Germeraad v. Powers, No. 15-3237 (7th Cir. 2016)
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In 2011, the bankruptcy court confirmed a Chapter 13 plan, under which the debtors were to pay $660 per month to the trustee for seven months, and then, for 53 months, $758 per month, later reduced to $670 per month. From these payments, the trustee would pay the claims of secured creditors and distribute approximately $22,000 to general unsecured creditors. In 2013, the trustee received the debtors’ 2012 income tax return, showing that their income had increased by $50,000. The trustee moved to modify the plan under 11 U.S.C. 1329, to increase the monthly payments to $1,416 per month for the 23 remaining months. The bankruptcy court denied the motion, stating that the Code did not allow modification of a Chapter 13 plan for the cited reasons, and that, even if the court had the power to modify the plan, the facts did not support the request. The district court upheld the bankruptcy court’s determination that it lacked authority to grant the motion. The Seventh Circuit vacated. While section 1329 does not explicitly identify the circumstances under which modification is appropriate and no Code provision expressly permits modification when a change in financial circumstances makes an increase affordable, it does not follow that modification in this circumstance is forbidden.
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In the United States Court of Appeals For the Seventh Circuit ____________________ No. 15 3237 JOHN GERMERAAD, Trustee Appellant, v. MYRICK POWERS AND ELVIE OWENS POWERS, Debtors Appellees. ____________________ Appeal from the United States District Court for the Central District of Illinois. No. 14 CV 03128 — Sue E. Myerscough, Judge. ____________________ ARGUED APRIL 11, 2016 — DECIDED JUNE 23, 2016 ____________________ Before BAUER and WILLIAMS, Circuit Judges, and ADELMAN, District Judge.* ADELMAN, District Judge. Myrick Powers and Elvie Owens Powers filed a petition under Chapter 13 of the Bankruptcy Code. After the bankruptcy court confirmed their plan, the * Of the Eastern District of Wisconsin, sitting by designation. 2 No. 15 3237 Chapter 13 trustee filed a motion to modify the plan to in crease the debtors’ payments to the general unsecured credi tors. The trustee’s motion was based on an increase in the debtors’ income, which, the trustee argued, resulted in their ability to pay more to their creditors under the plan. The bankruptcy court denied the motion. The trustee appealed to the district court, which affirmed. The trustee then filed this appeal. We vacate the judgment of the district court and re mand for further proceedings. I. The debtors filed their Chapter 13 petition on May 24, 2010. The bankruptcy court confirmed their plan on March 1, 2011. Under the plan, the debtors were to pay $660 per month to the Chapter 13 trustee for seven months, and then $758 per month for fifty three months. The latter payment was later re duced to $670 per month. From these payments, the trustee would pay the claims of secured creditors and distribute ap proximately $22,000 to the general unsecured creditors. In 2013, the trustee received the debtors’ income tax return for 2012. According to the trustee, the return showed that the debtors’ income had increased by $50,000 since 2011. Based on this increase in income, the trustee concluded that the debtors could afford a higher monthly payment for the re maining months of their plan. The trustee filed a motion to modify the debtors’ plan under 11 U.S.C. § 1329, which per mits postconfirmation modification of a Chapter 13 plan. The trustee proposed to increase the debtors’ monthly payments from $670 per month to $1,416 per month for the twenty three months that remained under the plan at the time the motion was filed. If the debtors made these increased payments, the No. 15 3237 3 trustee could (after a reduction for the trustee’s commission) distribute an additional $15,000 to the unsecured creditors. The debtors filed an objection to the trustee’s motion to modify. They argued that the Bankruptcy Code did not per mit modification of a Chapter 13 plan based on a postconfir mation increase in a debtor’s income. They also argued that, even if the Code did permit modification on this ground, the facts of the case did not warrant modification because, alt hough their income had increased, so had their expenses. Af ter the debtors filed their objection, the trustee took discovery relating to the debtors’ finances. Once this discovery was com pleted, the parties stipulated to certain facts. The bankruptcy court decided the trustee’s motion to modify based on the parties’ briefs and their stipulation of facts. See In re Powers, 507 B.R. 262 (Bankr. C.D. Ill. 2014). The court denied the motion for two independent reasons. First, the court held that, as a matter of law, the Bankruptcy Code did not contain a provision that would allow modification of a Chapter 13 plan for the reasons cited by the trustee. Id. at 267–74. Second, the court found that, even if the court had the power to modify the plan for the reasons cited by the trustee, the facts of the case did not support the trustee’s request. Id. at 274–75. The trustee appealed the bankruptcy court’s decision to the district court. The district court exercised jurisdiction over the appeal under 28 U.S.C. § 158(a)(1). On appeal, the trustee challenged both of the bankruptcy court’s reasons for denying the motion to modify. First, the trustee argued that the bank ruptcy court had erred as a matter of law when it concluded that the Bankruptcy Code did not permit modification based on a postconfirmation increase in a debtor’s income. Second, 4 No. 15 3237 the trustee argued that the bankruptcy court’s alternative rea son for denying the motion was based on clearly erroneous