Opinion
Case No. 12-52043
01-08-2013
In re: Henry Ferdinand Nys, Jr. Joann Louise Nys Debtors.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
_________________
C. Kathryn Preston
United States Bankruptcy Judge
Chapter 13
Judge Preston
OPINION AND ORDER SUSTAINING
CHAPTER 13 TRUSTEE'S OBJECTION
TO CONFIRMATION OF PLAN
The United States Bankruptcy Court for the Southern District of Ohio, Eastern Division has mandated use of a form plan, commonly called the "Mandatory Form Plan" (the "MFP"), in all Chapter 13 cases filed after January 1, 2008. See General Order No. 7 (Bankr. S.D. Ohio Oct. 24, 2007). Notwithstanding, Henry Ferdinand Nys and Joann Louise Nys ("Debtors") inserted a special provision in their Chapter 13 Plan (the "Special Provision") substantively altering subsection B(3) of the MFP. The Trustee objected. For the reasons set forth herein, the Court sustains the Trustee's Objection to Confirmation (the "Objection") (Doc. #25).
I. BACKGROUND
The creditors' bar, the debtors' bar, the Court, the standing Chapter 13 Trustee Frank Pees, and the Office of the United States Trustee collaborated to construct a form Chapter 13 plan for use in Chapter 13 cases filed in this Division. The proposed form plan was published and public comment solicited. After considering all comments submitted and making appropriate revisions to the proposed form, the Court approved the MFP and issued General Order No. 7 mandating its use in all Chapter 13 cases filed after January 1, 2008.
General Order No. 7 instructs the bar that, "[a]ny debtor who wishes to use an original or amended plan that varies from the Mandatory Form Plan must file a motion requesting leave to do so. Absent exceptional circumstances related to the particular Chapter 13 case, leave will not be granted." The MFP includes a section for special provisions in the event that a debtor's circumstances require provisions to address a creditor or a claim not already addressed in the language of the MFP. The General Order describes proper usage of that section:
Special [p]rovisions, if any, included in section H of the Mandatory Form Plan are restricted to those items applicable to the particular circumstances of the debtor(s). Special [p]rovisions shall not contain a restatement of provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, the Local Bankruptcy Rules, or
the Mandatory Form Plan.
Subsection B(3) of the MFP sets forth the treatment of liens that a Chapter 13 debtor proposes to pay as an unsecured claim, providing in pertinent part as follows:
B(3). Liens and/or Mortgage to be Paid as Unsecured Claims.
The following claims secured by a lien and/or mortgage will be paid as unsecured claims concurrent with Class 5 general unsecured claims. Debtor shall file a separate motion or adversary proceeding to determine: (I) whether the property listed below vests free and clear of the lien(s) and/or mortgage(s) pursuant to § 1327 or (ii) whether the lien(s) and/or mortgage(s) listed below may be avoided pursuant to other applicable provisions of the Bankruptcy Code. Notwithstanding § 1327(a), confirmation of the Plan shall not be dispositive of: (i) valuation of the collateral or (ii) the secured status of the claims.
Debtors filed a Petition for Relief under Chapter 13 of the Bankruptcy Code on March 12, 2012. In due course, Debtors filed their Second Amended Chapter 13 Plan (the "Plan"), which contains the Special Provision. The Special Provision states:
Notwithstanding Section (B)(3) of the Form Plan, if no objection is timely filed, the values as set forth in the Chapter 13 Plan and/or filed appraisal will be binding upon all parties at the time of Confirmation of the Chapter 13 Plan pursuant to 11 U.S.C. § 1327(a).The Trustee timely objected to confirmation of the Plan due to the Special Provision. The parties agree that avoidance of a lien on property of Debtors requires a motion or adversary proceeding. Avoidance of a lien is not the issue before the Court; the sole issue before the Court is whether it is proper for the MFP to require further litigation to establish the value of collateral.
Debtors have since filed a Third Amended Chapter 13 Plan containing the same Special Provision which was provisionally confirmed by Order of this Court entered November 7, 2012. The confirmation order provides that operation of the Special Provision is held in abeyance pending the Court's decision.
The Court requested memoranda from the parties in support of their respective positions. Debtors advanced two theories in support of the Plan. First, Debtors asserted that the MFP is inconsistent with Federal Rule of Bankruptcy Procedure 3012, Local Bankruptcy Rule 3012-1(a) and the form order of confirmation utilized by the Court. Debtors next posit that the MFP is inconsistent with the purpose and goal of § 1327 of bringing finality to the confirmation process.
