Foster, Matter of
| Decision Date | 01 March 1982 |
| Docket Number | No. 81-2191,81-2191 |
| Citation | 6 C.B. C.2d 285,670 F.2d 478,8 B.C.D. 1316 |
| Parties | 6 Collier Bankr.Cas.2d 285, 8 Bankr.Ct.Dec. 1316, Bankr. L. Rep. P 68,899 In the Matter of John W. FOSTER, Jr. and Myrtha D. Foster, Debtors. John W. FOSTER, Jr., and Myrtha D. Foster, Appellants, v. William HEITKAMP, Trustee, Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Jane Ford, Houston, Tex., for appellants.
Gary J. Knostman, Fulton Beach, Tex., amicus curiae.
Arthur L. Maller, Houston, Tex., court appointed, amicus curiae.
Appeal from the United States Bankruptcy Court for the Southern District of Texas.
Before GARZA and RANDALL, Circuit Judges *.
This case presents a bankruptcy court's refusal to confirm a "wage earner plan," under Chapter 13 of the Bankruptcy Code, which called for the making of the current regular payments on the debtors' homestead mortgage (current mortgage payments) "outside the plan" while the arrearage on the mortgage claim was to be cured pursuant to the provisions of § 1322(b)(5) of the Bankruptcy Code. The bankruptcy court denied confirmation on the basis of its belief that Chapter 13 policy requires that all payments be made within the plan. For the reasons set forth below, we vacate the judgment of the bankruptcy court and remand this case to the bankruptcy court for reconsideration of confirmation after clarification of the plan by the debtors. 1
On November 26, 1980, John W. Foster, Jr. and Myrtha D. Foster filed a petition and plan in bankruptcy pursuant to Chapter 13 of the United States Bankruptcy Code, 11 U.S.C. §§ 1301-1330 (Supp. IV 1980) (Chapter 13). 2 According to the plan, the Fosters would pay to the bankruptcy trustee $350 per month for thirty-six months, which payments were to be used to pay 100% of the priority claim of the Internal Revenue Service, the full value of the collateral of all secured creditors whose claims were timely filed and duly proven and allowed (with the exception of the mortgage claims 3 separately provided for), and 49% on the claims of the unsecured creditors whose claims were duly proven and allowed. The plan stated, as to the first and second lien holders on the Fosters' home, that these creditors would be paid "the arrearage only under the plan," and that "(t)he current payments will be outside the plan according to the terms of the notes and deed of Trust."
A creditors' meeting was held on February 11, 1981, at which the Fosters appeared and submitted to examination. Also in attendance were the bankruptcy trustee, appointed by the bankruptcy court, and the Fosters' attorney. The trustee recommended that a confirmation hearing be held and that the Chapter 13 plan proposed by the Fosters be confirmed.
At the confirmation hearing, held on February 26, 1981, the bankruptcy court noted that the Fosters' plan "met all requirements for confirmation and was recommended for confirmation by the trustee." Nevertheless, observing that the plan "proposed to make post-confirmation payments on residential mortgages outside the plan(,)" the bankruptcy court ruled from the bench that confirmation would be denied because of the payments outside the plan. On March 17, 1981, the bankruptcy court issued a written opinion detailing the reasons for denying confirmation of the Fosters' plan. In that opinion, the court concluded that "(o)n balance, Chapter 13 policy requires that all payments be made within the plan." The Fosters appeal the bankruptcy court's ruling, contending that the bankruptcy court's conclusion that all payments must be made within the plan is erroneous and that the denial of confirmation was therefore an abuse of discretion.
Chapter 13 of the Bankruptcy Code, entitled "Adjustment of Debts of an Individual With Regular Income," provides overextended debtors 4 an alternative to ordinary or straight bankruptcy (liquidating bankruptcy). 5 Debtors may obtain a discharge of their debts through the employment of a plan (sometimes referred to as a "wage earner plan") for the payment of their debts over an extended period of time (generally not to exceed three years) 6 out of the debtor's future income, "the very barter pledged by the debtor to obtain credit." 5 Collier on Bankruptcy § 1300.01 at 1300-16 (15th ed. 1981) (Collier ). The use of Chapter 13 has advantages over liquidating bankruptcy for both debtor and creditor.