factual findings and also involved an abuse of discretion. The district court addressed only the first argument. It concluded that the bankruptcy court did not err as a matter of law when it found that it lacked authority to grant the trustee’s motion. Noting that this conclusion was sufficient to resolve the ap peal, the district court declined to consider whether the bank ruptcy court clearly erred or abused its discretion in finding that the facts of the case did not support the trustee’s motion. In his appeal to this court, the trustee argues that both the district court and the bankruptcy court erred in concluding that the Bankruptcy Code does not permit a trustee to request modification of a plan based on a postconfirmation increase in a debtor’s income. The trustee asks that, if we accept his argument, we remand the case to the district court so that it may consider his arguments relating to the bankruptcy court’s alternative ground for denying the motion. Elvie Owens Powers, who is the only debtor participating in this appeal,1 contends that we lack jurisdiction to decide the appeal. She argues that the bankruptcy court’s order denying the trustee’s motion to modify the plan is not a final order for purposes of 28 U.S.C. § 158, and also that the case is moot. On the merits, she argues that the trustee has mischaracterized the bankruptcy court’s reasons for denying his motion and that, under the proper characterization, the court’s order must be affirmed. 1 Myrick Powers has not filed a brief in this appeal and did not partic ipate in oral argument. No. 15 3237 5 II. We begin by addressing the debtor’s arguments concern ing our jurisdiction. A. First, the debtor contends that a bankruptcy court’s order denying a motion to modify a Chapter 13 plan is not “final” within the meaning of 28 U.S.C. § 158. Under that statute, we generally have jurisdiction over a bankruptcy appeal only if both the bankruptcy court s order and the district court s or der are final. See 28 U.S.C. § 158(d)(1); Schaumburg Bank & Trust Co., N.A. v. Alsterda, 815 F.3d 306, 312 (7th Cir. 2016). In the bankruptcy context, “finality” is understood somewhat differently than it is in the context of ordinary civil litigation. See, e.g., Bullard v. Blue Hills Bank, __ U.S. __, __, 135 S. Ct. 1686, 1692 (2015). A bankruptcy case involves an aggregation of in dividual controversies, many of which would exist as stand alone lawsuits but for the bankrupt status of the debtor. Id. An order in a bankruptcy case is considered final when it resolves one of the individual controversies that might exist as a stand alone suit outside of bankruptcy. See Schaumberg Bank & Trust, 815 F.3d at 312–13. One way of assessing whether this stand ard has been met is to identify whether the order at issue brought to an end a single “proceeding” that exists within the larger bankruptcy case. See Bullard, 135 S. Ct. at 1692 (empha sizing that 28 U.S.C. § 158(a) allows appeals as of right from final orders in “cases and proceedings”). In the present case, Owens Powers argues that a bank ruptcy court’s denial of a trustee’s motion to modify a Chapter 13 plan does not resolve a “proceeding” within the larger bankruptcy case. She relies on the Supreme Court’s decision 6 No. 15 3237 in Bullard, in which the Court held that an order denying con firmation of a Chapter 13 plan is not final unless the bank ruptcy court also dismisses the underlying bankruptcy case. Id. at 1692–93. The Court reasoned that, in the context of the consideration of Chapter 13 plans, the relevant “proceeding,” for purposes of § 158(a), is the entire process of considering plans, which terminates only when a plan is confirmed or—if the debtor fails to offer any confirmable plan—when the case is dismissed. Id. at 1692. Owens Powers contends that, in the context of a trustee’s motion to modify a confirmed plan, the relevant “proceed ing” encompasses more than simply the bankruptcy court’s denial of the motion. She notes that a ruling on one motion to modify does not preclude the trustee from filing another mo tion to modify. Thus, argues the debtor, just like an order denying plan confirmation is not final, an order denying a trustee’s motion to modify a confirmed plan is not final. We do not find the debtor’s analogy to Bullard persuasive. The denial of a trustee’s motion to modify is generally not part of a larger “proceeding” that will conclude only when some event other than the denial of the motion occurs. Rather, the denial of the motion will generally resolve a discrete dispute within the larger bankruptcy case, i.e., whether the debtor’s plan may be modified for the reasons the trustee cites. If the trustee loses the motion on the merits, rather than because the motion contained a technical defect that could be cured, the bankruptcy court will not invite the trustee to bring a subse quent motion seeking plan modification on the same grounds. In contrast, when a bankruptcy court refuses to confirm a plan but does not also dismiss the case, the debtor is usually given an opportunity to submit a revised plan. Bullard, 135 S. Ct. at No. 15 3237 7 1690. This is why the Court found that the relevant “proceed ing” for purposes of plan confirmation encompasses more than the denial of any single proposed plan. That proceeding concludes only when either a plan is confirmed or the bank ruptcy case is dismissed. Of course, if the bankruptcy court does deny a trustee’s motion to modify a plan based on a technical defect or on some other basis that could be cured by an amended motion, then the bankruptcy court’s order will not be final. In this sit uation, the bankruptcy court’s order will not have resolved a discrete dispute but will have been merely one step in a larger proceeding that will conclude when the bankruptcy court de cides the amended motion. However, from the