First Brandon Nat. Bank v. Kerwin-White

• Decision Date: 31 January 1990
• Docket Number: Civ. No. 89-145.
• Citation: 109 BR 626
• Court: U.S. District Court — District of Vermont
• Parties: FIRST BRANDON NATIONAL BANK, Appellant, v. Sharon KERWIN-WHITE, Appellee.

109 B.R. 626 (1990)

FIRST BRANDON NATIONAL BANK, Appellant, v. Sharon KERWIN-WHITE, Appellee.

Civ. No. 89-145.

United States District Court, D. Vermont.

January 31, 1990.

COPYRIGHT MATERIAL OMITTED

Michael Palmer, Palmer & Associates, Middlebury, Vt., and Gleb Glinka, Cabot, Vt., for debtor.

James F. Carroll, Kelley, Meub, Powers & English, and Olin R. McGill, Jr., Middlebury, Vt., for First Brandon Nat. Bank.

OPINION

BILLINGS, Chief Judge.

In this appeal First Brandon National Bank contends that the bankruptcy court erred in confirming the debtor's Chapter 12 reorganization plan. The court agrees. For the forthcoming reasons the bankruptcy court's order confirming the plan is reversed and the case is remanded to the bankruptcy court to allow the debtor to prepare a new plan consistent with this opinion.

I. BACKGROUND

Sharon Kerwin-White, debtor and appellee in this case, operates a sheep farm on property which straddles the Vermont towns of Cornwall and Bridport. In August 1988, she filed for relief under Chapter 12. At that time appellant First Brandon National Bank was the debtor's most senior secured creditor and held promissory notes for approximately $84,600 which were oversecured by a lien on the debtors real and personal property.

In March 1989, the bankruptcy court confirmed a reorganization plan in which the debtor agreed to satisfy in full her debt to First Brandon by transferring a portion of the real property (collateral) equal in value to First Brandon's claim. After a hearing the bankruptcy judge determined that the fair market value of the 113 acres of Bridport land was $613/acre. Since the total value of the Bridport property was insufficient to satisfy First Brandon's claim, the bankruptcy court ordered the debtor to transfer additional acreage in Cornwall, which the court valued at $2,700/acre, to provide the difference. The plan provided that the second and third mortgages, held by other creditors, would move up to first and second, respectively, and be paid in full.

The bankruptcy court also held that First Brandon's appraisal costs were used to support its litigation and thus, were not proper administrative expenses of the estate. Finally, at a subsequent hearing, the bankruptcy court concluded that First Brandon's mortgage did not provide for attorneys' fees in anything other than foreclosure proceedings; thus, the court refused to allow First Brandon to recoup these costs under 11 U.S.C. § 506(b).

First Brandon now appeals the bankruptcy court's rulings on several grounds:

(1) debtor was not a "family farmer," pursuant to 11 U.S.C. § 101(17), on the date she filed her petition;

(2) the bankruptcy court erred by holding that 11 U.S.C. § 1225(a)(5) authorized the debtor to surrender less than all the collateral without allowing the bank to retain its lien on the remainder;

(3) the bankruptcy court\'s findings on the value of the Bridport and Cornwall lands were clearly erroneous;

(4) First Brandon is entitled, as an over-secured creditor, to attorneys\' fees pursuant to the agreement and 11 U.S.C. § 506(b); and,

(5) First Brandon is entitled to recover its appraisal costs as an administrative expense pursuant to 11 U.S.C. § 503(b)(1)(A).

II. DISCUSSION

A. Eligibility of Debtor Under Chapter 12

First Brandon initially argues that the debtor is ineligible for relief under Chapter 12 because she was not a "family farmer," pursuant to 11 U.S.C. § 101(17)(A), at the time the petition was filed. This court, however, need not address the issue because First Brandon neglected to raise it before the bankruptcy court; hence, it is considered waived. See In re Ozark Restaurant Equip. Co., 850 F.2d 342, 346 (8th Cir.1988) ("As a reviewing court the district court is not empowered to consider an issue not raised in the bankruptcy court."); Dallas v. S.A.G., Inc., 836 F.2d 1307 (11th Cir.1988).

To escape this bar, First Brandon suggests that eligibility is jurisdictional and thus can be raised at any time. This assertion, however, is against the weight of authority and is thus rejected.¹ See Rudd v. Laughlin, 866 F.2d 1040, 1042 (8th Cir. 1989); In re Phillips, 844 F.2d 230, 235 n. 2 (5th Cir.1988). To hold otherwise would allow creditors to attack collaterally a reorganization plan months after it has been approved. See In re Jarvis, 78 B.R. 288, 289 (Bankr.D.Or.1987). The better view is to regard eligibility as a defense which is waived if not raised in a timely fashion. Accordingly, the court declines to address the eligibility issues raised by First Brandon.

