MEMORANDUM OPINION
Before the court are motions by the chapter 13 trustee (a) for reconsideration of orders authorizing the sale and refinance of real estate owned by the debtors in these two cases and (b) for modification of their confirmed plans to increase the distribution to unsecured creditors to 100 cents on the dollar. The issue is whether debtors whose confirmed plans provide for less than full payment of unsecured claims, and who sell or refinance real property in order to pay off their plans early, must share any increase in the value of the property with their creditors or instead may simply pay the chapter 13 trustee an amount equal to the remaining payments due under the plan. In the original rulings, the court held (1) that a debtor selling real estate could be required to pay filed claims in full to the extent the sales proceeds were sufficient for that purpose, but (2) that a debtor refinancing rather than selling real estate could simply pay the remaining amount of the scheduled plan payments. The trustee seeks reconsideration of both rulings 1 as well as an order modifying the confirmed plans. The debtors, not surprisingly, oppose plan modification and insist they should not be required to pay any more than the remaining payments due under the plan.
Background
A. The current “hot” real estate market.
At the heart of the present dispute is the remarkable appreciation in the value of real estate over the last several years
B. The motion in the Murphy case to approve sale of real property.
James Owen Murphy filed a voluntary chapter 13 petition in this court on December 15, 2003. On his schedules, he listed an ownership interest in a condominium located at 10125 Oakton Terrace Road, Oakton, Virginia, which he valued at $155,000, subject to a deed of trust having a balance of $121,000. His schedules listed $52,374.37 in unsecured debts. After the trustee filed an objection to his original plan, the debtor filed an amended plan on March 22, 2004. That plan, which was confirmed on April 29, 2004, required the debtor to pay the chapter 13 trustee $700.00 per month for 36 months and projected a dividend to unsecured creditors of 37 cents on the dollar. 3 The debtor’s mortgage was current, and the plan simply provided that the debtor would continue to make direct payment of the monthly installments as they became due.
C. The motion in the Goralski case to approve refinance of real property.
Stanley Joseph Goralski and Doris Ann Goralski filed a joint voluntary chapter 13 petition in this court on April 29, 2003. The schedules filed with the petition reflected that they owned real property located at 13617 Chevy Chase Lane, Chantilly, Virginia, which they valued at $223,000. The schedules further reflected that the property was subject to liens in the total amount of $192,400.09. The plan filed by the debtors with their petition was confirmed without objection on September 18, 2003. It requires the debtors to pay the chapter 13 trustee $1,100.00 per month for 36 months and estimates a 28 percent dividend to unsecured creditors. Like the plan in the Murphy case, it provided for property of the estate to revest in the debtors upon confirmation. Plan § B-9.
On October 21, 2004 — approximately eighteen months áfter the petition was filed and seventeen months into the plan— the debtors filed a motion for permission to refinance their property in order to pay off the existing liens as well as their chapter 13 plan. The reason given for seeking to refinance was that Mr. Goralski’s earned income had been reduced by approximately one-half, and that having to make plan payments would create an undue hardship on the debtors because their current monthly income was insufficient to both make the plan payments and pay them ordinary and necessary business expenses.
5
A hearing on the motion to bor
Discussion
I.
The purpose of chapter 13 is to enable a financially strapped debtor to repay creditors to the best of his or her ability under court protection and court supervision. Although secured and priority claims must be paid in full, unsecured debts may be paid in a compromise amount so long as the plan is proposed in good faith, the present value of what creditors receive is at least as much as they would receive in a chapter 7 liquidation, and the debtor pays into the plan his or her disposable income for at least 36 months. §§ 1325(a)(3), (4), & (b)(1)(B), Bankruptcy Code;
Deans v. O’Donnell,
Once confirmed, a chapter 13 plan binds the debtor and each creditor. § 1327(a), Bankruptcy Code. Nevertheless, even a confirmed plan is not carved in stone. At any time before completion of payments under the plan, the debtor, the trustee, or an unsecured creditor may request modification of the plan to, among other things, “increase or reduce the amount of payments on claims of a particular class provided for by the plan” or to “extend or reduce the time for such payments.” § 1329(a)(1) & (2), Bankruptcy Code. Thus, a court may require that payments under a compromise plan be increased if the debtor’s financial situation, and thus his or her ability to pay, dramatically improves subsequent to confirmation.
Arnold v. Weast (In re Arnold),
The trustee’s position, succinctly stated, is that both the motion to sell and the motion to borrow were, in substance if not in name, motions to modify the confirmed plans. Modification of a confirmed plan’ in turn requires that the plan, as modified, satisfy the confirmation requirements of § 1325(a). § 1329(b)(1), Bankruptcy Code.
the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount' that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date[.]
