In re Kerwin-White, Bankruptcy No. 88-179.

Citation129 BR 375
Decision Date23 May 1991
Docket NumberBankruptcy No. 88-179.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court —District of Vermont
PartiesIn re Sharon E. KERWIN-WHITE, Debtor.

J. Barrera, Middlebury, Vt., for Estate of Laura Thompson.

J. Carroll, Powers, English & Carroll, Ltd., Middlebury, Vt., for First Brandon Nat. Bank.

G. Glinka, Glinka & Palmer, Cabot, Vt., for Sharon E. Kerwin-White, debtor.

T. Maikoff, Chapter 12 Trustee, pro se.

K. Purcell, Albany, N.Y., for U.S. Trustee.


FRANCIS G. CONRAD, Bankruptcy Judge.

This matter is before us on remand from the District Court and Debtor's modification of its Chapter 12 reorganization plan. We confirm Debtor's plan as modified.


Debtor and spouse operated a 138 acre dairy farm in Bridport and Cornwall, Vermont for several years. In 1988, Debtor encountered financial and marital difficulties (now divorced), and undertook to reorganize the dairy farm as a sheep farm. On August 12, 1988, Debtor commenced a Chapter 12 bankruptcy proceeding, 11 USC § 1201, et seq.2

Bank has a first mortgage on Debtor's real and personal property for $84,600.

Debtor's initial Chapter 12 plan, 11 USC § 1222, proposed a 100% payment to allowed unsecured creditors, payable in monthly installments over a five year period. Debtor's plan also proposed a full present value payment to senior secured creditors. The present value payment would be made either through installments or by the surrender of collateral up to the value of the secured debt. Debtor's second and third real property mortgagees would, in turn, move up to first and second positions, respectively, and be paid in full.

Unhappy with Debtor's proposed treatment under the plan, Bank objected and, after a contested evidentiary confirmation hearing, we ruled from the bench that Debtor must surrender 118 acres in full satisfaction of Bank's secured claim. Debtor would retain the remainder of 20 acres subject to the respectively advanced second and third mortgagees.

Bank appealed our ruling on five grounds:

1. Debtor was not a "family farmer" under 11 USC § 101(17);
2. We erred by holding 11 USC § 1225(a)(5)(C) authorized Debtor to surrender less than all of the collateral without allowing Bank to retain a lien on the unsurrendered portion;
3. Our valuations of the Bridport and Cornwall properties were clearly erroneous;
4. Bank, as an over-secured creditor, is entitled to attorney fees by agreement and 11 USC § 506(b); and,
5. Bank is entitled to recover appraisal costs as an administrative expense under 11 USC § 503(b)(1)(A).

On appeal to the District Court, Chief Judge Billings reversed in part, affirmed in part, and remanded. First Brandon National Bank v. Kerwin-White, 109 B.R. 626 (D.Vt.1990). Chief Judge Billings held:

1. Bank waived its objection to Debtor\'s eligibility as a "family farmer" because they "neglected to raise it before the bankruptcy court." Id., 109 BR at 629;
2. Debtor must either surrender all of its collateral to Bank under 11 USC § 1225(a)(5)(C) or, alternatively in a "cram-down" under 11 USC § 1225(a)(5)(B), surrender a portion of Bank\'s collateral up to the value of its debt and allow Bank to retain a lien on the unsurrendered portion of its collateral because Bank is an over-secured non-consenting creditor 3. In dicta,3 affirmed our valuation on the Bridport property as not clearly erroneous because it was supported by evidence. Reversed the Cornwall valuation because it could not "discern our basis for its conclusion" to average comparables;
4. In dicta,4 affirmed our determination Bank was not entitled to attorney fees because their agreements provide for such fees only in the event of foreclosure and "cannot be interpreted as authorizing attorney fees in bankruptcy proceedings." Id., 109 BR at 633; and,
5. Affirmed our denial of Bank\'s request for its cost of appraisal under 11 USC § 503(b)(1)(A) because Bank failed to meet its burden that such costs "were necessary to preserve its own interest in the estate." Id., 109 BR at 633.

Debtor appealed to the Second Circuit Chief Judge Billings' holding that a Chapter 12 plan could not provide for a surrender of less than all of the collateral in satisfaction of an oversecured creditor's claim without also providing a lien on the unsurrendered collateral. Debtor also appealed the District Court's reversal of our valuation on the Cornwall property. Bank cross-appealed. After some procedural discussions at the Circuit level about finality, Bank and Debtor withdrew their respective appeals without prejudice, and returned the case to this Court.5

Upon return to us, Debtor filed its "Motion to Modify Plan of Reorganization" on April 19, 1990. Debtor added the following language to paragraph 6.4 of the plan: "claimant Bank shall retain its lien on the remaining property as security for any deficiency." Id., p. 1 (emphasis in original).

