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McKinney v. Russell

United States District Court, M.D. Alabama, Northern Division

February 8, 2017

SABRINA L. MCKINNEY, Acting Trustee for the Middle District of Alabama, Trustee-Appellant,



         At root, this case is a dispute over whether a Chapter 13 plan should be modified to capture the proceeds of a post-confirmation windfall. Debtor-Appellee Barbara Jean Russell (“the Debtor”) filed a petition for Chapter 13 bankruptcy on January 18, 2013 (Doc. # 3-2)[1]; her plan was confirmed on April 29 of that year in Bankruptcy Court Chapter 13 Case No. 13-30160-DHW-13 (Doc. # 3-4). After Ms. Russell received a settlement for injuries she suffered in a 2015 car accident, Trustee-Appellant Sabrina L. McKinney (“the Trustee”) moved to modify the Debtor's plan so as to collect the net proceeds of the settlement for the benefit of the Debtor's unsecured creditors. (Doc. # 3-8.) The United States Bankruptcy Court for the Middle District of Alabama denied the Trustee's motion to modify (Doc. # 3-14), as well as the Trustee's later motion to reconsider the denial (Doc. # 3-23). The Trustee appeals the denial of these two motions (collectively, the “Order”[2]). For the reasons that follow, the Bankruptcy Court's decision will be reversed and the action will be remanded to the Bankruptcy Court.


         The court has jurisdiction to hear appeals from final orders of the Bankruptcy Court. 28 U.S.C. § 158(a)(1). Venue is proper because an appeal “shall be taken only to the district court for the judicial district in which the bankruptcy judge is serving.” Id. However, the Debtor contests jurisdiction, claiming that the Order was interlocutory in nature and therefore outside the ambit of § 158(a)(1). See id.; (Doc. # 9 at 10-12, 18.)

         In the bankruptcy context, the concept of finality takes on a different hue than in other civil litigation. “A bankruptcy case involves an aggregation of individual controversies, many of which would exist as stand-alone lawsuits but for the bankrupt status of the debtor.” Bullard v. Blue Hills Bank, 135 S.Ct. 1686, 1692 (2015) (citation and internal quotation marks omitted). Thus, an order need not resolve the entirety of the bankruptcy case to be final. Id. Rather, where an order effects a “final[ ] dispos[ition] of discrete disputes within the larger case, ” it may be appealed immediately. Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 657 n.3 (2006) (emphasis omitted). The bankruptcy appeals statute codifies this approach insofar as it provides broadly for district-court jurisdiction “to hear appeals . . . from final judgments, orders, and decrees.” § 158(a)(1) (emphasis added); see Bullard, 135 S.Ct. at 1692.

         The denial of a bankruptcy trustee's motion to modify a Chapter 13 plan is the sort of “final order” that may be appealed as of right under § 158(a)(1). Germeraad v. Powers, 826 F.3d 962, 967 (7th Cir. 2016). In Germeraad, the Seventh Circuit reasoned that such a denial does not form “part of a larger ‘proceeding' that will conclude only when some event other than the denial of the motion occurs. Rather, the denial of the motion will generally resolve a discrete dispute within the larger bankruptcy case, i.e., whether the debtor's plan may be modified for the reasons the trustee cites.” Id. at 966. Barring a curable “technical defect” in the motion, “the bankruptcy court will not invite the trustee to bring a subsequent motion seeking plan modification on the same grounds.” Id. And, crucially, denial of the motion for modification “precludes the trustee from filing a subsequent motion based on the same grounds.” Id. at 967.

         This is convincing logic, especially when compared to the interlocutory nature of a bankruptcy court's denial of a motion to confirm a plan in the first instance. See Bullard, 135 S.Ct. at 1693-94 (holding that “[d]enial of confirmation with leave to amend” is not a final order). If confirmation is denied, “[t]he parties' rights and obligations remain unsettled.” Id. at 1693. Not so when the bankruptcy court denies a motion to modify, as the denial leaves intact the debtor's obligations under the extant plan-the debtor does not fall into the state of limbo that results from the denial of a confirmation. And, although the denial of confirmation “does rule out the specific arrangement of relief embodied in a particular plan, ” there remains the background drumbeat of the march toward “an approved plan that would allow the bankruptcy to move forward.” Id. Ultimately, the denial is only a step in the process of reaching a binding Chapter 13 plan.

         In light of the Seventh Circuit's persuasive reasoning, the court finds that the Order resolved a discrete dispute and is therefore a final order from which the Trustee can appeal as of right. See Howard Delivery Serv., Inc., 547 U.S. at 657 n.3; Germeraad, 826 F.3d at 966. By virtue of the Bankruptcy Court's legal conclusion[3] that “[i]ncreasing payments to unsecured creditors is not sufficient cause to extend the plan term beyond three years” (Doc. # 3-22 at 4), the Order foreclosed any modification of the plan so as to capture the proceeds of the personal-injury settlement for the benefit of the Debtor's unsecured creditors. See id.; Bullard, 135 S.Ct. at 1692 (explaining that a confirmation order is final, partially because it “foreclos[es] relitigation of any issue actually litigated by the parties and any issues necessarily determined by the confirmation order”) (internal quotation marks and citation omitted). By its nature, the Order did not invite a curative amended motion, and accordingly gave a final resolution to that particular dispute.

