In re Scarver

• Decision Date: 23 August 2016
• Docket Number: Case No. 14-10150-WRS
• Citation: 555 B.R. 822
• Parties: In re Alesha Scarver, Debtor
• Court: U.S. Bankruptcy Court — Middle District of Alabama

555 B.R. 822

In re Alesha Scarver, Debtor

Case No. 14-10150-WRS

United States Bankruptcy Court, M.D. Alabama.

Signed August 23, 2016

Filed August 24, 2016

Michael D. Brock, Brock & Stout, Enterprise, AL, for Debtor.

MEMORANDUM OPINION

William R. Sawyer, United States Bankruptcy Judge

This Chapter 13 bankruptcy case is before the Court on the “Motion for a Determination of Secured Status” filed by 1^st Franklin Financial Corporation (“1^st Franklin”). (Doc. 40). The question presented is whether a Chapter 13 debtor acting in good faith may modify her confirmed plan to surrender collateral and reclassify any deficiency balance as an unsecured claim. For the reasons set forth below, the Court holds that a debtor may modify her confirmed plan for that purpose. Therefore, 1^st Franklin's motion is DENIED.

I. FACTS & PROCEDURAL HISTORY

Alesha Scarver (“Scarver”) obtained a loan from 1^st Franklin on July 31, 2012, in the amount of $6,931.99 that was secured by her 2001 Toyota Corolla. (Claim 7). Scarver filed Chapter 13 bankruptcy on January 28, 2014, and valued the Corolla at $4,125.00. (Doc. 1). 1^st Franklin filed a secured proof of claim for $4,867.89, and Scarver proposed to keep the Corolla by paying 1^st Franklin $99 per month at 4.25% interest; Scarver's plan classified 1^st Franklin's claim as a “910-claim.” (Claim 7; Doc. 2). Unsecured creditors would be paid nothing. (Doc. 2). The Court confirmed Scarver's plan on April 11, 2014. (Doc. 19).

Sometime in 2015, Scarver was involved in a traffic accident while driving the Corolla. On September 14, 2015, Scarver objected to 1^st Franklin's claim. (Doc. 25). She explained that her insurer had declared the Corolla to be a total loss and was willing to pay $2,802.45 for it, and Scarver wanted 1^st Franklin's claim to be deemed fully satisfied upon payment of the insurance proceeds. (Doc. 25). 1^st Franklin did not respond and the Court sustained Scarver's objection by negative notice on October 21, 2015. (Doc. 26); see LBR 3007-1. On November 4, 2015, Scarver moved to modify her plan by proposing to surrender the Corolla and the $2,802.45 in insurance proceeds to 1^st Franklin. (Doc. 29). Again 1^st Franklin did not respond and the Court granted Scarver's motion to modify her plan by negative notice on November 17, 2015. (Doc. 30); see LBR 9007-1.

1^st Franklin filed the instant motion for determination of secured status on April 12, 2016. (Doc. 40). 1^st Franklin argues that, after application of the insurance proceeds, the remaining balance on its claim should still be treated as secured. (Doc. 40). The Court held a hearing on May 17, 2016, and invited Scarver's bankruptcy attorneys to file a response, but they have not done so.¹

II. LAW

The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(a), and the District Court's General Order of Reference dated April 25, 1985. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L). This is a final order.

A. Bifurcation and “Cramdown” of Secured Claims

Before reaching the specific issue in this case, it is helpful to understand the nature of secured claims and a Chapter 13 debtor's options regarding their treatment prior to plan confirmation. “The general rule” under 11 U.S.C. § 506(a) “is that ‘a claim is secured only to the extent of the value of the property on which the lien is fixed; the remainder of that lien is considered unsecured.’ ” In re Moorer , 544 B.R. 702, 704 (Bankr.M.D.Ala.2016) (quoting United States v. Ron Pair Enters., Inc. , 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) ). “Chapter 13 debtors enjoy broad power to modify the rights of the holders of secured claims.” American Gen. Fin., Inc. v. Paschen (In re Paschen) , 296 F.3d 1203, 1205 (11th Cir.2002) (internal quotation marks omitted). A Chapter 13 debtor who wishes to keep collateral securing a claim may do so over the claimant's objection by paying the claimant the replacement value of the collateral, a process known as a “cramdown.” 11 U.S.C. § 1325(a)(5)(B). If the collateral's value is less than the amount of the debt, a debtor exercising a cramdown may bifurcate the claim into secured and unsecured portions under § 506(a) and pay only the secured amount. Paschen , 296 F.3d at 1206.

There are certain exceptions to a Chapter 13 debtor's power to bifurcate an undersecured claim in a cramdown. One exception protects mortgages secured by the debtor's principal residence. See Nobelman v. Am. Sav. Bank , 508 U.S. 324, 327, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) ; 11 U.S.C. § 1322(b)(2). A second exception, more pertinent to this case, prohibits bifurcation and cramdown of a claim under § 506(a) ...

if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day period preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle ... acquired for the personal use of the debtor....

