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In re Klaas

United States Court of Appeals, Third Circuit

June 1, 2017

IN RE: PAUL E. KLAAS; BETH ANN KLAAS, Debtors ELIZABETH SHOVLIN, Appellant

          Argued: October 26, 2016

         On Appeal from the United States District Court for the Western District of Pennsylvania (Nos. 2-15-cv-00802 & 2-16-cv-00467) Honorable Arthur J. Schwab, District Judge.

          Phillip S. Simon, Esq., Attorney for Appellees Paul E. Klaas and Beth Ann Klaas.

          Aurelius P. Robleto, Esq., Attorneys for Appellant Elizabeth Shovlin.

          Owen W. Katz, Esq., Jana S. Pail, Esq. Ronda J. Winnecour, Esq., Attorneys for Appellee Ronda J. Winnecour.

          Before: FISHER, [*] VANASKIE, and KRAUSE, Circuit Judges.

          OPINION

          KRAUSE, Circuit Judge.

         The Bankruptcy Code sets certain limits on the amount of time that debtors may be required to remain in Chapter 13 proceedings and make payments on their debts. This case presents two questions of first impression among the Courts of Appeals: whether bankruptcy courts have discretion to grant a brief grace period and discharge debtors who cure an arrearage in their payment plan shortly after the expiration of the plan term, and if so, what factors are relevant for the bankruptcy court to consider when exercising that discretion. Because we conclude the Bankruptcy Code does permit a bankruptcy court to grant such a grace period and the Bankruptcy Court did not abuse its discretion in granting one here, we will affirm the rulings of the District Court, which in turn affirmed the relevant order and judgment of the Bankruptcy Court.

         I. Background

         This consolidated appeal presents two decisions for review from the District Court: one affirming the Bankruptcy Court in its denial of Appellant-Creditor's Motion to Dismiss a Chapter 13 bankruptcy proceeding, and the other affirming the Bankruptcy Court's grant of Appellee-Debtors' Motion for Summary Judgment in a related adversary proceeding. Before addressing the facts relevant to those orders, a brief review of the relevant Bankruptcy Code provisions is necessary to understand the rights and obligations at issue in this case.

         A. Statutory Background

         Chapter 13 of the Bankruptcy Code, 11 U.S.C. §§ 1301-1330, offers the possibility of relief to individual debtors who have some capacity to make payments on their debts. 11 U.S.C. § 109(e). After filing a voluntary petition for relief, a Chapter 13 debtor must propose a "plan" that provides for the payment of future earnings to cover claims on the debtor's estate. 11 U.S.C. §§ 1321, 1322(a)-(c). The Code includes requirements for the contents of such a plan, including that the plan must provide for the payment of all priority claims and may not "discriminate unfairly" between classes of unsecured creditors. 11 U.S.C. § 1322. Relevant to this case, the Code requires that if the debtor's income is higher than the median income for the state in which the debtor resides, "the plan may not provide for payments over a period that is longer than 5 years." 11 U.S.C. § 1322(d)(1). The proposed plan is subject to court approval, but the Code directs the bankruptcy court to confirm a proposed plan if it complies with the Code's requirements, including that it is proposed in good faith and that it is anticipated "the debtor will be able to make all payments under the plan and to comply with the plan." 11 U.S.C. § 1325(a)(1), (a)(3), (a)(6).

         The bankruptcy court may appoint a neutral trustee to collect the money paid under the plan and to distribute it to creditors throughout the plan period. 11 U.S.C. § 1302. The total amount to be paid to the trustee in order to complete the goals of the plan, including charges for escrow account fees and the trustee's services, is often referred to as the "plan base." Although "[t]he term 'base' is not found in the Bankruptcy Code, " it is "commonly understood to mean the sum of money that a debtor will pay through his Chapter 13 plan." In re Jenkins, 428 B.R. 845, 849 (B.A.P. 8th Cir. 2010).

         Once confirmed, modifications to the plan are governed by 11 U.S.C. § 1329. That section provides, in relevant part: "[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 … extend or reduce the time for such payments." 11 U.S.C. §§ 1329(a)(2). However, it also incorporates § 1322(d)(1)'s five-year term limit by specifying that "the court may not approve" a plan modification that would extend the term to require payments more than five years after the first payment was due under the original plan. 11 U.S.C. § 1329(c). Once a debtor meets his obligations by completing "all payments under the plan, " he becomes entitled to "a discharge of all debts provided for by the plan, " 11 U.S.C. § 1328, often referred to as a "completion discharge."

