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8th Cir. BAP Holds Modification of BK Plan Requires At Least ‘Substantial Change in Circumstances’

The U.S. Bankruptcy Appellate Panel for the Eighth Circuit recently held that, at a minimum, a substantial change in circumstances is required to justify modification of a bankruptcy plan under Section 1229.

The Eighth Circuit BAP also determined that the bankruptcy court’s ruling that the debtors met their burden of showing an unanticipated, substantial change in circumstances was not clearly erroneous, despite multiple changes by the debtor, nor was the bankruptcy court’s finding that the fourth modified plan was feasible and confirmable.

A copy of the opinion in Farm Credit Services v. Steven L. Swackhammer is available at:  Link to Opinion.

After a bankruptcy court allowed Chapter 12 debtors – several years in a row – to modify their confirmed plan over the objection of their primary secured creditor, that creditor appealed. The issues on appeal were whether the bankruptcy court abused its discretion by confirming the debtors’ fourth modified plan under 11 U.S.C. § 1229 without requiring the debtors to show an “unanticipated and substantial change in circumstances” and whether, under the standard applicable to plan modifications, the court’s factual findings were clearly erroneous.

Section 1229(a)(2) provides that, “[a]t any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, on request of the debtor, the trustee, or the holder of an unsecured claim . . . to extend the time for payments,” among other permitted modifications (such as increasing or reducing payments under Section 1229(a)(1)). Additionally, Section 1229(b) requires that modified plans comply with the requirements of Section 1225(a), which governs when a plan shall be confirmed.

Here, the Eighth Circuit pointed out that compliance with Section 1225(a) means that, among other requirements, the court must find that the debtor “will be able to make all payments under the plan and to comply with the plan” – the so-called feasibility requirement of Section 1225(a)(6). The Court also noted that the language in Section 1229 is nearly identical to that governing modifications of chapter 13 plans under Section 1329 and is also similar to modifications of chapter 11 plans in Section 1127(b). All three chapters contain a provision that makes the terms of any confirmed plan binding on the debtor, creditors, and other parties in interest.

Therefore, the Eighth Circuit cited its previous decision in In re Johnson, 458 B.R. 745 (B.A.P. 8th Cir. 2011), that modification of a confirmed chapter 13 plan should be limited to situations in which there has been “a substantial change in circumstances.” Id. at 748. The Johnson court also held that when a confirmed plan is modified to reduce (as opposed to extending) payments under Section 1329(a)(1) due to a substantial change in circumstances, the modification must correlate to the change in circumstances. Id. at 749.

The Eighth Circuit thus concluded that plan modifications under Section 1229(a) require a showing, at a minimum, of a “substantial change in circumstances,” based on its previous holding in Johnson construing the identical language in Section 1329(a).

However, the Eighth Circuit did not take a position on whether it was required to find that the substantial change be “unanticipated,” because it concluded that the bankruptcy court’s alternate finding that the evidence showed an unanticipated substantial change in circumstances was not clearly erroneous.

Specifically, one of the debtors testified about complications caused by the Covid-19 pandemic and his earlier cancer treatment. Although the creditor argued that the bankruptcy court should not have taken judicial notice of the pandemic and that the evidence did not show clearly how the debtor’s cancer or the pandemic impacted his ability to farm, the Eighth Circuit could not find a definite and firm conviction that the bankruptcy court clearly erred. Furthermore, the Court noted that the bankruptcy court had the benefit of exhibits that were not in the appellate record as well as years of experience with the debtors.

For the same reasons, the Eighth Circuit concluded that the bankruptcy court did not clearly err in finding that the debtors’ fourth modified plan was feasible. To satisfy the feasibility requirement, there must be reasonable assurances from the debtor that the plan can be completed and that the plan will cash flow. In re Krause, 261 B.R. at 224.

Here, the record showed that, at the time of the hearing on the fourth modified plan, the debtors had made the payments required under the first modification, had paid 40% of the payments to the creditor required under the second modification, and had timely sold the first piece of their homestead as required by the fourth modified plan and that the second sale was in process. With this record, and given that the projections and other exhibits the bankruptcy court reviewed were not in the record on appeal, the Eighth Circuit could not say that the bankruptcy court clearly erred in finding that the debtors would be able to make their payments and comply with the plan under Section 1225(a)(6) or that the fourth modified plan was confirmable under all the requirements of Section 1225(a), as incorporated by Section 1229.

Accordingly, the Eighth Circuit affirmed the decision of the bankruptcy court.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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