fact that some orders denying motions to modify plans are not final, it does not follow that none of them are final. In this regard, an order denying a motion to modify is analogous to an order granting a motion to dismiss a complaint under Federal Rule of Civil Procedure 12(b)(6). If the district court grants the motion but does so based on a defect in the complaint that cannot be cured, then the order is final. See Strong v. David, 297 F.3d 646, 648 (7th Cir. 2002). However, if the district court grants the motion based on a technical defect that the plaintiff could cure by filing an amended complaint, then the order generally will not be final. Id. In the present case, the bankruptcy court did not deny the trustee’s motion to modify based on a technical defect that the trustee could have cured by filing an amended motion that sought the same relief. Rather, the bankruptcy concluded as a matter of law that the Bankruptcy Code did not allow the requested modification. The debtor notes that although the trustee could not have filed a second motion to modify requesting the same relief, 8 No. 15 3237 the trustee could have filed “a different motion”—one that “ask[ed] for a different change in the debtor’s plan or [was] based on a different financial situation.” Initially, we observe that the debtor has not identified any grounds on which the trustee could have filed a different motion to modify the plan in this case, and thus we cannot agree that in fact the trustee could have filed such a motion. However, we do not doubt that in some Chapter 13 cases, a trustee will file more than one motion to modify a confirmed plan. But this does not mean that in every case there is some larger “proceeding” relating to the trustee’s motions to modify that does not come to an end until it is legally impossible for the trustee to file any fur ther motions. Rather, where an order denying a motion to modify precludes the trustee from filing a subsequent motion based on the same grounds (i.e., based on the same facts and legal principles), that order will be final even though the trus tee could file a subsequent motion to modify based on differ ent grounds, should those grounds materialize. In such a case, the bankruptcy court’s resolution of the first motion to modify will have resolved a freestanding dispute within the larger bankruptcy case and be final for that reason. Here, we may analogize the denial of a trustee’s motion to modify to a denial of a Rule 60(b) motion for relief from a judgment entered in an ordinary civil case. See Fed. R. Civ. P. 60(b). That rule provides several grounds for relieving a party from the judgment. A court’s denying a party’s motion for re lief on one ground, such as that the judgment was procured by fraud, see Fed. R. Civ. P. 60(b)(3), will not preclude the party from later filing a second motion based on a different ground, such as the discovery of new evidence, see Fed. R. Civ. P. 60(b)(2), should that ground materialize. Yet, even though it is theoretically possible that more than one Rule 60(b) motion No. 15 3237 9 will be filed in a single civil case, a district court’s order deny ing any one motion will be considered final and immediately appealable. See, e.g., Madej v. Briley, 371 F.3d 898, 899 (7th Cir. 2004). The same result applies to a trustee’s motion to modify a Chapter 13 plan. For these reasons, we conclude that the bankruptcy court’s order denying the trustee’s motion to modify the plan was “fi nal” within the meaning of § 158(a)(1). Because the district court’s order was also final, we have jurisdiction over this ap peal under § 158(d)(1). B. The debtor next contends that this appeal is moot. Article III of the Constitution limits the federal judicial power to ac tual, ongoing cases or controversies, a limitation understood to require a live dispute involving a party with “an actual in jury traceable to the defendant and likely to be redressed by a favorable judicial decision.” Redmond v. Redmond, 724 F.3d 729, 735 (7th Cir. 2013) (quoting Lewis v. Cont l Bank Corp., 494 U.S. 472, 477 (1990)). The case or controversy requirement “subsists through all stages of federal judicial proceedings, trial and appellate.” Id. (quoting Lewis). If on appeal it be comes “impossible for a court to grant any effectual relief whatever,” the case becomes moot and jurisdiction no longer exists. Id. (quoting Knox v. Serv. Emps. Int l Union, Local 1000, __ U.S. __, 132 S. Ct. 2277, 2287 (2012)). In the present case, Owens Powers argues that it is no longer possible to grant the relief the trustee requests—mod ification of the plan—because five years have elapsed since the debtors began making payments under their original plan. This argument is based on 11 U.S.C. § 1329(c), which 10 No. 15 3237 provides, in relevant part, that a plan may not be modified such that it “provide[s] for” the debtor to make plan pay ments over a period that expires more than five years from the date on which the first payment under the original confirmed plan was due. The first payment under the Powers’ original confirmed plan was due in June 2010. Thus, Owens Powers argues, it is no longer possible to modify the plan. The debtor’s argument rests on the assumption that if the trustee’s request to modify the plan were allowed today, the result would be a plan that provides for the debtors to make payments over a period that expires after June 2015. That as sumption is incorrect. If we vacated the bankruptcy court’s disallowance of the trustee’s proposed modification, then by operation of 11 U.S.C. § 1329(b)(2), the trustee’s modified plan would “become[] the plan.” The modified plan would then “provide” that the debtors must make increased payments to the trustee each month for the twenty three months that re mained under the plan at the time the motion was filed, i.e., months 38 through 