In re Banks

• Decision Date: 19 November 1993
• Docket Number: Bankruptcy No. 9207534 SEG.
• Citation: 161 BR 375
• Parties: In re Jacqueline BANKS.
• Court: U.S. Bankruptcy Court — Southern District of Mississippi

161 B.R. 375 (1993)

In re Jacqueline BANKS.

Bankruptcy No. 9207534 SEG.

United States Bankruptcy Court, S.D. Mississippi, S.D.

November 19, 1993.

Nicholas Van Wiser, Byrd and Wiser, Biloxi, MS, for plaintiffs.

David L. Lord, Lord and Associates, Biloxi, MS, for defendant.

OPINION

EDWARD R. GAINES, Bankruptcy Judge.

Before the Court is the Debtor's Motion for Modification of Plan and Mercury Finance Company's objection thereto. Having considered the pleadings, memoranda, testimony of the debtor and arguments presented by counsel, the Court concludes that the motion should be denied.

I. FACTS

1. Jacqueline Banks filed a petition for relief under Chapter 13 of Title 11 of the United States Code, scheduling Mercury Finance Company as a creditor secured by a 1985 Ford Escort Station Wagon.

2. The debtor's Chapter 13 plan was confirmed by this Court on June 1, 1992. The plan provided that Mercury was to receive the value of its collateral, stated in the plan as $1,125.00, plus the contract rate of interest through the debtor's Chapter 13 plan payments. Unsecured creditors were to receive 10% under the plan.

3. After confirmation, the engine in the vehicle began to emit excessive smoke through its exhaust system. Repairs to correct the problem are estimated at $1,500.00. In March of 1993 the debtor filed a motion for modification of her plan proposing that Mercury's collateral be abandoned. The debtor has already financed another vehicle of similar vintage and intends to use the funds generated by the proposed modification to pay the new car notes.¹ The debtor seeks to have Mercury sell its collateral, apply the proceeds to the secured portion of its claim, and treat any deficiency in the secured claim as unsecured.

4. Mercury filed an objection to the proposed modification asserting that it violates 11 U.S.C. § 1327 which provides that the confirmed plan shall bind the creditor and the debtor. Mercury wants the proceeds from the sale of the vehicle to be applied to the secured portion of its total claim and not have any deficiency in the secured portion converted to unsecured status.

II. CONCLUSIONS

The matter before the Court is a core proceeding under 28 U.S.C. § 157. The Court has jurisdiction pursuant to 28 U.S.C. § 1334.

Section 1329 of Title 11 of the United States Code provides the following:

(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to

(1) increase or reduce the amount of payments on claims of a particular class provided for by the plan;

(2) extend or reduce the time for such payments; or

(3) alter the amount of the distribution to a creditor whose claim is provided for by the plan, to the extent necessary to take account of any payment of such claim other than under the plan.

(b)(1) Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section.

(2) The plan as modified becomes the plan unless, after notice and a hearing, such modification is disapproved.

11 U.S.C. § 1329(a)-(b).

Section 1327(a) of the Code provides that:

(a) The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.

11 U.S.C. § 1327(a).

The issue presented to the Court is whether the chapter 13 debtor may modify her confirmed plan to surrender collateral that has diminished in value to the secured creditor and to treat any deficiency after liquidation as an unsecured claim. Courts that have dealt with similar issues have reached differing conclusions in their analyses of allowable modifications under § 1329(a).

In In re Jock, 95 B.R. 75 (Bankr. M.D.Tenn.1989), the Court held that the debtor could modify a confirmed plan to surrender a car to a secured claim holder and pay any deficiency as an unsecured claim. That Court stated the following:

This Chapter 13 debtor could have satisfied the secured claim of Boatmen\'s by surrendering the car to the bank at confirmation of the original plan . . . The incorporation of §§ 1322(b)(8) and 1325(a)(5)(C) into the standards for post-confirmation modification in § 1329 empower this Chapter 13 debtor to modify the confirmed plan to surrender the car in satisfaction of Boatmen\'s secured claim.

Boatmen\'s argues that 11 U.S.C.S. § 1327 (1987) prohibits the debtor to modify its treatment after the original confirmation order became final. There is some case support for this view. See In re Abercrombie, 39 B.R. 178 (Bankr.N.D.Ga. 1984); Kitchen v. Malmstrom Federal Credit Union (In re Kitchen), 64 B.R. 452 (Bankr.D.Mont.1986). See also In re Johnson, 25 B.R. 178 (Bankr.N.D.Ga.1982). The cases cited by the bank prohibit post-confirmation modifications based on the "res judicata" or binding effect of a confirmed Chapter 13 plan under § 1327(a).

Section 1327(a) is not a limit on permitted modification of a confirmed Chapter 13 plan; rather, it is a statutory description of the effect of a confirmed plan or of a confirmed modified plan.

