Grace M. Forbes v. Russell C. Forbes ( 1997 )

UNITED STATES BANKRUPTCY APPELLATE PANEL
FOR THE EIGHTH CIRCUIT
_______________
Nos. 97-6041/6048
_______________
In re: *
*
RUSSELL CHARLES FORBES, *
*
Debtor. *
*
* Appeal from the United
GRACE M. FORBES, * States Bankruptcy Court
* for the Eastern District
Appellant, * of Missouri
*
v. *
*
RUSSELL CHARLES FORBES, *
*
Appellee. *
_______________
Submitted: October 9, 1997
Filed: December 9, 1997
_______________
Before KRESSEL, HILL, and DREHER, Bankruptcy Judges.
_______________
WILLIAM A. HILL, Bankruptcy Judge:
The appellant, Grace M. Forbes (“Grace”) is the former spouse
and, by virtue of a divorce decree award, a creditor of the Chapter
13 debtor, Russell C. Forbes (“Robert”), the appellee herein. In
these consolidated appeals she appeals from the bankruptcy court’s
approval of post-confirmation modification of Robert’s confirmed
Chapter 13 plan over her objection and from an order denying her
motion for reconsideration of its order approving the sale of real
property in which she claims a lien. Robert moved for dismissal of
both appeals on grounds of mootness. Resolution of the motion was
reserved pending oral argument.
I. FACTUAL AND PROCEDURAL HISTORY
In December 1992, Robert filed a voluntary petition and
repayment plan under Chapter 13 of the United States Bankruptcy
Code, 11 U.S.C. §§ 1301-1330. At the time of the filing, Grace was
Robert’s creditor, having been awarded maintenance and a monetary
judgment against him pursuant to a divorce decree entered in the
City Court of the City of St. Louis, Missouri.1 The monetary
judgment was secured by a lien on Robert’s property located at
1426-1428 Salisbury Street, St. Louis, Missouri (“Salisbury Street
property”).
A. The Modified Plan
Robert’s original Chapter 13 plan was a 60-month plan, and
provided for monthly contributions to the trustee totaling
$60,000.00. It made no specific reference to any particular
secured claim, but rather mentioned these claims only generally.
Grace’s claim was not treated as a secured claim; rather, it was
listed in Robert’s schedules as an unsecured nonpriority claim.
Robert’s plan was confirmed on April 5, 1994, without objection.
Shortly thereafter, in June 1994, Robert sought to modify the
previously-confirmed original plan by changing the amount of
monthly contributions payable to the trustee. His proposed
modified plan for the first time identified Grace as a secured
creditor, with a claim of $28,000.00 payable without interest over
42 months at $673.00 per month.2 The bankruptcy court approved
1
Although, numerous documents within the appellant’s
appendices were stricken by this Panel prior to oral argument,
including the divorce decree itself, the information to which
this footnote refers is provided by other documents not stricken.
2
The basis upon which Grace’s secured claim was
calculated, as set forth in the first modified plan, as well as
subsequent modified plans, is unclear. We do not have before us
any proof of claim in this connection. Compounding our
difficulties in this respect are the debtor's bankruptcy
schedules, which list Grace only as an unsecured creditor with a
2
this postconfirmation modification without objection.
In August 1994, Robert proposed a second postconfirmatiaon
modification to the plan, increasing the length of the plan and
changing his periodic contributions to the trustee, but leaving
unaltered the treatment it accorded Grace. As extended, total plan
payments became $67,600.00.
In early 1997, Robert received a settlement from a cause of
action which arose postfiling and postconfirmation, as well as
three years after the plan payments began. In March 1997, prompted
by receipt of the settlement proceeds, Robert proposed a third
post-confirmation modification by again changing the manner of
contribution. This time he proposed reducing the term of the plan
from 60 months to 40 months by making a single lump sum payment to
the trustee of $22,800.00, payable immediately upon court approval
of the modified plan, in addition to $45,400.00 previously paid the
trustee, for total plan payments of $68,200.00.3 The effect of
this proposal was to cash out the entire amount remaining to be
paid the trustee by accelerating the payments due in the final 20
months of the plan.
Both Grace and the trustee objected to the proposed
modification, alleging that the settlement proceeds constituted a
“windfall” which enabled Robert to pay all of his creditors in
full. The court overruled the objections, and once again approved
Robert’s proposed plan modification.
In her appeal from this order, Grace points to Robert’s post-
confirmation settlement, charging that the proceeds therefrom
claim of $16,000.00. The schedules themselves do not establish
Grace as a secured creditor.
3
The discrepancy between this figure and that of the
prior modification cannot be explained from the record.
3
became property of the estate pursuant to Bankruptcy Code Section
1306. In this connection she contends that the bankruptcy court,
preparatory to approving the accelerated distribution, was required
to make an independent determination of the criteria set forth in
Bankruptcy Code Section 1329(b)(1), which in turn incorporates
Section 1325(a). Under Section 1325(a)(4), Grace argues that the
bankruptcy court erred in failing to include Robert’s “windfall” in
its determinations under that Code section’s “best interests of
creditors” test. She also argues that the court erred by failing
to count the “windfall” as “disposable income” under the “best
efforts” test of Section 1325(b)(1)(B).