60. These months were within the permis sible five year period specified in § 1329(c). The modified plan would thus not “provide for” payments beyond five years. It is true that months 38 through 60 have come and gone without the debtors making the increased payments. How ever, this does not mean that allowing the modification would have no effect on the parties’ rights. Rather, if the modification were allowed, the debtors would be deemed in default be cause they failed to make all payments called for by their modified plan. If the debtors were in default, then several things of consequence could occur: the bankruptcy court could deny the debtors a discharge, dismiss their bankruptcy case, or convert the case to Chapter 7. See 11 U.S.C. No. 15 3237 11 §§ 1307(c)(6), 1328.2 Or, the bankruptcy court might allow the debtors to cure their default by paying the difference between the payments called for by the modified plan for months 38 to 60 and what they actually paid during those months. Alt hough these payments would be made outside of the five year period specified in § 1329(c), they would not be pay ments “provide[d] for” by the modified plan; rather, they would be payments made to cure a default under the modi fied plan, i.e., payments made because the debtors did not make the payments “provide[d] for” by the plan in the first place. See 1 Hon. W. Homer Drake, Jr., et al., Chapter 13 Practice and Procedure, § 11:15 at 1131 (2d ed. 2015) (“[W]hen a debtor is close to completing her plan payments and needs a reason able additional time to do so, courts have permitted the debtor to cure the defaults and consummate the plan. The rea soning is that the five year restriction applies to the schedul ing of the payments in the confirmed plan and does not pro hibit cure of those payments outside the scheduled time … .”). In any event, even if the bankruptcy court could not allow the debtors to cure their default because of the five year restriction, this appeal would still present a live dispute because the bankruptcy court has the power to deem the debt ors in default, deny them a discharge, and dismiss or convert their Chapter 13 case. The debtors might argue that it would be inequitable for the bankruptcy court to modify the plan or deny them a dis charge after they have already made the payments provided 2 At oral argument, the parties informed us that the bankruptcy court has not granted the debtors a discharge. We express no view on whether this appeal would be moot if the debtors had received a discharge. 12 No. 15 3237 for by the original plan. However, whether it would be ineq uitable to do any of these things is not a question that is rele vant to mootness. As we have previously held, so long as a court retains the “raw ability” to take some action that will have a concrete effect on the parties’ rights, the case is not moot even if the court would be reluctant to take that action. In re UNR Indus., Inc., 20 F.3d 766, 768–69 (7th Cir. 1994); accord United States v. Buchman, 646 F.3d 409, 410–11 (7th Cir. 2011). Next, the debtor contends that even if the five year re striction does not result in mootness, the case is still moot be cause § 1329(a) states that a plan “may be modified,” upon the request of the trustee (or the debtor or the holder of an al lowed unsecured claim) only “before the completion of pay ments” under the original plan. The debtors note that they have completed making payments under their original plan. Therefore, they contend, the bankruptcy court no longer has the power to approve a modified plan. However, § 1329(a) does not place any temporal limits on the bankruptcy court’s power to approve a requested modifi cation. Rather, the temporal limit applies to the party request ing modification, i.e., to the debtor, the trustee, or an unse cured creditor. Although § 1329(a) states that the plan “may be modified” only within the prescribed time, when this lan guage is read in the context of § 1329 as a whole, it is clear that it is referring to the time when the modification may be re quested, not to the time within which the bankruptcy court may approve the modification. Specifically, § 1329(b)(2) states that “[t]he plan as modified becomes the plan unless, after no tice and a hearing, such modification is disapproved.” This provision means that the modification is effective, i.e., that the plan is modified, on the date the party requests modification No. 15 3237 13 of the plan, unless the court later disapproves it. See 2 Drake et al., supra, § 21:7 at 642. So, for example, if the debtors had completed making payments under their original plan be tween the date on which the trustee filed the modified plan and the date the bankruptcy court considered whether to ap prove the modification, the bankruptcy court would still have had the power to approve the modification, since by the time the debtors completed making the payments required by the original plan, the plan would have been modified to require increased payments. Cf. In re Meza, 467 F.3d 874, 879–80 (5th Cir. 2006) (holding that a bankruptcy court may consider a trustee’s motion to modify a plan, if that motion was filed be fore the debtor completed payments under the original plan, even if the debtor completes making payments under the original plan before the bankruptcy court considers whether to approve the modification). Of course, in this case, the bank ruptcy court disapproved the trustee’s modification. Under § 1392(b)(2), the effect of the disapproval was to void the mod ification and reinstate the original plan. But this does not mean that the debtors’ having completed payments under the original plan prevents reinstatement of the trustee’s modified plan. Rather, if we were to vacate the bankruptcy court’s order disapproving the modification, then by operation of § 1329(b)(2), the modified plan would