This case presents one of the many conundrums that arise when trying to determine how to treat a post-petition, non-income, asset received in a Chapter 13 case. In this case, the question is what to do about settlement proceeds from a post-petition, post-confirmation auto accident involving one of the Debtor. The Chapter 13 Trustee filed a Motion to Modify the Debtors’ Ch. 13 Plan on March 2, 2017 seeking to have Debtors’ $24,500 personal injury claim settlement distributed to the unsecured creditors via the plan (the “Motion to Modify”). The Debtors filed a Response asking the Court to deny the motion as they needed to use most of the $24,500 for their current expenses.
The Debtors filed their Ch. 13 Petition on September 30, 2013. Their original Ch. 13 Plan was confirmed on February 27, 2014 and disclosed a liquidation value of $0.00. Debtors’ confirmed plan proposed to pay $27,931.44 by reason of their disposable income.
The Debtors were involved in a post-confirmation automobile accident on April 25, 2014. They retained the Tacoma Injury Law Group on May 2, 2014 to pursue a personal injury claim. They did not disclose the cause of action in this case until November 2016, after they reached a settlement for the $24,500. On November 1, 2016, the Debtors amended their Schedules A, B and C to disclose a “personal bodily injury claim for traffic accident on April 25, 2014” in the amount of $16,000. They attempted to exempt this entire amount in their Schedule C under 11 U.S.C. §522(d)(11)(D). On November 7, 2016, the Debtors filed a Motion to Appoint Special Counsel nunc pro tunc, and to approve the settlement of their personal injury claim.
The Ch. 13 Trustee opposed the Motion to Appoint Special Counsel nunc pro tunc, objected to the Debtors’ newly claimed exemption, and asked that the settlement proceeds be held by the Ch. 13 Trustee pending resolution of the objection to exemptions. The Debtors did not to respond to the Ch. 13 Trustee’s objection to the Debtors’ exemptions, and an order was entered on February 3, 2017 denying the Debtors’ claimed exemption to the settlement proceeds.
On March 2, 2017, the Ch. 13 Trustee filed the subject Motion to Modify Confirmed Plan pursuant to 11 U.S.C. §1329(a). The Ch. 13 Trustee sought to pay certain expenses of the personal injury case, and pay the remainder of the $24,500 settlement proceeds to unsecured creditors, after payment of administrative claims. The Ch. 13 Trustee argued that all the proceeds of the settlement should come into the plan because they were a windfall to the Debtors and Debtors had no other post-petition expenses related to the accident and no valid exemption in the funds. The Ch 13. Trustee concluded that Debtors had this unencumbered asset that was available for payment to creditors and to remain in good faith under their plan, Debtors needed to commit it to repaying their creditors.
On March 22, 2017, the Court held a hearing on Ch. 13 Trustee’s Motion to Modify. At the hearing, the Court raised questions concerning how the post-petition personal injury proceeds should be analyzed under the provisions of the Bankruptcy Code, beyond the Ch. 13 Trustee’s reliance on “good faith.” The Court asked first, whether the funds should be considered as part of the liquidation value of the estate and thus analyzed in terms of whether the Debtors were still in compliance with the “best interests of creditors” test under 11 U.S.C. §1325(a)(4). Second, the Court inquired whether the Debtors should receive any credit toward any “best interests of creditors” test number for funds paid to unsecured creditors under the disposable income test. The Court took the matter under advisement and permitted the parties to file additional briefs.
The Ch. 13 Trustee argued that the liquidation value of the estate should not be recalculated upon plan modification and therefore the Debtors only needed to meet the liquidation value calculated at the original confirmation to meet the “best interests of creditors” test under § 1325(a)(4), in this case $0.00. He also continued to argue that the Court should simply employ a “good faith” analysis to determine whether the proceeds of the personal injury settlement should be paid into the estate for payment to unsecured creditors, citing In re Mattson, 486 B.R. 361 (B.A.P. 9th Cir. 2012).
The Debtors argued in their Supplemental Response to Trustee’s Motion to Modify Confirmed Ch. 13 Plan that they were entitled to receive all but $5,702.13 of the $24,500 in settlement proceeds. The Debtors arrived at that number by claiming that their confirmed plan provided for the payment of $27,931.44 to unsecured creditors’ claims based on their disposable income. They acknowledged that $5,702.13 was necessary to make up a shortfall on the amount they had committed to paying unsecured creditors under their plan.
In their supplemental response, the Debtors did not contest that the Ch. 13 Trustee has satisfied §§ 1322(a) or 1322(b) or that those sections acted as a bar of the Ch. 13 Trustee’s proposed modification. The Debtors conceded that the settlement proceeds are not “earnings or other income” and are property of the estate “subject to payment of unsecured creditors’ claims.” (ECF No. 130, p.4). The Debtors asserted that the “best interests of creditors” test under §1325(a)(4) is satisfied by the Ch. 13 Trustee’s proposed modification, whether the test is applied as of the original confirmation date or later. They base this conclusion upon their calculation that the liquidation value of the estate under the Trustee’s proposed modification would be $14,633.22, taking into account the non-exempt settlement funds remaining after costs are paid. Id. The Debtors claim that the “best interests of creditors” test will be satisfied with their $5,702.13 proposed contribution from the settlement proceeds plus the portion of their monthly payments devoted to unsecured creditors ($22,229.31). The Debtors argue that these payments to unsecured creditors will exceed whatever “best interests of creditors” number is used.