Creditor interests are promoted through ratable recoveries from future income not available to creditors in liquidating bankruptcy proceedings. Chapter 13 maximizes debtor relief by preserving to the debtor existing assets, as well as employment or going-concern value, pending completion of a repayment plan under the supervision of the chapter 13 trustee.
Collier, supra, § 1300.02 at 1300-20.
A Chapter 13 case is commenced by the filing of a Chapter 13 petition. 11 U.S.C. § 301. Only the debtor may commence a Chapter 13 proceeding; there is no provision for an "involuntary" Chapter 13. 7 The commencement of the case creates an estate which includes, among other things, "all legal or equitable interests of the debtor in property as of the commencement of the case," 11 U.S.C. § 541, and property and earnings acquired after commencement of the case but before the case is closed, dismissed or converted, 11 U.S.C. § 1306(a), with the debtor remaining in possession of the property of the estate, except as provided in the confirmed plan or the order confirming the plan, 11 U.S.C. § 1306(b). The confirmation of a plan vests all of the property of the estate in the debtor. 11 U.S.C. § 1327(b). From the time of the filing of the Chapter 13 petition, the "automatic stay" provisions of § 362 restrict the actions of creditors against the property of the estate or of the debtor, "prohibiting most acts and the commencement or continuation of most civil actions to collect a consumer debt." Collier, supra, § 1300-45 at 1300-101. Again, a major concern is the protection of both debtor and creditor. Besides being a fundamental debtor protection, the stay provisions prevent some creditors from obtaining payment in preference to and to the detriment of other creditors. Collier, supra, § 1300.45 at 1300-99. The automatic stay provisions remain in effect as concerns most acts until the case is closed or dismissed or a Chapter 13 discharge is granted or denied. 11 U.S.C. § 362(c).
In addition to filing a petition, the debtor files a plan providing for the repayment of all or a portion of the claims against the debtor out of the debtor's future income (or out of the estate). 8 There are only three mandatory provisions of a Chapter 13 plan:
The plan shall-
(1) provide for the submission of all or such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan;
(2) provide for the full payment, in deferred cash payments of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claim; and
(3) if the plan classifies claims, provide the same treatment for each claim within a particular class.
11 U.S.C. § 1322(a). Section 1322(b) sets out some additional discretionary provisions which may be included in a Chapter 13 plan. 9 Of particular significance in this case are §§ 1322(b)(2) and 1322(b)(5). Section 1322(b)(2) provides that "the plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims." Section 1322(b)(5) provides that "the plan may, notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due."
In return for compliance with the plan, a debtor is entitled to a discharge of "all debts provided for by the plan or disallowed under section 502 of this title, except any debt -(1) provided for under section 1322(b)(5) of this title ; or (2) of the kind specified in section 523(a)(5) of this title." 11 U.S.C. § 1328 (emphasis added).
Confirmation of Chapter 13 plans is governed by § 1325(a). That section states that the court shall confirm a plan if six requirements are met:
(1) the plan complies with the provisions of this chapter and with other applicable provisions of this title;
(2) any fee, charge, or amount required under chapter 123 of title 28, or by the plan, to be paid before confirmation, has been paid;
(3) the plan has been proposed in good faith and not by any means forbidden by law; (4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date;
(5) with respect to each allowed secured claim provided for by the plan-
(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 under the plan on account of such claim is not less than the allowed amount of such claim; or
(C) the debtor surrenders the property securing such claim to such holder; and
(6) the debtor will be able to make all payments under the plan and to comply with the plan.
A major source of confusion in this case is the ambiguous use of the term "outside the plan." The Fosters stated in their proposed plan that "(t)he current payments (on their mortgage claim) will be outside the plan according to...
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