In re Alderman

• Decision Date: 28 January 1993
• Docket Number: Bankruptcy No. 92-11232-13.
• Parties: In re William ALDERMAN, and Darlene Alderman, Debtors.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Montana

150 B.R. 246 (1993)

In re William ALDERMAN, and Darlene Alderman, Debtors.

Bankruptcy No. 92-11232-13.

United States Bankruptcy Court, D. Montana.

January 28, 1993.

Jerrold L. Nye, Billings, MT, for debtors.

ORDER

JOHN L. PETERSON, Bankruptcy Judge.

In this Chapter 13 case, the Chapter 13 Trustee objects to confirmation of the Debtors' second Amended Chapter 13 Plan ("Plan"), filed December 10, 1992, on the grounds that the Plan seeks to pay alleged "allowed secured claims" of First Security Bank, for which Proofs of Claim have not been filed and that the Debtors improperly claim a homestead exemption in real property belonging to the Alderman Ranch Partnership, a partnership in which the Debtors own a partnership interest, in violation of the "best interests of the creditors test" of 11 U.S.C. § 1325(a)(4). The Small Business Administration ("SBA") filed an objection to confirmation on January 4, 1993, and a supporting brief on January 7, 1993, joining the Trustee's § 1325(a)(4) objection.

After due notice, hearing on confirmation of the Plan was held at Billings on January 12, 1993. The Debtors, the Trustee, and the SBA were all present or represented. Testimony of the Debtor William Alderman was heard. No exhibits were admitted into evidence. Argument of the Trustee was heard on the necessity for the secured creditor to file a Proof of Claim in order to receive a distribution under the Plan. At the close of the hearing the Court deemed these matters submitted.

The Trustee filed a brief in support of the objection that a Proof of Claim must be filed for a secured creditor to receive a distribution under the Plan on January 21, 1993. The Debtors filed a brief in opposition on January 22, 1993. The U.S. Trustee requested and was granted leave to file a brief in support of the Trustee's argument regarding the necessity for filing a Proof of Claim. The SBA filed a brief before the hearing on its § 1325(a)(4) objection, to which the Debtors filed a response. Upon review of the record and the briefs, this Court deems these matters ripe for decision.

At issue are:

1) Whether the "best interests of creditors test" of § 1325(a)(4) is satisfied when the Debtors claim a homestead exemption in real property that is partnership property, to which no timely objection is made; and

2) Whether a secured creditor must file a Proof of Claim to receive a distribution under a Chapter 13 Plan.

For the reasons set forth below, the Court holds that the "best interests of the creditors test" is satisfied, but that a secured creditor must file a Proof of Claim to have an allowed secured claim entitled to receive a distribution under a Chapter 13 Plan. Confirmation of the Debtors' second amended Chapter 13 Plan, therefore, must be denied because the Plan provides for distribution to secured claims for which Proofs of Claim have not been filed and have thus not been allowed.

The Debtors filed a voluntary Chapter 13 Petition on August 6, 1992, together with Statements and Schedules. Schedule A sets forth the following real property, to-wit:

REAL PROPERTY:

William Alderman has .122 share/interest in the following real property located in Powder River County, Montana:

                TOWNSHIP 4 SOUTH, RANGE 49 EAST, M.P.M
                Sec. 2:   NE¼, S½NW¼, S½
                Sec. 3:   All, less SE¼SE¼
                Sec. 4:   All
                Sec. 5:   All, less 2.3 acres highway
                Sec. 10:  N½
                TOWNSHIP 3 SOUTH, RANGE 49 EAST, M.P.M
                Sec. 21: S½S½
                Sec. 27: All
                Sec. 28: S½NW¼, SW¼, N½SE¼
                Sec. 29: All
                Sec. 34: All
                Sec. 15: All
                The above real property is owned by Alderman
                Ranch Partnership, of which William
                Alderman has .122 share/interest in & to
                said partnership — 5796 acres valued @ $80/
                ac — $463,680 — Debtor's interest ................. $56,568.00
                E½ Sec. 32-T3S-R49E, MPM, Powder River
                County, Montana. William Alderman's
                undivided ¼ interest ................................... $ 4,000.00
                

At Schedule C the Debtors list the same real property as exempt under the homestead exemption, Mont.Code Ann. § 70-32-101.

First Security Bank ("Bank") is listed as having a secured claim in the amount of $7,300 at Schedule D, out of a total of $173,511 in secured claims. SBA is scheduled as having a secured claim in the sum of $114,000, and an unsecured claim in the sum of $74,000. First Security Bank has not filed a Proof of Claim. The SBA, in contrast, filed a Proof of Claim on December 7, 1992, claiming a secured claim in the sum of $52,500, and an unsecured claim in the sum of $69,580.33. Under F.R.B.P. 3001(f), a Proof of Claim executed and filed in accordance with the rules shall constitute prima facie evidence of the validity and amount of the claim. In re Vanden Bos, 9 Mont.B.R. 419, 421 (Bankr.Mont. 1991).