B. Approval of the Property Sale
The second appeal presented concerns the sale of the Salisbury
Street property, upon which Grace claims a lien. The bankruptcy
court ordered an independent appraisal of this property in July
1994.4
At various times during the proceedings in the bankruptcy
court, Robert moved to convey the Salisbury Street property to
Grace by quitclaim deed, thereby attempting to receive an
“allowance of secured claim credit of $55,000.00,” presumably in
satisfaction of Grace’s secured claim. For reasons not disclosed
in the record, the bankruptcy court refused to allow the
conveyance.
Thereafter, Robert entered into a sale contract on the
property, which was made subject to the bankruptcy court’s
approval, for the sum of $28,000.00. The sale was set for August
4
Although the minute entries in this case indicate that
the appraiser filed an appraisal of the property, the appraisal
document itself is absent from the record before us. From
peripheral documents included in the record, we can only surmise
that the property was appraised at $55,000.00.
4
8, 1996, and, after hearing, the court granted Robert’s motion to
sell the property for that amount.
Grace then moved the court to reconsider its order permitting
sale of the property. The court held a hearing on the matter, and
subsequently denied her motion.
On appeal, Grace makes three challenges to the bankruptcy
court’s sale order. First, she alleges that the order is based
upon factual and procedural errors. Next, she argues that the
court failed to provide adequate protection for her lien, thereby
failing to meet the requirements of 11 U.S.C. § 363(e). Lastly, she
contends that the court’s April sale order denied her procedural
due process.
II. STANDARD OF REVIEW
On appeal, the bankruptcy court’s findings of fact are
reviewed for clear error and its legal determinations are reviewed
de novo. O’Neal v. Southwest Missouri Bank of Carthage (In re
Broadview Lumber Co.), 118 F.3d 1246, 1250 (8th Cir. 1997); Natkin
& Co. v. Myers (In re Rine & Rine Auctioneers, Inc.), 74 F.3d 848,
851 (8th Cir. 1996); Hartford Cas. Ins. v. Food Barn Stores, Inc.
(In re Food Barn Stores, Inc.), No. 97-6055, 1997 WL 705577, at *1
(B.A.P. 8th Cir. Nov. 14, 1997); see also FED. R. BANKR. P. 8013.5
“A finding is ‘clearly erroneous’ when although there is evidence
to support it, the reviewing court on the entire evidence is left
5
Rule 8013 of the Federal Rules of Bankruptcy Procedure
reads, in pertinent part, as follows:
Findings of fact, whether based on oral or
documentary evidence, shall not be set aside unless
clearly erroneous, and due regard shall be given to
the opportunity of the bankruptcy court to judge the
credibility of the witnesses.
FED. R. BANKR. P. 8013.
5
with a definite and firm conviction that a mistake has been
committed.” Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.
Ct. 1504, 1511, 84 L. Ed. 2d 518 (1985) (quoting United States v.
United States Gypsum Co., 333 U.S. 364, 395, 68 S. Ct. 525, 542, 92
L. Ed. 746 (1948)); see United States v. Garrido, 38 F.3d 981, 984
(8th Cir. 1994); Chamberlain v. Kula (In re Kula), No. 97-6014NE,
1997 WL 694299, at *4 (B.A.P. 8th Cir. Oct. 31, 1997). If the
bankruptcy court’s account of the evidence is plausible in light of
the entire record viewed, it must be upheld even though we might
have weighed the evidence differently had we been sitting as the
trier of fact. Anderson, 470 U.S. at 573-74, 105 S. Ct. at 1511;
Vaughn v. Sexton, 975 F.2d 498, 506 (8th Cir. 1992), cert. denied,
507 U.S. 915, 113 S. Ct. 1268, 122 L. Ed. 2d 664 (1993).
“Whether property is included in the bankruptcy estate is a
question of law.” Ramsay v. Dowden (In re Central Arkansas Broad.
Co.), 68 F.3d 213, 214 (8th Cir. 1995). “Chapter 13 plan
confirmation issues requiring statutory interpretation are subject
to de novo review. Jurisdictional issues also are reviewed de
novo.” Hagel v. Drummond (In re Hagel), 184 B.R. 793, 795 (B.A.P.
9th Cir. 1995) (citations omitted); see also Leavitt v. Soto (In
re Leavitt), 209 B.R. 935, 938 (B.A.P. 9th Cir. 1997) (“Statutory
construction involves an issue of law which we review de novo.”).
The bankruptcy court’s denial of a motion for reconsideration is
reviewed for an abuse of discretion.6 Bellus v. United States, 125
F.3d 821, 822 (9th Cir. 1997); Employment Sec. Div. v. W.F.
Hurley, Inc. (In re W.F. Hurley, Inc.), 612 F.2d 392, 395-96 (8th
Cir. 1980).
