Kaye Elizabeth Sandford

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
KAYE ELIZABETH SANDFORD,
No. 11-10-14424 TS
Debtor.
MEMORANDUM OPINION
The Debtor has asked the Court to modify her Third Amended Chapter 11 Plan of
Reorganization to give her until December 31, 2013 to sell her assets and pay creditors.1
Three secured creditors objected.2 This is a core matter. 	The Court has considered the
briefs and supporting papers of the parties, has heard the testimony of witnesses at a final
hearing, and has considered the arguments of counsel. 	Being sufficiently advised, the
Court finds that the Motion is not well taken and should be denied.
I. 	FACTS
The Court finds the following facts:
1. 	Debtor filed this bankruptcy case on August 30, 2010.
2. 	Debtor has been trying to sell the real property commonly known as the
Vista Clara Resort and Spa and the Flying M Ranch (together, the “Property”) since
before the petition date.
1 Emergency Motion to Modify Debtor’s Third Amended Chapter 11 Plan of Reorganization to
Enlarge Time Under Certain Provisions for Cause, filed July 19, 2013, doc. 310 (the “Motion”).
2 Sterling Bank, doc. 322; U.S. Bank, doc. 329; and Los Alamos National Bank, doc. 316.
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3. 	Debtor filed her First Amended Plan of Reorganization on February 10,
2012 (the “First Plan”).
4. 	Los 	Alamos 	National 	Bank 	(“LANB”), 	JPMorgan 	Chase 	Bank
(“JPMorgan”), and US Bank N.A. (“U.S. Bank”) objected to the First Plan.
5. 	To resolve the objections, Debtor filed her Second Amended Chapter 11
Plan of Reorganization on June 5, 2012 (the “Second Plan”).
6. 	At the confirmation hearing on the Second Plan, LANB, US Bank, and
JPMorgan, (together, the “Secured Lenders”) consented to confirmation of the plan with
certain modifications.
7. 	These 	modifications, 	together 	with 	certain 	additional 	modifications
required 	by the 	Court, are 	reflected 	in the 	Third 	Amended 	Chapter 	11 	Plan 	of
Reorganization, filed June 18, 2012, doc. 217 (the “Third Plan”).
8. 	As reflected in the Third Plan, The Secured Lenders agreed to forego
monthly adequate protection or other payments, and for Debtor to have 14 months after
confirmation to sell the Property. In exchange, Debtor agreed inter alia to the inclusion
of the following language in the treatment of each Secured Lender’s claim:
Mandatory Conversion. If on or before August 15, 2013, the Debtor does
not close and fund the sale of the [Property], or as much of the [Property]
as may be sufficient to pay __________ Allowed Secured Claim in full,
the Debtor’s bankruptcy case shall be converted to a case under Chapter 7
of the United States Bankruptcy Code. 	In such event, Debtor shall cause
an order converting this case to chapter 7 to be submitted to the Court for
entry on or before August 21, 2013.
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9. 	The 	mandatory 	conversion 	language 	appears, 	with 	slight 	variations
depending on the secured creditor, four times in the Third Plan. 	In addition, the
following language appears in paragraph 5.4 of the Third Plan, which was not in the
Debtor’s Second Plan:
Conversion. 	Notwithstanding anything herein to the contrary, if by
August 15, 2013, the Debtor has not (i) closed and funded the sale of the
Vista Clara Portion and/or the Ranchitos Property, or so much of the
aforementioned properties to fully repay US BANK N.A., Sterling, LANB
and 	JPMorgan, 	or 	(ii) 	paid 	U.S. 	Bank 	N.A., 	Sterling, 	LANB, 	and
JPMorgan the full amount of their Allowed Claims, the case will be
converted to Chapter 7 as provided herein.
10. 	The Secured Lenders agreed to the Third Plan in reliance on Debtor’s
agreement to convert the case in August, 2013, if she had not completed and funded a
sale of the Property sufficient to pay them in full.
11. 	By the Motion, the Debtor seeks to extend until December 31, 2013 the
time she has to complete and fund the sale of her Property, which means that she wishes
to delay payment to the Secured Lenders, and delay or avoid the conversion of her case to
Chapter 7.
