In re Miceli

• Citation: 587 B.R. 492
• Decision Date: 09 July 2018
• Docket Number: Bankruptcy No. 17-82877
• Parties: IN RE Anthony G. MICELI, Debtor.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

587 B.R. 492

IN RE Anthony G. MICELI, Debtor.

Bankruptcy No. 17-82877

United States Bankruptcy Court, N.D. Illinois, Western Division.

Signed July 9, 2018

Chad M. Hayward, The Law Offices of Chad M. Hayward, P.C., Naperville, IL, for Debtor.

MEMORANDUM OPINION

Thomas M. Lynch, United States Bankruptcy Judge

Associated Bank, N.A., a secured creditor, objects to confirmation of the amended Chapter 13 Plan proposed by Anthony Miceli. (ECF No. 30.) Associated Bank objects to the Debtor's proposal to distribute smaller monthly payments to the secured creditor for its mortgage arrearage claim until the allowed claim of the Debtors attorneys is paid in full, after which the payments to the creditor will increase. The creditor contends that this arrangement violates the requirement for confirmation that periodic payments under section 1325(a)(5)(B)(iii)(I) be "in equal monthly amounts." The Debtor argues in response that subsection (B)(iii)(I) does not prohibit a pro rata distribution to certain creditors and, in any case, the requirement does not apply to mortgage arrearage claim at issue here. For the reasons discussed below, this Court concludes that the plan provides for periodic, pro rata payments on secured claims that do not satisfy the equal monthly amount requirement. Because this arrangement is not accepted by the affected creditor the plan as proposed cannot be confirmed and the objection will be sustained.

JURISDICTION AND PROCEDURE

The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. This matter involves confirmation of a bankruptcy plan and, therefore, is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L).

BACKGROUND

The facts are largely undisputed. The Debtor filed his Chapter 13 Petition on December 7, 2017. Two proofs of claim were timely filed and both claimants assert their claims to be fully secured. Of particular interest is the claim of Associated Bank for $72,202.62 secured by a mortgage in the Debtor's principal residence. In it the bank alleges that $23,943.42 of its claim is the "[a]mount necessary to cure any default as of the date of the petition."¹ (Claim No. 2-1.)

The Debtor prepared his plan on Official Form 113, the new national model plan implemented in December 2017. The plan treats Associated Bank's arrearage claim as secured in Part 3.1, captioned "Maintenance of payments and cure of default, if any." Under the plan the Debtor will continue to pay his monthly contractual installments, currently $477.83, directly to Associated Bank.² It provides that the existing arrearage will be paid in full through disbursements by the trustee, and lists the arrearage to be $23,943.42, for which it provides an interest rate of "0.00%". It bears noting while the plan indicates "$0.00" to be the monthly payment on the arrearage, it estimates that the total payments on the arrearage will be $23,943.42. The plan states that "[u]nless otherwise ordered by the court, the amounts listed on a proof of claim filed before the filing deadline under Bankruptcy Rule 3002(c) control over any contrary amounts listed below as to the current installment payment and arrearage." (Amended Plan, Part 3.1.)

General Order No. 17-02 of this Court took effect on December 1, 2017. It provides that:

Unless otherwise provided in a chapter 13 plan, claims of creditors will be paid pro rata in the following order: (1) current mortgage payments under 1322(b)(5); (2) monthly payments on non-mortgage secured claims; (3) costs of administration; (4) mortgage arrears under 1322(b)(5); (5) priority unsecured claims other than costs of administration; and (6) other unsecured claims.

Mr. Miceli's plan provides for sixty monthly payments of $500 to be paid to the trustee, totaling $30,000. From this amount, the Debtor estimates that the trustee will distribute $5,743.00 on administrative expenses and priority claims over the term of the plan, including an estimated $1,800 in trustee's fees and $3,600 attorney's fees.³ While the plan states that it anticipates paying 100% of allowed unsecured claims, it estimates them to be "$0".

In an apparent attempt to square the plan's $0.00 proposed monthly payment with the anticipated total arrearage distribution of $23,943.42, the Debtor states in his response to the objection that his plan intends to pay the Associated Bank arrearage from the Debtor's $500 monthly installments. He explains that the trustee will distribute the funds according to the "waterfall" distribution arrangement provided in General Order No. 17-02. The plan proposes to treat the first 6% of each of the trustee's $500 monthly distribution as a cost of administration. The remainder of the trustee's monthly distribution will be paid first to the Debtor's attorney for his fees "estimated to total $1,800" until the attorney's claim is paid in full. After that, the remainder will be distributed to Associated Bank to pay in full its mortgage arrearage claim.