6
The abuse of discretion standard and the clearly
erroneous standard are indistinguishable. Cooter & Gell v.
Hartmarx Corp., 489 U.S. 384, 401, 110 S. Ct. 2447, 2458, 110
L. Ed. 359 (1990); Chamberlain v. Kula (In re Kula), 213 B.R. 729
(B.A.P. 8th Cir. 1997).
6
III. DECISION
A. The Modified Plan
i. Motion to Dismiss as Moot
As a threshold matter, we first address Robert’s motion to
dismiss Grace’s consolidated appeals as moot. Robert argues that
Grace’s appeal from the bankruptcy court’s order approving the
postconfirmation plan modification became moot when the court
granted Robert a discharge in bankruptcy, as required under Code
Section 1328, after he completed making all of his payments under
the modified plan. We disagree.
“It has long been settled that a federal court has no
authority ‘to give opinions upon moot questions or abstract
propositions, or to declare principles or rules of law which cannot
affect the matter in issue in the case before it.’” Church of
Scientology v. United States, 506 U.S. 9, 12, 113 S. Ct. 447, 449,
121 L. Ed. 2d 313 (1992) (quoting Mills v. Green, 159 U.S. 651, 653,
16 S. Ct. 1332, 133, 40 L. Ed. 293 (1895)). Thus, “[t]he ‘existence
of a live case or controversy is a constitutional prerequisite to
the jurisdiction of the federal courts.’” In re Grand Jury
Subpoenas Duces Tecum, 78 F.3d 1307, 1310 (8th Cir.) (quoting In re
Grand Jury Subpoenas Dated December 7 and 8 v. U.S., 40 F.3d 1096,
1099 (10th Cir. 1994)), cert. denied, --- U.S. ---, 117 S. Ct. 432,
136 L. Ed. 2d 331 (1996); Arkansas AFL-CIO v. FCC, 11 F.3d 1430,
1435 (8th Cir. 1993) (en banc).
An appeal is moot in this sense “only if events have taken
place during the pendency of the appeal that make it ‘impossible
for the court to grant any effectual relief whatever.’” In re
Continental Airlines, 91 F.3d 553, 558 (3d Cir. 1996) (en banc)
(quoting Church of Scientology, 506 U.S. at 12, 113 S. Ct. at 449
(in turn quoting Mills, 159 U.S. at 653, 16 S. Ct. at 133 (internal
quotation marks omitted)), cert. denied, --- U.S. ---, 117 S. Ct.
686, 136 L. Ed. 2d 610, reh’g denied, --- U.S. ---, 117 S. Ct. 1098,
7
137 L. Ed. 2d 230 (1997); Tungseth v. Mutual of Omaha Ins. Co., 43
F.3d 406, 408 (8th Cir. 1994).
Initially we note that it is true that Grace’s claim existed
in bankruptcy only for so long as Robert’s plan existed. Once
Robert completed making payments under his plan as modified, the
bankruptcy court was required, “[a]s soon as practicable,” to grant
him a discharge. 11 U.S.C. § 1328(a). This the bankruptcy court
did, during the pendency of Grace’s appeal. Upon discharge,
Robert’s plan ceased to exist and so too did Grace’s claim
thereunder.
However, as Grace’s counsel remarked during oral argument, the
matter concerning the propriety of the bankruptcy court’s granting
the debtor his discharge has been appealed to the United States
District Court for the Eastern District of Missouri. It is, then,
in every sense, “a live case or controversy.” Accordingly, Grace’s
appeal from the bankruptcy court’s approval of Robert’s plan
modification, the completion of payments thereunder resulting in
his discharge, is not moot.
ii. The Merits of the Appeal
In order to qualify for approval under the Code, Robert’s
third proposed plan modification must satisfy the requirements of
11 U.S.C. § 1325(a), which include, inter alia, the “best interests
of creditors” test. In her appeal from the bankruptcy court’s
order confirming Robert’s third plan modification, Grace contends
that the court erred in disregarding Robert’s postconfirmation
settlement proceeds when it performed this test. She additionally
contends that the court was required, and failed, to perform the
“best efforts” test with respect to the settlement proceeds.
Before beginning our discussion of the arguments Grace has
presented us, we pause to comment upon the functional concept of
“the plan,” which informs our application of the Code provisions
8
and concepts which follow in our decision below. A debtor’s plan
in bankruptcy is the vehicle by which he or she achieves fiscal
rehabilitation. For so long as it exists in bankruptcy, there is,
at any given time, only one effective plan; the plan is an unitary
constant. Although the Bankruptcy Code speaks of “the plan” and
“the modified plan,” it speaks of a solitary construct. This can
only be so, and is inherent in the Code, for the Code speaks of
postconfirmation plan alterations exclusively in terms of
“modification” thereof. See 11 U.S.C. § 1329. The Code thus
contemplates change to a plan in bankruptcy in evolutionary terms,
incorporating new change into a preexisting basis--an original or
previously modified plan. Thus the Code states, in keeping with
the paradigm of the plan as a unitary constant and solitary
construct, that “[t]he plan as modified becomes the plan . . . .”
