In order to modify a plan confirmed under Chapter 12 pursuant to § 1229, the movant must demonstrate that there was a substantial change in circumstances that is sufficient to justify modification of a plan. (Norton) Farm Credit Services of America PCA v. Swackhammer, 2023 WL 3591920 (8th Cir. BAP May 23, 2023)
Case Summary
The Swackhammers were farmers who filed a Chapter 12 petition in September of 2018. Confirmation of their Chapter 12 plan was contested by Farm Credit Services of America but finally was confirmed in September of 2019.
In February of 2020 and February of 2021, the Swackhammers moved to modify their confirmed plan to extend the time under the plan to make their annual payments to Farm Credit Services and other secured creditors. Each time they sought to modify, FCS challenged the modification. These first two applications asserted that their circumstances had changed substantially due to “abnormally wet weather, equipment failure, employee illness, or losses in farm acreage from delayed financing.” Each time the Swackhammers sought a modification, the Court approved the modification and rejected FCS’s objections.
In March of 2022, the Swackhammers again filed a motion to approve a third modified plan and again sought to extend the deadline for making the annual payment to FCS. The Swackhammers asserted that the modification was necessary due to an unforeseen loss in revenue in their 2021 crops. They did, for the first time, assert that they had no obligation to establish a change in circumstance to invoke § 1229 to modify their plan. Again, FCS asserted that the Swackhammers were compelled to demonstrate that their revenue loss was due to a substantial and unanticipated change in circumstances.
After an evidentiary hearing, the Bankruptcy Court confirmed the debtors’ modified plan and FCS appealed, arguing that the Swackhammers had failed to establish a substantial change in circumstance and had actually demonstrated their Chapter 12 plan was not feasible.
The BAP rejected the debtors’ argument that there was no requirement in § 1229 to demonstrate a change in circumstance that would justify the modification. The BAP held “that plan modifications under § 1229(a) require a showing, at a minimum, of a ‘substantial change in circumstances,’ . . .” The BAP took no position on whether the change in circumstance must be “unanticipated” reserving that issue for another day. They did agree with the Bankruptcy Court that the Swackhammers had satisfied the requirement that they demonstrate a change in circumstance.
The Court also deferred to the Bankruptcy Court which had rejected the feasibility issue raised by FCS. “To satisfy the feasibility requirement, there must be reasonable assurances from the debtor that the plan can be completed and that the plan will cash flow. . . . Debtors’ income and expense projections are considered in conjunction with their actual past performance to determine feasibility.”
The modification decision of the Bankruptcy Court was accordingly affirmed.
What This Case Means to Debtors
At first blush, one could dismiss the Swackhammer case as a Chapter 12 where a farmer had a difficult time making his annual payments to a secured creditor. In a larger sense, however, the implications of this case extend to Chapter 13. After all, the language in § 1329 is virtually identical to the language in § 1229.
There has been a split amongst courts as to whether a substantial change in circumstance must be demonstrated prior to initiating a modification under § 1329. The Swackhammer case answers loudly in the affirmative.
Accordingly, if the Swackhammer case is to be followed, Chapter 13 debtors seeking to affect a modification must demonstrate a substantial change in their economic circumstances. Further, changes in the plan that are sought pursuant to § 1329 or § 1229 must correlate or address the changes in circumstances that have been experienced by a debtor. The Swackhammers presented evidence to the Bankruptcy Court that the modification was necessitated because they had experienced delays in financing, causing his “cash rent” landlords to turn to other farmers,so farmed acreage was lost.
The Swackhammercase indicates that simply because the debtor wishes to shorten the term of the plan, reduce distributions to creditors, or recognize that creditors did not file claims as anticipated, failed to provide justification for a modification. Counsel representing debtors in Chapter 13 cases should be prepared to allege in applications to modify and be able to demonstrate that there has been a substantial change in the debtor’s financial condition which the modification addresses. This could include a reduction in income due to a loss of employment, illness, a change in employment or other financial condition that affects debtors regularly.
Chapter 13 was intended to be a malleable mechanism by which debtors could repay debt to the best of their ability. If their ability is affected, either improving the debtor’s financial situation or damaging their financial condition, plans can be and should be modified.
What This Case Means to Creditors
Here, FCS certainly appears to have gotten the short end of the stick. They had not received a single annual plan payment as required in the confirmed plan due to the modifications that delayed their payments. For a three-year period, therefore, nothing had been paid to FCS that would compensate them for the deterioration of its collateral and the lost opportunity that such nonpayment presented.
To be fair, FCS did try to challenge both the confirmation of the plan and each modification. This shows an interest in keeping active during the pendency of the case. How often, however, in a Chapter 13 context, are creditors confounded by modifications when the amounts at issue are too small to justify getting involved. Although FCS was unsuccessful in stopping the delay, it should be commended for keeping an eye on the case, not closing the file, and keeping the debtors honest and focused.
What This Case Means to Trustees
Both the Swackhammers and FCS were effectively represented by counsel and could litigate the issue without the involvement of the Chapter 12 trustee. Such is not necessarily the case in Chapter 13. Creditors do not have the resources to “make a point” by contesting a modification. Creditors tend to rely upon the active involvement of a Standing Chapter 13 trustee to make certain that there is a check on a debtor’s proposed modification, that the debtor has actually experienced a substantial change in circumstance justifying the modification, and the modification proposed is justified by the change in circumstances. In many courts, modifications under § 1329 must be accompanied by new budgets that demonstrate the debtor’s current financial condition. This gives a trustee something to hang her hat on when bringing the modification to the attention of the court.
