In the United States Bankruptcy Court

for the Northern District of Iowa


JOHN W. MARTIN
RITA MARTIN
Bankruptcy No. L-87-00674D
Debtor(s). Chapter 12

Ruling Re Debtors Motion to Modify Plan


This matter is before the Court on the motion of the debtors, John and Rita Martin (debtors) to modify their confirmed Chapter 12 Plan of Reorganization. Two creditors, Production Credit Association of the Midlands (PCA) and the Farmer's Home Administration (FmHA), object to the proposed modification on a number of different grounds. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(0). The following opinion denying the debtors' motion to modify their confirmed Chapter 12 plan constitutes this Court's findings of fact, conclusions of law, and order pursuant to Fed.R.Bankr.P. 7052.

Background and Findings of Fact

The bulk of the facts which gave rise to the present dispute are fully reported in an earlier ruling of this Court entered on June 25, 1991, and reported at 130 B.R. 951. Those factual findings are incorporated by reference and will not be repeated in full here. The Court, however, does repeat some of those facts to put the present dispute in context.

When the debtors filed for bankruptcy, PCA filed a proof of claim in which it asserted a security interest in a number of items of the debtors' property. PCA, however, did not assert a security interest in a life insurance policy insuring John Martin's life which it held as additional security for its debts owed to it by the debtors. PCA's claim eventually was established in the bankruptcy claims process as a $388,079 secured claim and $106,432.62 unsecured claim. PCA's lien in the life insurance policy was not considered in determining PCA's secured claim because neither PCA nor the debtor ever asserted the lien as part of PCA's claim.

The debtors' Chapter 12 plan of reorganization was confirmed on June 4, 1987. The plan terms called for scheduled payments on both PCA's secured and unsecured claims.

John Martin died on May 11, 1988. Rita Martin received in excess of $250,000 from the life insurance policy on John Martin's life. PCA asserted an entitlement to these proceeds on the basis of its security interest in the policy and its proceeds.

The debtor and PCA eventually settled their dispute over the proceeds by agreeing that. PCA would receive payment of nearly $220,000-to be applied to its allowed secured claim nearly and $30,000 to be applied on its allowed unsecured claim.(1) This settlement arrangement was not disclosed in the bankruptcy proceeding. When FmHA, an unsecured creditor, found out about this arrangement, FmHA filed a motion to compel PCA to disgorge the payments received from the life insurance proceeds. FmHA asserted, among other things, that the plan confirmation and PCA's full participation in the claims process acted to bind PCA to the treatment of its claims under the plan.

The Court took that matter under advisement. After some indications of settlement possibilities, the Court held a status conference on this dispute on March 15, 1991. The debtor filed the present motion to modify the Chapter 12 plan on May 20, 1991.

On June 25, 1991, this Court ruled in favor of FmHA on its motion to disgorge in an opinion published at 130 B.R. 951 (Bankr. N.D. Iowa 1991). In that ruling, the Court found, among other things, that PCA could not receive direct payment of the insurance proceeds on its secured claim or have a portion of its unsecured claim receive preferential treatment because PCA had failed to assert its lien in the insurance proceeds at any time during the bankruptcy claims process. The Court concluded that the PCA was not entitled to payments from the insurance proceeds on its secured claim unless or until PCA was successful in adding the lien in the life insurance to its allowed secured claim through a motion to reconsider its claim under § 502(j). Unless or until PCA's claim was reconsidered under § 502(j), the life insurance proceeds constituted property of the debtor's bankruptcy estate free and clear of any liens.

After the Court entered the June 25, 1991 ruling, the debtor indicated that it intended to go forward with its proposed modification, filed May 20, 1991. The proposed modification seeks to change the treatment of PCA's claim and the payment of that claim under the modified plan. Essentially, the debtor proposes to add the life insurance, arbitrarily valued at the amount of one years premium payments, to the amount of PCA's allowed secured claim and, then, to pay down PCA's increased secured claim with installment payments of the insurance proceeds.

Conclusions of Law

The debtor argues that the proposed modification is appropriate and should be allowed under § 1229. Section 1229 provides:

  1. At any time after confirmation of the plan but before the completion of payments under such plan., the plan may be modified, on request of the debtor, the trustee, or the holder of an allowed secured claim, to-
    1. increase or reduce the amount of payments on claims of a particular class provided for by the plan;
    2. extend or reduce the time for such payments; or
    3. alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan.
  2. (1) Sections 1222(a), 1222(b), and 1223(c) of this title and the requirements of section 1225(a) of this title apply to any modification under subsection (a) of this section.
    1. The plan as modified becomes the plan unless, after notice and a hearing, such modification is disapproved.
  3. A plan modified under this section may not provide for payments over a period that expires after three years after the time that the first payment under the original confirmed plan was due, unless the court, for cause, approves a longer period, but the court may not approve a period that expires after five years after such time.