11 U.S.C. § 1329(b)(2). An individual who grows from infancy to
adulthood alters significantly in the process and yet retains his
or her identity throughout; so, too, does a plan retain its
identity and constancy throughout its evolution and development in
bankruptcy. Although it may change with time, it is, in essence,
that which it always was--the plan.
Consistent with the notion that there is but a single plan in
effect at any given time during the pendency of a bankruptcy case,
we would additionally note that there is ordinarily but a single
plan confirmation made during the entire course of a bankruptcy
case. The Bankruptcy Code does not provide for the “confirmation”
of a modified plan; rather, the plan as modified becomes the plan
if it is not disapproved. Therefore, a plan is effective when
confirmed, and a plan modification is effective when approved.
a. The Best Interests of Creditors Test
In order to be confirmed, a Chapter 13 plan must satisfy the
“best interests of creditors” test, which is found at 11 U.S.C. §
9
1325(a)(4). A postconfirmation plan modification must also satisfy
this test pursuant to Section 1329(b)(1), which provides that,
“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.” 11 U.S.C. §
1329(b)(1).
Section 1325(a)(4) provides that,
(a) Except as provided in subsection (b), the court
shall confirm a plan if--
(4) the value, as of the effective date of the
plan, of property to be distributed under the
plan on account of each allowed unsecured claim
is not less than the amount that would be paid on
such claim if the estate of the debtor were
liquidated under chapter 7 of this title on such
date . . . .
11 U.S.C. § 1325(a)(4). Thus, in performing the test, comparison
is made between 1) the value of property which unsecured creditors
are to receive under the debtor’s proposed plan or postconfirmation
plan modification, and 2) the net value of unencumbered nonexempt
property which would be distributed to those creditors under a
hypothetical Chapter 7 liquidation of the debtor’s estate.
The language contained within Section 1325(a)(4) concerning
the valuation date under the test--“as of the effective date of the
plan” and “on such date”--has been the source of significant
controversy among courts and commentators alike. While it is
accepted that the statutory language “on such date” refers to “the
effective date of the plan,” Hollytex Carpet Mills v. Tedford, 691
F.2d 392, 393 (8th Cir. 1982); First Nat’l Bank of Malden v.
Hopwood (In re Hopwood), 124 B.R. 82, 85 (E.D. Mo. 1991) (Chapter
12); In re Lupfer Bros., 120 B.R. 1002, 1004 (Bankr. W.D. Mo.
1990) (Chapter 12); In re Bremer, 104 B.R. 999, 1002-08 (Bankr.
W.D. Mo. 1989) (Chapter 12); In re Statmore, 22 B.R. 37, 38
(Bankr. D. Neb. 1982), the issue presently before us is to what
10
date in time “the effective date of the plan” refers.
The majority of courts within our Circuit which have addressed
the application of this language, have determined that it refers to
the effective date of the plan as originally confirmed. Zellner,
827 F.2d at 1225; In re Lupfer Bros., 120 B.R. at 1004; In re
Hopwood, 124 B.R. at 85; In re Bremer, 104 B.R. at 1002-08. In
Hollytex Carpet Mills v. Tedford, 691 F.2d 392, 393 (8th Cir.
1982), however, the Eighth Circuit held that the “effective date of
the plan” referred to “the date of the filing on the petition in
bankruptcy.” Id. at 393 (quoting In re Statmore, 22 B.R. 37, 38
(Bankr. D. Neb. 1982))7; see In re Nielson, 86 B.R. 177, 178-79
(Bankr. E.D. Mo. 1988) (Chapter 12).
Yet, despite this conflict, these cases support the
proposition that the effective date of the plan is neither
determined nor redetermined at the point of postconfirmation
modification. Moreover, the courts in Tedford and Statmore, which
were faced with application of the best interests of creditors test
in the context of postconfirmation modification, expressly rejected
the argument that the language of Section 1325(a)(4) refers to a
later date. 691 F.2d at 393; 22 B.R. at 38. But see In re
Guentert, 206 B.R. 958, 963 (Bankr. W.D. Mo. 1997) (“While there is
no specific Code provision so providing, it stands to reason that
any property that has become property of the estate post
confirmation [sic] must be calculated in the best interest of
7
We note that support for the Tedford position, which
the Eighth Circuit originally drew from Collier’s, continues
therein. Citing in a footnote Tedford, Statmore, and In re
Nielson, Collier’s states that, “the deemed chapter 7
liquidation which would have produced the cash payment is based
upon the value of the nonexempt property in the estate on the
date the petition was filed.” 8 L. King, COLLIER ON BANKRUPTCY ¶
1325.05[2][a], p. 1325-17 (15th ed. rev. 1997).
