Report of the American Bar Association Tax Section Task Force on the Tax Recommendations of the National Bankruptcy Review Commission

RETROACTIVE CHALLENGE TO NONCONFORMING CHAPTER 13 PLANS

(COMMISSION TRACK NUMBER 441)

Present Law

Prior to confirmation of a chapter 13 plan any party in interest may object to confirmation and be heard (Bankruptcy Code Section 1324).

Bankruptcy Code Section1327(a) provides that a confirmed chapter 13 plan is binding on ". . . the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan."

Following confirmation, the plan may be modified on motion of the debtor, the trustee, or the holder of an allowed unsecured claim, for the purposes of changing the amount of, or the length of the plan, or to reflect payments made to a creditor made outside the plan (Bankruptcy Code Section 1329).

Proposals Before the Commission

Commission Track Number 441. Commissioner Shepard proposes an amendment to provide that the government may move for retroactive modification or nullification of a confirmed chapter 13 plan on grounds that it does not comply with the Bankruptcy Code or other statutory law. See Santa Fe Discussion Issues, p. 13, Item IIC5.

Task Force Position

The Task Force opposes this proposal. The law with respect to finality as to issues that could have been raised, but were not, at the confirmation hearing should be preserved without modification.

Reasons For Position

This proposal, instead of improving the administration of chapter 13 plans or correcting an imbalance in the treatment of the government under the Code would instead merely reward government inefficiency and interfere with public policy regarding prompt administration of such cases.

As Robin Phelan, former president of the American Bankruptcy Institute, observed,

There seems to be more concern about the ineptitude of the taxing authorities' computers than there is about the taxpayer and the crushing tax debt that sometimes occurs that people just can't get out from under . . .

This proposal seeks to save the Government from the effects of the occasional confirmed plan that fails to treat a tax claim with all of the rights or privileges that the IRS may deem itself entitled to. The proposal would appear to suggest that the Code is unfairly deferential to debtors who may have proposed a faulty plan, either negligently or deliberately, with resulting prejudice to a tax claim.

However, the proposal fails to adequately consider the reasons for the res judicata effect of the confirmation process:

1) The rule that a confirmed plan is res judicata as to objections that could have been raised at the confirmation hearing is a two-edged sword. Granted it binds the government even in the event of an unfair plan, but it also prevents the debtor from making repeated attempts to obtain reconsideration of a plan with which the debtor may not be pleased;

2) Allowing reconsideration of a plan on grounds that it does not comply with law would invite a new wave of post-confirmation litigation by creditors of all categories seeking an advantage, regardless of the merits of such grounds. Such a result would be contrary to explicit Congressional intent for establishing the Commission in the first place, which is to find ways to simplify and shorten, not complicate and extend the bankruptcy process;

3) One of the reasons advanced for the adoption of the proposal is "Requiring that a Chapter 13 plan comply with law on pain of dismissal even after confirmation is fair inasmuch as the debtor is seeking equitable relief and should bear the burden of any plan failures." However, this suggestion fails to mention the corollary of equitable remedies, namely that ". . . equity aids the vigilant, not those who slumber upon their rights."

4) In a similar vein, relaxing the binding effect of a confirmed plan and the concomitant increase in litigation will add to the costs of administration, including attorneys' fees. This is contrary to the mission of the Commission; in remarks made on the Senate floor in favor of creation of the Commission it was observed, ". . . it is vital that the costs of all litigation be reduced, but nowhere more so than in bankruptcy."

Under existing procedure the government receives adequate notice of the filing of the case, and is given actual notice, or at the very least information putting it on inquiry notice of the contents of the plan. There is no reason the government cannot adhere to the rules of procedure to the same extent as non-governmental creditors, nor is there reason the government cannot file timely objections to plans it feels do not comply with law.

Questions, comments or suggestions? kbercik@taxcounsellor.com