to and received during the case, in furtherance of his argument that the $3.8 million was not property of the estate and hence unreachable. Then the debtor attempted to argue before the BAP that the stock options were not wages or compensation. Id. at 13 and footnote 3. The BAP “reject[ed] his attempt to reverse ground on appeal.” Query: If the Debtor had taken the position – that the stock options were not wages or compensation – in the lower court, would the result have been any different? While the BAP did not consider this question per se, it did reject the debtor’s position that the $3.8 million represented “past earnings and future appreciation.” Id. at 13-14.
[As of the date of submission of this article, the debtor has not appealed the BAP’s decision]
These materials were authored by Kathleen A. Cashman-Kramer, Of Counsel at Sullivan Hill Rez & Engel (Cashman-Kramer@Sullivanhill.com), with editorial contributions from ILC members Summer Shaw and Hon. Meredith Jury (ret.).