be reinstated and deemed effective as of the date it was filed. It would be as if the bankruptcy court had never disapproved the modification in the first place. The modification thus would have occurred within the time period specified in § 1329(a). For these reasons, we conclude that this appeal is not moot. 14 No. 15 3237 III. On the merits, the parties’ principal disagreement con cerns the legal standard that governs a bankruptcy court’s ex ercise of its discretion in deciding a trustee’s motion to modify a confirmed plan based on a postconfirmation increase in the debtor’s income. The trustee contends that a bankruptcy court has discretion to grant the motion where the trustee shows that, because of an increase in income, the debtor can afford to pay more to the unsecured creditors than the original plan requires. Owens Powers contends that a modification based on increased income is allowed only if the trustee shows that “good faith,” as that term is used in 11 U.S.C. § 1325(a)(3), re quires the increase. In addition, the parties disagree about how to characterize the bankruptcy court’s decision in this case. The trustee contends that the bankruptcy court held as a matter of law that it lacked authority to grant a motion to modify based on a postconfirmation increase in the debtor’s income. Owens Powers, who concedes that the bankruptcy court had authority to grant a motion to modify based on a postconfirmation increase in income, contends that what the bankruptcy court actually held was that the trustee had failed to prove that good faith required the increase. For the reasons explained below, we side with the trustee on both issues. Section 1329 provides that: (a) At any time after confirmation of the plan but be fore 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– No. 15 3237 (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; (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; or (4) reduce amounts to be paid under the plan by the actual amount expended by the debtor to purchase health insurance for the debtor … . (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. (2) The plan as modified becomes the plan unless, after notice and a hearing, such modification is disap proved. (c) A plan modified under this section may not provide for payments over a period that expires after the appli cable commitment period under section 1325(b)(1)(B) after the time that the first payment under the original confirmed plan was due, unless the court, for cause, approves a longer period, but the court may not ap prove a period that expires after five years after such time. 15 16 No. 15 3237 In short, § 1329 states that modification may be requested by either the debtor, the trustee, or the holder of an allowed un secured claim.3 It contains three general limits on the bank ruptcy court’s power to approve the request. First, modifica tion is allowed only if it will modify the plan in one of the ways specified in § 1329(a)(1)–(4). Second, a modification must comport with the provisions of the Code listed in § 1329(b)(1). Finally, as we have already discussed in the con text of mootness, a modification may not result in a plan providing for payments over a term that is longer than the period specified in § 1329(c), which in this case is five years. In the present case, the trustee’s proposed modification satisfies these basic requirements. The purpose of the modifi cation is to increase payments to the unsecured creditors, and thus it is of a type specified in subsection (a)(1). The modifi cation would not result in a plan that violates any of the pro visions identified in subsection (b)(1). And, as we have al ready held, the modification would not result in a plan that provides for payments over a period that is longer than five years. 3 Section 1329 was added to the Bankruptcy Code as part of the Bank ruptcy Reform Act of 1978, Pub. L. No. 95 598, 92 Stat. 2549 (1980). As originally enacted, § 1329 did not identify the parties who could request modification, and it was interpreted as allowing only the debtor to do so. See 92 Stat. at 2651; In re Fitak, 92 B.R. 243, 248 (Bankr. S.D. Ohio 1988). However, the 1984 amendments to the Code added language stating that modification could be requested by the debtor, the trustee, or the holder of an allowed unsecured claim. See Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98 353, § 319, 98 Stat. 333, 357 (1986). No. 15 3237 17 Although § 1329 contains these three general limits on modification, it does not contain an explicit standard for de termining when a modification that is within those limits should be approved. See In re Witkowski, 16 F.3d 739, 746 (7th Cir. 1994); Barbosa v. Solomon, 235 F.3d 31, 38 (1st Cir. 2000); In re Arnold, 869 F.2d 240, 241 (4th Cir. 1989); 1 Drake et al., supra, § 11:4 at 1083 (noting that “§ 1329 provides no standards to guide the court in the exercise of its discretion”). However, courts routinely deem modification appropriate when there has been a postconfirmation change in the debtor’s financial circumstances that affects his or her ability to make plan pay ments. See, e.g., Barbosa, 235 F.3d at 40 (“Congress saw fit to allow the trustee and holders of unsecured claims to seek an amendment to the confirmed plan in order to carry the ability to pay standard forward in time, allowing upward or down ward adjustment of plan payments in response to changes in the debtor’s financial circumstances which affect his/her abil ity to make payments”); Arnold, 869 F.2d at 241 (“Although § 1329(a) does not explicitly state what justifies such a modifi cation, it is well settled that a substantial change in the debtor’s financial condition after confirmation may warrant a change in the level of payments.”); In re Powers, 202 B.R. 618, 622 (B.A.P. 9th Cir. 1996) (noting that a “debtor’s changed fi nancial situation” is grounds for modifying a plan); 1 Drake et al., supra, § 11:12 at 1100–01 (collecting numerous cases sup porting the proposition that “[c]ourts generally permit debt ors to modify plans to reduce payments based on reduced in come” and “generally require[] debtors whose income in creases significantly after confirmation to pay more”). So, for example, if the debtor loses her job and can no longer afford the payments required under the original plan, then she may request modification to have the plan payments reduced. 