The debtor contends that all of the necessary requirements of § 1229 are satisfied by the proposed modification before this Court and, therefore, the motion to modify should be approved.

FmHA and PCA argue that the proposed modification should be disapproved for a number of reasons. First, FmHA and PCA contend that the proposed modification is rendered moot by the June 25, 1991 order and that principles of finality make the previous ruling binding here. They also assert that the modification does not satisfy the "best interest of creditors" test under § 1225(a)(5), that modification is not warranted in these circumstances, and that the modification is not timely.

This Court agrees with FmHA and PCA to the extent that they are arguing that this dispute is controlled by the prior decision in this case. The Court believes that the June 25, 1991 ruling found that PCA's.lien on the life insurance proceeds could not be recognized in this case unless or until the debtor or PCA successfully had PCA's claim reconsidered under § 502(j). The Court stands by that ruling.

Neither the debtor nor PCA has filed a motion under § 502(j) to reconsider the claim of PCA. Instead, the debtor has attempted to use § 1229 to accomplish the same purpose. The debtor has made a vague argument that the § 1229 modification request essentially "reconsiders" PCA's claim and satisfies the directives of the June 25, 1991 order.

This Court does not agree with the debtor. A motion to modify under § 1229 is not the same as a motion to reconsider a claim under § 502(j). This distinction is not one of form over substance. Each of these Code sections have separated and distinct standards and requirements. Under § 502(j), "a claim that has been allowed or disallowed may be reconsidered for cause." (emphasis added). This Court has previously observed that under § 1329 (which is identical to § 1229) there is "no requirement of a showing of cause for the modification of a plan." In re Jourdan, 108 B.R. 1020, 1022 (Bankr. N.D. Iowa 1989) (quoting In re Moseley, 74 B.R. 791, 799 (Bankr. C.D. Cal. 1987)). This substantive difference in the standards of § 502(j) and § 1229 refutes the debtors' argument that this modification essentially constitutes a 502(j) reconsideration of PCA's claims.

Moreover, this Court does not believe that there is any language whatsoever under § 1229 which allows a party to modify a "claim." Under the Chapter 12 modification provision, a plan may be modified to do one of three things:

  1. increase or reduce the amount of payments on claims of a particular class provided for by the plan;
  2. extend or reduce the time for such payments; or
  3. alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan.

§ 1229(a)(1)-(3). All of these things deal with altering the amount or time for paying the claim, but not with altering the claim itself. The Court believes such a reading of § 1229 is completely consistent with § 502(j)'s position and role in the Code, as well as this Court's June 25, 1991 ruling.

This Court is not ruling that the debtor can never modify its plan to treat PCA's claim differently than it is currently being treated. The Court only observes that the type of modification the debtor proposes, seeking to alter the claim of PCA and the payments on that claim, is appropriate only after a party has successfully obtained reconsideration of the claim under § 502(j). Here, the debtor's modification proposal essentially is putting the cart before the horse.

The Court is not implying the debtor should next file a § 502(j) motion, and if successful move again for this Court to approve the present proposed modification. This Court's position is quite to the contrary. The manner in which the parties submitted the case on FmHA's motion to disgorge lead the Court to believe that if the Court ruled in favor of disgorgement the case would proceed directly to a disposable income hearing on the amount of disposable income, if any at all, generated by the life insurance proceeds. The Court believed and continues to believe that the disposable income hearing is the next logical step given the posture of this case.

Indeed, here the debtors argue that Mrs. Martin is a 1150 year old farm widow with no off the farm job skills." This essentially is a disposable income argument. While that argument may or not may be controlling, the Court believes it is in the best interest of all parties to move quickly to resolve the disposable income issue. Hence, the Court encourages the parties to move in that direction.

ORDER

IT IS THEREFORE ORDERED that debtors' proposed modification of their confirmed Chapter 12 plan is denied.

DONE AND ORDERED this 3rd day of March, 1992.

Michael J. Melloy
Chief Bankruptcy Judge


1. No other unsecured creditors were paid a dividend out of the insurance proceeds.