In re Lopez

• Decision Date: 03 August 2007
• Docket Number: Bankruptcy No. SA 06-10420-TA.,BAP No. CC-06-1359-MkBPa.
• Citation: 372 B.R. 40
• Parties: In re Rudy A. LOPEZ, Debtor. Amrane Cohen, Chapter 13 Trustee, Appellant, v. Rudy A. Lopez, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

372 B.R. 40

In re Rudy A. LOPEZ, Debtor Amrane Cohen, Chapter 13 Trustee, Appellant, v. Rudy A. Lopez, Appellee.

BAP No. CC-06-1359-MkBPa.

Bankruptcy No. SA 06-10420-TA.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on May 17, 2007.

Filed August 3, 2007.

Linda S. Conway, Orange, CA, for Amran Cohen, Chapter 13 Trustee.

Bruce D. White, Esq., White & Roseman, Newport Beach, CA, for Appellee.

Before: MARKELL,¹ BRANDT and PAPPAS, Bankruptcy Judges.

OPINION

MARKELL, Bankruptcy Judge.

INTRODUCTION

Amrane Cohen, a Chapter 13² Trustee, challenges the bankruptcy court's order confirming the Chapter 13 plan of Rudy Lopez, the debtor in this case. Mr. Lopez's plan permits him to pay his postpetition payments on notes secured by deeds of trust on his residence ("maintenance payments") directly to his creditors, while simultaneously allowing him to pay his prepetition arrears on those notes via the trustee. The trustee objected to the direct payment provisions; he believes Mr. Lopez should pay all amounts to him under the plan, and that he should then disburse those amounts to the creditors. For the reasons given below, this panel disagrees, and AFFIRMS the decision of the bankruptcy court, reported at In re Lopez, 350 B.R. 868 (Bankr.C.D.Cal.2006).

FACTS

Mr. Lopez filed a Chapter 13 petition on March 31, 2006. At the time of the filing, he was delinquent on his obligations to creditors Wilshire Credit Corporation (Wilshire") and Countrywide Home Loans, Inc. ("Countrywide"), which held first and second deeds of trust on his residence. Due to these delinquencies, foreclosure was imminent. The debtor's filing stopped the sale.

The debtor's Chapter 13 plan³ proposed to pay the following debts "through the plan":⁴ his arrears on notes secured by deeds of trust⁵ to Wilshire and Countrywide; his delinquent property taxes; his debts owed to the State of California EDD;⁶ the balance of his attorneys' fees; and the trustee's fee. To cover these amounts, the plan proposed a total monthly plan payment of $852. The plan payment is the amount of the net income after expenses shown on debtor's unchallenged schedules of income and expenses,

The plan additionally authorized Mr. Lopez to pay all payments coming due postpetition and which were related to his residence directly to the relevant creditors. These creditors included Wilshire Mortgage Countrywide, and the Orange County Tax Collector.⁷

The trustee objected to all direct payments to the extent they related to an obligation in default at filing and that the plan would cure. The bankruptcy court overruled the trustee's objections to plan confirmation in a published decision. In re Lopez, 350 B.R. 868, 874 (Bankr.C.D.Cal. 2006). The trustee appeals.

JURISDICTION

The bankruptcy court had jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and § 157(b)(1), (b)(2)(A) and (b)(2)(L). This panel has jurisdiction under 28 U.S.C. § 158(a) and (b), which provide appellate jurisdiction over final orders. A Chapter 13 confirmation order is a final order. Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083, 1087 (9th Cir.1999).

STANDARD OF REVIEW

This panel reviews issues of law de novo and findings of fact for clear error. Shook v. CBIC (In re Shook), 278 B.R. 815, 820 (9th Cir.BAP2002). Interpretations of the Bankruptcy Code that present legal questions are reviewed de novo. Cal. Cent. Trust Bankcorp v. Been (In re Been), 153 F.3d 1034, 1036 (9th Cir.1998).

DISCUSSION

The trustee's sole basis for objection is that the Bankruptcy Code⁸ does not permit the debtor to directly pay maintenance payments on debts secured by his home when arrears related to that debt are simultaneously paid through the Chapter 13 plan.

1. Analysis of Pre-BAPCPA Case Law

The trustee contends that, despite longstanding practice in this and other circuits⁹ and the comments of the leading treatise on Chapter 13,¹⁰ pre-BAPCPA Ninth Circuit precedent does not permit debtors to make direct payments in these circumstances.

A. Fulkrod and Chapter 12

The trustee's principal argument relies on Ninth Circuit precedent holding that direct payments may be impermissible in certain Chapter 12 family-farmer bankruptcies. Specifically, the trustee points to Fulkrod v. Barmettler (In re Fulkrod), 126 B.R. 584 (9th Cir.BAP1991) ("Fulkrod I"), aff'd sub. nom. Fulkrod v. Savage (In re Fulkrod), 973 F.2d 801 (9th Cir.1992) ("Fulkrod II") (collectively "Fulkrod") to support his position. In Fulkrod, a Chapter 12 debtor filed a plan providing for direct payment to three creditors with "impaired" claims.¹¹ Fulkrod II, 973 F.2d at 802. The bankruptcy court disagreed with this treatment and ordered that the trustee, rather than the debtor, make the payments through the plan. The debtor appealed, and both the Bankruptcy Appellate Panel ("BAP") and the Ninth Circuit affirmed. Id.