18 No. 15 3237 Conversely, if the debtor’s income increases such that she can afford to pay more to her creditors than required under the original plan, then the trustee or an unsecured creditor may request that plan payments be increased. Courts have rea soned that authority to allow such modifications is implied by the purposes of Chapter 13, which are to allow the debtor a fresh start where it is possible to do so without liquidating the debtor’s assets (as in a Chapter 7 bankruptcy case), while at the same time ensuring that the debtor devotes all of her dis posable income during the life of the plan to repaying credi tors. 1 Drake, et al., supra, § 11:4 (quoting In re Forte, 341 B.R. 859, 869–70 (Bankr. N.D. Ill. 2005)). In addition, courts have noted that the legislative history relating to the 1984 amend ments to the Bankruptcy Code—which amended § 1329(a) to permit trustees and unsecured creditors (and not just debtors) to request plan modification—supports the conclusion that plan modification is permitted when a change in the debtor’s income makes increased payments affordable. Barbosa, 235 F.3d at 40–41 (citing Personal Bankruptcy: Oversight Hearings Before the Subcomm. on Monopolies and Commercial Law of the H. Comm. on the Judiciary, 97th Cong. 22–23 (1981–82)); Arnold, 869 F.2d at 241–42 (same).4 4 While courts generally agree that a postconfirmation change in the debtor’s ability to make plan payments is grounds for modifying a plan to either increase or decrease the debtor’s payments, they have disagreed on whether there must be some threshold showing relating to the amount of change that has occurred since confirmation and whether that change was unanticipated at the time of confirmation. Specifically, some courts have held that modification is permitted only if there have been “unanticipated, substantial changes” in the debtor’s financial circumstances since the time of confirmation. See, e.g., Arnold, 869 F.2d at 243. However, in Witkowski, No. 15 3237 19 In the present case, the trustee requested modification of the debtors’ plan after he determined that the debtors’ income had increased substantially since confirmation and, for that reason, they could afford to make higher plan payments. In his motion, the trustee cited various cases recognizing that the bankruptcy court has discretion to allow modification for this reason. The bankruptcy court, however, found that no “statu tory authority” or “Code provision” supported the trustee’s request. Powers, 507 B.R. at 270–71, 273–74. The court initially characterized the trustee’s modification as a request “to recal culate disposable income” under the method specified in 11 U.S.C. § 1325(b). That subsection of the Code generally pro vides that a court may not confirm a plan, over the objection of the trustee or an unsecured creditor, unless under the plan the debtor will, during the applicable plan period, pay all of her projected disposable income—as calculated under the methods specified in that subsection—to the unsecured cred itors. However, because § 1325(b) is not mentioned in § 1329(b)(1) as a section of the Code that “appl[ies]” to modi fication, many courts have concluded that the projected dis posable income test of § 1325(b) does not apply to a proposed modification. See, e.g., In re Sunahara, 326 B.R. 768, 781–82 (B.A.P. 9th Cir. 2005). Other courts have held that the test does apply. See, e.g., In re Cormier, 478 B.R. 88, 94–97 (Bankr. D. Mass. 2012). The bankruptcy judge in the present case is in the former camp, and that is why she held that § 1325(b) does not provide authority to allow the trustee’s modification. But the trustee has not at any stage of this case suggested that the modification was based on the disposable income test of we held that a substantial, unanticipated change in circumstances is not a prerequisite to modification. 16 F.3d at 742–46. 20 No. 15 3237 § 1325(b). Instead, as noted, the trustee argues that the modi fication is supported by the cases holding that a plan may be modified where an increase in income means that the debtor can afford to make higher payments. Thus, in this appeal, we do not need to decide whether the bankruptcy court was cor rect in holding that § 1325(b) does not apply to modifications under § 1329. After concluding that § 1325(b) was not a source of author ity for the trustee’s modification, the bankruptcy court found that no other Code provision supported the modification. Powers, 507 B.R. at 270–74. In this part of its opinion, the bank ruptcy court characterized the trustee’s modification request as being based “solely on the equities of the situation.” Id. at 270. The court then rejected the idea that a modification could be based on equitable grounds rather than on an express pro vision of the Bankruptcy Code. Id. at 271 (stating that court could not “exercise its discretion to modify a confirmed Chap ter 13 plan other than for the reasons or under the circum stances expressly provided for by statute”). Instead, the court reasoned, a motion to modify “must comply with and be sup ported by the Code provisions made applicable to modifica tions by § 1329(b)(1).” Id. at 274. In rejecting the trustee’s argument that the court had au thority to allow a modification that was based “solely on the equities of the situation,” the