11 U.S.C. § 1325(a) (hanging paragraph)² ; see also DaimlerChrysler Fin. Servs. Am. LLC v. Barrett (In re Barrett) , 543 F.3d 1239, 1242–43 (11th Cir.2008). A creditor obtains a purchase-money security interest (“PMSI”) in collateral when the debtor incurs an obligation “as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used.” ALA. CODE § 7–9A–103(a)(2). When a creditor holds a PMSI on the debtor's vehicle and the underlying debt was incurred within 910 days prior to the debtor's bankruptcy, the creditor holds what is called a “910-claim” and is entitled to full payment on its claim, regardless of the vehicle's value, if the debtor chooses to cram down the claim.

Scarver kept the Toyota Corolla and promised to pay the full amount of 1^st Franklin's claim as a 910-claim.³ Now that she has wrecked the Corolla and experienced a shortfall on the insurance proceeds, the question is whether she must pay 1^st Franklin the full amount of its claim in order to obtain a Chapter 13 discharge in this case.

B. Post-Confirmation Plan Modification

Anytime after a Chapter 13 plan is confirmed, but before plan payments are completed, the debtor, trustee, or any unsecured creditor may seek to modify the plan. 11 U.S.C. § 1329(a) ; Meza v. Truman (In re Meza) , 467 F.3d 874, 878 (5th Cir.2006). Post-confirmation plan modification entails three basic requirements. First, the modification must comply with one of the provisions of § 1329(a), which, as relevant to this case, requires the modifying plan to either:

(1) increase or reduce the amount of payments on claims of a particular class provided for by the plan;

(2) extend or reduce the time for such payments; [or]

(3) alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan[.]

11 U.S.C. § 1329(a).⁴ Second, the modification must comply with the requirements for plan confirmation set out in 11 U.S.C. §§ 1322(a) and 1325(a), and may treat claims as permitted by 11 U.S.C. §§ 1322(b)(2) and 1323(c). 11 U.S.C. § 1329(b)(1). Third, the modification cannot extend the payment period beyond five years after the first plan payment was due, and cannot extend the original commitment period of the debtor's disposable income except for cause. 11 U.S.C. § 1329(c). A party seeking to modify a confirmed plan under § 1329 need not demonstrate an unforseen substantial change in the debtor's circumstances. In re Thomas , 291 B.R. 189, 193 (Bankr.M.D.Ala.2003). “The plan as modified becomes the plan unless, after notice and a hearing, such modification is disapproved.” 11 U.S.C. § 1329(b)(2).

Scarver's plan modification complies with § 1329(c). Whether it complies with §§ 1329(a) and (b)(1) depends on whether Scarver can reclassify 1^st Franklin's secured claim after her payment plan has been confirmed.

C. Post-Confirmation Claim Reclassification

For more than twenty-five years, courts have been divided over whether a Chapter 13 debtor has the power to reclassify a secured claim after plan confirmation. The current minority view holds that a Chapter 13 debtor may not reclassify a secured claim after plan confirmation under any circumstances.⁵ The current majority view holds that a Chapter 13 debtor may surrender collateral and reclassify any resulting deficiency balance from a secured debt to an unsecured debt, if done in good faith.⁶ This has been the prevailing view for the past ten years.

1. The Minority View: Post-Confirmation Claim Reclassification is Prohibited

The leading cases of the minority camp are a pair of pre-BAPCPA decisions from the Sixth Circuit. See Ruskin v. DaimlerChrysler Servs., N.A., LLC (In re Adkins) , 425 F.3d 296 (6th Cir.2005) ; Chrysler Fin. Corp. v. Nolan (In re Nolan) , 232 F.3d 528 (6th Cir.2000). In Nolan , the debtor owed $12,000 on a vehicle that she sought to cram down, and her confirmed plan bifurcated the claim into a secured portion of $8,000 and an unsecured portion of $4,000. Nolan , 232 F.3d at 529. When her vehicle became undependable due to high use and lack of proper maintenance, the debtor moved to modify her plan in order to surrender the vehicle and reclassify the deficiency balance as an unsecured claim. Id. at 529–30. The Sixth Circuit held that the debtor's proposed modification was per se impermissible under § 1329, id. at 532, overruling, e.g. , In re Jock , 95 B.R. 75 (Bankr.M.D.Tenn.1989), and articulated five rationales for its holding.

First, the Sixth Circuit explained that § 1329(a) “does not expressly allow the debtor to alter, reduce or reclassify a previously allowed secured claim.” Nolan , 232 F.3d at 532. Instead, it held that § 1329(a)(1) “only affords the debtor a right to request alteration of the amount or timing of specific payments.” Id. It further held that § 1329(b)(1) could not “enlarge the modifications” permitted by § 1329(a) b...