95 B.R. at 77. See also, In re Anderson, 153 B.R. 527 (Bankr.M.D.Tenn.1993) (noting that Jock has been criticized but stating that it remains the law in that district); In re Rimmer, 143 B.R. 871 (Bankr.W.D.Tenn.1992); In re Williams, 108 B.R. 119 (Bankr. N.D.Miss.1989); In re Stone, 91 B.R. 423 (Bankr.N.D.Ohio 1988).

Other courts have placed limitations on postconfirmation modifications. The Court in In re Algee, 142 B.R. 576 (Bankr.D.C.1992) made the following observations:

Without the doctrine of res judicata as a brake on § 1329, 11 U.S.C. § 1327(a) would be rendered meaningless, with any confirmation issue subject to being revisited at whim. Thus, despite the seemingly unqualified language of 11 U.S.C. § 1329, courts have held that modification is not warranted unless there has been an unanticipated substantial change in circumstances, a test applied on an objective basis. In re Arnold, 869 F.2d 240, 243 (4th Cir.1989).

142 B.R. at 580.² See, In re Abercrombie, 39 B.R. 178 (Bankr.N.D.Ga.1984); In re Kitchen, 64 B.R. 452 (Bankr.D.Mont.1986); In re Johnson, 25 B.R. 178 (Bankr.N.D.Ga.1982). See also, In re Howard, 972 F.2d 639 (5th Cir.1992) (indicating res judicata effect of § 1327(a)). See generally, Harry L. Deffebach, Postconfirmation Modification of Chapter 13 Plans: A Sheep in Wolf's Clothing, 9 Bankr.Dev.J. 153 (1992). The Court in Algee further stated the following:

More liberal applications of res judicata principles or abandonment of those principles occurred in In re Frost, 96 B.R. 804 (Bankr.S.D.Ohio 1989); In re Jock, 95 B.R. 75 (Bankr.M.D.Tenn.1989); In re Stone, 91 B.R. 423 (Bankr.N.D.Ohio 1988), and In re Williams, 108 B.R. 119 (Bankr. N.D.Miss.1989). The court finds each of these cases distinguishable or unpersuasive.

142 B.R. at 581.

Other courts have also refused to allow postconfirmation modifications to surrender collateral and reclassify the creditor's claim from secured to unsecured. See, In re Sharpe, 122 B.R. 708 (E.D.Tenn.1991)³; In re Holt, 136 B.R. 260 (Bankr.D.Idaho 1992).

Norton Bankruptcy Law and Practice provides a helpful discussion on the issue presented to the Court:

Once a creditor\'s allowed claim has been determined under Code § 506(a) to be fully secured or to be secured for a certain amount or its secured status has otherwise been fixed, and a plan dealing with the secured claim has been confirmed, it surely must be thought that this substitute for the creditor\'s prior collateral rights in property of the estate will enjoy the same protection under the Fifth Amendment as did those collateral rights. Not to so conclude presupposes a cruel and deceptive system of laws — at least from the creditor\'s viewpoint.

Debtors, however, have had a considerable (but not unmarred) success in using Code § 1329 to modify confirmed Chapter 13 plans in ways which appear to deprive creditors of the constitutionally — protected value of secured claims.

Code § 1329(a) basically authorizes the amendment of a confirmed plan so as to change (1) the amount; or (2) the time for payments "on claims of a particular class provided for by the plan." The boldest and most frequent attempt by debtors to use the postconfirmation modification to alter the treatment of secured claims occurs when the collateral no longer appears to have a value which justifies full payment of the balance of the secured claim — in contrast with the composition percent being paid on unsecured claims. The collateral having lost its attractiveness, the debtor proposes an amendment to the plan so as (1) to surrender the now-unattractive collateral to the creditor; (2) to reduce the unpaid balance of the secured claim to reflect the now-diminished value of the collateral; (3) to have that reduced secured balance satisfied by the surrender of the collateral; (4) to have the remaining balance of the secured claim converted to an unsecured claim; and (5) to have this balance of the claim satisfied by the 5%, 17%, or whatever percent payment provided for unsecured claims — all over the objection of the holder of the secured claim.

Norton Bankruptcy Law and Practice 2d § 124:3, pp. 124-25 and 124-26 (1993) (footnotes omitted).

In discussing the rationale behind various cases dealing with these issues, Norton reasoned the following:

Mere dismissal of the applicability of the rule of res judicata to a secured claim dealt with by a confirmed plan is unconvincing, for it appears that both creditor and debtor should be able to rely on the confirmed plan\'s treatment of the claim, subject only to possible modification of the "amount" or the "time" of payments on the secured claim. Even such a change must meet the "good faith"

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