In re James Owen MURPHY, Jr., Debtor. James Owen Murphy, JR., d/b/a Murphy‘s Golf Shop, Plaintiff-Appellant, v. Gerald M. O‘Donnell, Trustee, Defendant-Appellee. In re Stanley Joseph Goralski; Doris Ann Goralski, Debtors. Gerald M. O‘Donnell, Chapter 13 Trustee, Trustee-Appellant, v. Stanley Joseph Goralski; Doris Ann Goralski, Debtors-Appellees.
Nos. 05-1637, 05-1844
United States Court of Appeals, Fourth Circuit
Decided Jan. 18, 2007.
Argued Nov. 28, 2006.
474 F.3d 143
Before WILLIAMS and TRAXLER, Circuit Judges, and HAMILTON, Senior Circuit Judge.
Affirmed by published opinion. Senior Judge HAMILTON wrote the opinion, in which Judge WILLIAMS and Judge TRAXLER joined.
OPINION
HAMILTON, Senior Circuit Judge.
The two cases befоre the court involve instances in which the Chapter 13 trustee sought to modify a confirmed Chapter 13 plan to increase the amount to be paid to the unsecured creditors.1 In the first case, that of Stanley and Doris Goralski, the Chapter 13 trustee sought to modify the confirmed Chapter 13 plan after the bankruptcy court granted the Goralskis permission to refinance the mortgage on their residence. In the refinancing, the Goralskis received some of the equity in their residence in cash in exchange for a corresponding amount of debt, and the Chapter 13 trustee sought a portion of this money for the further benefit of the unsecured creditors. The Goralskis sought to refinance their mortgage primarily because Stanley Goralski‘s earned income was cut approximately in half, making it difficult for the Goralskis to make their plan payments and, at the same time, pay their ordinary and necessary living expenses. In the second case, that of James Owen Murphy, Jr., the Chapter 13 trustee sought to modify the confirmed Chapter 13 plan after the bankruptcy court granted Murphy permission to sell his condominium. The Chapter 13 trustee sought a
I
The facts and procedural history in these two cases are not in dispute and are set forth separately for the reader‘s convenience.
A
Stanley and Doris Goralski filed a joint Chapter 13 petition in the United States Bankruptcy Court for the Eastern District of Virginia 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. The Goralskis listed the sum of $89,438 as the amount of their unsecured debt. The plan filed by the Goralskis with their petition was confirmed without objection on September 18, 2003. It required the Goralskis to pay the Chapter 13 trustee $1,100 per month for thirty-six months аnd estimated a twenty-eight percent dividend to the unsecured creditors. The Goralskis’ confirmed plan provided that, upon confirmation, “[a]ll property of the estate shall revest in the debtor[s].”
On October 21, 2004, approximately eighteen months after the Chapter 13 petition was filed, the Goralskis filed a motion for permission to refinance the mortgage on their residence, which had appreciated significantly in value. As part of the refinancing, the Goralskis sought to obtain a portion of the equity in their residence in cash in exchange for a corresponding amount of debt.2 The primary reason given for seeking to refinance was that Stanley Goralski‘s earned income had been cut approximately in half, making it difficult for the Goralskis to make their plan payments and, at the same time, pay their ordinary and necessary living expenses.3 In the motion, the Goralskis offered to pay all remaining payments required under the confirmed plan.
At the hearing on the motion, the Chapter 13 trustee took the position that, to the extent the proceeds of the refinancing were sufficient to pay all filed claims in full, the Goralskis should be required to pay the filed claims at a rate of 100 percеnt. The bankruptcy court overruled the Chapter 13 trustee‘s objection and granted the motion to refinance. The next day, the Chapter 13 trustee filed a motion to reconsider, as well as a motion to modify the confirmed plan, asking that the Goralskis’ confirmed plan be modified to require $64,365 from the refinancing be paid to the Chapter 13 trustee to allow for the payment of all filed claims at a rate of 100 percent.
B
On December 15, 2003, Murphy filed a voluntary Chapter 13 petition in the United States Bankruptcy Court for the Eastern District of Virginia. On his schedules, he indicated that he owned a condominium located at 10125 Oakton Terrace Road, Oakton, Virginia, which he valued at $155,000, subject to a lien of $121,000. Murphy‘s schedules also listed $52,374 of unsecured debt. Murphy‘s plan, which was confirmed on April 29, 2004, required him to pay the Chapter 13 trustee $700 per month for thirty-six months and projected a thirty-seven percent dividend to the unsecured creditors. Like the Goralskis’ confirmed plan, Murphy‘s confirmed plan provided that, upon confirmation, “[a]ll property of the estate shall revest in the debtor.”