§ 1325(a)(4). Thus, the trustee argues, any appreciation in the value of the real property must be made available to unsecured creditors to the extent necessary to insure that they receive what they would receive if the debtor’s estate were liquidated under chapter 7 on the date of the plan modification.
II.
Neither the Supreme Court nor the Fourth Circuit have ruled on this issue. However, the trustee and the debtors each find support for their respective positions in the reported case law in various jurisdictions. The court examines separately the reported cases involving sale and those involving refinance.
A. Post-Confirmation Sale of Real Estate
The leading case supporting the trustee’s position with respect to a post-confirmation sale is
Barbosa v. Soloman,
A similar result was reached in two cases decided by a sister district within this circuit. In the first,
In re Stinson,
In the second case,
In re Morgan,
Trustees have not fared as well in other jurisdictions. In
In re Fitak,
In
In re Golek,
Finally, in
In re Euler,
B. Post-Confirmation Refinance of Real Estate
A recent decision supporting the trustee’s position with respect to post-confirmation refinance is
In re Kieta,
Much the same result was reached in
In re Martin,
The trustee’s argument has been rejected by other courts. In
Massachusetts Housing Finance Agency v. Evora,
Similar to the present case is
In re Sounakhene,
III.
The initial question to be resolved is whether a debtor’s early payoff of a plan from the proceeds of a sale or a refinance constitutes a plan “modification” by the debtors under § 1329. The trustee here invokes the literal language of § 1329,
(1) increase or reduce the amount of payments on claims of a particular class provided for by the plan;
(2) extend or reduce the time for such payments; or
(3) alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan.
§ 1329(a)(l)-(3), Bankruptcy Code (emphasis added). Clearly, early payoff of a plan will have the literal effect of reducing the period over which payments are made on “claims of a particular class” (which is what “such payments” grammatically refers to), such as unsecured claims. 8 Additionally, the sale or refinance will itself result in a lump-sum payoff (usually at settlement) of any mortgage arrearage claim being paid through the plan. Yet, the fact remains that such early payoff of the plan has absolutely no prejudicial effect on any party, a point that the district court found persuasive in Evora. Although the court acknowledged that there appeared to be decisions on both sides of the question of whether an early payoff constituted a plan modification, it found that the conflict was more apparent than real, and it synthesized what it determined to be the correct rule: .
When determining whether a motion is in fact a modification, courts examine the substance of the plan and the nature of the debtor’s obligation to the debtor’s creditors, not to the number of payments proposed. If a motion, whether or not styled as a motion to amend the plan, seeks to alter the substance of the plan, it is treated as a modification.
Evora, 255 B.R. at 342. The crucial inquiry, according to the court, was not whether the motion affects the “number of payments,” but whether it affects “the amount to be paid to the unsecured creditors.” Id.
In the present case, neither the motion to sell nor the motion to refinance seeks to reduce the amount to be paid the unsecured creditors. Indeed, because there is a time value to money, an early payoff actually increases -the economic worth, or present value, 9 of the distribution to the unsecured creditors. Even creditors being paid at a nominal 100 cents on the dollar do not in economic terms actually receive that amount when the claim is paid by deferred payments over an extended period of time. For example, using a discount rate of 6% per annum, the present value received by creditor whose $100 claim is paid in equal monthly installments over 36 months is $91.38. If the plan is paid off early at the 12th month, however, the present value increases to $95.14, which is obviously a benefit to the creditor. In such circumstances, to treat the debtor’s voluntary early payoff of the plan as a “modification” would represent a triumph of formalism over substance and common sense. Accordingly, the court declines to treat a voluntary early pay-off by the debtors of the confirmed plans in the present cases as a post-confirmation “modification” that triggers de novo review of previously resolved confirmation issues, such as the liquidation test.
Even though a voluntary early payoff is not a plan “modification,” however, that does not mean that the circumstances that enable the debtor to make the payment are irrelevant, since § 1329(a) permits the trustee or an unsecured creditor to seek modification of a plan to increase payments on claims of a particular class when the debtor’s financial position, and thus his or her ability to pay, has improved dramatically since confirmation.
Arnold v. Weast (In re Arnold),
In
Arnold,
the debtor’s stated income at the time his 36-month, 20% compromise plan was confirmed was $80,000.
Id.
at 241. As it turned out, he actually earned $102,000 that year, $146,500 the next year, and $200,000 the following year.
Id.
On motion of an unsecured creditor, the bankruptcy court increased the monthly plan payment from $800 per month to $1,500 per month and extended the plan term to 60 months. The debtor took an appeal, and both the district court and the Fourth Circuit affirmed. The Court first rejected the debtor’s argument that increasing the plan payments contravened Congress’s intent to give debtors a “fresh start” through bankruptcy, noting, “Congress ... intended that the debtor repay his creditors to the extent of his capability during the Chapter 13 period. Certainly, Congress did not intend for debtors who experience substantially improved financial conditions after confirmation to avoid paying more to their creditors.”