On June 6, 1990, we held a telephonic status conference where we overruled Bank's contention that a new plan of reorganization and de novo hearing were needed. We ruled, inter alia,6 a plan modification would suffice and scheduled a hearing on the modification only.

On August 20, 1990, we heard all pending motions, including Debtor's "Motion to Modify Plan of Reorganization," Chapter 12 Trustee's request for a ruling on distribution of funds received under the plan,7 and Bank's Motion to Dismiss Debtor's Chapter 12 case.8 A post-hearing briefing schedule was fixed, after which we took all remaining issues under advisement.


Debtor and Bank briefed the following claims:

1. Bank argues Debtor must either surrender all of Bank\'s collateral under § 1225(a)(5)(C), or Bank must retain its lien on the unsurrendered portion pending sale of the surrendered property under § 1225(a)(5)(B). Debtor counters that a Chapter 12 debtor may satisfy an oversecured creditor by transferring collateral up to the full value of the creditor\'s allowed claim without the additional requirement that creditor must also retain a lien on the unsurrendered property.9 (Debtor\'s

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This Page Contains Footnotes. view is known in Chapter 12 jargon as "eat dirt.").

2. Bank argues District Court\'s reversal and remand requires a new confirmation hearing on a newly presented plan with newly presented evidence. Debtor counters its proposed plan modification complies with the District Court\'s requirement that Bank retain a lien on the unsurrendered property as security for any deficiency.10
3. Bank challenges Debtor\'s eligibility as a "family farmer" under § 101(17). Debtor says Bank waived its right to contest Debtor\'s eligibility.11
4. Bank argues our valuation finding on the Cornwall property is clearly erroneous while Debtor says our original valuation of the Cornwall property was correct.12
5. Bank says the potential deficiency that is secured by the proposed lien on the unsurrendered collateral must also include interest, late fees, all costs of sale, and interim tax and insurance expenses that may result from a sale of the surrendered property. Debtor counters Bank failed to challenge the $86,500.00 allowed amount of its claim (except for adding attorneys\' fees and appraisal costs that were denied by the District Court) and has therefore waived entitlement of these additions to its allowed claim.
6. In the event we approve Debtor\'s proposed modification, Bank asks that we also require judicial review prior to sale of the surrendered property to assure Bank the sale is "commercially reasonable." Debtor counters there is no Code provision that requires Court supervision over the conduct of a sale of surrendered property.
1. Whether the potential deficiency secured by the proposed lien on the unsurrendered collateral must include interest, late fees, all costs of sale, and interim tax and insurance expenses that may result from the sale of the surrendered property?
2. Whether the Court ought to condition its approval of Debtor\'s proposed plan modification upon our supervision over Bank\'s sale of its surrendered collateral to assure the sale is "commercially reasonable?"

Does the deficiency secured by the lien13 on the unsurrendered collateral include interest, late fees, all costs of sale, and interim tax and insurance expenses after we have fixed the value of the over-secured creditor's allowed secured claim? The short answer is no.

We deny Bank's request to these additional costs for three reasons. First, for the same reason the District Court denied Bank's request for attorney fees supra, we cannot allow a request to add late fees, all costs of sale, and interim tax and insurance, i.e., Bank's agreements provide for such items only in the event of foreclosure action and no such action was brought prior to Debtor's bankruptcy filing. See, First Brandon National Bank v. Kerwin-White, supra, 109 B.R. at 633. Second, Bank's request to add interest is untimely and deemed waived because it was made after we fixed the value of Bank's allowed secured claim under §§ 502 and 506. This aspect of our determination was not appealed to the District Court. Third, the District Court's ruling that Bank is entitled to a lien to secure a deficiency encompasses only the shortfall between what Bank realizes from a sale of surrendered property and its allowed secured claim.

Outside of bankruptcy, a consensual over-secured creditor is entitled to receive exactly what it bargained for under its agreements. The same is true inside bankruptcy, i.e., the over-secured creditor gets the value of its allowed secured claim under §§ 502 and 506, and, to the extent the agreements giving rise to its allowed claim expressly provide, reasonable fees, costs or charges. Additionally, the over-secured creditor with an allowed secured claim in bankruptcy is...

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