On November 8, 2004, Murphy filed a motion for authority to sell his condominium for $235,000, explaining that he had obtained a new job in Pennsylvania and needed to move.4 In the motion, Murphy indicated that he was willing to tender a sum to the Chapter 13 trustee sufficient “to complete the payment of debtor‘s chapter 13 payments.” The Chapter 13 trustee did not object to the sale, but stated at the hearing that he needed approximately $30,000 from the sale to pay the filed unsecured claims in full. Murphy objected to paying the Chapter 13 trustee anything more than the approximately $12,000 still owed under the confirmed plan. The bankruptcy court preliminarily ruled that the sale proceeds constituted income that had to be applied to the plan and directed that $30,000 be turned over to the Chapter 13 trustee. Because Murphy‘s counsel stated that he intended to appeal the ruling, and so that there could be a final order to allow the contract to go to settlement, the order entered by the bankruptcy court simply approved the sale and stated that disрosition of the $30,000 would be the subject of a further order. The bankruptcy court‘s ruling allowed the Chapter 13 trustee to disburse up to $11,973 of the proceeds (the amount needed to complete the scheduled plan payments) but required the Chapter 13 trustee to hold the balance of the $30,000 pending further order of the court.5 Although the ruling technically favored the Chapter 13 trustee, the Chapter 13 trustee moved for reconsideration and, contemporaneously, moved to modify the plan payments to allow for payment of all pending unsecured claims at a rate of 100 percent.
In its decision, the bankruptcy court modified the confirmed plan to provide for full payment of the pending unsecured claims. On appeal to the district court, the district court affirmed the bankruptcy court‘s ruling. Murphy now appeals to this court.
II
In contrast to a Chapter 7 bankruptcy, which involves the liquidation of a
Generally, there are two types of Chapter 13 plans. “Percentage” plans designate what рercentage each unsecured creditor will receive without specifying an exact amount the debtor must pay into the plan. In re Golek, 308 B.R. 332, 335 (Bankr.N.D.Ill.2004). In contrast, “pot” plans set the exact amount the debtor must pay into the plan, leaving in question the percentage each unsecured creditor will receive until all claims are approved. Id. Both of the plans in this case are pot plans.
A confirmed Chapter 13 plan is “a new and binding contract, sanctioned by the court, between the debtors and their pre-confirmation creditor[s].” Matter of Penrod, 169 B.R. 910, 916 (Bankr.N.D.Ind.1994); see also
Under
We have not set forth a thorough analysis on how a bankruptcy court should analyze a motion for modification pursuant to
Although we did not define the term “substantial” in In re Arnold, we held that an increase in the debtor‘s salary from $80,000 per year to $200,000 per year was a substantial change in the debtor‘s financial condition. 869 F.2d at 243. A change is unanticipated if the debtor‘s present financial condition could not have been reasonably anticipated at the time the plan was confirmed. Id.
Because the doctrine of res judicata did not prevent modification of the debtor‘s
Simply stated, per In re Arnold, when a bankruptcy court is faced with a motion for modification pursuant to
A
In the case of the Goralskis, we agree with the bankruptcy court and the district court that, through the cash-out refinancing, the Goralskis did not experience a substantial change in their financial condition. The record reflects that, although the Goralskis’ residence appreciated in value post-confirmation, Stanley Goralski‘s earned income had been reduced by approximately one-half. To meet their obligations under the confirmed plan, the Goralskis refinanced their existing mortgage, taking a sizeable amount of the equity (over $64,000) in their residence to allow them to continue to meet their financial obligations under the confirmed plan (through a lump sum payment or continued periodic payments) and to pay their every day living expenses.
