In re Shay
MEMORANDUM AND ORDER ON MOTION TO CONFIRM AMENDED PLAN
Debtors Patricia Shay and Keith Paulus have moved the Court (ECF Nos. 21, 22) to approve for confirmation an Amended Chapter 13 Plan (ECF No. 20) that seeks to exercise 11 U.S.C. § 1322(b)(9) and have all property acquired post-petition vest with the Debtors rather than with the Chapter 13 Trustee as property of the estate, as this district’s Chapter 13 Form Plan provides. Chapter 13 Trustee Michael Malaier has opposed confirmation of the proposed Amended Plan (ECF No. 27). Argument was heard on the matter from counsеl for the Debtors and for the Chapter 13 Trustee on Tuesday June 7, 2016 and the Court took the matter under advisement. As discussed below, the Court DENIES confirmation of Debtors’ proposed Amended Chapter 13 Plan.
J. Background
Debtors commenced this case on March 16, 2016. They are above median income debtors with an applicable commitment period of 60 months. Debtor Shay works for Pierce County, and has for 46 years, and earns net income each month of $5,123.00. ■
Debtors do not have a mortgage, and have one secured creditor on a car loan of $13,758. They are also liable on the lease of a 2016 Camry (which they have assumed) that they scheduled with approximately $26,000 liability for lеase payments remaining. Mr. Paulus has one priority debt creditor, $36,388 in back child support owed to the Washington State Department of Social and Health Services.
Debtors scheduled $96,296 in general unsecured debt on their Schedule F, the bulk of which is a $67,300 judgment in favor of Usama Darwich Hamade, which arises from a 2014 state court lawsuit described in Debtors’ Statement of Financial Affairs as a contract dispute arising out of an entity for which Debtor Paulus was the webmaster.
With their petition, Debtors filed a proposed Chapter 13 Plan (ECF No. 2) on the prescribed form with plan payments of $435 every two weeks. The plan proposed to pay $3780 in attorney’s fees, $275 per month on the car loan at 4% interest, and paid at least $4,503.60 to general unsecured creditors.
The original plan included the form language in Paragraph VIII, Property of thе Estate, which includes a provision that property of the estate that was in the possession of the debtor on the petition date would vest with the debtor upon confirmation. It also included the form language as to post-petition property:
Property (including, but not limited to, bonuses, inheritances, tax refunds or any claim) acquired by the debtor post-petition shall vest in the Trustee and be property of the estate. The debtor shall promptly notify the Trustee if the debtor becomes entitled tо receive a distribution of money or other property (including, but not limited to, bonuses, inheritances, tax refunds or any claim) whose value exceeds $2,500.00, unless the plan elsewhere specifically provides for the debtor to retain the money or property.
On April 28,2016, Debtors withdrew this proposed plan and filed the First Amended Chapter 13 Plan at issue here (ECF No. 20). The terms of the Amended Plan are almost identical to the first — same plan payment, same payments to creditors — but it edited the language of Paragraph VIII to say that property acquired by Debtors post-petition shall vest “in the Debtor(s)”, as opposed to the Trustee. Debtors also added a provision in Paragraph XII (“Additional Case-Specific Provisions”) to identify that they had altered the language of Paragraph VIII.
Debtors’ arguments in support of the Amended Plan (ECF No. 22) is that the requirement of Local Rule W.D. Wash. Bankr.3015-l(a) that the Form Plan be used exceeds the Court’s rulemaking au
The Chapter 13 Trustee filed an opposition to Debtors’ motion to confirm the Amended Plan (EOF No. 27) arguing that the Form Plan, and local rule requiring its use, do not deprive Debtors of any rights because the plan can be amended via provisions in Paragraph XII and also Debtors do not have a right to retain post-petition property, which under 11 U.S.C. § 1306(a) is property of the estate, at' least without giving the Trustee and creditors the opportunity to modify the plan to have the value of the property disbursed to creditors. Trustee points out that even if рroperty vests with the Trustee, that does not equate to a plan modification and the Trustee cannot payout any additional income or other property received to creditors without a court approved plan modification under 11 U.S.C. § 1329. The Trustee further argues that the Plan is not filed in good faith as the revision to Paragraph VIII is really an attempt to try to prevent the Trustee or a creditor from seeking to modify a plan if the debtor experiences post-confirmatiоn changes in circumstance or acquires nonexempt post-petition property.
