555 B.R. 500
W.D. Pa.2016Background
- Debtors Paul and Beth Klaas filed a Chapter 13 plan (60 months) that was confirmed March 14, 2011; plan required 60 monthly payments and projected a 2.8% trustee fee.
- Debtors made the 60 required monthly payments within the 60-month term but a trustee fee increase produced an unexpected shortfall (~$1,123).
- Trustee filed a Motion to Dismiss for underfunding on January 29, 2015; Debtors promptly made additional payments in March 2015 that fully funded the plan and the Trustee withdrew the dismissal motion.
- Creditor Elizabeth Shovlin (assignee of largest unsecured creditor) opposed allowing payments made after month 60 and sought denial of Debtors’ discharge in an adversary proceeding (arguing Sections 1322/1325/1328 barred post-60th-month payments and that Debtors failed debtor-education timing requirements).
- Bankruptcy Court granted summary judgment for Debtors, concluding (inter alia) the Code does not bar curing an unforeseen shortfall shortly after the 60-month period and that Debtors met discharge requirements; district court affirmed.
Issues
| Issue | Plaintiff's Argument (Shovlin) | Defendant's Argument (Klaas/Trustee) | Held |
|---|---|---|---|
| Whether Sections 1322/1325 bar any payments after a confirmed 60-month plan period | Any payment after month 60 violates the 5-year limit and renders plan incomplete | Sections 1322/1325 bar only knowingly proposing plans >5 years; courts may allow reasonable post-60-month cure of unforeseen shortfalls | Payments to cure an unforeseen shortfall shortly after month 60 are permissible; Sections 1322/1325 do not categorically bar such cures |
| Whether Section 1328(a) precludes discharge if final plan payment occurs after 60 months | Section 1328(a) requires completion within the plan term; no exception for post-60th-month payments | Section 1328(a) mandates discharge once debtor completes all payments; timing (within or shortly after 60 months) is not addressed and does not bar discharge | Section 1328(a) requires discharge upon completion of plan payments; timely cure after shortfall entitled Debtors to discharge |
| Whether hardship discharge under §1328(b) was required when payments occurred after 60 months | Because payments occurred after 60 months, only §1328(b) route applies (which Debtors did not seek) | §1328(b) governs cases where debtors do not complete payments; here Debtors completed funding (including cure) | §1328(b) inapplicable; Debtors completed plan and were entitled to discharge under §1328(a) |
| Whether contract/forfeiture principles foreclose cure and discharge | Confirmed plan functions like a contract with a condition that terminates at 60 months; post-deadline performance is a breach with no cure | Contract doctrines (avoid forfeiture; excuse of condition) support permitting a prompt cure of an unanticipated shortfall absent creditor harm | Contract principles favor allowing a reasonable cure to avoid disproportionate forfeiture where creditors suffer no prejudice; discharge denial was inappropriate |
Key Cases Cited
- Christianson v. Colt Indus. Operating Corp., 486 U.S. 800 (1988) (law-of-the-case and when prior decisions should be revisited)
- Grogan v. Garner, 498 U.S. 279 (1991) (bankruptcy discharge standards and fresh-start policy)
- In re Michael, 699 F.3d 305 (3d Cir.) (district court appellate role over bankruptcy decisions)
- Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76 (3d Cir.) (clearly erroneous standard for factual findings)
- Rosen v. Bezner, 996 F.2d 1527 (3d Cir.) (denial of discharge is an extreme remedy)
- DiFederico v. Rolm Co., 201 F.3d 200 (3d Cir.) (accepting factual findings unless devoid of support)
- In re W.R. Grace & Co., 729 F.3d 311 (3d Cir.) (clarifying standards of review)
- In re Nortel Networks, Inc., 669 F.3d 128 (3d Cir.) (mixed question review guidance)