bankruptcy court seems to have rejected the cases, cited above, in which courts have recog nized that modification under § 1329 is allowed when there has been a postconfirmation change in the debtor’s financial circumstances that affects his or her ability to make plan pay ments. Indeed, the phrase “entirely on the equities of the sit uation” appears in one of those cases, In re Than, 215 B.R. 430, No. 15 3237 21 438 (B.A.P. 9th Cir. 1997). In that case, the court stated that “Congress contemplated in enacting § 1329 a motion to mod ify the plan if the debtor’s income increased so the court could consider all of the circumstances of a particular debtor to de termine whether higher payments should be required.” Id. The court then held: “When § 1325(b) [i.e., the projected dis posable income test] is inapplicable, the § 1329 analysis is based entirely on the equities of the situation.” Id. In rejecting this line of authority, the bankruptcy court concluded that a modification is allowed only if it is “supported by” one of the Code provisions listed in § 1329(b)(1). Powers, 507 B.R. at 274. On appeal, the district court held that, as a matter of law, the bankruptcy court was correct in concluding that the pro jected disposable income test of § 1325(b) did not apply to modification under § 1329. In re Powers, __ B.R. __, __, 2015 WL 5725701, at *2 (C.D. Ill. Sep. 30, 2015). However, as we have noted, the trustee did not argue that § 1325(b) applies to modification under § 1329. Instead, the trustee argued that even though § 1325(b) may not apply to modification, the bankruptcy court had the authority to modify the plan to in crease the debtor’s payments if a change in the debtor’s finan cial circumstances enabled the debtor to pay more to her cred itors. The district court acknowledged that the trustee had cited “several cases from outside of the Seventh Circuit in which courts have held that a confirmed Chapter 13 plan may be modified when the debtor experiences an increase in in come.” Id. at *3. But the court deemed those cases inconsistent with our opinion in Witkowski, which the court interpreted as meaning that modification is available only if it is based on one of the Code provisions listed in § 1329(b)(1). The court therefore concluded that the bankruptcy court lacked author ity to allow the trustee’s modification. 22 No. 15 3237 We conclude that both the district court and the bank ruptcy court erred in concluding that the Code does not au thorize the trustee’s modification. First, Witkowski does not hold that modification under § 1329 is allowed only if the modification is supported by one of the Code provisions listed in § 1329(b)(1). The sentence in Witkowski that the dis trict court cited to support its contrary conclusion is this: “A modified plan is also only available if §§ 1322(a), 1322(b), 1325(a) and 1323(c) of the bankruptcy code are met.” Witkowski, 16 F.3d 739, 745 (7th Cir. 1994) (cit ing 11 U.S.C. § 1329(b)(1)). However, context makes clear that this sentence means only that § 1329(b)(1) places certain limits on plan modification. The sentence appears in our discussion of the debtor’s argument that the common law doctrine of res judicata prevents modification of a confirmed plan unless the movant demonstrates a change of circumstances. See id. at 744–46. The debtor had argued that, unless res judicata ap plied in the modification context, bankruptcy courts would be inundated with motions to modify. Id. at 745. In rejecting this argument, we observed that “modifications under § 1329 are not limitless.” Id. It was then that we pointed out that some of the limits on modification are found in the Code provisions listed in § 1329(b)(1). Id. Importantly, we did not say that a court could modify a plan only if the modification was based on—rather than merely consistent with—one of those provi sions. Rather, after summarizing the limits on modification, we recognized that § 1329 does not explicitly identify the cir cumstances under which modification is appropriate. Id. at 746 (citing Arnold, 869 F.2d at 241). We then held that “modi fication under § 1329 is discretionary,” and concluded that the bankruptcy court in that case did not abuse its discretion in modifying a plan at the request of the trustee to increase the No. 15 3237 23 payments made to the unsecured creditors. Id. We allowed this modification even though it was not based on any provi sion listed in § 1329(b)(1). Thus, Witkowski does not support the result reached by the district court and the bankruptcy court in this case. Although it is true, as the bankruptcy court pointed out, that no provision of the Code expressly permits modification when a change in the debtor’s financial circumstances makes an increase in payments affordable, it does not follow that modification for this reason is forbidden. Indeed, the Code does not contain any provision that expressly identifies the grounds on which a trustee or an unsecured creditor may modify a plan. See 1 Drake et al., supra, § 11:1 at 1072 (noting that “the standards for postconfirmation modification in Code § 1329 provide no guidance for determining what a trustee or unsecured creditor can require a debtor to do”). Be cause Congress did not provide express standards to govern modifications by trustees and unsecured creditors, it neces sarily left the development of those standards to the courts. And, as we have explained, the courts have long recognized that a trustee or an unsecured creditor may seek modification when the debtor’s financial circumstances change after confir mation and result in the debtor’s having the ability to pay more. See, e.g., Barbosa, 235 F.3d at 40; Arnold, 869 F.2d at 241; Powers, 202 B.R. at 622; 1 Drake et al., supra, § 11:12 at 1101 (collecting cases). Allowing the bankruptcy court, in its dis cretion, to approve modification for