Memorandum Decision re Proceeds of Sale of Real Property

Thursday, April 27, 2000


In re: 
No. 97-3-1545-BTC
Chapter 13


Debtors filed a motion seeking a determination that they are entitled to keep the proceeds of the postpetition sale of certain real property. The chapter 13 trustee David Burchard (Trustee) filed a countermotion seeking a determination that the proceeds of sale must be used to pay off the chapter 13 plan. Melanie M. Darling appeared for Debtors. Adam N. Barasch appeared for Trustee. Upon due consideration, and for the reasons set forth below, I determine that Debtors are entitled to retain the proceeds.


Debtors' confirmed chapter 13 plan provides that Debtors will pay Trustee $875 per month for 60 months. The plan also provides that Debtors must sell real property at 847 Thornhill Drive, Colma, California (the Property) by April 4, 1999, and pay all liens against the Property from the proceeds of sale. After Debtors defaulted in making monthly plan payments, the plan was modified to suspend payments for several months and increase future payments from $875 per month to $1,175 per month. When Debtors again failed to make monthly payments and failed to sell the Property by the sale deadline, Debtors moved to reduce payments to $900 per month and to extend the sale deadline. Trustee moved to dismiss the case. Both motions were continued several times and were never submitted to the court for decision. The Property was finally sold on March 15, 2000. The net proceeds after payment of all liens against the Property total $27,792. Trustee contends that these sale proceeds should be used to pay off the chapter 13 plan immediately. Debtors contend that they are only required to bring plan payments current and that they may keep the excess proceeds and pay their remaining obligations over the remaining term of the plan.


The principal question is whether the plan requires that the proceeds from sale of the Property be used to pay all remaining plan obligations, or only to pay off the liens against the Property. The plan provides in relevant part "liens will remain to 847 Thornhill Dr. and that property will be sold no later than two years from filing date and liens paid by proceeds as available." Debtors argue that this language clearly provides that only the liens against the Property need be paid from the proceeds of sale. Trustee argues that two circumstances suggest that this language be interpreted to require that sale proceeds be used to pay off all remaining plan obligations. Trustee first notes that he objected to confirmation on the basis that the plan was not feasible, because the plan originally contained no sale deadline and Debtors would be unable to make all required payments without selling the Property. Trustee next notes that Debtors have repeatedly failed to make the payments specified in the plan and that it is unlikely that Debtors will complete the plan unless the sale proceeds are used to pay off the plan.

I find that the plain language of the plan requires Debtors to pay only the liens against the Property from the proceeds of sale, and that the circumstances cited by Trustee do not support a contrary interpretation of the plan. At the time Trustee objected to confirmation, the parties believed that the Property had no value in excess of the liens against it. Thus, the Trustee's objection does not suggest that the parties expected that sale proceeds would be used to pay off any claims other than the liens against the Property. That Debtors have repeatedly failed to make plan payments since confirmation may be the basis for a motion to modify the plan to require an immediate payoff, but it is not relevant in determining the parties' intent at the time the plan was confirmed, and Trustee's papers state expressly that he is not seeking modification of the plan.

It is not clear whether Debtors still seek to modify the current plan to reduce the plan payments from $1,175 to $900 per month. To the extent they do so, the motion is denied. In obtaining substantial cash proceeds from the sale of the Property, Debtors have an unexpected ability to pay off the plan earlier than originally anticipated. It is undisputed that Debtors have repeatedly failed to make the payments called for in their own plan. By requesting that the plan be modified to reduce the monthly payment while permitting them to retain the sale proceeds, Debtors request that the existing terms of the plan be modified to reflect their decreased ability to make monthly payments, but not to reflect their increased ability to pay creditors through a lump-sum payment. Debtors are not entitled to equitable relief because they do not do equity themselves.

My comments at the hearing notwithstanding, I do not address at this time whether Debtors' "zero percent" plan requires Debtors to make payments to unsecured creditors to the extent the plan payments called for in paragraph 1 of the plan exceed the amount needed to pay secured and priority creditors. It is not clear that issue is ripe, and the parties have not had an adequate opportunity to brief the issue.

Debtors' motion for permission to use sale proceeds is granted. Debtors' motion to modify the plan is denied. Trustee's motion to compel payoff of the plan is denied. This order is without prejudice to any future motion of Trustee to modify the plan or to dismiss the case for failure to perform under the plan.



Dated: _________________


Thomas E. Carlson

United States Bankruptcy Judge