11
creditor’s test before any plan modification can be confirmed.”).8
This is so, for, as we emphasized in preface to this discussion,
there is only one plan to which the Code refers. Regarding the
effective date of the plan, there is only one plan. The effective
date is not altered by modification of the plan, for the modified
plan remains, ever constant, the plan.
Many practical considerations support this conclusion. In his
Chapter 13 treatise, Judge Keith M. Lundin raises a host of
troubling questions which would be implicated by the fixing of “the
effective date of the plan” as of the date of postconfirmation
modification, including the following:
What if the debtor acquired no new property but
property owned at the [original] petition [date] has
appreciated or depreciated with the passage of time?
. . . .
This [question] leads [ ] to the absurd result that a
Chapter 13 debtor could be required by consecutive
motions from unsecured claim holders to continuously
modify the confirmed plan if the debtor owns an asset
that appreciates after confirmation of each modified
plan.
8
It is also possible that the implication that
posteffective postpetition property is included for purposes of
the best interests of creditors test, at any point, has been
overruled by the 1994 amendment to Code Section 348(f)(1)(A).
This section now provides,
(f)(1) Except as provided in paragraph (2), when a
case under chapter 13 of this title is converted to
a case under another chapter under this title--
(A) property of the estate in the converted
case shall consist of property of the estate,
as of the filing of the petition, that
remains in the possession of or is under the
control of the debtor on the date of
conversion . . . .
11 U.S.C. § 348(f)(1)(A).
12
Lundin, Keith M., CHAPTER 13 BANKRUPTCY, vol. 2, § 6.44 at 6-131 to
132.
Acknowledging the controversy surrounding this statutory
language, we note that it is sufficient for the resolution of the
issues before us that the Eighth Circuit in Tedford expressly
rejected the suggestion that the “effective date of the plan”
constitutes the date of postconfirmation modification. We next
turn to the issue of what constitutes property of the hypothetical
Chapter 7 estate for purposes of comparative analysis under the
best interests of creditors test.
The focus of the best interests of creditors analysis rests
upon a hypothetical distribution to unsecured creditors under
Chapter 7. The more expansive Chapter 13 definition of property of
the estate, found at 11 U.S.C. § 1306, is therefore irrelevant to
this analysis. See 8 L. King, COLLIER ON BANKRUPTCY ¶ 1325.05[2][a],
p. 1325-17 (15th ed. rev. 1997). Instead, Code Section 541 guides the
liquidation inquiry, into what would be included in the estate as
of the effective date of the plan. See id.; 5 W. Norton, BANKRUPTCY
LAW AND PRACTICE § 122:7, p. 122-63 (2d ed. 1995 and Supp. 1997).
This assessment generally includes property which has been
listed in the debtor’s schedules, but also includes items of
property which are not found therein. For instance, Section
541(a)(1) specifically includes as property of the estate, “all
legal and equitable interests of the debtor in property,” a phrase
which is sufficiently broad to include causes of action. Ramsay v.
Dowden (In re Central Arkansas Broad. Co.), 68 F.3d 213, 214 (8th
Cir. 1995) (per curiam); Apostolou v. Fisher, 188 B.R. 958, 966
(N.D. Ill. 1995). However, in order for a cause of action to be
included in property of the estate for the purposes of 11 U.S.C. §
541(a)(1), it must have existed as of the petition date, see Sender
v. Buchanan, 84 F.3d 1281, 1285 (10th Cir. 1996); Mixon v.
Anderson (In re Ozark Restaurant Equip. Co., Inc.), 816 F.2d 1222,
13
1224 (8th Cir.), cert. denied sub nom. Jacoway v. Anderson, 484
U.S. 848, 108 S. Ct. 147, 98 L. Ed. 2d 102 (1987); Swift v. Seidler
(In re Swift), 198 B.R. 927, 930 (Bankr. W.D. Tex. 1996), and thus,
in turn, for purposes of Section 1325(a)(4)’s liquidation analysis.
In the instant matter, the cause of action, from which Robert
ultimately received settlement proceeds, arose post-petition.
Accordingly, it would not be included in property of the estate for
purposes of the liquidation analysis under the best interests of
creditors test. Therefore, its existence is irrelevant to the
issue of the Chapter 13 plan modification as it was proposed, and
to any objection thereto made by Grace.
Thus, in light of the foregoing discussion, it was not error
for the bankruptcy court to disregard the settlement in conducting
the best interests of creditors test pursuant to Section
1325(a)(4), to the extent that it did so, as it proceeded to
approve Robert’s third proposed postconfirmation plan modification.
b. The Best Efforts Test
Grace further contends that the bankruptcy court was required
to perform the “best efforts” test before approving Robert’s third
postconfirmation plan modification. She proposes that Robert’s
settlement proceeds would be distributable to unsecured creditors
pursuant to the test’s requirements.
The “best efforts” test, located at 11 U.S.C. § 1325(b),
provides in part that,
(1) If the trustee or the holder of an allowed
unsecured claim objects to the confirmation of the
plan, then the court may not approve the plan unless,
as of the effective date of the plan--
(B) the plan provides that all of the debtor’s
projected disposable income to be received in
the three-year period beginning on the date that
the first payment is due under the plan will be
applied to make payments under the plan.
