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9th Cir. Allows Chapter 13 Bankruptcy Plans With Estimated Durations

bankruptcyThe U.S. Court of Appeals for the Ninth Circuit recently held that bankruptcy courts could confirm Chapter 13 plans proposing estimated time periods to complete the plan if unsecured creditors and the trustee did not object, reversing a contrary ruling from its Bankruptcy Appellate Panel.

A copy of the opinion in In re Nanette Sisk is available at:  Link to Opinion.

Multiple debtors filed Chapter 13 bankruptcies. The debtors proposed payment plans largely conformed to the court’s model plan. However, they relied on the court’s prior model to replace the current model’s fixed durational language with estimated time periods and to add an alternative provision that unsecured nonpriority creditors would receive “an aggregate dividend of $0.” Neither the trustee nor any unsecured creditor objected to the proposed plans.

Despite the lack of any objection, the bankruptcy court conducted multiple hearings and ultimately rejected the debtors’ proposed plan amendments. The court held that confirming plans with estimated lengths would effectively allow debtors to modify their plans without court approval.

To illustrate its concerns, the court pointed to two debtors who anticipated an increased income during the plan’s timeframe. With their increased income, the debtors could pay off their secured and priority creditors, and — because of the plan’s estimated timeframe — they could receive their discharge without seeking any amendment to their plan. The bankruptcy court found that this would improperly eliminate any opportunity for their unsecured nonpriority creditors to receive payment on their claims despite the increase in their income.

The BAP affirmed, but the Ninth Circuit reversed.

The Ninth Circuit first considered its jurisdiction to hear the appeal, noting the debtors’ need under the U.S. Supreme Court’s Spokeo ruling to demonstrate an injury in fact both “concrete and particularized” and “actual or imminent, not conjectural or hypothetical.” The Court found that the debtors could suffer economic harm from being forced into a Chapter 13 plan with a fixed duration, because the fixed duration plan could result in them making additional payments to both unsecured creditors and the trustee beyond those they would have made in a plan with an estimated duration. The Court determined that these potential harms constituted sufficiently concrete and particularized injury for it to exercise jurisdiction over the appeal.

The Ninth Circuit next turned to the substance of the appeal, holding that no express provision of Chapter 13 prohibits plans with estimated lengths. The Court noted that only two provisions of Chapter 13 expressly discuss plan duration. Section 1322 imposes a maximum duration of five years for above-median-income debtors and three years for below-the-median debtors. Section 1325 mandates a fixed minimum duration, but only if the trustee or a creditor objects to the plan.

Construing these provisions together, and noting on more than one occasion that section 1325 only requires the fixed minimum duration where the trustee or a creditor objects, the Ninth Circuit found that the statutory language did not impose a fixed minimum duration where the trustee or a creditor does not object to the plan. It also found that neither section prohibits estimated term plans. Noting that section 1325 explicitly imposes a minimum duration only when an objection is raised, the Court found that the section strongly suggests Congress intentionally chose not to include fixed terms for plans that do not draw objections.

The Ninth Circuit also considered the language in section 1329, which allows debtors, trustees, and unsecured creditors to modify bankruptcy plans at any time before the debtor completes payments. It declined to follow the BAP’s conclusion that section 1329 prohibits debtors from unilaterally modifying their plans, which the BAP determined estimated term provisions effectively allow. Rather, the Court found that estimated term provisions allow the debtor to seek an early discharge, not modify the plan. It also noted that unsecured nonpriority creditors could still seek to modify the plan at any point before the debtors’ discharge, as well as object to the plan to preclude an estimated timeframe before confirmation.

The Court further rejected the BAP’s public policy rationale that fixed plan durations conformed to Congress’s purposes in enacting the Bankruptcy Abuse Prevention and Consumer Protection Act to ensure that debtors repay creditors the maximum they can afford. The Ninth Circuit expressed doubt that Congress intended a “pro-unsecured creditor” policy in crafting BAPCPA, and it found that “BAPCPA’s purpose, whatever that may be, should not guide” the Court’s interpretation. Although the Court recognized the possibility that requiring fixed minimum terms may better serve creditors, it held that “this does not give courts license to judicially amend Chapter 13’s requirements.”

The Ninth Circuit additionally found that the debtors did not propose the plan in bad faith, overruling the BAP’s finding that debtors proposing estimated time periods unfairly manipulated the Bankruptcy Code. The Court reiterated earlier rulings that the good faith inquiry is not a vehicle to promulgate bankruptcy requirements not in the Code, and that debtors do not act in bad faith merely for doing what the Code permits them to do. It also noted that the BAP’s bad faith finding would necessarily mean debtors using bankruptcy court’s prior model — which specifically allowed estimated plan durations — unfairly manipulated the code for years before the bankruptcy court updated its model.

Finally, the Ninth Circuit disagreed with the debtors’ position that the bankruptcy court violated the Code by taking more than 45 days to rule on the debtors’ plans and by holding hearings despite the lack of any objection. The Court found that the Chapter 13 only requires bankruptcy courts to hold a hearing within 45 days, not conclude the hearing. It also found that bankruptcy courts have an independent duty to ensure plans conform to the Code even when no party objects, and that they have discretion to manage their dockets to aid their inquiry.

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Kevin Hudspeth is a Principal of Maurice Wutscher LLP. He practices in the firm’s Commercial Litigation, Consumer Credit Litigation, Appellate, and Regulatory Compliance groups, predominantly representing national mortgage loan servicers on a wide variety of issues. Kevin has substantial litigation experience in federal and state courts across the country. He regularly handles cases involving the FDCPA, RESPA, TILA, FCRA, FACTA, the TCPA, the United States Bankruptcy Code, and similar federal and state laws and regulations, as well as cases litigating real estate and commercial business disputes, the Uniform Commercial Code, loan repurchase demands, and contested foreclosures. Prior to joining Maurice Wutscher, Kevin worked as an Assistant Attorney General with the Office of the Illinois Attorney General, where he litigated actions arising under the Illinois Consumer Fraud and Deceptive Business Practices Act, the Illinois Uniform Deceptive Trade Practices Act, the Illinois Securities Law, and other related statutes. He also previously worked for Fifth Third Bank, N.A., where he coordinated and supervised outside counsel on litigation strategy for contested foreclosures and cases involving default mortgage loan servicing. Kevin has taught legal research and writing as an Adjunct Professor with Loyola University Chicago School of Law and has published articles in academic and trade journals on a diverse range of topics impacting the consumer lending industry, including issues related to the transfer and enforcement of promissory notes, procedural and evidentiary problems presented in contested mortgage foreclosure cases, substantive law impacting bankruptcy administration, and related matters. He regularly contributes to the American Bar Association’s Business Law Today. Kevin is admitted to practice law in the States of Ohio and Illinois, and he has represented clients pro hac vice in trial and appellate level jurisdictions throughout the country. For more information see

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