The Trustee argued that Debtors' Plan violates General Order No. 7, and principles of due process. The Trustee also suggested that public policy weighs in favor of the MFP in that it is fair to all parties in interest and nothing in the Bankruptcy Code requires the Court to determine the value of collateral as a condition precedent to confirmation of a Chapter 13 plan.
II. ANALYSIS
The Court's decision is based upon its conclusion that the MFP is not inconsistent with the Bankruptcy Code, federal bankruptcy rules or local bankruptcy rules. Additionally, use of the Special Provision violates the provisions of General Order No. 7.
A. The Treatment Set Forth in the MFP is Consistent with the Bankruptcy Code.
Sections 1322 and 1325 of the Bankruptcy Code invite debtors to include in their Chapter 13 plan numerous provisions for addressing the claims of creditors. However, only certain provisions are mandatory. Section 1322(a) provides in pertinent part:
Unless otherwise indicated, all statutory citations are to sections of the Bankruptcy Code codified in Title 11 of the United States Code.
(a) The plan —11 U.S.C. § 1322(a) (emphasis supplied).
(1) shall provide for the submission of all or such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan;
(2) shall provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claim;
(3) if the plan classifies claims, shall provide the same treatment for each claim within a particular class; and
(4) notwithstanding any other provision of this section, may provide for less than full payment of all amounts owed for a claim entitled to priority under section 507(a)(1)(B) only if the plan provides that all of the debtor's projected disposable income for a 5-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.
The Court is required to confirm a plan when the conditions articulated in § 1325 are met:
(a) Except as provided in subsection (b), the court shall confirm a plan if11 U.S.C. § 1325(a) - (b)(1)(B). Neither § 1322 nor § 1325 mandate the determination of the value of a secured creditor's collateral prior to confirmation of a proposed plan.
(1) The plan complies with the provisions of this chapter and with the other applicable provisions of this title;
(2) any fee, charge, or amount required under chapter 123 of title 28, or by the plan, to be paid before confirmation, has been paid;
(3) the plan has been proposed in good faith and not by any means forbidden by law;
(4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date;
(5) with respect to each allowed secured claim provided for by the plan—
(A) the holder of such claim has accepted the plan;
(B) (i) the plan provides that—
(I) the holder of such claim retain the lien securing such claim until the earlier of—(ii) the value, as of the effective date of the plan, of property to be
(aa) the payment of the underlying debt determined under nonbankruptcy law; or(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;
(bb) discharge under section 1328; and
distributed under the plan on account of such claim is not less than the allowed amount of such claim; and(6) the debtor will be able to make all payments under the plan and to comply with the plan;
(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(C) the debtor surrenders the property securing such claim to such holder;
(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; or
(7) the action of the debtor in filing the petition was in good faith;
(8) the debtor has paid all amounts that are required to be paid under a domestic support obligation and that first become payable after the date of the filing of the petition if the debtor is required by a judicial or administrative order, or by statute, to pay such domestic support obligation; and
(9) the debtor has filed all applicable Federal, State, and local tax returns as required by section 1308.
. . . .
(b)
(1) If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan—
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the plan provides that all of the debtor's projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.
Debtors suggest that the form language of subsection B(3) of the MFP does violence to the intent of § 1327, in that it impairs the finality of the order of confirmation. This may appear to be true, but, while the res judicata effect of § 1327 is laudable and important, the Court is of the opinion that establishing the value of property was not an intended purpose of that statute.
Section 1327(a) provides in pertinent part: "The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan." 11 U.S.C. § 1327(a).
In addition to the mandatory provisions of § 1322, in the Chapter 13 plan, a debtor may:
(1) designate a class or classes of unsecured claims, as provided in section 1122 of this title, but may not discriminate unfairly against any class so designated; however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims;11 U.S.C. § 1322(b). None of these provisions expressly speak to valuation of collateral. Indeed, a debtor may not have to set forth values of collateral in the proposed plan, if the debtor files a Chapter 13 proceeding in a district without a form plan similar to this Division's MFP or in a district without a local rule mandating such. The central purpose of the Chapter 13 plan is to address payment of claims. Thus, it is not apparent that the values of property were intended to be established by the plan or the order of confirmation, and the intended effect of finality of the order of confirmation is not impaired by subsection B(3) of the MFP.