14
11 U.S.C. § 1325(b)(1)(B)9; see Stuart v. Koch (In re Koch), 109
F.3d 1285, 1289 (8th Cir. 1997).
However, it is not certain, and is indeed rather doubtful,
that this test applies to postconfirmation plan modifications.
Case law on this point is unsettled. Some courts omit the section
from postconfirmation modification requirements. In re Anderson,
153 B.R. 527, 528 (Bankr. M.D. Tenn. 1993); In re Moss, 91 B.R.
563, 566 (Bankr. C.D. Cal. 1988). Others favor its application as
a requirement for postconfirmation modification. In re Guentert,
206 B.R. 958, 963 (Bankr. W.D. Mo. 1997); In re Jackson, 173 B.R.
168, 171 (Bankr. E.D. Mo. 1994); In re Klus, 173 B.R. 51, 58
(Bankr. D. Conn. 1994); and In re Solis, 172 B.R. 530, 532 (Bankr.
S.D. N.Y. 1994).
Arguments for exclusion of the test’s applicability to
postconfirmation plan modifications are made largely based upon its
facial omission from Section 1329(b)(1). Section 1329(b)(1), which
contains the requirements of postconfirmation plan modification,
provides that “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.” 11 U.S.C. §
1329(b)(1). Additional argument is made that Section 1329(b)(1) is
rendered mostly redundant if “all of Chapter 13 becomes applicable
9
“Disposable income” is defined for purposes of Section
1325(b)(1)(B) as,
income which is received by the debtor and which is
not reasonably necessary to be expended--
(A) for the maintenance or support of the
debtor or dependent of the debtor; and
(B) if the debtor is engaged in business, for
the payment of expenditures necessary for the
continuation, preservation, and operation of
such business.
11 U.S.C. § 1325(b)(2).
15
at postconfirmation modification by reference to [Section]
1329(b)(1).” Lundin, Keith M., CHAPTER 13 BANKRUPTCY, vol. 2, § 6.45
at 6-134 to 135.
Conversely, arguments for inclusion of the test as a
requirement do so under Section 1325(a), which provides in
pertinent part, “Except as provided in subsection (b), the court
shall confirm a plan if--(1) the plan complies with the provisions
of this chapter and with the other applicable provisions of this
title; . . . .” 11 U.S.C. § 1325(a)(1) (emphasis added). Here,
proponents argue that Section 1325(b) is implicated by either
Section 1325(a)’s preface, “[e]xcept as provided in subsection (b)”
or by Section 1325(a)(1)’s blanket application of the chapter
provisions, “the plan complies with the provisions of this
chapter.”
Though they suggest that it must have been Congress’ intent to
apply the test to the requirements for postconfirmation plan
modifications, leading bankruptcy treatises acknowledge a “failure”
or “oversight” on Congress’ part to do so by not including Section
1325(b) in those requirements, which are listed in Section
1329(b).10 We agree that Congress omitted Code Section 1325(b) in
the requirements for postconfirmation plan modification, and
further, decline to take its prerogative as our own.
10
The Norton treatise provides, “Code § 1329(b) does not
apply all of the confirmation requirements to a modified plan
that would be applicable to an original Chapter 13 plan. . . .
The failure to include Code § 1325(b) in the list of sections
applicable to postconfirmation modification under Code § 1329(b)
is probably legislative oversight.” 5 W. Norton, BANKRUPTCY LAW
AND PRACTICE § 124:2, p. 124-10 (2d ed. 1995 and Supp. 1997).
Collier’s, in turn, states that, “Section 1329(b)(1) directs
that a chapter 13 plan modified after confirmation is subject to
all criteria for the confirmation of an original chapter 13 plan
as prescribed by section 1325(a). . . . The omission of
section 1325(b) from the list in section 1329(b)(1) was probably
a legislative oversight.” 8 L. King, COLLIER ON BANKRUPTCY ¶
1329.05[3], pp. 1329-9-10 (15th ed. rev. 1997).
16
We note that our conclusion is supported by the absurd result
which would have obtained had the best efforts test been applied
under these facts. Once more, Judge Lundin has presaged the perils
opened to debtors in these matters, with the following:
Application of the disposable income test at
confirmation of a modified plan is at least confusing
and may render many postconfirmation modifications
impossible altogether. . . . [C]ounting the three-
year period in the disposable income test from the
date the first payment is due under the modified plan
would preclude approval of modification of a plan that
is already more than two years old. Section 1329(c)
clearly states that the court may not approve a
modified plan that calls for payments after five years
after the first payment was due under the original
confirmed plan. . . . Mathematically, no proposed
modified plan can satisfy both the disposable income
test in § 1325(b) and the five-year limitation in §
1329(c) if the proposed modification is filed after
two years after the commencement of payments under the
original plan.