12. 	At the final hearing, the Debtor introduced into evidence a Letter of Intent
signed by the Debtor and Gaaruda LLC (the “LOI”), in support of her argument that if
the Court grants her Motion, she will be able to sell the Property by the extended
deadline.
13. 	The Secured Lenders expressed concern about Gaaruda’s financial ability
to purchase the Property. No evidence of such ability was tendered.
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14. 	The Debtor also had her current broker, Tommy Gardner of Sotheby’s
International Realty/Santa Fe Commercial Realty), testify about his efforts to sell the
Property. Mr. Gardner testified that he thought the market has improved recently, and he
is optimistic that a buyer can be found in the near future, although he had no offers in
hand as of August 15, 2013.
15. 	Debtor has three general unsecured creditors: Virginia Sandford (Debtor’s
mother), $40,000; Ferrell Gas, $2,920.29; and Bank of America, $47,126.63 (credit card
debt). None voted on any plan.
II. 	DISCUSSION
A. 	Relevant Law.
1. 	Section 1127(e). 	The Motion is brought under 11 U.S.C. §
1127(e)(2), which provides:
If the debtor is an individual, the plan may be modified at any time after
confirmation of the plan but before the completion of payments under the
plan, whether or not the plan has been substantially consummated, upon
request of the debtor, the trustee, the United States trustee, or the holder of
an allowed unsecured claim, to—
…
(2) 	extend or reduce the time period for such payments;
…
Section 1127(e) was enacted in 2005 as part of the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005(“BAPCPA”). 	It mirrors the post-confirmation
modification provisions of Chapter 12, 11 U.S.C. § 1229(a), and Chapter 13, 11 U.S.C. §
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1329(a)(2), even to the point of providing that the “trustee” may seek to modify an
individual’s chapter 11 plan post-confirmation, an unlikely scenario.
2. 	The Standard for Determining Motions under § 1127(e). There is a
split in the case law about the standard for analyzing motions to amend confirmed plans
under §§ 1127(e), 1229(a), and/or 1329(a).3 The majority of courts have held that
granting or denying motions to modify confirmed plans under these subsections4 is within
the bankruptcy court’s sound discretion. See, e.g., In re Meza, 467 F.3d 874, 877-78 (5th
Cir. 2006); In re Witkowski, 16 F.3d 739, 748 (7th Cir. 1994); Barbosa v. Solomon, 235
F.3d 31, 41 (1st Cir. 2000); In re Brown, 219 B.R. 191, 192 (6th Cir. BAP 1998)
(modification under § 1329 is discretionary); In re Mattson, 468 B.R. 361, 367 (9th Cir.
BAP 2012); In re Mallari, 2012 WL 4855180, at *6 (E.D. Mich. 2012); In re Riddle, 410
B.R. 460 (Bankr. N.D. Tex 2009). See also In re Self, 2009 WL 2969489, at *4 (Bankr.
D. Kan. 2009) (while not ruling specifically on the issue, Judge Karlin seemed to support
the “sound discretion” modification standard).
In contrast, the Fourth Circuit Court of Appeals requires the movant to show a
substantial, unanticipated change in the debtor’s financial condition. 	In re Murphy, 474
F.3d 143 (4th Cir. 2007). 	Other courts have agreed. 	See, e.g., In re Zamora, 2008 WL
752456, at *3 (Bankr. D.N.M. 2008) (Starzynski, J.); In re McCray, 172 B.R. 154, 158
(Bankr. S.D. Ga. 1994); In re Wilson, 157 B.R. 389, 390-92 (Bankr. S.D. Ohio 1993); In
3 These subsections are substantially identical. 	Section 1329(a) contains a fourth type of
permissible modification, relating to health insurance costs.
4 The Court cites case law on §§ 1229(a) and 1329(a) because there are so few cases construing §
1127(e).
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re Woodhouse, 119 B.R. 819, 820 (Bankr. M.D. Ala. 1990); In re Fitak, 92 B.R. 243
(Bankr. S.D. Ohio 1988), affirmed, 121 B.R. 224 (S.D. Ohio 1990). 	For the most part,
these courts reason that confirmation of a plan is res judicata, and therefore should not be
lightly disturbed. 	McCray, 172 B.R. at 158, citing Woodhouse. 	Some of the cases also
conclude that the “substantial, unanticipated change” standard can be deduced from
legislative history. The Tenth Circuit has not ruled on this issue.