All the Goralskis did was to eliminate a portion of their equity in the property for cash in exchange for a corresponding amount of debt. Thus, even when one considers that the Goralskis’ residence appreciated in value post-confirmation,11 at most, they simply received a large loan in place of a small one. By any stretch, a loan, regardless of the size, is not income. The apparent increase in their balance sheet was offset by the amount оf the loan, resulting in virtually no change to their financial condition. To be sure, although the Goralskis obtained a lower interest rate on their new loan, this fact alone did not substantially improve their financial condition, especially when one considers the primary reason for the refinancing—Stanley Goralski‘s reduced income. Under the doctrine of res judicata, there being no substantial change to the Goralskis’ financial condition, the cash-out refinancing cannot provide a basis for modifying the Goralskis’ confirmed plan pursuant to
We note that there is considerable disagreement in the courts concerning whether a debtor‘s proposal for an early payoff through the refinancing of a mortgage
If we were to write on a clean slate, we would find ourselves struggling much like these other courts have struggled. However, we are not writing on a clean slate. Under In re Arnold, a debtor must experience a substantial and unanticipated change in his post-confirmation financial condition before his confirmed plan can be modified pursuant to
We also observe that our decision clearly strikes the right balance between debtors on the one hand and creditors on the other. Our decision encourages refinancing when the debtor is struggling “under less advantageous loan terms, which, by implication, puts the future stream of payments to creditors under the Chapter 13 plan at risk.” In re Brumm, 344 B.R. at 803. As noted by the court in In re Brumm, lower payments on long term debt, which often is achieved through lower interest rates on a refinancing, gives a debtor “greater short term financial stability.” Id. Moreover, оur decision encourages refinancing when the debtor‘s income, such as in the case of Stanley Goralski, goes down, thereby putting at risk the debtor‘s ability to make plan payments. The debtor‘s early payoff coupled with his assumption of long term debt works to the benefit of the unsecured creditors, as the unsecured creditors receive their benefit of the bargain under the confirmed plan and are no longer exposed to a further reduction in the amount they will receive through a debtor‘s motion to modify the confirmed plan.
In this case, the Goralskis unquestionably took the more noble course оf seeking to fulfill their obligations under the confirmed plan when the reduction in Stanley Goralski‘s income could have motivated them to file their own motion to modify, seeking to pay less. For taking the high road, the Goralskis should not be penalized. Accordingly, we affirm the district court‘s affirmance of the bankruptcy court‘s decision in the Goralskis’ case because
B
Unlike the Goralskis’ case, in Murphy‘s case, we conclude that Murphy did experience a substantial and unanticipated change in his post-confirmation financial condition, аnd, thus, the doctrine of res judicata does not prevent the modification of Murphy‘s confirmed plan pursuant to
Turning to the question of whether this change in Murphy‘s financial condition could have been reasonably anticipated at the time the plan was confirmed, on the one hand, the Chapter 13 trustee should have general knowledge of real estate market trends in his district. In this case, the parties apparently concede that, in the two years preceding plan confirmation, the increase in the Housing Price Index for the Washington, D.C.-Alexandria-Arlington area ranged from ten to thirteen percent per year. Thus, Murphy‘s position would be stronger if his house appreciated, say, twenty-five percent in eleven months. However, a 51.6 percent increase certainly is an unanticipated change given the current market trends. Accordingly, because there has been a substantial and unanticipated change in Murphy‘s financial condition, we can turn to the question of whether the bankruptcy court abused its discretion when it ordered Murphy to share part of his newfound financial gains with his unsecured creditors.
In assessing whether to grant or deny the Chapter 13 trustee‘s motion for modification, the bankruptcy court was required to determine whether the Chapter 13 trustee‘s motion for modification sought one of the circumstances for modification set forth in
Sections
First, it is obvious that the Chapter 13 trustee‘s proposal to modify the plan to pay the unsecured creditors at a rate of 100 percent is feasible insofar as Murphy unquestionably has the ability to pay the unsecured creditors at a rate of 100 percent. Indeed, even with a 100 percent payout, Murphy still is netting in excess of $60,000 on the sale of his condominium without any corresponding debt. Next, we agree with the lower courts and the Chapter 13 trustee that a 100 percent payment to the creditors meets the best interest of the creditors under the circumstances of this case. Finally, the Chapter 13 trustee‘s proposal to modify was made in good faith. Our decision in In re Arnold recognizes that a debtor who experiences a substantial аnd unanticipated improvement in his financial condition after confirmation should not be able to avoid paying more to his creditors. 869 F.2d at 242. In contravention to In re Arnold, Murphy is seeking to do just that. He is seeking to pocket over $80,000 by selling his residence less than a year after his plan was confirmed, without paying a portion of that money to his unsecured creditors, who are receiving under the current confirmed plan only about thirty-seven cents on the dollar. In exercising his fiduciary duty, the Chapter 13 trustee proposed the modification in good faith to prevent Murphy from receiving such a substantial windfall. Accordingly, the bankruptcy court did not аbuse its discretion when it modified Murphy‘s confirmed plan to provide for full payment of the pending unsecured claims.
C
Finally, we need to address one other argument raised by Murphy. He argues that the bankruptcy court was not at liberty to modify his confirmed plan because his plan, in accordance with
Section
(a) Property of the estate includes, in addition to the property specified in section 541 of this title—
(1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first; and
(2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.
Five interpretations of the interplay between
III
For the reasons stated herein, the judgments of the district court are affirmed.
AFFIRMED.
Notes
(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to—
(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.
***(b)(1) Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section.