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Bankruptcy Court Denies Debtor's Post-Confirmation Motion To Exclude PI Settlements From Chapter 13 Plan

The bankruptcy court has denied debtors' post-confirmation motion to exclude from a Chapter 13 plan the proceeds of their personal injury claims where they had not objected to an order confirming the plan that included those proceeds within the plan. 

The Court said the procedural history of the case is "torturous" and was interwoven with a decision in another case respecting the inclusion of personal injury settlements in a Chapter 13 plan, In re Vargas, 2011 WL 4482005 (Bankr.D.R.I. Sept. 27, 2011) and the appeal of that decision, In re Vargas, 2012 WL 2450170 (B.A.P. 1st Cir. Jun. 8, 2012).  The Vargas case was decided by the Court's prior judge. 

For purposes of this blog entry, we will say that the debtors in the subject case initially claimed their personal injury settlement proceeds were exempt under three separate provisions of Section 522(d) of the Bankruptcy Code.  However, they did not object at the hearing on confirmation of the plan when the trustee represented to the court that the proceeds would be paid into the plan nor did they object when the trustee presented an order to that effect. 

With respect to the Vargas case, the debtors argued it held that settlement proceeds like theirs were exempt.  The Court disagreed with their interpretation.  The Court said Vargas held that an unliquidated personal injury claim of unknown value could be exempt from inclusion in the the debtor's disposable income analysis.  The Bankruptcy Appellate Panel subsequently held that the parties had failed to preserve the issue for appeal.  In this case, at least one of the debtors' personal injury claims had been settled and the proceeds were being held in escrow.

The Court first determined the appropriate grounds under Section 1329 for modifying a Chapter 13 plan after confirmation. The Court noted two conflicting views among the courts but said the First Circuit had set forth a "four-part framework" for such modifications in Barbosa v. Solomon, 235 F.3d 31 (1st Cir. 2000):  (1) modifications are only allowed in three specific circumstances provided by the statute; (2) a modified plan is permitted only if the other requirements of Sections 1322(a), 1322(b), 1325(a) and 1229(c) are met; (3) the modification must be proposed in good faith; and (4) the proposed modification need not be approved and in practice not all modifications are approved.

The Court then considered whether the debtors had met the requirements for modification.  First, the Court said the debtors did not have a legitimate reason for seeking a post-confirmation modification.  It said the prior decision in Vargas did not establish new law subsequent to their confirmation because it was based on Supreme Court decision rendered before confirmation.  Moreover, the debtors had failed to preserve the issue of whether the settlement proceeds were exempt when they failed to object to the trustee's representations at the confirmation hearing or to object to the trustee's order.  Accordingly, it denied the debtors' motion to modify the plan and hold the settlement proceeds were exempt.    

In re Patrick O. Murphy, 487 B.R. 86 (Bankr.D.R.I. 2013).

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