In re Hoffman

• Decision Date: 17 September 2015
• Docket Number: Bankruptcy Case No. 15–40391–JDP
• Citation: 538 B.R. 57
• Parties: In re: Tracey Jo Hoffman, Debtor.
• Court: U.S. Bankruptcy Court — District of Idaho

538 B.R. 57

In re: Tracey Jo Hoffman, Debtor.

Bankruptcy Case No. 15–40391–JDP

United States Bankruptcy Court, D. Idaho.

Signed September 17, 2015

Kathleen A. McCallister, Boise, ID, Chapter 13 Trustee.

Alexandra O. Caval, Twin Falls, ID, Attorney for Debtor.

John Ritchie, Twin Falls, ID, Attorney for Robert and Kathi Meyers.

MEMORANDUM OF DECISION

Jim D. Pappas, United States Bankruptcy Judge

Introduction

Chapter 13¹ trustee Kathleen A. McCallister (“Trustee”) objects to confirmation of the plan proposed by debtor Tracey Hoffman (“Debtor”). To resolve the objection, the Court must decide whether two claims filed in the case, based upon debts for which the debtor is not personally liable, may be treated as allowed unsecured claims, and may share in distributions under Debtor's proposed chapter 13 plan. After conducting a confirmation hearing, and having considered the parties' briefs and arguments, as well as applicable law, this Memorandum constitutes the Court's findings of fact and conclusions of law. Fed. R. Bankr.P. 7052.

Facts

The material facts are simple and undisputed.²

Debtor lived with her parents in their home for an extended time, caring for them when they became ill. When her parents could not pay the debts secured by the home, creditors Robert and Kathi Meyers (“the Meyers”), obtained a state court decree authorizing them to foreclose a deed of trust. The Meyers scheduled the home for a sheriff's sale to occur on April 30, 2015. However, before the sale, Debtor's parents passed away.

On April 27, 2015, Debtor commenced a probate proceeding in state court and was appointed to act as the personal representative of her parents' estate. On April 28, 2015, Debtor, acting as personal representative, conveyed the home to herself as an individual.

On April 29, 2015, Debtor filed a chapter 13 petition commencing this bankruptcy case. On July 2, 2015, Debtor proposed an amended chapter 13 plan (“Plan”). Dkt. No. 32.

According to the Plan, an appraisal obtained by Debtor on the home indicates its value is $86,000. Id. at ¶ 5.2. The house is encumbered by three liens, but Debtor is not personally liable for any of the debts secured by these liens. The first and second priority liens are deeds of trust securing loans made to Debtor's parents by the Meyers. The other encumbrance on the house is a statutory lien asserted by the State of Idaho for Debtor's parents' unpaid Medicaid expenses of over $315,000.

The balance due on the Meyers' first deed of trust is about $74,000. The Plan proposes to cure the existing default on this debt with monthly payments to be made through the Plan by Trustee. Id. at ¶ 5.3 Debtor will directly make the current monthly payments on this loan. Id. at ¶ 5.2.

The second deed of trust balance is about $22,000. Given the value of the house, and the amount owed on the first deed of trust, this debt is only partially secured. The Plan proposes to pay about $12,000 on this debt, representing the amount of equity in the house securing the debt in monthly payments, together with interest, via Trustee. Id. The Plan proposes that the balance of this debt will constitute an unsecured claim, and that the Meyers will share in the pro rata distributions to be made to unsecured creditors by Trustee.³ Id. at ¶ 5.2 & 7.2.

Because there is no equity in the house over and above the amounts owed on the Meyers' liens to secure the State of Idaho's claim, the Plan proposes to “strip” the statutory lien from the house, and to treat this claim as wholly unsecured. Id. at ¶ 5.4. The State of Idaho will share in pro rata plan distributions to unsecured creditors. Id. at ¶ 7.2.

The Plan will not pay the unsecured claims in full.⁴

After appropriate notice, neither the Meyers nor the State of Idaho objected to the Plan's proposed treatment of their claims. Indeed, the Meyers, who are represented by counsel in the bankruptcy case, have seemingly consented to this treatment.⁵

Trustee, for her part, acknowledges that the Plan's proposals to cure and maintain the Meyers' first deed of trust debt, to “cram down” the second deed of trust, and to strip the State of Idaho's statutory lien, are proper under the Code. Even so, Trustee objected to the Plan's proposal to pay any amounts to the Meyers and the State of Idaho as unsecured creditors. Dkt. No. 39. Trustee contends that the treatment of these two obligations as unsecured claims in the bankruptcy case, and their payment under the Plan on a pro rata basis with Debtor's own unsecured debts, should not be allowed because Debtor is not personally obligated to pay either the Meyers or State of Idaho. Dkt. No. 44, p. 5. Put another way, Trustee argues, under the Plan, Debtor's parents' creditors are being paid at the expense of Debtor's own creditors.

