In re Keokuk

• Decision Date: 08 April 2019
• Docket Number: CASE NO. 17-30370
• Citation: 600 B.R. 593
• Parties: IN RE Sabrina D. KEOKUK, Debtor
• Court: U.S. Bankruptcy Court — Eastern District of Kentucky

600 B.R. 593

IN RE Sabrina D. KEOKUK, Debtor

CASE NO. 17-30370

United States Bankruptcy Court, E.D. Kentucky, Frankfort Division.

Signed April 8, 2019

Daniel Hitchcock, Patrick T. Smith, Lexington, KY, for Debtor.

MEMORANDUM OPINION AND ORDER

Gregory R. Schaaf, Bankruptcy Judge

The Debtor seeks confirmation of her Second Amended Chapter 13 Plan. [ECF No. 99.] 21st Mortgage Corporation, a secured creditor, argues that the Second Amended Plan does not comply with 11 U.S.C. § 1325(a)(5)(B).¹ [ECF No. 107.] The Objection is sustained, and confirmation of the Second Amended Plan is denied for the reasons set out herein.

I. FACTS.

The Debtor filed for chapter 13 relief and scheduled real property at 1392 Baxter Ridge Road, Lawrenceburg, Kentucky ("Real Estate"), and a 2007 Giles mobile home located thereon ("Mobile Home"). [ECF No. 18.] 21st Mortgage filed Proof of Claim No. 7 for $ 87,531.45 based on a note that is secured by liens on the Real Estate and the Mobile Home. The liens are not disputed, and the Mobile Home is treated as personal property under Kentucky law.

A. The Debtor's Initial Plan.

The Debtor initially proposed a plan that valued 21st Mortgage's secured claim at $ 20,000.00, payable in equal monthly installments at 5.25% interest. [ECF No. 19.] 21st Mortgage objected to the proposed cram down value [ECF No. 30] and a hearing was scheduled to determine the amount of the secured claim pursuant to § 506(a). [ECF Nos. 55 and 59.] The parties agreed before the hearing, and it was therefore ordered, that "the value of the [Mobile Home] is $ 36,000.00 and the value of the [Real Estate] is $ 22,500.00 for a total value of $ 58,500.00." [ECF No. 67 ("Agreed § 506(a) Valuation Order").]

B. The Debtor's First Amended Plan.

The Debtor then filed its First Amended Plan. [ECF No. 72.] Instead of merely adjusting the initial secured value to the agreed secured value, the Debtor proposed to: (i) retain the Real Estate in exchange for equal monthly payments that total the agreed value of the Real Estate pursuant to § 1325(a)(5)(B) ($ 22,500.00); and (ii) surrender the Mobile Home pursuant to § 1325(a)(5)(C). [Id. ] Confirmation was denied because the First Amended Plan did not pay 21st Mortgage the value of its allowed secured claim as required by § 1325(a)(5)(B). [ECF No. 94 at 6-7.]

The proposal did not work because the Debtor was not entitled to immediately reduce the total amount of the allowed secured claim payable in subpart (B)(ii) by the § 506(a) value of surrendered property. Surrender of the Mobile Home pursuant to § 1325(a)(5)(C) is not the equivalent of a distribution of value in payment of the allowed secured claim. [ECF No. 94.] See also In re Tosi , 546 B.R. 487, 492 (Bankr. D. Mass. 2016) (surrender pursuant to § 1325(a)(5)(C) means the debtor will make the collateral available to the secured creditor so the secured creditor can exercise its state law rights); In re Williams , 542 B.R. 514, 518 (Bankr. D. Kan. 2015) (surrender does not transfer ownership); In re Rose , 512 B.R. 790, 793 (Bankr. W.D. N.C. 2014) (surrender does not transfer title or require a lender to foreclose on its mortgage).

The conclusion that the First Amended Plan failed under subpart (B) eliminated the need to decide if a plan could address an allowed secured claim under both subparts (B) and (C). [But see ECF No. 94 at 6 (the plain language of the statute means it is unlikely a debtor may elect both subparts (B) and (C) ).] The order denying confirmation also rejected the Debtor's alternative reading of the Amended Plan to treat surrender of the Mobile Home as a distribution under subpart (B) instead of a surrender under subpart (C). [Id. at 7-8.] The Amended Plan did not reflect this structure and the proposal would require the detailed analysis conducted in this Opinion. The Debtor was ordered to amend her plan to accurately reflect her intention, which she attempted to do in the Second Amended Plan. [Id. ]

C. The Debtor's Second Amended Plan.

The Debtor timely filed a Second Amended Plan on December 31, 2018. [ECF No. 99.] The Second Amended Plan proposes the following for the 21st Mortgage claim:

II. SECURED CLAIMS.

A. Secured Claims To Be Paid Through the Plan and Motion to Value Collateral.

2. Secured Claims Valued Under § 506. The Debtor moves the Court to value collateral as follows according to 11 U.S.C. § 506(a). Each of the following secured claims, if allowed, shall be paid through the plan until the secured value or the amount of the claim, whichever is less, has been paid in full. Any remaining portion of the allowed claim shall be treated as a general unsecured claim. Any claim with a secured value of $0 shall be treated as a general unsecured claim.

