Revesting Provision in a Chapter 13 Plan Will Not Shield That Postconfirmation $3.8 Million Stock Buyout Windfall From Creditors

July 1, 2020 by Marisol Nagata, Esq.

The Bankruptcy Appellate Panel for the Ninth Circuit (BAP) clarified that a revesting provision in a confirmed chapter 13 plan does not prevent modification of the plan to capture increases in the debtor’s post-confirmation compensation.

Accordingly, the BAP ruled that a Chapter 13 debtor may not retain a $3.8 million windfall from a stock buyout. Instead, the debtor must contribute a portion of the post-confirmation income to pay his unsecured creditors 100% of their claims. (Berkley v. Burchard (In re Stephen William Berkley), 613 B.R. 547 (9th Cir. BAP 2020)).

Facts

Mr. Berkley filed Chapter 13 in June 2014. At the time of filing his bankruptcy petition, Mr. Berkley was a self-employed software developer earning $5,000.00 per month. He proposed to make $1,233.00 monthly plan payments over five-years. Under the plan, unsecured creditors would receive only one percent (1%) of their allowed claims. The plan also provided that “[p]roperty of the estate will revest in Debtor upon confirmation.” In April 2015, the Court confirmed Mr. Berkley’s plan.

Sometime in 2016, Mr. Berkley was hired as CEO and in 2018, began receiving stock options as part of his compensation package. In late 2018 or early 2019, Mr. Berkley received a buyout offer, where he would receive about $3.8 million for his stocks. Mr. Berkley disclosed this to the Chapter 13 Trustee (“Trustee”) in month 57 of his plan. Mr. Berkley asserted that the revesting provision in the plan meant that he owned the post-confirmation $3.8 million stock payout outright and that the Trustee could not force him to pay additional funds into the plan since the confirmed plan did not anticipate such payment. He needed to only perform on the terms of the confirmed plan, which he had done for nearly over 4 years.

The Trustee disagreed and contended that Mr. Berkley should turn over about $202,000.00 of the stock proceeds to pay his creditors in full. As such, the trustee filed a post-confirmation motion to modify Mr. Berkley’s plan relying on 11 U.S.C. § 1329(a), which provides that “[a]t any time after confirmation of the plan but before 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 – (1) increase or reduce the amount of payments on claims of a particular class provided for by the plan.” The trustee also argued that, under § 1306(a)(2), property of the estate includes “earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11 or 12, whichever occurs first”. The trustee argued that Mr. Berkley’s stock grants were for “services performed by the debtor” and his “post-petition acquired stock and increased income are changed circumstances” warranting modification of the plan.

The bankruptcy court agreed with the Trustee and granted the Trustee’s motion. Mr. Berkley timely appealed to the BAP, which affirmed the order.

Reasoning

A) Statutory Mechanism for Capturing Post-Confirmation Income Adjustments.

The BAP indicated that §1329 specifically provides that, “at any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified” to “increase or reduce the amount of payments on claims of a particular class provided for by the plan.” A bankruptcy court has discretion to consider a debtor’s change in circumstances and “[a]n unexpected increase in income is one such change that could warrant a plan modification to increase payments”. The BAP added that “unsecured creditors may request a later modification of the plan to increase the debtor’s payment if the debtor acquires disposable income during the pendency of the applicable commitment period.” (citing Danielson v. Flores (in re Flores), 735 F.d 855, 860 (9th Cir. 2013)(en banc)). The BAP also noted the policy justification for §1329 is “to allow creditors to receive increased payments from debtors whose earnings happen to increase” and recognized the 2005 Bankruptcy Abuse Prevention & Consumer Protection Act’s primary goal of helping to “ensure that debtor’s who can pay creditor do pay them”. (Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 64 (2011). Here, Mr. Berkley’s plan was confirmed in April 2015, but his plan had not been completed. He was in month 57 of his 60-month commitment period. Therefore, under §1329, it was appropriate to allow a plan modification to capture the approximately $3.8 million postconfirmation increase in Mr. Berkley’s income for the benefit of his unsecured creditors.

B) Property of the Estate vs. Property of the Debtor.

Next, the BAP rejected Mr. Berkley’s attempt to shield the stock proceeds by arguing that the proceeds were not property of the estate. Mr. Berkley contended that the Trustee had no right to any income above the $1,233.02 monthly plan payments. However, in the BAP’s view, Mr. Berkley wrongly assumed that “unless the postconfirmation income is property of the estate, the debtor cannot be compelled to devote it to the plan.” The BAP pointed out, debtors often use non-estate sources (such as family contributions, loans or withdrawals from pension plans, gifts, and non-estate property) to fund a plan. The BAP clarified that under §1329, a plan may be modified postconfirmation due to increase in the debtor’s income, “whether or not the additional income is property of the estate”.

Potential impact on unsecured creditors

This clarity from the BAP is great win for unsecured creditors! On the one hand, Debtors cannot use §1329 as a shield to prevent the chapter 13 trustees from capturing income increases for the benefit of unsecured creditors, and on the other, use the same statutory mechanism as a sword against their unsecured creditors when they are experiencing unforeseen financial hardships. Had Mr. Berkley experienced a post-confirmation decline in his monthly disposable income during the pendency of his chapter 13 case, we would have certainly expected him —as debtors routinely do — to move the court for an order modifying his plan and reducing his monthly plan payment. A reduction in monthly plan payments equates to a reduction in dividends paid out to unsecured creditors. As the bankruptcy court aptly noted: if Mr. Berkley did not want to contribute the extra $202,000 to the plan, then he was free to dismiss his case. But, the obvious result of a voluntary case dismissal is the termination of the automatic stay by operation of law. Without the automatic stay in effect, Mr. Berkley’s unsecured creditors would also be free to resume their collection efforts and the $3.8 million proceeds would certainly be within arm’s reach of Mr. Berkley’s creditors.

This case is also potentially beneficial to creditors whose claims:

  1. May have been crammed down to the value of the property;
  2. Deemed either wholly or partially unsecured; and
  3. Are getting very little to no payout on their unsecured claims under the terms of debtor’s confirmed plan.

In this case, Mr. Berkley’s unsecured creditors were getting paid 1% of their allowed claims. Imagine getting paid pennies on the dollar for over four years. But, three months before the debtor is set to complete the plan, the claims end up getting paid 100% on the dollar due to the good fortune of a considerable increase in debtor’s postpetition, postconfirmation income! Certainly, this case involves a unique set of facts.

It is rare to see a huge windfall in bankruptcy cases whether from an unexpected $3.8 million stock buyout, or a multi-million lottery winnings or an inheritance. But nonetheless, if and when there is an increase in debtor’s income warranting a plan modification, then expect a corresponding increase in dividends to unsecured creditors. Depending on the amount of the increase in debtor’s income — if sizable relative to the aggregate unsecured claims — unsecured creditors could potentially get paid in full (or substantially in full).

Reach out to Geraci Law Firm here for a free consultation.

Connect with us