this reason is consistent with Chapter 13’s policy of requiring debtors to repay credi tors to the extent they are able, and it is also supported by the legislative history of the 1984 amendments to Chapter 13. Bar bosa, 235 F.3d at 40–41; Arnold, 869 F.2d at 241–42. Thus, we 24 No. 15 3237 hold that a bankruptcy court may allow modification to in crease the debtor’s payments if, in its discretion, it concludes that a change in the debtor’s financial circumstances makes an increase in payments affordable. In this court, Owens Powers concedes that a bankruptcy court has discretion to allow modification at the request of the trustee or an unsecured creditor when the debtor experiences an increase in income. However, the debtor contends that the court may allow the modification only if the trustee shows that “good faith … required the increase.” This is a reference to 11 U.S.C. § 1325(a)(3), which requires a plan to be “pro posed in good faith.” The debtor further contends that the bankruptcy court actually denied the trustee’s motion on the ground that he had not shown that good faith required the increase. We do not find these contentions persuasive. First, the debtor develops no legal argument in support of her contention that a plan may be modified based on an in crease in income only when the modification is required by good faith. Rather, the debtor merely asserts in her brief that “increased income supports increased plan payments only in the context of good faith.” The debtor cites no cases that sup port this assertion, and she does not offer an interpretation of the Code that supports it. Nor do we see how the Code could be interpreted to allow modification based on an increase in income only when good faith “requires” the modification. It is true that the good faith standard is incorporated into § 1329 because it is one of the “requirements of section 1325(a)” that applies to any modification. See 11 U.S.C. § 1329(b)(1). But all this means is that a party may not propose a plan in bad faith, such as by “manipulation of code provisions.” Witkowski, 16 F.3d at 746. Section 1325(a)(3) does not provide a standard for No. 15 3237 25 determining when a modified plan that has been proposed in good faith should be approved. Perhaps the debtor means to argue that a plan may be modified to increase payments only when modification is necessary to bring the debtor into compliance with the good faith requirement. But § 1325(a)(3), by its terms, applies only to the proponent of a plan, which obviously will not be the debtor when the modification is requested by the trustee or an unsecured creditor. Although the debtor’s good faith will have been at issue when the debtor proposed the original plan, and will be at issue when it is the debtor who requests modification under § 1329, the debtor’s good faith is not at is sue when the modification is proposed by the trustee or an unsecured creditor. We also reject Owens Powers’s suggestion that the bank ruptcy court actually denied the trustee’s modification be cause he had failed to show that good faith required the in crease in plan payments. Although the bankruptcy court ref erenced the good faith standard three times in its opinion, two references were merely observations that the standard applies to modification under § 1329(b)(1). See Powers, 507 B.R. at 273, 274. In the third reference, the bankruptcy court stated that “[m]odification requests, whether made by a trus tee or a debtor, must be proposed in good faith, and moving to modify to circumvent the original confirmation require ments may suggest bad faith.” Id. at 272. Here, the court did not find that the trustee had, in fact, proposed the modified plan in bad faith. Rather, the court made this statement dur ing the course of a larger discussion in which the court re jected the trustee’s suggestion that modification could be based on equitable grounds rather than on an express Code 26 No. 15 3237 provision. See id. at 270–73. At no point did the court suggest that it would have approved the modification if the trustee had shown that good faith “required the increase,” as the debtor suggests. Finally, we discuss the bankruptcy court’s alternative holding, which was that it would not allow the trustee’s mod ification even if it had authority to consider whether equitable considerations required an increase in payments. Powers, 507 B.R. at 274–75, 276. In this part of its opinion, the bankruptcy court determined that the trustee had failed to show that the debtors’ financial circumstances had changed such that it was now equitable to require higher payments. Id. On appeal to the district court, the trustee argued that this alternative hold ing was based on clearly erroneous factual findings, including mathematical errors, that caused the court to misunderstand the debtors’ then current financial circumstances. The trustee also argued that the bankruptcy court had abused its discre tion by failing to consider all of the evidence in the record per taining to this issue. However, the district court declined to review the bankruptcy court’s alternative holding, reasoning that it was unnecessary to do so in light of its conclusion that the bankruptcy court’s primary holding was correct. Owens Powers has not asked us to affirm the district court on the basis of the bankruptcy court’s alternative holding. Nor has the trustee asked us to review that holding. Instead, the trustee asks that we remand the case to the district court so that it may review the holding in the first instance. Accord ingly, we will not address the alternative holding but will re mand the case to the district court. No. 15 3237 27 IV. For the reasons stated, we vacate the judgment of the dis trict court and remand for further proceedings consistent with this opinion.
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