The parties stand on their briefs and oral argument. The Chapter 13 trustee takes no position on the objection. This determination is based upon these submissions, and takes judicial notice where appropriate of the court's docket of the case and the filings therein and with consideration of the argument of counsel. See, e.g., Lulay Law Offices v. Rafter, 579 B.R. 827 n.1 (N.D. Ill. 2017) (taking "judicial notice of matters of public record, such as filings in the bankruptcy court, even where not specifically referenced by the parties") (citing United States v. Wood, 925 F.2d 1580, 1582 (7th Cir. 1991) ).

DISCUSSION

A. Equal Monthly Payment Required by Section 1325(a)(5).

The court must confirm a Chapter 13 Plan that satisfies the criteria of 11 U.S.C. § 1325(a). Under section 1325(a)(5) :

(i) the plan [must] provide[ ] that--

(I) the holder of such claim retains the lien securing such claim until the earlier of--

(aa) the payment of the underlying debt determined under nonbankruptcy law; or

(bb) discharge under section 1328; and

(II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law;

(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and

(iii) if--

(I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and

(II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan.

11 U.S.C § 1325(a)(5)(B).

With respect to the allowed secured claim of Associated Bank, the Debtor proposes to keep its real property collateral without the creditor's consent. The plan proposes to pay Associated Bank only its current monthly contractual payment, now estimated to be $477.83, for the first 8 or 9 months, after which the monthly distribution will bump up $470 to $947.83 for the remainder of the plan (with a slightly lower payment in the month the attorney's fees are paid off). Thus, the principal issue for confirmation is whether the plan provisions for the Associated Bank secured claim complies with the in equal payment provisions of section 1325(a)(5)(B)(iii)(I) of the Bankruptcy Code where it provides for the trustee to distribute to the creditor lesser monthly payments until the attorney's fees are paid off.

Courts are divided whether a Chapter 13 plan can provide for such a two-step repayment arrangement for paying off attorneys' fees without the secured creditor's consent.⁴ As discussed below, two lines of cases—the " DeSardi approach" and the " Erwin approach"—reach the conclusion that it is permissible to do so. A third line of decisions⁵ holds that it is not. After close consideration of this authority and the statutory language, this court concludes that section 1325(a) does authorize confirmation of a plan that requires a secured creditor to accept smaller payments with larger payments to be made only later in the term of the plan.

The DeSardi line of cases reason that the equal monthly payment provision of section 1325(a)(5)(B)(iii)(I) only requires that the payments to the creditor be equal once they begin and must continue to be equal until they cease. In re DeSardi, 340 B.R. 790, 806 (Bankr. S.D. Tex. 2006). See also In re White, 564 B.R. 883 (Bankr. W.D. La. 2017) ; In re Butler, 403 B.R. 5 (Bankr. W.D. Ark. 2009) ; In re Chavez, 2008 WL 624566 (Bankr. S.D. Tex. Mar. 5, 2008) ; In re Hill, 397 B.R. 259 (Bankr. M.D. N. C. 2007). These cases emphasize that subsection (5)(B)(iii)(I) does not expressly state when the equal payment requirement applies in contrast to other provisions of the subsection such as section 1325(a)(5)(B)(iii)(II)'s requirement that adequate protection payments on personal property collateral be made "during the period of the plan" and section 1325(a)(5)(B)(ii)'s reference to value "as of the effective date of the plan" to conclude that the lack of such a provision in subsection (5)(B)(iii)(I) was intended. See, e.g., In re DeSardi, 340 B.R. at 805-06. On that limited point this court does not disagree with DeSardi and we do not suggest that section 1325(a)(5)(B)(iii)(I) requires monthly payments to be made throughout the full term of the plan.

But neither the plan proposed in this case nor the plans considered in the DeSardi line of cases propose to pay the secured creditor equal periodic payments over a single period. In DeSardi, the debtors proposed to pay the secured creditor a minimal amount as required to provide adequate protection by section 1325(a)(5)(B)(iii)(II) from the inception of the plan for several months followed...