                                                       Estimated Amount      Secured    Interest    Monthly
                Secured Creditor             Collateral Description    of Claim               Value      Rate*      Payment
                21st Mortgage Corporation
                (See VII B. Special
                Provisions)                  2007 Giles mobile home         $87,500.00    $36,000.00     0.00%        $0.00
                                             1392 Baxter Ridge Rd
                                             Lawrenceburg, Kentucky
                21st Mortgage Corporation    2 acre lot                     $87,500.00    $22,500.00     5.25%      $471.61
                

VII. SPECIAL PROVISIONS.

The Debtor's Memorandum attached to the Second Amended Plan explains that the Debtor is modifying 21st Mortgage's rights because the claim is not secured entirely by real estate that is the Debtor's principal residence. [ECF No. 99-1.] See also 11 U.S.C. § 1322(b)(2) (allowing modification). The proposed plan values the Real Estate and Mobile Home at $ 58,500.00 based on two December 2017 appraisals prepared for 21st Mortgage. [See ECF No. 99-1 at 2; see also ECF Nos. 90 and 91.] The appraised values are also the basis for the Agreed § 506(a) Valuation Order.

The Debtor describes the proposed treatment of the 21st Mortgage allowed secured claim as follows:

Specifically, the Debtor's amended chapter 13 plan proposes to pay 21st Mortgage $ 22,500.00 in monthly plan payments at the rate of $ 471.61, plus 5.25% interest. [Docket No. 99]. In addition, in the Special Provisions section of the amended plan the Debtor proposes to transfer to 21st Mortgage possession of the 2007 Giles manufactured home valued by 21st Mortgage's appraiser at $ 36,000.00. [Docket No. 99]. Collectively, 21st Mortgage is receiving "property distributed under the plan" in the full amount of the secured portion of its claim of $ 58,500.00 as of the effective date of the plan.

[ECF No. 99-1 at 2 (footnote omitted).] The plan does not disclose whether the Debtor intends to transfer title to the Mobile Home or just possession. The Debtor indicated at the confirmation hearing that she is willing to transfer title to the Mobile Home to effectuate a distribution under § 1325(a)(5)(B).

21st Mortgage objects. [ECF No. 107.] It argues that § 1325(a)(5)(B)(ii) does not allow satisfaction of an allowed secured claim with non-cash property. [Id. at 2.] 21st Mortgage also argues that the valuation agreed on by the parties does not contemplate ownership costs, such as insurance and taxes, and distribution expenses, such as a commission or the cost of removal. [Id. at 3.]

The Chapter 13 Trustee does not recommend confirmation. [ECF No. 101.] The Trustee sees a conflict because Section II.A.2 implies the Debtor will retain the Mobile Home, which requires periodic payments, while Section VII.B indicates the Debtor will transfer the Mobile Home to 21st Mortgage. The Trustee asks the Debtor to "[a]mend the plan to clarify whether the debtor intends to pay the secured value of the claim at $ 36,000.00, as provided in section II.A.2, or surrender the collateral as stated in the special provision." [Id. ]

A confirmation hearing on the Second Amended Plan was held on February 21, 2019, and the matter was submitted for a decision.

II. DISCUSSION.

The broad question in this case is whether the Debtor's proposed plan is confirmable pursuant to § 1325(a)(5)(B). More specifically, may the Debtor propose a chapter 13 plan that pays part of the allowed secured claim of 21st Mortgage with property, i.e. , the Mobile Home, and the balance with deferred cash payments? The Debtor may propose such a plan, provided the deferred cash payments equal the total allowed secured claim less the value of the property distributed at confirmation.

The Debtor's plan assigns a value of $ 36,000.00 to the Mobile Home, which represents the § 506(a)(2) value. This price is too high based on information available in the record. Section 506(a)(2) sets the value of the allowed secured claim; it does not address the value of property that is used to pay that allowed secured claim. The value of the Mobile Home as property distributed to pay the allowed secured claim pursuant to § 1325(a)(5)(B)(ii) is less than the § 506(a)(2) value.

Therefore, the Second Amended Plan does not distribute property at least equal to the value of the allowed secured claim as required by § 1325(a)(5)(B)(ii) and is not confirmable.

A. The Second Amended Plan Is an Attempt to Comply with § 1325(a)(5)(B).

1. A Debtor May Alter a Mortgagee's Rights Under § 1322(b), Provided the Plan Complies with § 1325(a)(5).

Section 1322(a) sets out the terms required in a chapter 13 plan and § 1322(b) describes provisions the plan may contain. 11 U.S.C. § 1322(a) and (b). Section 1325(a) directs a court to confirm a plan if the plan addresses the requirements therein. 11 U.S.C. § 1325. A plan that does not conform to these requirements is not confirmable.

The relationship between the Debtor and 21st Mortgage is defined by the terms of the note and security documents. Section 1322(b)(2) allows the Debtor to modify the terms of these agreements. 11 U.S.C. § 1322(b)(2). Section 1322(b)(2) does not describe the permitted modifications, but the outer limits of any modifications are set by the confirmation requirements of § 1325...