Northern District of Texas Releases En Banc Opinion on Early Completion of Chapter 13 Plan

The six judges of the Bankruptcy Court for the Northern District of Texas have released an opinion on when a debtor can pay off a chapter 13 plan prior to its scheduled completion date under BAPCPA. In re Howard L. McCarthy, Jr., No. 06-40127-DML-13 (Bankr. N.D. Tex. 6/11/08). The judges ruled that absent modification of the plan to increase the payments or bad faith by the debtor, that the court must enter a discharge once payments are completed.

In the McCarthy case, the Debtor had above median income and was required to file a 60 month plan. The Court confirmed a plan providing for payments of $49,260. This payment would pay about 60% of the unsecured claims. The Debtor had to pay more than the amount of his disposable income in order to satisfy the chapter 7 liquidation test. After six months, the Debtor sold his non-exempt real estate pursuant to court order and paid the proceeds to the Trustee. The Debtor continued to make his regular monthly payments. After 21 months, he had paid $49,260 into the plan and the Trustee filed a notice of completion of payments. The Debtor then filed a motion for entry of discharge, which the Trustee opposed.

The Court found that the case did not turn on the definition of "applicable commitment period" under Section 1325(b). Instead, the Court found that the result was dictated by Sec. 1328(a).

The Court stated:

"Much of the focus of the Parties and the Amici in their briefs and at oral argument was on the question of whether the 'applicable commitment period' provided for in section 1325(b) of the Code, in Debtor's case 60 months, serves as a temporal requirement for the duration of a chapter 13 case or is simply a multiplier to be used to determine a minimum amount a debtor's plan must provide for unsecured creditors. A number of courts have struggled with this question arriving at diverse conclusions. . . . In the case at bar, however, we are not required to reach or decide that issue. Rather, the Motion poses the easier question of whether Debtor is entitled to a discharge under section 1328(a) of the Code.

* * *

"We must apply section 1328(a) in accordance with its plain meaning. . . .

"Section 1328(a)'s meaning is, in fact, plan and unambiguous. If the debtor has completed all payments under the plan, 'the Court shall grant the debtor a discharge. . . . ' (citation omitted). The use of the word 'shall' in section 1328(a) means that granting the relief is mandatory if the preconditions specified in the section are met."

Memorandum Opinion, pp. 4-5.

Having arrived at its conclusion in just five pages, the Court devoted the remainder of its opinion to replying to the Trustee's argument that deceptive debtors could use this language to slide a payment under the Trustee's door in the dead of night in order to avoid disclosing changed circumstances which would justify a modification.

The Court had two responses to this argument. First, the Court pointed out that the Marrama decision meant that "a debtor's fraudulent conduct may be addressed to prevent as well as undo a result achieved through the ordinary operation of the Code . . . " However, the Court noted that "this case is not one where money was slipped under the Trustee's door in aid of a scheme to avoid a potential plan modification." Instead, the Debtor had done exactly what was contemplated under the plan. The Debtor's Plan required the Debtor to pay a sum exceeding his monthly payments. As a result, it was clear that the Plan contemplated sale of assets. Additionally, at the time of the sale of the Debtor's property, it was clear that this pre-payment would result in the plan being paid off early. However, the Trustee did not seek to modify the plan.

Finally, the Court noted that the better procedure would be to formally request a modification of the plan to pay it off early. "The safe procedure for prepayment by a debtor under a plan is to seek approval of a plan modification under section 1329(a). If that is done, the Trustee, creditors and the court will have confidence that the prepayment is undertaken in good faith and not in anticipation of a windfall or other change in the debtor's circumstances that might otherwise bring about proposal of a Trustee's or unsecured creidtir's modification to the debtor's plan." Memorandum Opinion, p. 9.

Thus, the lesson of McCarthy is that a discharge must be granted once the payments are completed, even under BAPCPA. However, that right is balanced by the ability of the Trustee to seek a modification or to oppose discharge based upon fraud.