Id.
at 242 (internal citation omitted). The Court also rejected the debtor’s argument that the confirmation order was res judicata on the issue of his ability to pay. The Court held that this was true “only where there have been no unanticipated, substantial changes in the debtor’s financial situation.”
Id.
at 243. The Court then adopted what it described as an “objective test ... to determine whether a change was unanticipated: ‘whether a debtor’s altered financial circumstances could have been
reasonably anticipated
at the time of confirmation by the parties seeking modification.’ ”
Id.
Because, in the Court’s view, the creditor “should not be expected to have anticipated a $120,000 jump in [the debtor’s] income in only two years,” res judicata presented no bar to an upward adjustment in the debtor’s monthly payment “to take into account the unanticipated and substantial improvement in his financial condition.”
Id.; see also In re Euerle,
In each of the two cases currently before the court, the trustee has filed a motion to modify the confirmed plan to provide for full payment of unsecured claims. Under Arnold, the test is whether the increased value of the real estate represents a “substantial” change in the debt- or’s financial situation and whether the party seeking modification—here, the trustee—could have “reasonably anticipated” the magnitude of the change at the time of confirmation.
A.
Mr. Murphy listed the value of his condominium as of December 2003, when his bankruptcy petition was filed, at $155,000. In November 2004, he sold it for $235,000, a 51.6% percent increase in only 11 months. That this represents a “substantial” improvement in the debtor’s
Moreover, the improvement does not consist of either unrealized or phantom income — a mere improvement in the debt- or’s balance sheet — but of actual cash in the debtor’s pocket that is reasonably available to pay creditors and that the debtor — who has not offered any evidence suggesting otherwise — can apparently afford to pay without financial hardship. 10 As the Fourth Circuit held in Arnold, Congress did not intend for chapter 13 debtors “who experience substantially improved financial conditions after confirmation to avoid paying more to their creditors.” Allowing the debtor to compromise his unsecured creditors at 37 cents on the dollar while pocketing more than $80,000 from the sale of the property less than one year after the plan is confirmed simply fails to comport with the fundamental obligation of good faith. Accordingly, the court finds that the trustee has established good cause for modification of the plan to provide for full payment of unsecured claims.
B.
The debtor argues, however, that because his plan provided for property of the estate to revest in him at confirmation, the condominium was no longer property of the estate at the time it was sold, thereby precluding any claim by creditors or the trustee to share in its appreciation. In this connection, the debtor correctly notes that the confirmation orders in Stinson and Morgan expressly provided that property of the estate would not revest in the debtors until the debtors were discharged after plan payments were complete.
Although the debtor’s argument has a surface appeal, the court concludes that whether the property revested at confirmation is ultimately not dispositive on the issue of whether the trustee can seek modification of the plan to account for the sales proceeds realized by the debtor. As an initial matter, the court notes that
Nor does the court’s holding depend on whether the sales proceeds constituted “disposable income” as that term is used in the Bankruptcy Code. The disposable income test, which is set forth at § 1325(b), Bankruptcy Code, requires that, upon objection by the trustee or an unsecured creditor, a debtor must either pay claims in full or must pay his or her disposable income into the plan for 36 months. As noted, some courts have held that the omission in § 1329 of any reference to § 1325(b) means that the disposable income test does not apply to post-confirmation plan modifications. Such a reading of the statute, if correct, could certainly lead to anomalous results, but is essentially irrelevant to the present motion. The Fourth Circuit’s holding in
Arnold
is not phrased in terms of changes in the debtor’s disposable income, but rather in terms of the debtor’s “financial condition,” which is a broader concept. The requirement in
Arnold
that the debtor share any substantial and unanticipated improvement with his or her creditors is not grounded in the disposable income test, but rather in the fundamental requirement of good faith under § 1325(a)(3).
See also Solomon v. Cosby (In re Solomon),
With respect to Mr. and Ms. Goralski’s case, the record does not reveal the loan terms and, in particular, the amount of the “cash out” after payment of the existing mortgages. 12 But based on the statements made by the parties at oral argument, it would appear that the debtors received at least $63,365 from the refinance. Their schedules reflected a market value for the property on the petition date of $223,000 and a mortgage balance of $192,400, leaving an equity of $30,600 (for a loan to value ratio of approximately 86%). Assuming that the loan to value ratio for the refinance was no higher than the existing 86%, the property must have appraised for at least $297,400. This would have represented an increase of $74,400, or 33%, over an 18-month period. While clearly “substantial,” it may not qualify as “dramatic” in the quite the same way as, say, the increase of Mr. Arnold’s salary from $80,000 to $200,000 over a two- and-a-half-year period. For that reason, the court might have some difficulty in finding that appreciation of this magnitude was something the trustee could not reasonably have anticipated at the time the plan was confirmed.