The Court believes that the Witkowski line of cases is better reasoned. 	The
Seventh Circuit’s holding that modification is within the bankruptcy court’s discretion
was based on two main arguments, both of which are persuasive:
a. 	The language of § 1329(a) is plain and unambiguous, and does not
require proof of an unanticipated, substantial change in circumstances or financial
condition. 16 F.3d at 742-44;5 and
b. 	The 	common 	law 	doctrine 	of 	res 	judicata 	does 	not 	prevent
modification of confirmed plans, because the doctrine does not apply “when a statutory
purpose to the contrary is evident.” 16 F.3d at 744-46.
The Court agrees with Witkowski’s analysis of these two issues, and will follow
the Witkowski line of authority. 	Thus, while the Court will consider changes to the
Debtor’s financial condition as a factor in ruling on the Motion, the Court will not require
5 The Witkowski court cites to several cases that rely on legislative history to support their ruling
that the movant must show a substantial, unanticipated change in financial condition, but properly
dismisses these cases with the following: 	“Legislative history helps us learn what Congress
meant by what it said, but it is not a source of legal rules competing with those found in the U.S.
Code.” Witkowski, 16 F.3d at 744, citing Matter of Sinclair, 870 F.2d 1340, 1344 (7 th Cir. 1989).
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proof of a substantial, unanticipated change of financial condition as a prerequisite to
plan modification.
3. 	Section 1127(e) Limits the Types of Modifications. 	The three
subsections of § 1127(e) are exclusive; if a proposed modification does not fall within
one of the subsections, the modification cannot be allowed. In re Plummer, 378 B.R. 569
(Bankr. C.D. Ill. 2007), citing In re Witkowski, 16 F.3d 739, 745 (7th Cir. 1994).
4. 	The General Policy Favoring Settlements. There is a strong public
policy favoring the enforcement of compromises and settlement agreements. 	In re
Pfiester, 449 B.R. 422, 425 (Bankr. D.N.M. 2011) (Judge Starzynski), citing Williams v.
First National Bank, 216 U.S. 582 (1910) and Smith v. Munro, 134 Vt. 417, 365 A2.d
259 (1976); In re Phillps, 483 B.R. 254, 261 (M.D. Fla. 2012) (citing In re Munford, Inc.,
97 F.3d 449, 455 (11 th Cir. 1996), the court stated that “public policy . . . favors
enforcement of settlement agreement and providing relief to the creditors who have been
waiting for years to receive relief”). 	The policy of enforcing settlement agreements is
tempered where doing so might adversely affect third party creditors who did not have
notice of, and a chance to object to, the agreement. 	See, e.g., Farm Credit of Central
Florida, ACA v. Polk, 160 B.R. 870, 873 (M.D. Fla. 1993).
B. 	The Facts in This Case do Not Favor Modification. 	Applying the legal
principles outlined above to the facts, it is clear that the proposed modification should not
be approved. 	First, granting the Motion would upset the settlement agreement reached
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among the Debtor and the Secured Lenders. 	This should not be done absent fairly
compelling circumstances, as the proposed modification would reduce the Secured
Lenders’ benefit of their bargain. The Secured Lenders have waited (at least) 14 months
without a payment, and have given the Debtor the unfettered right to market and sell the
Property. 	In exchange, the Debtor agreed to convert the case if she did not complete a
sale by August 15, 2013. It would not be fair to extend this deadline over the objection of
the Secured Lenders.
Second, denying the motion would not substantially harm third parties. Debtor’s
disclosure statement lists three general unsecured creditors: Virginia Sandford (Debtor’s
mother), $40,000; Ferrell Gas, $2,920.29; and Bank of America, $47,126.63. Compared
with these claims, which total about $90,000, the disclosure statement shows secured
claims of about $3,500,000. Furthermore, the unsecured creditors had the opportunity to
appear and participate in the bankruptcy case, so they could have objected to the August
15, 2013 “drop dead” date had they wanted to.
