In re Gift

• Decision Date: 22 March 2012
• Docket Number: No. 11–12310.,11–12310.
• Citation: 469 B.R. 800
• Parties: In re Anna Sheneater GIFT, Debtor.
• Court: U.S. Bankruptcy Court — Middle District of Tennessee

469 B.R. 800

In re Anna Sheneater GIFT, Debtor.

No. 11–12310.

United States Bankruptcy Court, M.D. Tennessee.

March 22, 2012.

Ronald K. Nevin, Nashville, TN, for Debtor.

Memorandum Opinion

RANDAL S. MASHBURN, Bankruptcy Judge.

This matter is before the court on the Metropolitan Government of Nashville and Davidson County's (“Metro”) Amended Objection to Confirmation of Anna Sheneater Gift's (“Debtor”) Chapter 13 Plan. More specifically, Metro, as an oversecured creditor, objects because the debtor's plan does not provide for post-petition interest (12%) and post-petition penalty (6%) (for a total of 18% post-petition) on its tax claim pursuant to 11 U.S.C. § 506, 11 U.S.C. § 511, and Tenn.Code Ann. § 67–5–2010 (“T.C.A.”). The debtor arguesthat only the 12% interest rate should be applied. For the reasons contained herein, the court GRANTS IN PART AND DENIES IN PART Metro's objection to confirmation. The following constitutes the Court's findings of fact and conclusions of law.

I. Undisputed Facts

The parties submitted this matter to the Court upon stipulations, and no factual matters remain in dispute. Both parties agreed that no witnesses were required, and that they would rely upon the court record and their legal arguments. The relevant facts are limited and very straightforward.

The debtor filed a voluntary petition under Chapter 13 of Title 11 of the U.S.Code on December 13, 2011. Schedule E, attached to the debtor's petition, listed a priority claim held by Metro in the amount of $6,873.14. The debtor's chapter 13 plan provided for payment of the Metro claim in full as a priority claim.

The bankruptcy filings reflect that the debtor's assets significantly exceed her liabilities. Her summary of schedules shows assets totaling $117,725 and liabilities of less than $20,000. Thus, this is an unusual case involving a clearly solvent debtor—a fact that will become particularly important in one aspect of the analysis of the issues. As might be expected with a Chapter 13 case involving a solvent debtor, the debtor's plan provides for payment of 100% of allowed unsecured claims.

On January 9, 2012, Metro filed an objection (and an amended objection) to the debtor's plan, asserting Metro's secured claim was entitled to be paid at 18% interest. Also on January 9, 2012, Metro filed two proofs of claim. As amended on the same day, the Metro claims were for $1,188.41 for 2011 real property taxes and $8,734.93 for 2006 through 2010 property taxes. The proofs of claim both assert that the claims are secured by the debtor's real property valued at $115,100.

The parties agree that Metro is an oversecured creditor, with a statutory lien for delinquent property taxes. The debtor concedes Metro's right to post-petition interest, see United States v. Ron Pair Enterprises, 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), but contests Metro's claim for statutory penalties. The parties ask the court to determine if the debtor's plan should provide 12% interest as proposed by the debtor, or the combined 18% rate (12% default interest, plus 6% penalty) that Metro seeks.

II. Analysis

Based on the language in T.C.A. § 67–5–2010, Metro's lien for taxes also secures its right to payment of interest, penalties and costs.¹ In other words, Metro has a nonconsensuallien imposed by state statute, and Metro asserts that all elements of the claim are covered by the lien. The dispute over confirmation arises because the debtor has not provided for the penalty reflected in the statute.

A. Claim Allowance/Disallowance

The filing and allowance of claims is governed by provisions of Chapter 5 of the Bankruptcy Code applicable to all actions filed under Chapters 7, 11, 12 and 13. 11 U.S.C. § 103(a). Specifically, section 502(a) of the Code provides: “[a] claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest ... objects.” See In re Chavis, 47 F.3d 818 (6th Cir.1995). “Claim” is a defined term in the Code:

(5) The term “claim” means—

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or

(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

11 U.S.C. § 101(5).

Section 502(b) requires the court to “determine the amount of [a] claim ... as of the date of filing of the petition, and [to] allow such claim in such amount, except to the extent that” it fits within a list of exceptions, including the disallowance of a claim for unmatured interest. 11 U.S.C. § 502(b)(2). Section 502 controls the overall question of whether a creditor's bargained for (or statutorily created) right to payment will be allowed or disallowed. See Gencarelli v. UPS Capital Business Credit, 501 F.3d 1, 6 (1st Cir.2007). Section 502(b) does not address the extent an allowed claim is an allowed secured claim under § 506(a). In re Bennett, 312 B.R. 843 (Bankr.W.D.Ky.2004) (citing In re Hill, 304 B.R. 800, 804 (Bankr.S.D.Ohio 2003)).

