Bankruptcy Courts Must Independently Assess Chapter 13 Plans

Patterson Belknap Webb & Tyler LLP

Patterson Belknap Webb & Tyler LLP

In a recent decision, a district court reversed the decision of the bankruptcy court and clarified the independent obligation of the Bankruptcy Court to ensure that a Chapter 13 Plan satisfies the necessary requirements of the Bankruptcy Code, irrespective of the parties’ conduct. In re: BRUCE D. PERRY, Debtor. KRISTA PREUSS, Standing Chapter 13 Tr., SDNY, Appellant, v. BRUCE D. PERRY, Appellee., No. 20-CV-4617 (CS), 2021 WL 4298192 (S.D.N.Y. Sept. 21, 2021)

In the proceedings below, the debtor filed a Chapter 13 bankruptcy petition, which included unsecured claims totaling $427,103.70. Id. at 1. The debtor's petition also included a $2,000 per month expense for an “RV payment.” The debtor's amended Chapter 13 Plan that included proposed payments of $575 per month for 60 months. Id. At the confirmation hearing, the Chapter 13 Trustee (the “Trustee”) orally objected that (1) the unsecured amount exceeds the unsecured debt limit for Chapter 13 cases, and that (2) the RV expense was inappropriate. Id. The bankruptcy court dismissed these objections because the Trustee had not “timely put them in writing.” The court entered a confirmation order, and denied the Trustee’s subsequent motion to reargue. Id. The Trustee then filed a notice of appeal.

In the appeal, the Trustee argued that the plan was confirmed in error, as both the amount of unsecured debt and the RV expenses were inappropriate, and that by failing to consider these arguments and summarily confirming the plan, the bankruptcy court “failed to undertake its independent obligation to ensure that the Plan conformed to Provisions of the Bankruptcy Code.” Id. at 2 (citing Trustee Br. at 7-8).

District Judge Cathy Seibel agreed, noting that section 1325(a) of the Bankruptcy Code “instructs a bankruptcy court to confirm a plan only if the court finds, inter alia, that the plan complies with the ‘applicable provisions’ of the Code.” Id. (citing United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 277 (2010)). Judge Seibel quoted further excerpts from Espinosa, which “mandates that ‘bankruptcy courts have the authority – indeed, the obligation – to direct a debtor to conform his plan to the requirements of’ the Bankruptcy Code.” Id. (citing Espinosa, 559 U.S. at 277). This means that bankruptcy courts must make “independent determination[s] . . . before a plan is confirmed” and that “bankruptcy courts are ‘require[d] . . . to address and correct a defect in a debtor’s proposed plan even if no [party] raises the issue.” Id. (citing Espinosa, 559 U.S. at 277-78, n.14).

Judge Seibel observed that the bankruptcy court “declined to consider” the issues raised by the Trustee “because no timely written objection was made,” and explained that the absence of a “timely objection does not mean . . . that the Plan met” the requirements of the Bankruptcy Code. Id. Namely, “§109(e)’s requirement that Debtor’s noncontingent, liquidated, unsecured debt be less than $419,275.00.” Id. Judge Seibel dismissed arguments to the contrary, reversed the bankruptcy court’s decision, and remanded the matter for the bankruptcy court to “address the merits of the Trustee’s arguments in the first instance.” Id. at 3.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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