II. Analysis
A. The Local Rule and Form Language in the Form Plan Are Proper Exercises of the Court’s Rule-making Authority.
The parties agree that the standard as to whether a local rule is an appropriate exercise of rulemaking under Federal Rule of Bankruptcy Procedure 9029 is whether the rule or practice is: (1) consistent with the Acts of Congress and Federal Rules of Bankruptcy Procedure; (2) not duplicative of the Code of Bankruptcy Rules; and (3) not used to limit or prohibit use of the Official Forms. Fed. R. Bankr.P. 9029(a); Sigma Micro Corp. v. Healthcentral.com (In re Healthcentral.com),
Here, the local rule at issue, Local Rule W.D. Wash. Bankr.3015-1, requires in subsection (a) that all chapter 13 plans must confirm to Local Bankruptcy Form 13-4 (the “Form Plan”). But subsection (b) goes on to provide that any additional ease-specific provisions that modify any other provision of the Form Plan should be included in Paragraph XII and should begin by referencing the paragraph edited.
Contrary to Debtors’ argument, the local Form Plan does not require that any debtor include the language Paragraph VIII wholesale. Local Rule 3015-l(b) specifically allows a debtor to change the language of the form plan but requires that the debtor include the language in a particular location, Paragraph XII of the Form Plan, and that the debtor call out
Debtors’ reliance on In re Healthcentral.com,
As the Form Plan is not inconsistent with the Code or Rules, not duplicative and not used to limit use of the Official Forms, and allows a debtor to modify any provision in the Form Plan in accordance with other applicable law, the Court concludes that the Form Plan and Local Rule 3015-1 are proper exercises of the Court’s rulemaking authority under Bankruptcy Rule 9029.
B. Debtors’ Proposed Modification Does Nоt Comply with the Law as to Post-Petition Property
The issue whether the Debtors’ proposed revision of Paragraph VIII complies with the Code requires consideration of the intersection of three provisions in the Bankruptcy Code. Section 1322(b)(9) allows debtors to provide in a plan for the vesting of any property of the estate, at confirmation or later, in the debtor or any other entity. Section 1327(b) provides that unless ordered otherwise, confirmation of the plan vests all propеrty of the estate with the debtor. And Section 1306(a)(1) provides that all property of the same kind as specified in Section 541 which a debtor acquires after the commencement of a case — but before closure, dismissal or conversion — becomes property of the estate.
1. Sections 1306 and 1327(b)
The Ninth Circuit considered the interplay of Sections 1306(a) and 1327(b) in
Subsequently the Ninth Circuit Bankruptcy Appellate Panel considered whether a post-petition inheritance which the debt- or acquires more than 180 days after filing a petition is property of the estate in a chapter 13, in Dale v. Maney (In re Dale),
Bankruptcy Courts in the Circuit since Dale have found that the same applies to property acquired. post-confirmation, and Section 1327(a)’s provision that property normally vests with the debtor upon confirmation should not be construed “so as to suspend or supersede the more specific chapter 13 provision, § 1306(a)(1).” In re Rankin,
Applying these decisions to the extant case, should Debtors Shay and Paulus acquire additional income or property post-petition and/or post-confirmation, that propеrty is property of the estate per Section 1306(a)(1) or (2). A plan provision that automatically vests post-petition property with the debtor without ever becoming property of the estate, as proposed by the debtors in their amended plan, is inconsistent with the Code.
The language of the Form Plan, declaring such property to be property of the estate and having it vest with Trustee, does not -deny Debtors any substantive right, nor does it allow the Trustee to “intercept” funds and pay them tо creditors. Requiring additional post-petition income or the value of post-petition property to be paid to creditors is a two-step process. First, as discussed further infra at page 419-20, the income and property must be property of the estate. See In re McAllister,