No objection was filed to SBA's Proof of Claim, so this Court fixed the amount of SBA's unsecured claim in accordance with the Proof of Claim at hearing on January 13, 1993. However, the Debtors surrendered their meat market business to the SBA in December 1992, thereby disposing of SBA's secured claim and leaving SBA with its allowed unsecured claim of $69,580.33.

The Debtors filed a second amended Plan on December 10, 1992. The Plan provides for payments to the Bank on two "allowed secured claims", even though the Bank has not filed a Proof of Claim. The Plan provides the following treatment of unsecured creditors: "After the payments specified above, the Trustee shall pay dividends, to the extent possible, to allowed unsecured, nonpriority claims on a pro rata basis." The Plan does not specify the amount of any payments to the unsecured creditors. The Trustee argues that the amount payable to the unsecured creditors under the Plan should be $7,892. The SBA concurs.

The Debtors claim a homestead exemption in William Alderman's share of the unencumbered partnership property and Debtors' own real property, and do not propose to pay this amount, $27,628, according to the SBA, under the Plan to the unsecured creditors. This is the basis of the Trustee's and SBA's § 1325(a)(4) objections.

1. BEST INTEREST OF CREDITORS — 11 U.S.C. § 1325(a)(4).

The "best interests of creditors test" is found at § 1325(a)(4), which provides:

"the court shall confirm a Plan if —

(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.

The Trustee argues that the Debtors are not allowed to claim a homestead exemption in partnership property based upon Grenco Real Estate Investment Trust v. Morris (Grenco), 48 B.R. 313 (W.D.Va. 1985). That court noted the difference between the purposes of exemptions in Chapter 7 and Chapter 13. Id. at 314. A Chapter 7 debtor loses much of the estate to liquidation in return for a discharge, but may use exemptions, such as the homestead exemption, in order to obtain a fresh start. Id. Under Chapter 13, the narrow purpose of exemptions is informational so as to allow the court to apply the "best interest of the creditors" test of § 1325(a)(4). The court, "makes a comparison between (1) the creditors' position under the proposed Chapter 13 reorganization plan and 2) the position the creditors would have been in if the debtor had proceeded under Chapter 7." Id.

Since the purpose of exemptions in Chapter 13 is informational only, the bankruptcy court in Grenco did not require the debtor to perfect a Virginia homestead exemption which the debtor would have claimed under Chapter 7, and the district court affirmed that the failure to perfect the exemption did not prohibit consideration of that exemption in conducting the "best interest of the creditors" test. In the instant case Schedule C lists the homestead as recorded on June 26, 1992. The Trustee does not argue that the homestead has not been properly recorded. The SBA states that the Debtors' interest in the partnership has not been claimed as exempt. However, Schedule C clearly refutes the SBA's argument, and both the Trustee and SBA failed to object to the Debtors' claimed homestead exemption. The Debtors having recorded the declaration of homestead pursuant to Montana law, the Trustee's reliance on Grenco does not support the Trustee's argument against allowing the homestead exemption in partnership property to undertake the best interest of creditors test.

Both the Trustee and SBA argue repeatedly that partnership property may not be claimed under the homestead exemption. The creditors cite as authority in support of their argument, one case construing 11 U.S.C. § 105(a), In re Budinsky, 1991 WL 105640 (W.D.Pa.1991), and In re Olszewski, 124 B.R. 743, 746 (Bankr.S.D.Ohio 1991). The Debtors cite in opposition the U.S. Supreme Court opinion Taylor v. Freeland & Kronz (Taylor), ___ U.S. ____, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992), which this Court cited in Braddock v. U.S.A. (In re Braddock), 149 B.R. 636 (Bankr.Mont. 1992):

In Taylor, the United States Supreme Court provided the following summary of the procedure for claiming exemptions:

When a debtor files a bankruptcy petition, all of his property becomes property of a bankruptcy estate. See 11 U.S.C. § 541. The Code, however, allows the debtor to prevent the distribution of certain property by claiming it as exempt. Section 522(b) allowed Davis to choose the exemptions afforded by state law or the federal exemptions listed in § 522(d). Section 522(l) states the procedure for claiming exemptions and objecting to claimed exemptions as follows:

"The debtor shall file a list of property that the debtor claims as exempt under subsection (b) of this section. . . . Unless a party in interest objects, the property claimed as exempt on such list is exempt."

Although § 522(l) itself does not specify the time for objecting to a claimed exemption, Bankruptcy Rule 4003(b) provides in part:

"The trustee or any creditor may file objections to the list of

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