Third, the evidence of an imminent sale is weak. 	The LOI does not support
Debtor’s argument that the requested extension would result in a closed sale of the
Property for $4,000,000. It could happen, but the likelihood of such a favorable result is
unknown. Viewed impartially, it appears that the most likely outcome from the LOI is a
possible sale, at an unknown price of $4,000,000 or (probably) less, which may well
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would close, if ever, after December 31, 2013.6
The Court’s concern about the seriousness of the LOI and other hoped-for offers
is underlined by the various statements made by the Debtor to the Secured Lenders
during the course of marketing the Property. 	The Debtor provided the Secured Lenders
with a number of “Marketing Summaries.” In each one, the description of the marketing
efforts and status might lead one to believe that a sale, or at least a binding purchase
offer, was shortly to arrive. 	Nothing ever materialized, despite all of the described
“strong interest.” 	This history leads one to wonder whether the marketing efforts
described in the Motion7 and by Mr. Gardner, together with the LOI, aren’t more of the
same.
Fourth, there is not much evidence that Debtor’s financial condition has changed.
Debtor’s broker, Mr. Gardner, testified that there has been a recent improvement in the
Santa Fe area commercial real estate market. 	This could be considered a change in
Debtor’s financial condition. It is not clear how substantial a change it is, however, and
the change probably could not be characterized as unanticipated. The apparent lack of a
substantial, unanticipated change weighs against Debtor’s efforts to modify her plan.
6 The Court held a post-hearing status conference on August 27, 2013, at which hearing Debtor’s
counsel informed the Court and the Secured Lenders that Debtor had received a verbal offer from
Gaaruda LLC to purchase the Property, to close by December 31, 2013. No purchase agreement
had yet been drafted, negotiated, or signed. At the time of the hearing, Debtor was preparing a
counteroffer. Debtor had also received a nonbinding letter of intent from another potential buyer.
7 The July 19, 2013 Motion states “As a result of Debtor’s and her brokers’ best efforts, Debtor is
in advanced negotiations with several potential purchaser for the sale of the Property, and
anticipates that several offer will be formally made within the next week or so.” As of the August
15, 2013 hearing, the only evidence of a “formal offer” was the LOI, which states at least four
times that it is nonbinding.
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Finally, the Secured Lenders argue that the Debtor’s inability to complete a sale
before now may be due to the price at which the Property has been offered. A Chapter 7
trustee, they argue, may have more success selling the Property because he or she may be
willing to list the Property for less. While there is no way to know whether Debtor would
have been able to complete a sale before now if she had lowered the listing price sooner
and/or more, it certainly is possible. It may be better for all creditors, including general
unsecured creditors, to have a neutral trustee in control of the sales process.
The Court sympathizes with the Debtor and her struggle to sell her real estate, pay
the secured creditors, and (hopefully) retain at least some excess for herself. The Debtor
has been trying to achieve this end for years, but has been unable to find a buyer for the
Property willing to pay a price she finds acceptable. 	Unfortunately, the deadline she
committed to has come and gone, and no sale has been completed. All things considered,
she should be held to the bargain she negotiated.
III. 	CONCLUSION
If the evidence indicated that a Property sale closing truly were imminent, then
the Court likely would have grant the Debtor some relief, despite the agreed-upon August
15, 2013 conversion date, under a “no harm, no foul” theory. 	The Motion, LOI, and
hearing testimony, however, do not convince the Court that a closing can reasonably be
counted on in the near future. 	Thus, the Secured Lenders’ right to the benefit of their
bargain outweighs the Debtor’s reasonable desire for a little more time to find a buyer
and close a sale.
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The Motion must be denied.
___________________________________
Hon. David T. Thuma,
United States Bankruptcy Judge
Entered on the docket: August 27, 2013.
Copies to:
William Arland
201 Third Street, NW, Suite 505
Albuquerque, NM 87102
James Jurgens
100 La Salle Circle, Suite A
Santa Fe, NM 87505
Barry Williams
4811-A Hardware Dr., NE, Suite 4
Albuquerque, NM 87109
Richard M. Leverick
5120 San Francisco NE
Albuquerque, NM 87109
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