(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;
(3) provide for the curing or waiving of any default;
(4) provide for payments on any unsecured claim to be made concurrently with payments on any secured claim or any other unsecured claim;
(5) notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due;
(6) provide for the payment of all or any part of any claim allowed under section 1305 of this title;
(7) subject to section 365 of this title, provide for the assumption, rejection, or assignment of any executory contract or unexpired lease of the debtor not previously rejected under such section;
(8) provide for the payment of all or part of a claim against the debtor from property of the estate or property of the debtor;
(9) provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity;
(10) provide for the payment of interest accruing after the date of the filing of the petition on unsecured claims that are nondischargeable under section 1328(a), except that such interest may be paid only to the extent that the debtor has disposable income available to pay such interest after making provision for full payment of all
allowed claims; and
(11) include any other appropriate provision not inconsistent with this title.
There are policy reasons for preserving the form of the MFP. Prior to the inception of the MFP in this Division, debtors contemplating avoidance of a lien secured by real estate (other than the debtor's principal residence), would set forth in the proposed Chapter 13 plan payment of such a lienholder's claims as unsecured or partially secured, based on the value of the real estate. The value would be set forth in the plan. It became incumbent on the lienholder to object to the value of the real estate set forth in the plan. Often, in order to facilitate confirmation of the plan, the parties would agree to conditional confirmation of the plan, reserving the issue of value of the property for later determination by the Court. If the parties were unable to agree to such a procedure, confirmation was delayed until the Court could schedule and conduct an evidentiary hearing to determine the value of the property. Of course, an evidentiary hearing could be delayed by the need to obtain appraisals, conduct adequate discovery, and assure the appearance of necessary witnesses. In the meantime, due to the operation of § 1326(a)(2), the trustee was unable to commence payments to any creditors, including those holding mortgages or liens on the debtor's home, motor vehicle or other property. This created difficulties, inasmuch as creditors whose claims are secured by property that the debtor intends to retain and use, are generally entitled to adequate protection pursuant to § 363. Subsection B(3) of the MFP was designed to protect the interests of secured creditors, while allowing confirmation of the plan to proceed and payment of other creditors to commence. Use of Debtors' Special Provision regresses to the cumbersome procedure that the MFP was in part designed to alleviate. Moreover, allowing Debtors to avoid the effect of the MFP's language invites other alterations of the MFP form provisions. At some point the MFP ceases to serve its purpose.
Section 1326 provides in pertinent part:
(a)(1) Unless the court orders otherwise, the debtor shall commence making payments not later than 30 days after the date of the filing of the plan or the order for relief . . . .
. . . .
(2) A payment made under (1)(A) shall be retained by the trustee until confirmation or denial of confirmation.
Additionally, there are or can be numerous issues that are related to a debtor's Chapter 13 plan. Avoidance of a lien, either consensual or judicial, pursuant to §§ 522(f), 544 or 547, is one. The Chapter 13 plan is the mechanism for payment of claims rather than disposition of liens. At least some lien avoidance actions must be brought by way of an adversary proceeding. See Fed. R. Bankr. P. 7001. It can require many months to reach a final resolution of a lien avoidance case. In one of the anomalies of Chapter 13, a plan must treat secured claims in specific fashion, and Chapter 13 of the Bankruptcy Code does not accommodate those instances when the bankruptcy estate has the right to avoid a lien and treat the lienholder's claim as unsecured. See 11 U.S.C. § 1325. Conceptually, a creditor holding a secured claim could object to a plan to the extent it provides for payment of the creditor's secured claim in a manner inconsistent with § 1325. Yet, the Bankruptcy Code contemplates quick, efficient confirmation of plans, in order to commence expeditious payment of claims. Thus, a tension exists between the goal of achieving confirmation timely and resolving a contested lien issue as a condition precedent to confirmation.