B. Surrender of Property Under 11 U.S.C. § 1225(a)(5)(C)

First Brandon contends that 11 U.S.C. § 1225(a)(5) requires the debtor to either surrender all of the bank's collateral or retain its lien on the property not surrendered. In essence, First Brandon believes that even if the bankruptcy court fixed the value of the collateral surrendered as equal to the underlying debt, it should be protected from any shortcomings by retention of its lien on the remaining collateral. The court agrees.

Section 1225(a)(5) states that a court should confirm a plan with respect to each allowed secured claim if:

(A) the holder of such claim has accepted the plan;

(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and

(ii) the value, as of the effective date of the plan, of property to be distributed by the trustee or the debtor under the plan on account of a claim is not less than the allowed amount of such claim; or

(C) the debtor surrenders the property securing such claim to the holder;

11 U.S.C. § 1225(a)(5) (emphasis added).

Because First Brandon has not accepted the plan in this case the plan must be approved under one of the two nonconsenting secured creditor provisions. §§ 1225(a)(5)(B) or (C). Subsection (B), the cram-down provision, allows property to be distributed in satisfaction of the creditor's claim but requires that the lien securing the claim be retained. In contrast, subsection (C) authorizes the debtor to surrender "the property securing such claim" but does not require that a lien be retained.

Since the plan did not provide for retention of First Brandon's lien in accord with subsection (B), it could only be confirmed pursuant to the surrender of property provisions of subsection (C). First Brandon contends that the word "the" preceding property in subsection (C) mandates that the entire collateral be surrendered to the nonconsenting creditor. The debtor argues, however, that this is an unduly restrictive interpretation which would thwart Chapter 12's purpose of providing emergency relief to family farmers.

To bolster its position the debtor relies on 11 U.S.C. §§ 1222(b)(7) and (8) which authorize the partial distribution of property to those having an interest in such property.² In essence, the debtor seeks to transpose the permissive provisions of § 1222(b) on to § 1225(a)(5). The court finds this interpretation strained and hence refuses to follow it. Section 1222(b) is a general provision of Chapter 12 which merely states what plans may contain; it does not purport to override the specific limitations placed on it in § 1225(a)(5).

Section 1225(a)(5)(C) allows a plan to be confirmed without creditor consent if the plan provides that the "debtor surrenders the property securing such claim" to the creditor. The plain language of this provision compels the debtor to surrender the entire collateral to the creditor because the entire collateral and nothing less is the property which secures the claim. In re Townsend, 90 B.R. 498, 502 (Bankr.M.D. Fla.1988) (plan may be confirmed under § 1225(a)(5)(C) only if all the property securing the claim is surrendered to the creditor). If the debtor wishes to surrender less than all of the collateral in full satisfaction of her debt to a nonconsenting creditor, she should seek confirmation of the plan under § 1225(a)(5)(B)'s cram-down provision.³ See R. Rogers, Collier Farm Bankruptcy Guide ¶ 4.082 (1989).

Furthermore, this interpretation of § 1225(a)(5)(C) dovetails cleanly with § 1225(a)(5)(B)'s cram-down provision. A creditor cannot legitimately complain when the entire collateral is surrendered pursuant to § 1225(a)(5)(C) because the secured claim originally bargained for is not greater than the value of the collateral. See 11 U.S.C. § 506(a). On the other hand, if less than all the collateral or other property is distributed to the most senior creditor in satisfaction of the debt without retention of the lien, the creditor might not realize the full amount of his original secured claim and thus, can genuinely claim that he is being discriminated against. Section 1225(a)(5)(B) protects against this unjust result by allowing the creditor to retain a lien when its secured claim is satisfied by the distribution of anything less than all the property which secured the claim. The debtors interpretation of § 1225(a)(5)(C), however, would permit a reorganization plan to circumvent the protection § 1225(a)(5)(B) provides to creditors. The court cannot sanction such a incongruous result.

To the extent that In re Massengill, 73 B.R. 1008 (Bankr.E.D.N.C.1987), rev'd on other grounds, 100 B.R. 276 (E.D.N.C. 1988), or its progeny In re Inderland, 77 B.R. 268 (Bankr.D.Mont.1987), hold otherwise, the court declines to follow them. At least one commentator has criticized Massengill for authorizing a surrender of property under § 1225(a)(5)(C) when the proper mechanism was a cram-down under § 1225(a)(5)(B):

The use of the word "surrender" implies that the debtor relinquishes control of the property to the secured creditor without any conditions. If the purported surrender of property under the plan involves mandatory concessions by the secured party, it is hardly a surrender of that property and should not be approved. For instance, if the debtor proposes to surrender a parcel of land to a secured creditor, but desires the property to

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