Lundin, Keith M., CHAPTER 13 BANKRUPTCY, vol. 2, § 6.45 at 6-136 to
137.
We thus conclude that the “best efforts” test is not a factor
to be considered by a court in approving postconfirmation
modifications. There is only one plan from which the test’s three
years run. Under the facts before us, Robert’s settlement
proceeds, having been received outside these time parameters for
the test, are irrelevant to any calculation thereunder. Therefore
Robert met the requirements of Code Section 1325(b)(1)(B) by
devoting to the plan all of his disposable income in the three-year
period beginning on the date his first payment fell due under the
originally confirmed plan, and the bankruptcy court did not err in
either rejecting application of this test to Robert’s third
proposed plan modification, or in rejecting the settlement proceeds
for inclusion thereunder. The Bankruptcy Code requires no more
from Robert than the performance he has already rendered.
17
B. Approval of the Property Sale
i. Motion to Dismiss as Moot
Robert argues that Grace’s appeal from the court’s denial of
her motion for reconsideration is moot because she failed to seek
and obtain a stay of the sale order pursuant to Rule 8005 of the
Federal Rules of Bankruptcy Procedure. As of this date, Grace has
failed to move for a stay of the court’s April sale order (there
having been at least two prior sale orders of, and one notice of
intent to sell, the Salisbury Street property).
At this time, we have before us no definitive information
concerning the sale status of Robert’s property. The record on
this point merely indicates that: (1) Robert entered into a
contract for sale of the property, contingent upon court approval,
with Mrs. Doris Spann in March 1997; (2) Robert moved to permit
this sale; (3) a notice of the motion to sell issued (although
Grace contends she did not receive such notice); (4) the court
granted Robert’s motion; (5) Grace moved the court to reconsider
its sale decree; and (6) the court denied Grace’s motion. At oral
argument, Robert informed the court that as of that date (October
9, 1997), the sale had not occurred and that he was still willing
to give the property to Grace.
Robert’s mootness argument is based largely upon Rule 8005 of
the Federal Rules of Bankruptcy Procedure. Rule 8005 originates
from, and supports, bankruptcy’s finality rule, which consists of
both statutory and judicially-created counterparts. A full
discussion of the finality rule is warranted here, for it is under
this rule, along with Bankruptcy Rule 8005, that Grace’s appeal may
indeed be moot.
The finality rule in bankruptcy “applies when an appellant has
failed to obtain a stay from an order that permits a sale of the
debtor’s assets[. . . ., and] dictates that the appellant’s failure
to obtain a stay moots the appeal.” Onouli-Kona Land Co. v. Estate
18
of Richards (In re Onouli-Kona Land Co.), 846 F.2d 1170, 1171 (9th
Cir. 1988); see 255 Park Plaza Assocs. Ltd. Partnership v.
Connecticut Gen. Life Ins. Co. (In re 255 Park Plaza Assocs. Ltd.
Partnership), 100 F.3d 1214, 1216 (6th Cir. 1996); In re CGI
Indus., Inc., 27 F.3d 296, 299-300(7th Cir. 1994).
This rule originated as “a judicial doctrine which developed
from the general rule that the occurrence of events which prevent
an appellate court from granting effective relief renders an appeal
moot, and the particular need for finality in orders regarding
stays in bankruptcy.” Algeran v. Advance Ross Corp., 759 F.2d
1421, 1423-24 (9th Cir. 1985); see In re 255 Park Plaza Assocs.
Ltd. Partnership, 100 F.3d at 1216; Sullivan Cent. Plaza, I, Ltd.
v. BancBoston Real Estate Capital Corp. (In re Sullivan Cent.
Plaza, I, Ltd.), 914 F.2d 731, 734 (5th Cir. 1990).
The original codification of the judicial rule, in what was
former Bankruptcy Rule 805, was subsequently fragmented, and its
application limited, when Congress revised the Bankruptcy Code and
Rules. This revision resulted in the enactment of Bankruptcy Rule
8005 and the concomitant incorporation of Bankruptcy Rule 805's
mootness provision into the Bankruptcy Code, 11 U.S.C. § 363(m).
Algeran, 759 F.2d at 1423-24; Plotner v. AT&T, 172 B.R. 337, 340-
41 (D. W.D. Okla. 1994); see also In re 255 Park Plaza Assocs.
Ltd. Partnership, 100 F.3d at 1217 (codification of mootness rule
in Section 363(m)).
Section 363(m) is limited in application to trustee sales of
debtor property.11 11 U.S.C. § 363(m); see In re Onouli-Kona Land
11
Bankruptcy Code Section 363(m) provides that,
The reversal or modification on appeal of an
authorization under subsection (b) or (c) of this
section of a sale or lease of property does not
affect the validity of a sale or lease under such
authorization to an entity that purchased or leased
such property in good faith, whether or not such
entity knew of the pendency of the appeal, unless
19
Co., 846 F.2d at 1172; In re 255 Park Plaza Assocs. Ltd.