2. Section 1322(b)(9).
The debtors argue that the Form Plan abridges their right to designate, pursuant to Section 1322(b)(9)’s provision that a plan can provide for “vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity,” to whom property of the estate existing at confirmation or acquired post-confirmation vests. While Section 1322(b)(9) has mostly been used by debtors attempting to vest real property back with a secured creditor in lieu of foreclosure or surrender via a deed in lieu and acceptance — a practice which also is controversial, see e.g., Bank of New York Mellon v. Watt, 3:14-cv-02051,
The problem with what these Debtors are trying to do is their pre-emptive effort to use the option allowed under Section 1322(b)(9) to erase Section 1306 as to unknown and unanticipated assets and increases in income. Debtors’ own motion contemplates that Mr. Paulus may well seek employment to increase their income, and it is clear Debtors do not want to have to share any of those funds with their creditors. But that is exactly what the Bankruptcy Code contemplates they may be required to do under Section 1329(a)(1). The same argument made regarding the interplay between Section 1327(b) and Section 1306(a), that other provisions of the Bankruptcy Code should not be construed “so as to suspend or supersede the more specific chapter 13 provision, § 1306(a)(1),” In re Rankin,
There are other consequences of a provision that automatically vests post-petition property in the debtor. As set forth in the Form Plan, if post-petition income vests with the Trustee as property of the estate, post-petition creditors and creditors not stayed under the Code from collecting against the debtor’s property are stayed from attempting to collect debts-from post-property of the estate under Section 362(a)(3). If that property is vested with the Debtors, they lose any such protections. Post-petition creditors can go after
But the greatest risk of allowing such a provision in a plan blanketing any potential property, is that if such post-petition property does come into existence — especially an inheritance or other non-earning related assets — regardless of its size or availability, a debtor could argue there could be no modificаtion of a plan per Section 1329 because that property has already vested with the debtor, is not property of the estate and therefore should not be available to creditors. Parties have argued that a court can require that non-estate property be paid to the Trustee to increase disbursements to creditors, but the better analysis is that debtors cannot be compelled to use “excluded property,” i.e., property that is exempt or otherwise riоt property of the estate, to pay creditors. In re McAllister,
A subtler consequence is one pointed out by Trustee at oral argument. Under Section 348, if a court determines that a conversion to chapter 7 is in bad faith, post-petition property of the estate becomes part of the chapter 7 estate. This provision becomes a nullify if the post-petition property automatically becomes property of the debtor.
The Court holds that Debtors cannot use Sectiоn 1322(b)(9) in a plan to vest unknown or undisclosed property, or property which may come into existence In futuro, in the debtor, and that such provision specifically contravenes Section 1306(a).
C. Whether the Debtors’ Proposed Revision to Paragraph VIII is Proposed in Good Faith
The Trustee alternatively asks the Court to hold that the Debtors’ proposed change to Paragraph VIII is not made in good faith. The Court cannot conclude on the record before it that the proposal by thе Debtors is not in good faith. • That would require an evidentiary hearing. It is unnecessary for the Court to address that issue based upon its conclusion that the Debtors’ proposal is inconsistent with the Bankruptcy Code.
NOW, THEREFORE, IT IS HEREBY ORDERED that Debtors’ Motion to Confirm their Amended Plan is DENIED. Debtors will have 14 days to file and serve a new plan consistent with this decision. The Trustee may seek dismissal of the case by ex parte order if the Debtors fail to file such a plan.
Notes
. The Statement of Financial Affairs shows Debtor Paulus has not had any source of income since 2014.
. The Chapter 13 Trustee calculates that under the Amended Plan Debtors will actually pay approximately $35,668 to general unse-cureds, although that does not account for any additional attorneys’ fees. (ECF No. 27)
. Under Section 1306(a)(2) all earnings for services performed prior to dismissal, closure or conversion become property of the estate.
. Waldron's holding suggests that it may apply only to property acquired post-confirmation, leaving a gap as to property acquired pre-petition and pre-confirmation, This leaves open a possibility that a debtor could acquire property post-petition, not disclose it, obtain confirmation of a plan and then claim that the undisclosed property had vested in him. If as the Dale court ruled, such property is property of the estate, then courts should make clear that unless property acquired post-petition but pre-confirmation, is specifically disclosed with adequate time for trustees and creditors to analyze whether a plan should be modified, such proрerty should not be deemed to re-vest at time of confirmation under section 1327(a). See In re Nott,
. Whether the refunds have to be committed is a function of whether they are needed to fund a plan, which is often a question of how much of a refund might be anticipated based on the debtor’s income, withholding and likely tax liability.