Must a Chapter 13 Plan be 3 or 5 years (or full pay) even if no one objects?

One of the more interesting cases we will discuss on Saturday is In re Escarcega.  The BAP really blasts the chapter 13 trustee up in San Jose.   The BAP ruled that a chapter 13 plan must be 3 or 5 years (or full pay), even if no one objects.

In re Escarcega, 573 B.R. 219 (9th Cir. BAP September 2017) 

Issue:   Where the chapter 13 trustee does not object to a plan, must the plan still be for “the applicable commitment period”?

Holding:   Yes.  Plus the chapter 13 trustee should be objecting to such plans.

Judges Elaine Hammond and Stephen Johnson, Northern District of California (San Jose Division)

Jury, Faris, Brand

Opinion by Meredith Jury

The chapter 13 debtors here proposed plans that had an “indeterminate term.”   The plans proposed that “once the debtor has paid all allowed secured and priority claims and administrative expenses as provided for in this plan, the plan shall be deemed completed.”   The plans provided that unsecured creditors get nothing.  The trustee did not “object” to the plan at least formally.  The trustee sent the debtors a “draft objection” which she did not file.  Had the trustee filed an objection, the plan would have had to be a three year or five year term.  § 1325(b) provides that “if the trustee or an unsecured creditor objects,”

the debtor must pay his “net disposable income” for the “applicable commitment period.”  The debtors here argued that the trustee did not object, therefore the plan did not have to be three years or five years.  The trustee conceded that “[s]he did not file her objections precisely because ‘my objections trigger a commitment period under 1325(b)(1)(B).’”  The bankruptcy courts ruled that these plans were not filed in good faith and therefore refused to confirm the plans.  As the order denying confirmation was not final, the BAP granted leave to appeal.

The BAP affirmed excoriating the chapter 13 trustee saying, “we seriously question the tactics of this chapter 13 trustee who essentially colluded with the debtors’ bar to avoid the consequence that filing an objection would have under controlling Ninth Circuit case law.  Her role in insuring that unsecured creditors would never receive a dividend in these cases strikes the Panel as inconsistent with the diligence required of such trustees.”

The Plan was essentially an attempt to avoid the ruling of the Flores and Kagenveama cases which provide that even if the debtor has no disposable income after curing the secured debt and paying the priority and administrative expenses, the plan must be three or five years.  The BAP said that these cases “taken together, establish that Debtors’ plans must specify a length and cannot contain provisions which essentially amount to plan modifications shortening that length without complying with the procedural requirements of § 1329 and without obtaining a court order.”  “Debtors cannot unilaterally skirt the specific procedural safeguards that apply to plan modifications.”

Note:  The very lengthy memorandum of Judges Hammond and Johnson is published at 557 B.R. 755.  It contains lots of charts and diagrams.

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