In re Kelley, Bankruptcy No. 18200088.

• Decision Date: 29 October 1985
• Docket Number: Bankruptcy No. 18200088.
• Citation: 53 BR 961
• Parties: In re Paul M. KELLEY, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Kentucky

53 B.R. 961 (1985)

In re Paul M. KELLEY, Debtor.

Bankruptcy No. 18200088.

United States Bankruptcy Court, W.D. Kentucky.

October 29, 1985.

J. Richard Downey, Franklin, Ky., for debtor.

H. Jefferson Herbert, Jr., Glasgow, Ky., for PCA.

Robert E. Brizendine, Atlanta, Ga., for debtor.

MEMORANDUM OPINION

MERRITT S. DEITZ, JR., Bankruptcy Judge.

A reorganization plan which expressly provides for certain remedies upon default may close the door to the traditional creditor's remedy of dismissal of a Chapter 11 case for a default of that same type. That lesson of logic is learned from the case at hand.

This farm reorganization plan was confirmed in April, 1983, and it provided among other things that upon the debtor's failure to make annual payments on a secured debt to the Mammoth Cave Production Association, the PCA's exclusive remedy would be to foreclose on its collateral, with no resulting personal liability of the debtor. The exculpatory nature of the remedy is emphasized by its recitation no fewer than four times, using slightly different phraseology each time, in the text of the plan.

After the debtor's failure to make a first payment of $75,000, and for other reasons to which we will turn shortly, the PCA moved under 11 U.S.C. § 1112 for dismissal of the confirmed plan for "material default".

Certainly a plan provision for such a substantial payment standing alone would, when breached, give rise to a claim of "material default". But this plan goes on to provide:

Once again, these obligations to pay Mammoth Cave are "in rem" in nature, and Debtor personally has no obligation to pay same, but, as long as Debtor continues to pay the annual amounts indicated above, Debtor may continue to use the equipment upon which Mammoth Cave has retained its security interest. Should the Debtor fail to make any payment shown on the preceding schedule, Mammoth Cave may forthwith retake possession of all of its collateral, without further orders or proceeding. Should Mammoth Cave Production Credit Association retake possession of its collateral, the Debtor shall have no further obligation to Mammoth Cave Production Credit Association hereunder.

The creation of an alternative remedy gives the debtor, in effect, an option: Either make the payments when due or hand over the property. With such a provision the debtor gained no additional advantage, and the creditor made no further sacrifice, than would have occurred in a straight liquidation proceeding. In fact, given the judicial history of farm reorganizations in this district, this "walk-away" provision is a fair restatement of the laws of probability.¹

To the extent that the substitute remedy created an option, it may be said that the debtor's nonpayment of the first annual installment was not a default at all, material or otherwise; by failing to pay he merely elected to give up the secured property. The PCA repossessed its collateral prior to the commencement of the present action, and therefore may be considered satisfied according to our reading of the plan.

We give only limited...