In re Foley

• Decision Date: 19 August 2019
• Docket Number: Case No. 18-29998-bhl
• Citation: 606 B.R. 790
• Parties: IN RE: Ollie Beatrice FOLEY, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

606 B.R. 790

IN RE: Ollie Beatrice FOLEY, Debtor.

Case No. 18-29998-bhl

United States Bankruptcy Court, E.D. Wisconsin.

Signed August 19, 2019

Michael J. Watton, Milwaukee, WI, for Debtor.

Scott Lieske, Chapter 13 Trustee, Milwaukee, WI, for Trustee.

DECISION ON CONFIRMATION OF CHAPTER 13 PLAN

Brett H. Ludwig, United States Bankruptcy Judge

INTRODUCTION

On June 4, 2019, the court held a combined confirmation hearing on eight different chapter 13 plans filed in eight different chapter 13 cases,¹ including this one. All of the debtors are represented by the same counsel and all of the proposed plans include the same non-standard provision addressing secured creditors' lien-retention rights. Other than Chapter 13 Trustee Scott Lieske, no interested party objected, and, after the debtors satisfied the trustee's concerns, he recommended confirmation of all eight plans.

At the combined confirmation hearing, the court questioned whether the plans could be confirmed given that the lien-retention language in the non-standard provisions deviates from the lien-retention requirements in 11 U.S.C. § 1325(a)(5)(B). Debtors' counsel acknowledged the deviation and stated it was intentional. Counsel explained that the non-standard provisions are intended to allow for the possible early release of secured creditors' liens and insisted that the language is not a barrier to confirmation because secured creditors have accepted the plans, within the meaning of § 1325(a)(5)(A), by not objecting to confirmation. The court took the issue of confirmation under advisement.

After reviewing the plans, the Code, and relevant caselaw, the court now concludes that the plans may be confirmed. The language in the non-standard provisions is not a barrier to confirmation because the affected secured creditors have accepted these debtors' plans; a properly served secured creditor that declines to object to confirmation has accepted the proposed plan for purposes of § 1325(a)(5)(A). This holding does not mean, however, that secured creditors' lien rights will terminate early. The court has serious questions about whether the language used achieves this goal. Because that issue is not yet ripe, a final ruling on the impact (if any) of the non-standard provisions is for another day.

BACKGROUND

Each of these eight debtors filed a chapter 13 plan using the district's required plan form. See E.D. Wis. Local Rule 3015(a) Mandatory model plan ("All Chapter 13 debtors must use the Chapter 13 model plan included in the Appendix to these Local Rules."). All eight plans include a checkmark in Part 1.3 on the first page of the plan form, alerting creditors to the inclusion of a non-standard provision in Part 8 of the form. Part 8 recites the same language concerning secured creditors' liens:

Creditors with secured claims shall retain their mortgage, lien or security interest in collateral until the earlier of (a) the payment in full of the secured portion of their proof of claim, or (b) discharge under 11 U.S.C. § 1328.

Secured claims are otherwise addressed in Part 3 of the plan form. Three of the debtors (Jordan, Bridges, and Lee) treat secured claims in Part 3.2 of their plans. The other five debtors (Foley, Cruz, Shaw, Laverty, and Uren) treat secured claims in Part 3.3 of their plans. The differences between these two groups stem from the "hanging paragraph" in 11 U.S.C. § 1325(a).²

The Jordan, Bridges, and Lee plans address creditors with purchase money security interests in Part 3.2 because the claims were incurred outside the 910-day period preceding the petition date. These secured claims are not subject to the restrictions in the hanging paragraph, and, consistent with Bankruptcy Rule 3012(b), the debtors ask the court, through their plans, to reduce the creditor's allowed secured claim to the value of the collateral, with the balance being treated as unsecured, consistent with 11 U.S.C. § 506(a). The Foley, Cruz, Shaw, Laverty, and Uren plans treat secured claims in Part 3.3 because the claims are held by creditors with purchase money security interests that were incurred within the 910-day period preceding the date of the filing of the petition and for which the underlying collateral is a motor vehicle acquired for the personal use of the debtor. Under the "hanging paragraph," these "910 car claims" cannot be reduced to the value of the collateral, as the debtor would otherwise have the right to do under § 506(a). Accordingly, these debtors' plans provide for the payment of these secured claims in full with interest, regardless of the value of the collateral.