         The Debtor contends that the denial was not final because the Trustee was free to “propose yet another modified plan.” (Doc. # 9 at 12.) But the Debtor failed to identify any basis for such a motion, and, more importantly, her argument implies that “there is some larger ‘proceeding' relating to the trustee's motions to modify that does not come to an end until it is legally impossible for the trustee to file any further motions.” Germeraad, 826 F.3d at 967. This is not the case. Where, as here, the denial of modification “precludes the trustee from filing a subsequent motion based on the same grounds, ” the denial “resolve[s] a freestanding dispute within the larger bankruptcy case, ” and is therefore final. Id. Because the Order was final, the court may exercise jurisdiction over this appeal.[4] See § 158(a)(1).


         A bankruptcy court's findings of fact are reviewed for clear error, and its legal conclusions and any mixed questions of law and fact are reviewed de novo. Educ. Credit Mgmt. v. Mosley (In re Mosley), 494 F.3d 1320, 1324 (11th Cir. 2007); Christopher v. Cox (In re Cox), 493 F.3d 1336, 1340 n.9 (11th Cir. 2007). “The district court must independently examine the law and draw its own conclusions after applying the law to the facts, and then may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings.” McLaney v. Ky. Higher Educ. Assistance Auth. (In re McLaney), 375 B.R. 666, 672 (M.D. Ala. 2007) (citations and internal quotation marks omitted). A finding of fact “is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” Anderson v. City of Bessemer City, N.C. , 470 U.S. 564, 573 (1985) (citation, internal quotation marks, and alterations omitted).


         On January 18, 2013, Ms. Russell filed for relief under Chapter 13 of the Bankruptcy Code. (Doc. # 3-2.) She proposed a 60-month plan, under which she would pay in full her sole secured claim-a debt secured by her 2009 Hyundai Accent-and pay nothing on her unsecured claims.[5] (Doc. # 3-3.) The Bankruptcy Court confirmed her plan on April 29, 2013. (Doc. # 3-4.) Because the Debtor's income is below the median in Alabama (Doc. # 3-2 at 17), she is subject to a minimum commitment period of three years under 11 U.S.C. § 1325(b)(4). (However, as further discussed below, Ms. Russell elected to undertake a maximum-length Chapter 13 plan so that she could save her car.)

         On April 24, 2015, the Debtor was in a car accident and totaled her Hyundai. (Doc. # 3-5.) She filed a motion on April 29, 2015, to substitute collateral, seeking the Bankruptcy Court's permission to buy a replacement vehicle with her insurance proceeds from the property damage. (Doc. # 3-5.) Notably, the Debtor did not disclose that she was pursuing a claim for personal injury or taking any other action as a result of the accident. On May 11, 2015, the Bankruptcy Court granted the motion to substitute collateral. (Doc. # 3-6.) Then, on February 5, 2016-three years and eighteen days after filing the bankruptcy petition, and over nine months after the accident-the Debtor filed an application to retain an attorney for purposes of prosecuting her personal-injury action. (Doc. # 3-7.) The Bankruptcy Court granted the application on March 1. (Doc. # 3-12.) Even before the application was granted, the Debtor reached a settlement in her action and had filed on February 22, 2016 a motion to approve the settlement and an application to approve her attorney's fees. (Docs. # 3-10, 3-11.) The Bankruptcy Court granted the motion on March 18 (Doc. # 3-15), and the attorney-fee application on March 28, 2016 (Doc. # 3-16).

         While the application to employ Debtor's personal-injury attorney was pending before the Bankruptcy Court, on February 16 the Trustee filed a motion to modify Debtor's Chapter 13 plan to capture the net proceeds from Ms. Russell's cause of action.[6] (Doc. # 3-8.) After a hearing, the Bankruptcy Court denied the Trustee's motion on March 14. (Doc. # 3-14.) On March 28, the Trustee moved to reconsider (Doc. # 3-17), and the parties briefed the issue (Docs. # 3-19, 3-20, 3-21). The Bankruptcy Court denied the motion on June 22 (Doc. # 3-23), reasoning that “the [D]ebtor is not required to pay the [settlement] proceeds into the plan because the applicable commitment period ended prior to her receipt of those proceeds” (Doc. # 3-22 at 3). The Trustee timely filed a notice of appeal on June 27, 2016. (Doc. # 3-24.)


         Chapter 13 of the Bankruptcy Code offers debtors a financial reset in exchange for their commitment of future disposable income to repay outstanding debts. See 11 U.S.C. § 1301 et seq. The chapter offers advantages to creditors and to debtors alike: creditors receive “ratable recoveries from [the debtor's] future income, ” and debtors wipe clean their financial slates without having to liquidate existing assets. 8 Collier on Bankruptcy ¶ 1300.02 (A. Resnick & H. Sommer eds., 16th ed. 2016). The vehicle for this fresh start is the Chapter 13 plan, which sets out the debtor's proposed payments to her creditors. See 11 U.S.C. §§ 1321, 1322. The bankruptcy court will confirm the plan if it meets certain criteria, id. ยง 1325, and, on the completion of plan payments, the debtor will enjoy a discharge of ...

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