         Of course, not all debtors are able to meet their plan obligations. In that circumstance, the bankruptcy court may dismiss a case or convert it to a Chapter 7 bankruptcy "for cause, " including upon "material default by the debtor with respect to a term of a confirmed plan." 11 U.S.C.§ 1307(c)(6). Alternatively, the court may grant a "hardship discharge" of some of the debts if (1) the debtor cannot make all payments due to "circumstances for which [he] should not justly be held accountable, " (2) a certain amount of property has already been distributed under the plan, and (3) modification under § 1329 "is not practicable." 11 U.S.C. § 1328(b).

         B. Factual Background

         In 2009, Appellee-Debtors Paul and Beth Ann Klaas filed a voluntary Chapter 13 petition in the Western District of Pennsylvania, proposing a plan that required payments of $2, 485 each month for sixty months, i.e., five years, and that was confirmed by the Bankruptcy Court. About a year after confirmation, in response to an increase in mortgage payments, the plan was amended to increase the payments to $3, 017 a month for the remainder of the sixty-month period. This new monthly payment reflected an anticipated plan base of $174, 059.24 that Debtors were then required to pay to complete the plan's goals. Debtors made consistent monthly payments and, after sixty months, they had paid a total of $174, 104, slightly exceeding their projected plan base.

         Nevertheless, sixty-one months after the start of the plan, Appellee-Trustee Ronda Winnecour filed a Motion to Dismiss the case under 11 U.S.C. § 1307(c), alleging that her final calculation showed that Debtors still owed $1, 123 to complete their plan base.[1] She noted in her motion that "[s]hould the debtors remit funds sufficient to complete the plan, the Trustee [would] not object to withdrawing her motion to dismiss." Appellant App. Vol. II, 7. Debtors cured the arrears within 16 days of the motion alerting them to the deficit, and the Trustee consequently withdrew the motion.

         By that point, however, the Trustee's motion had been joined by Appellant-Creditor Elizabeth Shovlin, who was the successor in interest to a holder of several unsecured claims against Debtors, and Creditor pressed forward, arguing that the late payment was invalid because the plan and the Code required all payments to be completed within sixty months.[2]While the Bankruptcy Court agreed that the failure to completely fund the plan base within sixty months was a material default constituting cause for dismissal under 11 U.S.C. § 1307(c), it also found that the default was not the result of an unreasonable delay by Debtors, that Debtors promptly corrected the deficiency, and that the delay did not significantly alter the timing of plan distributions to creditors. The court, therefore, denied the Motion to Dismiss, concluding that "[b]y the time of the hearing on the trustee's motion, the default was no longer material, " and that Debtors had "fully funded their plan obligations." In re Klaas ("Klaas I"), 533 B.R. 482, 488 (Bankr. W.D. Pa. 2015). Creditor appealed the order denying the motion, and the District Court affirmed. Shovlin v. Klaas ("Klaas II"), 539 B.R. 465, 466 (W.D. Pa. 2015).

         Creditor also initiated an adversary proceeding by filing a complaint objecting to the discharge of the Klaases' debts. Nearly a year after its decision on the Motion to Dismiss, the Bankruptcy Court, relying on that ruling and the law of the case doctrine, again rejected Creditor's arguments that the failure to complete all payments within the plan term mandated dismissal and granted summary judgment in favor of Debtors. In re Klaas ("Klaas III"), 548 B.R. 414, 425 (Bankr. W.D. Pa. 2016). The Bankruptcy Court issued a completion discharge, Bankr. Case 09-29574 Dkt. No. 211, [3]and the District Court again affirmed on appeal, Shovlin v. Klaas ("Klaas IV"), 555 B.R. 500, 502 (W.D. Pa. 2016). Creditor then filed a notice of appeal of the adversary case, which was consolidated with the first appeal before our Court.

         II. Jurisdiction

         Although no party in this case contests our jurisdiction, "[w]e have an independent obligation to ascertain our own jurisdiction" before we may reach the merits of the case. In re Cont'l Airlines, Inc., 932 F.2d 282, 285 (3d Cir. 1991). And although the two appeals have been consolidated before us, "[n]either consolidation with a jurisdictionally proper case nor an agreement by the parties can cure a case's jurisdictional infirmities." Brown v. Francis, 75 F.3d 860, 866 (3d Cir. 1996). ...


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