All eight proposed plans were properly served on the United States Trustee, the chapter 13 trustee, and all creditors, as required by Local Rule 3015(b). The plan form alerts creditors that if they "oppose the plan's treatment" of their claims, the creditor "must file an objection to confirmation," and, if no objection is filed, "the court may confirm the plan without further notice." No creditor chose to file a timely objection. In fact, only the chapter 13 trustee objected, and the debtors promptly resolved the trustee's concerns. Accordingly, in each case, the chapter 13 trustee entered a docket notice affirmatively recommending confirmation of each plan:

After considering all of the confirmation requirements provided by 11 U.S.C. section 1325, the trustee advises that there is a reasonable basis for concluding that the plan is confirmable, including that the debtor can make all payments under the plan and comply with the plan; and that the debtor has certified that the debtor properly served the plan on all necessary parties. The trustee consequently advises that the court may confirm the plan.

After a June 4, 2109 combined confirmation hearing, the court took the issue of plan confirmation in all eight cases under advisement.

ANALYSIS

Whether a chapter 13 plan should be confirmed is governed in large part by 11 U.S.C. § 1325(a), which directs that the court "shall" confirm a plan if the conditions in nine numbered paragraphs have been satisfied. The first subparagraph requires a determination that the plan "complies" with all the provisions of chapter 13 and any other applicable provisions of the Bankruptcy Code. See 11 U.S.C. § 1325(a)(1). Subparagraph (5) addresses how a chapter 13 plan may treat allowed secured claims.

At the June 4, 2019 confirmation hearing, the court raised questions about the non-standard provision and whether it prevented confirmation. In particular, the court questioned whether the language used runs afoul of the required treatment of allowed secured claims in § 1325(a)(5) or otherwise fails to comply with the Bankruptcy Code sufficient to preclude confirmation under § 1325(a)(1).³

A. Section 1325(a)(5) provides three alternative means of treating creditors with allowed secured claims in a Chapter 13 plan.

Under § 1325(a)(5), a debtor may treat a secured creditor's claims in a chapter 13 plan in one of three ways. The debtor can: obtain the secured creditor's acceptance of the plan under § 1325(a)(5)(A) ; propose a plan that provides specific payment and lien-retention terms spelled out in § 1325(a)(5)(B) ; or surrender the underlying collateral to the secured creditor under § 1325(a)(5)(C).

The debtors here argue that § 1325(a)(5) is satisfied because all affected secured creditors have accepted the plans within the meaning of § 1325(a)(5)(A). The debtors do not contend that either of the other conditions is met. None of the plans complies with § 1325(a)(5)(B). While the claim payment provisions in all eight plans appear to satisfy subsection (B), the lien retention language added in the nonstandard provisions deviates from the treatment required to satisfy the statute. More specifically, the statute requires the plan to provide that the secured creditor retain its lien until the earlier of: "the payment of the underlying debt determined under nonbankruptcy law ; or ... discharged under section 1328." 11 U.S.C. § 1325(a)(5)(B)(i)(I) (italics added). The non-standard provisions alter the italicized language to provide for the lien release at the earlier of "the payment in full of the secured portion of their proof of claim , or ... discharge under 11 U.S.C. § 1328." And, none of the debtors seeks to surrender collateral under § 1325(a)(5)(C).

1. Courts are split on whether a properly served creditor's inaction indicates acceptance under § 1325(a)(5)(A).

The appellate courts that have addressed the issue agree that a secured creditor accepts a plan under § 1325(a)(5) when the creditor does not object to confirmation. The Tenth Circuit Court of Appeals unambiguously confirmed this point in In re Jones , 530 F.3d 1284, 1291 (10th Cir. 2008), albeit in dicta. While its holding rests on other grounds, the court of appeals flatly stated, in discussing § 1325(a)(5), that a secured creditor's "failure to object constitutes acceptance of the plan." Similarly, the First Circuit Bankruptcy Appellate Panel has held that an objecting creditor's failure to appear at a confirmation hearing in prosecution of its confirmation objection supported the bankruptcy court's finding that the creditor had accepted the plan under § 1325(a)(5). See In re Lorenzo , No. PR 15-001, 2015 WL 4537792 (1st Cir. BAP July 24, 2015) (noting the creditor "had an affirmative obligation to prosecute its objection and that obligation did not rest with either the chapter 13 trustee or the bankruptcy court"). No circuit or bankruptcy appellate panel has rejected this approach. The Seventh Circuit has not weighed in on the issue.

At the bankruptcy court level, courts are more widely split. In the years shortly after the passage of BAPCPA, at least three bankruptcy courts refused to find § 1325(a)(5) satisfied by a creditor's failure to object. In all three cases, debtors proposed to bifurcate and cram down a creditor's 910 car claim, a treatment that would not comply with § 1325(a)(5)(B) as impacted by the then...