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In re Touroo

United States District Court, E.D. Michigan, Southern Division

June 25, 2019

IN RE David Brian Touroo, Debra Sue Touroo, Debtors.
v.
TAMMY L. TERRY, CH. 13 STANDING TRUSTEE, Appellee. DAVID BRIAN TOUROO and DEBRA SUE TOUROO, Appellants,

          OPINION AND ORDER REVERSING DECISION OF BANKRUPTCY COURT

          GEORGE CARAM STEEH UNITED STATES DISTRICT JUDGE.

         David and Debra Touroo (“Debtors”) appeal the bankruptcy court's final order dismissing their Chapter 13 case. The court found that Debtors defaulted by failing to make all of the required payments under their plan before the plan expired. The court determined that it did not have discretion to allow the Debtors to cure their default after the expiration of the plan. As explained below, this court concludes that the Bankruptcy Code gives the court discretion to allow Debtors a grace period to cure their default and does not mandate dismissal under these circumstances. The bankruptcy court's decision is reversed and this case is remanded for further proceedings.

         BACKGROUND FACTS

         Debtors filed their Chapter 13 bankruptcy petition on April 18, 2013. On April 26, 2013, they filed a plan proposing payments of $283 per month, for sixty months. Debtors amended their plan on June 21, 2013, reducing the plan length from sixty to fifty months, among other changes, including weekly instead of monthly payments. The bankruptcy court confirmed the plan on July 31, 2013. The first plan payment under the confirmed plan was made on August 6, 2013.

         Debtors proposed a plan modification extending the plan length from fifty to sixty months, which was approved by the bankruptcy court on July 25, 2017. The plan called for a total of $8, 911.37 to be distributed to unsecured creditors. The plan also required Debtors to remit their 2017 federal income tax refund to the Trustee.

         Debtors made all their weekly payments under the plan through payroll garnishment. On August 23, 2018, the Trustee filed a motion to dismiss based upon Debtors' failure to remit their 2017 tax refund and because of the expiration of the plan. Shortly thereafter, the Debtors submitted their $1, 417 tax refund to the Trustee, who received it on August 27, 2018. Debtors opposed the motion to dismiss, arguing that the bankruptcy court had discretion to allow them to cure their default.

         The bankruptcy court disagreed, noting that the Bankruptcy Code does not allow for the confirmation of a plan that extends longer than sixty months. The court conditionally granted the Trustee's motion to dismiss, allowing Debtors fourteen days to file a plan modification to excuse the obligation to remit the 2017 tax refund or to file a motion for a hardship discharge. The order provided that if Debtors did not file either item, the court “will enter an order dismissing this case, without further notice or hearing.” Doc. 3 at PageID 67.

         Debtors filed a proposed plan modification on October 8, 2018, which did not excuse the obligation to remit the tax refund. Rather, Debtors sought to retroactively make their first plan payment due on August 31, 2013, a month after the original order confirming the plan was entered, thus changing the expiration date of the plan to August 31, 2018, and consequently making the tax refund payment timely. The bankruptcy court entered an order disapproving the plan modification and dismissing the case on October 12, 2018. The court stated that “the first payment in fact was due under the confirmed plan no later than August 7, 2013, and that means that the five year period described in 11 U.S.C. § 1329(c) expired no later than August 7, 2018. . . . [T]he Debtors admittedly did not make all the payments required by their confirmed plan until after August 7, 2018. These are historical facts that cannot be changed retroactively by a plan modification now. To rule otherwise would itself violate § 1329(c).” Doc. 3 at PageID 77.

         LAW AND ANALYSIS

         Debtors filed a timely notice of appeal of the bankruptcy court's final order dismissing the case. District courts have “jurisdiction to hear appeals . . . from final judgments, orders, and decrees . . . of bankruptcy judges.” 28 U.S.C. § 158(a). This court reviews the bankruptcy court's interpretation of the Bankruptcy Code de novo. In re Dow Corning Corp., 456 F.3d 668, 675 (6th Cir. 2006). When “statutory language is unambiguous, our inquiry both begins and ends with the text itself.” United States v. Bedford, 914 F.3d 422, 427 (6th Cir.), cert. denied, 139 S.Ct. 1366 (2019).

         Pursuant to 11 U.S.C. § 1322(d), the bankruptcy court may not approve a plan that provides for payments over a “period that is longer than five years.” Id. Once a plan is confirmed by the court, the debtor and his creditors are bound by its terms. 11 U.S.C. § 1327. If a debtor meets his obligations under the plan, he is entitled to “a discharge of all debts provided for by the plan, ” often referred to as a “completion discharge.” 11 U.S.C. § 1328. Section 1328 provides for a completion discharge if the debtor has completed “all payments under the plan.” This section does not contain “an express requirement that such payments were made within five years.” In re Klaas, 858 F.3d 820, 829 (3d Cir. 2017). In the event the debtor materially defaults on the plan requirements, the court has discretion to dismiss the cause for cause. Id. (noting that the court “may” dismiss a case for cause, which is “permissive language”); 11 U.S.C. § 1307.

         Under 11 U.S.C. § 1329, a debtor may modify a plan after it has been confirmed. A debtor may modify a plan to “extend or reduce the time for . . . payments, ” 11 U.S.C. § 1329(a)(2), but may not modify the plan to extend its length beyond five years, 11 U.S.C. § 1329(c). This time limitation for Chapter 13 plans reflects congressional concern that debtors were being forced into lengthy payment terms, which it viewed as “the closest thing there is to indentured servitude” because such plans do not “provide the relief and fresh start for the debtor that is the essence of modern bankruptcy law.” Klaas, 858 F.3d at 830 (citing H.R. Rep. No. 95-595 at 117 (1977)); see also In re Black, 78 B.R. 840, 841-42 (S.D. Ohio 1987).

         Debtors filed for Chapter 13 relief on April 18, 2013, and filed their original plan on April 26, 2013. The court confirmed the plan on July 31, 2013, determined that the first weekly payment under the confirmed plan was due no later than August 7, 2013, and concluded that the plan expired no later than August 7, 2018.[1] Doc. 3 at PageID 183.

         Debtors submitted their 2017 tax refund to the Trustee on August 27, 2018. The bankruptcy court declined to allow the Trustee to apply this late payment to the plan, reasoning that allowing payment after the expiration of the five-year period would contravene the limit set forth in 11 U.S.C. § 1329(c). The court granted the Trustee's motion to dismiss pursuant to 11 U.S.C. § 1307(c), which provides that the bankruptcy court may dismiss a case “for ...


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