Resolution of Trustee's objection is the sole impediment to confirmation.⁶ To resolve it, the Court must determine whether Debtor's proposal to pay the debts owed by her parents to the Meyers, and to the State of Idaho, as allowed unsecured claims is appropriate in this case.

Analysis and Disposition

I.

A chapter 13 plan may “designate a class or classes of unsecured claims ....”

§ 1322(b)(1). However, “a plan may place a claim ... in a particular class only if such claim ... is substantially similar to the other claims ... in such class.” Id .; § 1122(a). And, if a plan does classify unsecured claims, it “shall provide for the same treatment of each claim within [that] class ....” § 1322(a)(3).

In this case, the Plan requires Debtor to make a total of 60 monthly payments to Trustee. Dkt. No. 32, ¶ 2.1. After provisions for payments to administrative, priority and secured claimants, the Plan proposes that there be a single class of unsecured claims, and provides the same treatment of all claimants within that class. Id. at ¶ 7.2 (“... the Trustee will, from funds available after payment of priority and secured claims, pay pro-rata dividends to all Creditor(s) who have filed timely allowed unsecured claims.”). It is this term of the Plan that Trustee targets as improper. Simply stated, the confirmation issue raised by Trustee is whether the Meyers and the State of Idaho hold “allowed unsecured claims” under the Code so that they may share in distributions under the Plan. If so, Debtor's classification and treatment of those claims in the Plan in the same fashion as all of Debtor's other unsecured debts is appropriate, and the Plan should be confirmed. If the Meyers and State of Idaho do not hold allowed unsecured claims, they can not properly be classified and treated the same as creditors holding allowed unsecured claims based on Debtor's personal debts.

II.

What constitutes a “claim” in a bankruptcy case is “a straightforward issue of statutory construction to be resolved by reference to the text, history, and purpose of the Bankruptcy Code.” Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) (internal quotation marks omitted). Under the Code, a “claim” may be either a:

(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.

§ 101(5). Commenting on this definition, this Court has observed that “Congress intended this language to adopt the broadest definition of ‘claim’ ” and that the “ ‘right to payment’ [means] nothing more or less than an enforceable obligation ...” In re KM Allied of Nampa, 11.2 IBCR 69, 70–71 (Bankr.D.Idaho 2011) (citing Pennsylvania Dept. of Pub. Welfare v. Davenport, 495 U.S. 552, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990) ).

Here, outside of the bankruptcy case, it is undisputed that the Meyers and the State of Idaho do not hold a right to payment from Debtor personally. Instead, they are “nonrecourse” creditors, who can look only to the Debtor's home for satisfaction of their debts.In re KM Allied of Nampa, LLC, 11.2 IBCR at 71 (quoting First Fed. Bank of Cal. v. Weinstein (In re Weinstein), 227 B.R. 284, 292 (9th Cir. BAP 1998) (describing the rights of a nonrecourse creditor)).

III.

A.

Do the Meyers' and the State of Idaho's limited rights constitute a “claim” in Debtor's bankruptcy case as contemplated in § 101(5) ? In a case with somewhat similar facts, the Court has previously answered this question in the affirmative.

In KM Allied of Nampa, a chapter 11 debtor had executed a deed of trust and UCC fixture filing on its property in favor of a bank to secure another party's debt. Id. at 70. In the debtor's later bankruptcy case, based upon the Supreme Court's holding in Johnson, this Court decided that while the debtor was not personally liable for the debt, the bank's right to resort to the debtor's property to collect the debt was sufficient to constitute a “claim” in the chapter 11 case under § 101(a)(5). Id. at 71.

A review of the reasoning of Johnson is also appropriate here. As the Court explained in that decision, the Code's definition of “claim” under § 101(5) includes nonrecourse claims because such a creditor “still retain[s] a ‘right to payment’ in the form of its right to proceeds from the sale of the debtor's property,” and the “creditor's surviving right to foreclose on the mortgage can be viewed as a ‘right to an equitable remedy’ for the debtor's default on the underlying obligation.” Id. at 71 (quoting Johnson, 501 U.S. at 84, 111 S.Ct. 2150 ). Applying this reasoning to the facts in that case, the Court concluded that “there [was] no doubt that [a] surviving mortgage interest corresponds to an ‘enforceable obligation’ of the debtor.” Id. (quoting Johnson, 501 U.S. at 84, 111 S.Ct. 2150 ). Thus, the bank held a claim.

B.

The conclusion by the Supreme Court, and by this...