But even if the appreciation could be fairly characterized as both substantial and unanticipated, the court cannot find that the refinance effected an improvement in the debtors’ financial condition sufficient to support involuntary modification of their plan. The refinance simply exchanged the increase in the value of the house for a corresponding amount of debt. While it is true that the debtors, by refinancing, have in a colloquial sense “tapped” the equity that has accrued since confirmation, the cash they have received is by no means found money. What the debtors have received, very simply, is a loan. A loan does not represent income, nor does it improve a debtor’s financial condition. Rather, the cash received from a loan is balanced by a corresponding debt, with the result that the debtors’ net worth remains unaltered. The trustee does not suggest that the debtors could have been compelled, 18 months into a five-year plan, to incur indebtedness and borrow against the equity in their residence so as to increase the dividend on unsecured claims regardless of how much the property might have appreciated during the plan term. The fact that the debtors (whether wisely or otherwise) voluntarily decided to borrow against the equity should not result in a different outcome. Additionally, there is no evidence of any bad-faith motivation for the refinance. The trustee has not disputed the debtors’ explanation that they refinanced in order to take advantage of the current low interest rates and reduce their monthly financial burden after Mr. Goralski’s income was reduced. The trustee’s motion to modify the plan and to require the debtors to pay borrowed funds in order to increase the dividend on unsecured claims will therefore be denied.
D.
Separate orders will be entered granting the trustee’s motion to modify the plan in the Murphy case and denying the motion in the Goralski case.
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Notes
. Although the ruling on the sale motion favored the trustee, the order allowed the trustee to immediately disburse to creditors only an amount equal to the remaining payments required by the confirmed plan, with the disbursement of the remaining portion to be set forth in a separate order. It is presumably to obtain a ruling with respect to the remaining sums in escrow that the trustee filed the motion for reconsideration, which would perhaps more accurately be considered a motion for supplemental relief.
. Attached as an exhibit to this opinion is a graph reflecting housing price index data for the United States, the State of Virginia, and the Washington-Arlington-Alexandria MSA as downloaded from the Office of Housing Enterprise Oversight web site. The graph shows the increase for the 3rd quarter of each year over the corresponding quarter of the prior year. The third quarter values were used because those were the most recent figures available for 2004.
. The standard form of plan is this district is a so-called "pot” plan rather than a "percentage” plan.
See In re Witkowski,
. LBR 3015-2(A) & Ex. 1.
. Although the motion stated that a copy of. the loan approval was attached, no such doc
. Based on the trustee's stated intention of filing a motion to reconsider, the order required that $19,800.00 from the refinance be paid to the trustee and that $43,815 be held in escrow by the debtors’ counsel to abide the court’s ruling on the motion to reconsider.
. The opinion does not state how the debtors were able to bifurcate the creditor’s claim— which at that point stood at $99,640 — into secured and unsecured components, given that a chapter 13 plan may not modify the rights of a creditor secured only by a security interest in the debtor’s principal residence.
See
§ 1322(b)(2), Bankruptcy Code;
Nobelman v. Am. Sav. Bank,
. Of course, as the court noted at oral argument, debtors might easily moot such an argument by simply including language in the plan reserving the right to pre-pay the plan at any time.
.
See In re Birdneck Apartment Assocs., II, L.P.,
. The debtor has not filed with the court a report of sale as required by LBR 6004-2(D), and the court therefore has no precise information as to the amount of cash realized by the debtor from the sale. However, working from the sales price of $235,000 and a mortgage balance of $121,000 as shown on the debtor’s schedules, and also assuming a 6% broker's commission and other sales costs of 2%, the debtor would have netted approximately $95,200. After paying $12,000 to the trustee to complete the scheduled payments under the plan, the debtor would still have $83,200. As noted, the additional amount needed to pay filed claims at 100% rather than 37% is approximately $20,000. That would still leave the debtor with approximately $63,200.
. That said, it is difficult to see why the proceeds would
not
constitute "income,” and "disposable” income at that. The sale of an appreciated asset generates income for both accounting and income tax purposes. In some instances (such as where depreciation has been taken or the property has been refinanced), the income may be more phantom than real. But here the sale resulted in actual cash. Why something that is legally income for tax purposes and that represents actual cash that the debtor is free to spend should not be considered income is a mystery. However, the court's ruling is this case is not
. Since it is the trustee's motion to modify the plan, the trustee has the burden of proof. Thus, any gaps in the evidence must be construed against the trustee.