Partnership, 100 F.3d at 1217; Miami Ctr. Limited Partnership v.
Bank of New York, 838 F.2d 1547, 1553 (11th Cir. 1988). However,
the judicial mootness doctrine survives in situations other than
those provided for by Section 363(m). Miami Ctr. Ltd. Partnership,
838 F.2d at 1553; Pittsburgh Food & Beverage, Inc. v. Ranallo, 112
F.3d 645, 648 (3d Cir. 1997); In re 255 Park Plaza Associates Ltd.
Partnership, 100 F.3d 1217; Rochman v. Northeast Utils. Serv.
Group (In re Public Serv. Co. of New Hampshire), 963 F.2d 469, 472
(1st Cir.), cert. denied, 506 U.S. 908, 113 S. Ct. 304, 121 L. Ed. 2d
226 (1992); Anheuser-Busch, Inc. v. Miller (In re Stadium
Management Corp.), 895 F.2d 845, 848 (1st Cir. 1989)(citing cases);
In re Highway Truck Drivers & Helpers Local Union 107, 888 F.2d
293, 297 (3d Cir. 1989); Algeran, 759 F.2d at 1423-24.
“Therefore, . . . unless a stay is obtained, an order approving a
sale of property will not be affected on appeal.” Plotner, 172
B.R. at 340-41.
Bankruptcy Rule 800512, although discretionary in nature, is
such authorization and such sale or lease were
stayed pending appeal.
11 U.S.C. § 363(m).
12
Rule 8005 provides in part that,
A motion for a stay of the judgment, order, or
decree of a bankruptcy judge, for approval of a
supersedeas bond, or for other relief pending appeal
must ordinarily be presented to the bankruptcy judge
in the first instance. Notwithstanding Rule 7062 but
subject to the power of the district court and the
bankruptcy appellate panel reserved hereinafter, the
bankruptcy judge may suspend or order the
continuation of other proceedings in the case under
the Code or make any other appropriate order during
the pendency of an appeal on such terms as will
protect the rights of all parties in interest.
20
consistent with, and supports, the codal and judicial counterparts
of the mootness rule. As the Court of Appeals for the Second
Circuit describes,
Bankruptcy Rule 8005 sets forth a procedure by which a
party may seek a general stay of a bankruptcy court’s order
pending appeal so that the estate and the status quo may be
preserved pending resolution of the appeal. The party who
appeals without seeking to avail himself of that protection
does so at his own risk.
In re Chateaugay Corp., 988 F.2d at 326; see In re Continental
Airlines, 91 F.3d 553, 562 (3d Cir. 1996), cert. denied, --- U.S.
---, 117 S. Ct. 686, 136 L. Ed. 2d 610, reh’g denied, --- U.S. ---,
117 S. Ct. 1098, 137 L. Ed. 2d 230 (1997); Allstate Ins. Co. v.
Hughes, 174 B.R. 884, 888 (D. S.D. N.Y. 1994) (quoting same); cf.
In re Ewell, 958 F.2d at 278-79 (debtor’s appeals rendered moot
pursuant to Bankruptcy Rule 8005 by reason of her failure to obtain
a stay pending appeal of bankruptcy court’s approval of sale of two
parcels of real estate).
Case law on this subject as developed by the Court of Appeals
for the Eighth Circuit is consistent with the above discussion. In
a line of decisions addressing mootness in the context of
bankruptcy, the Eighth Circuit has adhered to the finality rule--
both the judicial doctrine as well as the codified rule--as it
pertains to the sale of debtor property to third parties. See
Metro Property Management Co. v. Information Dialogues, Inc. (In re
Information Dialogues), 662 F.2d 475, 477-78 (8th Cir. 1981); Van
Iperen v. Production Credit Assoc. (In re Iperen), 819 F.2d 189,
191 (8th Cir. 1987); Roller v. Worthen Nat’l Bank of Northwest (In
re Roller), 999 F.2d 346, 347 (8th Cir. 1993).
FED. R. BANKR. P. 8005.
21
Therefore, under the weight of the case law previously
discussed, it is clear that if indeed the property has already been
sold, Grace’s appeal in this regard is rendered moot. We cannot
say it is so, however, for as noted, we do not have before us
evidence to this effect; the question of the sale status of the
Salisbury Street property is an open one.
Irrespective of whether mootness might rest on this basis,
however, Grace’s appeal is rendered moot for another reason
entirely, to wit, that her lien survived the bankruptcy proceedings
in the lower court intact. The bankruptcy court’s order permitting
the sale of Robert’s property did not provide for a sale free and
clear of interests pursuant to 11 U.S.C. § 363(f). Thus, the
property was authorized to be sold, but sold subject to Grace’s
lien. Accordingly, we conclude that Grace’s lien survived the
debtor’s bankruptcy proceedings wholly intact and unaffected, and
that her appeal in this respect is therefore moot.
Accordingly, the orders appealed from are affirmed.
A true copy.
Attest.
CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE
EIGHTH CIRCUIT.
22