Fulkrod assumed that the issue was controlled by the trustee fee statute, 28 U.S.C. § 586. As applicable to Chapter 12 debtors, this statute provides that the trustee may collect "a percentage fee not to exceed — ... (ii) in the case of a debtor who is a family farmer, the sum of — (I) not to exceed ten percent of the payments made under the plan of such debtor...." 28 U.S.C. § 586(e)(1)(B)(ii).

In analyzing this language, the BAP stated:

We believe that Congress intended to use the term `under the plan' [from 28 U.S.C. § 586(e)(1)(B)(ii)] to mean those payments which result from the operation of Chapter 12 bankruptcy law. Those payments should be made by the trustee, and the trustee's fee should be assessed against the funds received from the debtor for that purpose. Typically, those payments will involve impaired claims which the debtor could not insist upon but for the protections of Chapter 12.

Fulkrod I, 126 B.R. at 588. The BAP continued, stating that "[a] contrary provision in a plan or an order confirming a plan is permissible because the [C]ode contemplates flexibility in the payment of claims, and would allow direct payment of an impaired claim without trustee compensation in appropriate circumstances." Id.

Although it affirmed the BAP, the Ninth Circuit nevertheless stated that "[a]lthough the BAP hinted that Chapter 12 might permit a debtor to make direct payments to impaired creditors without trustee compensation in certain limited circumstances, that statement is neither necessary to its decision nor supported by statute." Fulkrod II, 973 F.2d at 803 (citation omitted).

The Ninth Circuit's dicta — that the BAP's statement regarding impairment was not "supported by statute" — is the source of the trustee's current argument.¹² Although dicta, Fulkrod II nonetheless deserves consideration in any determination as to what debts may be paid outside of a Chapter 13 plan.¹³ Cf. In re Barocio, 2003 Bankr.LEXIS 2032, at *4 (Bankr.D.Alaska 2003) ("[W]hile other circuits which have examined the issue have concluded that debtors in chapter 12 and 13 cases can make direct payments on impaired claims in their plans, the Ninth Circuit's analysis in Fulkrod is applicable to chapter 13 as well as chapter 12 cases in this district."). But, after analysis, we conclude that it is not binding or determinative.

The section of the Judicial Code at issue in Fulkrod, 28 U.S.C. § 586, also applies to cases under Chapter 13, and thus it might be urged that Fulkrod II would require reversal here; that said, however, the particular clause analyzed by Fulkrod, namely 28 U.S.C. § 586(e)(1)(B)(ii) and its use of the phrase "under the plan," technically apply only to cases under Chapter 12. Moreover, Fulkrod's focus on this particular clause — 28 U.S.C. § 586(e)(1)(B)(ii) — was both indirect and curious; in essence, the court inferred what should be paid through the plan by focusing on a statute that set the maximum percentage fee that the Attorney General may set for trustees under each chapter, and nothing else. As shown infra, part B.2, there was a statute more directly on point — 11 U.S.C. § 1226(c).

Nevertheless, the Code employs similar language in the section applicable in Chapter 13-28 U.S.C. § 586(e)(2). Paragraph (2) of that provision also sets compensation by reference to amounts received by Chapter 13 trustees "under plans."¹⁴ This phrase, though, is not particularly illuminative; read in the abstract, the language indicates that trustees should receive a fee for all amounts they receive "under plans," but it does not purport to define what types of payments should be received "under plans," which is the issue in the present case.

There are significant differences between Chapter 12 and Chapter 13 that make the distinctions regarding their treatment under 28 U.S.C. § 586 appropriate. Chapter 13, for example, is substantially less permissive than Chapter 12 regarding the scope of allowed modifications of secured debt, particularly regarding modifications of claims secured by residences. Chapter 12 allows plans to make long-term modifications — that is, modifications that exceed the maximum five-year term of a Chapter 12 or 13 plan — to secured claims; Chapter 13 does not permit such modifications.¹⁵

Fulkrod accommodates this distinction in the Chapter 12 context, as Chapter 12 debtors may routinely modify farm mortgages and other secured debt, and thereby change the debtor's ongoing payments.¹⁶ The efficient operation of Chapter 12 thus may call for more supervision. Much less need exists in the Chapter 13 context for such creditor "protection," as the Code itself provides much of that protection. See, e.g., 11 U.S.C. § 1322(b)(2), (b)(5), and (d); see also In re Lopez, 350 B.R. at 870.

Moreover, the power to make payments in Chapter 13 directly to creditors has never been in doubt. 11 U.S.C. 1326(c); 5 Keith M. Lundin, Chapter 13 Bankruptcy § 401.1, p. 401-1 (3d ed. 2000 & Supp. 2006) ("Direct payment has always been allowed by the Bankruptcy Code in Chapter 13 cases...."). The...