In re Lovey

Citation: 599 B.R. 97Docket: Bankruptcy Case No. 12-40883-JMM

Court: United States Bankruptcy Court, D. Idaho; April 19, 2019; Us Bankruptcy; United States Bankruptcy Court

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Two motions from debtors James Michael Lovey and Julia Danielle Kinsey are before the court. The first motion is a "Second Corrected Amended Chapter 11 Final Report," essentially requesting an early discharge. The second seeks to modify the confirmed Chapter 11 plan, which has met with objections from the United States Trustee (UST). Hearings were held on January 15, 2019, and March 28, 2019, after which the motions were placed under advisement.

The Chapter 11 case was initiated on June 21, 2012, and an amended plan was confirmed on August 14, 2013. This plan categorized U.S. Bank, N.A. as a Class 5 creditor, detailing specific assets and their values that would be surrendered, with any remaining debt becoming unsecured, to be paid under Class 6 terms. U.S. Bank filed eight proofs of claim, without distinctions among them, and the plan provided for general unsecured creditors to receive $500 monthly over 126 months, amounting to approximately 23% of their claims.

The debtors reported on August 10, 2018, that they had paid U.S. Bank $6,257.47 and 23% of unsecured claims. They sought an early discharge, claiming completion of all payments except for student loans and mortgage debts. The UST objected, citing procedural issues and lack of clarity regarding the payments to U.S. Bank. Following the objection, the debtors withdrew their discharge motion and submitted an amended final report indicating that U.S. Bank's debt was fully settled through property return. They filed a second motion for discharge, which was similarly met with UST objections.

Debtors submitted a second amended chapter 11 final report, indicating that US Bank had been fully paid through a return of property and that unsecured creditors received $50,024.24. The report clarified that a payment of $30,000 previously attributed to US Bank was actually made to EdFinancial Services, a non-dischargeable student loan, and the report date was revised to July 6, 2018. Following this report, Debtors filed a motion for entry of discharge and a motion to modify their Plan, the latter being considered first by the Court as it relates to the discharge motion. Debtors seek to eliminate further payments to unsecured creditors after July 2018, except for EdFinancial Services, citing that US Bank accepted a lien on assets worth $38,300 as full payment for their debt. They assert that the sale of a vehicle yielded only $2,175 toward US Bank's claim and contend that US Bank has not claimed any payments related to this debt since the confirmation of the plan in August 2013. The Court notes that US Bank’s amended proof of claim contradicts Debtors' assertion of full payment. Despite this, US Bank has not objected to either the motion for early discharge or the motion to modify the Plan and has not responded to Debtors' objections regarding its proof of claim. The ability to modify a chapter 11 plan is governed by 11 U.S.C. § 1127(e), allowing modifications at any time post-confirmation before completing payments under the plan, allowing for adjustments to payments and distributions to creditors.

Debtors are seeking to eliminate future payments on unsecured debts under their Plan and to discharge those debts, continuing only payments on student loans. They have not provided grounds for this position, suggesting the modification is aimed at facilitating an early discharge. The court has discretion to decide on motions to amend confirmed chapter 11 plans, as established in *In re Mattson*. Modifications must align with one of the goals outlined in § 1127(e), and the proposed changes to reduce US Bank's claim and payments to unsecured creditors satisfy the first requirement.

However, modifications must also comply with the requirements under §§ 1121-1128 and § 1129, which include disclosure under § 1125 and voting. A modified plan is only effective after disclosure, notice, and court approval. While minor modifications may not require extensive disclosure, if only one creditor is affected, further disclosure may be unnecessary. The Ninth Circuit Bankruptcy Appellate Panel supports this view, indicating that a modification is material if it significantly impacts a creditor's decision to accept the plan. In this case, the anticipated changes are significant enough to warrant new disclosures, necessitating a revised disclosure statement to be presented to all creditors, who must then have the opportunity to change their votes.

Disclosure and balloting are mandated due to the proposed modification affecting all unsecured creditors and US Bank. The modification would decrease payments to unsecured creditors from 126 to approximately 60 and reduce total payments from $63,000 to $30,000, rendering it material and necessitating amended disclosures and solicitation of votes. The lack of objections from US Bank and unsecured creditors does not negate the requirement for compliance with § 1127(f)(1). Consequently, the Court denies the Debtors' motion to modify.

Regarding the motion for entry of discharge, Debtors assert they have completed all payments under the plan, which is incorrect. The Plan requires $500 monthly payments over 126 months starting August 15, 2013, regardless of the inclusion of US Bank's unsecured claim. A confirmed plan is binding and acts as a contract between debtors and creditors. The Court notes that under § 1141(d)(5), a debtor can only be discharged if unsecured creditors receive at least as much as they would have in a Chapter 7 liquidation and if plan modification is not practicable. The absence of a hardship provision in this section suggests that early discharge is contingent solely on meeting the liquidation value requirement and the practicality of modification.

The Court expresses concern over potential misuse of early discharge provisions by chapter 11 debtors, who could seek discharge after minimal payments to unsecured creditors, disregarding the full duration of their repayment plan. The Court emphasizes that overly rigid interpretations of discharge criteria could undermine statutory intentions, recognizing that modifications to a plan may be necessary under changed circumstances (e.g., illness or unexpected financial gain). It concludes that determining the practicability of plan modifications under § 1127(e) requires specific factual situations, suggesting that few cases would meet this threshold.

In the Belcher case, Debtors have shown that unsecured creditors will receive at least what they would in a chapter 7 liquidation, having indicated they reached the 23% payment threshold required for confirmation. However, the Court questions whether merely achieving this minimum is adequate, given the Plan's stipulation for payments over 126 months. It asserts that reaching the minimum percentage does not absolve the Debtors from their obligation to continue payments throughout the entire term. Furthermore, the Court finds that Debtors have not demonstrated that modifying the Plan is impracticable; they must show an inability to make the scheduled payments. Debtors' counsel claimed financial difficulties due to relocation and employment changes but did not provide evidence of their inability to pay the required amounts.

Debtors must demonstrate that all conditions for an early discharge are met, as established in *In re Fisher*. In a previous case, *In re Milburn*, the court accepted the debtor's counsel's claim of insufficient income to meet plan obligations due to a lack of objections. However, in the current matter, the U.S. Trustee (UST) objected, noting the absence of evidence that the Debtors could not modify their payment plan. Consequently, the court found *Milburn* distinguishable and concluded that Debtors failed to prove that plan modification was impracticable. Although Debtors argued they could not afford $500 monthly payments, the court was not convinced they could not pay a lesser amount. Therefore, the motion for discharge was denied due to noncompliance with modification requirements, specifically regarding disclosure and balloting. Additionally, Debtors did not demonstrate that modification was impracticable, leading to a further denial of the motion for early discharge. A separate order will follow. References to the Bankruptcy Code and Federal Rules of Bankruptcy Procedure were noted, along with US Bank's proofs of claim and the Debtors' objection to one of these claims. The modification proposed by Debtors aimed for implementation from July 2018, with relevant payment calculations provided. The court's authority to grant a discharge under § 1141(d)(5)(B) was not contested in this case.