Section 506 provides the roadmap for determining whether and to what extent a claim is secured. A secured claim is defined by § 506(a)(1) as “[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest ... to the extent of the value of such creditor's interest in the estate's interest in such property.” 11 U.S.C. § 506(a)(1). Section 506(b) provides:

(b) To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.11 U.S.C. § 506(b). “Section 506(b) explicitly allows oversecured creditors to recover postpetition interest[ ] on their claims, thereby exempting them from the strictures of § 502(b) to the extent their claims are oversecured.” In re Dow Corning Corp., 456 F.3d 668, 681 (6th Cir.2006).

Thus, the oversecured creditor, having a claim allowed in an amount pursuant to section 502 as of the date of the petition, looks to section 506(b) for what amounts may be added on because it is oversecured. Because Metro's claim is measured “as of the date of the filing of the petition,” Metro is entitled to interest, penalties, attorney fees, and costs that accrued prepetition as part of their allowed secured claim pursuant to section 502(b)(2). Postpetition, interest, fees, costs, and charges are prioritized for secured treatment only if authorized under 11 U.S.C. § 506(b). Bondholder Comm. v. Williamson County (In re Brentwood Outpatient, Ltd.), 43 F.3d 256, 263 (6th Cir.1994) (section 506[b] applies only to post-petition secured amounts); Rushton v. State Bank of Southern Utah (In re Gledhill), 164 F.3d 1338, 1340 (10th Cir.1999) (same); In re Leatherland Corp., 302 B.R. 250, 257–258 (Bankr.N.D.Ohio 2003) (same). In order to set Metro's claim for purposes of confirmation, the court must determine where postpetition penalties fit in, if at all, under this framework.²

B. Section 506(b) Analysis

To the extent that Metro's “penalty” is a fee, cost or charge, it is subject to the “reasonableness” qualifier in section 506(b) to determine its priority. If the penalty is nothing more than “default interest” with veiled nomenclature, then the interest rate is set by 11 U.S.C. § 511 by reference to T.C.A. § 67–5–2010.³ Finally, to the extent the penalty is not interest and also cannot be categorized as a “fee, cost or charge,” then it is not entitled to secured treatment at all. Thus, it is critical to determine how Metro's “penalty” fits within the parameters of section 506(b).

C. The Brentwood Outpatient Cases

Bondholder Comm. v. Williamson County (In re Brentwood Outpatient, Ltd.), 43 F.3d 256 (6th Cir.1994) involved a chapter 11 debtor that owed delinquent property taxes that accrued postpetition. Like the present case, all parties agreed that the County was oversecured. The Chapter 11 plan provided for the County to be paid in full on the effective date of the plan. After confirmation of the plan, the Bondholder Committee paid the base tax, plus prepetition and postpetition interest, but objected to payment of the statutory penalties, attorneys' fees, and costs. In that case, the precise issue was:

We must decide whether in a Chapter 11 proceeding a local government may collect statutory (1) costs and attorneys' fees and (2) penalties of 1/2% per month which accrue on delinquent property taxes after the filing of the bankruptcy petition; and (3) whether any allowable penalties, costs, and fees are due up to the time the delinquent property taxes are paid or only up to the effective date of the Chapter 11 plan.

43 F.3d at 258. The Sixth Circuit held that section 506(b) as it was worded at that time, addressed only consensual lienholders, and that it seemed odd that it should be dispositive of a case involving a nonconsensual claimholder. However, the historical development of the law in this area convinced the Court that section 506(b) did indeed answer the question:

Early in this century Justice Holmes wrote for a unanimous Supreme Court that the United States had adopted, along with the basic English bankruptcy system, the “English rule” that even secured claims in bankruptcy were not entitled to postpetition interest. Sexton v. Dreyfus, 219 U.S. 339, 31 S.Ct. 256, 55 L.Ed. 244 (1911). The English rule was thought to serve the interest of providing a “certain date” for winding up the affairs of the bankrupt and distributing the estate....In a case at midcentury...