Finally, there is the question of fairness and due process. As part of their financial reorganization under Chapter 13, some debtors seek avoidance of secured claims pursuant to § 506 of the Bankruptcy Code. It is the position of some courts that the avoidance of a lien envisioned by § 506 must be implemented through an adversary proceeding. See Fed. R. Bankr. P. 7001; see also In re Forrest, 424 B.R. 831 (Bankr. N.D. Ill. 2009) (holding that an adversary proceeding is necessary to avoid a wholly unsecured junior mortgage). But whether the lien avoidance is effectuated by adversary proceeding or motion practice, Federal Rule of Bankruptcy Procedure 7004 has special service requirements for some creditors that may be the target of the avoidance action. There are few issues, if any, posed by such an avoidance action other than the value of the property at issue. Deciding valuation as a consequence of confirmation of a plan renders a de facto ruling of lien avoidance subject only to the procedural step of filing a motion or adversary proceeding. However, the plan is not served on creditors in a fashion consistent with Rule 7004. This treads dangerously close to a violation of the due process that must be afforded secured creditors whose liens are under attack.
B. The Provisions of the MFP Are Not Inconsistent with the Federal Rules of Bankruptcy Procedure or the Local Bankruptcy Rules.
Debtors declare that subsection B(3) of the MFP is inconsistent with Federal Rule of Bankruptcy Procedure 3012, Local Bankruptcy Rule ("LBR") 3012-1 and the form order of confirmation utilized by the Trustee.
Rule 3012 addresses the procedure for valuation of collateral, providing that:
The court may determine the value of a claim secured by a lien on property in which the estate has an interest on motion of any party in interest and after a hearing on notice to the holder of the secured claim and any other entity as the court may direct.Fed. R. Bankr. P. 3012 (emphasis supplied). This rule merely sets forth a procedure for determining valuation of property subject to a lien. It is not inconsistent with the concept envisioned by subsection B(3) of the MFP of proceedings outside of the confirmation process for such a determination. And Debtors fail to illustrate any inconsistency between the rule and subsection B(3) of the MFP.
LBR 3012-1 is titled "Valuation of Collateral (Personal Property in Chapter 13 Cases)" and provides in pertinent part:
Objections to the value of personal property in chapter 13 cases are governed by this rule.Local Bankruptcy Rule 3012-1. The scope of LBR 3012-1 is clearly limited to personal property: it so states in the title as well as the text of the rule. Subsection B(3) of the MFP addresses avoidance of mortgages on real estate. Again, Debtors fail to illustrate how the MFP is inconsistent with LBR 3012-1.
(a) General Rule. Unless otherwise ordered by the court, stipulated between the parties, or evidenced by uncontested appraisal, personal property secured by valid consensual or judicial liens shall be valued for purposes of § 506(a) of the Code at the lower of the claimant's representation on its proof of claim or the debtor's representation in the chapter 13 plan, or if the valuation is not stated in the plan, then the value set forth in the debtor's schedules. Any amount by which a proof of claim exceeds that valuation shall be allowed and treated as an unsecured claim unless otherwise ordered.
C. The Provisions of the MFP Are Not Inconsistent with the Form Order of Confirmation.
Finally, Debtors complain that the language of subsection B(3) of the MFP is inconsistent with the form order of confirmation utilized in this Division, which states in the sixth decretal paragraph:
The value of property which is the subject of a security interest shall be the lesser of the value set forth in the Plan (or if a value is not stated in the Plan, then the value set forth in the Debtor(s)' schedules) or the value set forth in the secured creditor's proof of claim, unless a different value is stipulated by the parties or determined by Court order.Admittedly, the language of this paragraph is somewhat ambiguous. The ambiguity is clarified however, by reference to the MFP: section C addresses (among other things) claims secured by personal property and utilizes the term "security interest" when addressing liens on such property. Conversely, with the exception of the introductory paragraph in section B, section B of the MFP, and specifically subsection B(3), refer to encumbrances on real estate as "mortgages" or "liens."
More importantly, the form order of confirmation does not have the imprimatur of Congress or the Supreme Court as do the Bankruptcy Code and Rules, and does not carry the weight of statutory provisions or rules. Similarly, the form order of confirmation has not been vetted by committee or the various parties involved in the bankruptcy process or subjected to public comment, and it is not the subject of a general order. Thus, to the extent that the form order of confirmation is ambiguous or unclear, the MFP must prevail. Correction of the form order, if correction is needed, is not accomplished through special provisions to the MFP.
D. The Special Provision Violates the Provisions of General Order No. 7.
Pursuant to the provisions of General Order No. 7,
[s]pecial [p]rovisions, if any, included in section H of the [MFP] are restricted to those items applicable to the particular circumstances of the debtor(s). Special [p]rovisions shall not contain a restatement of provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, the Local Bankruptcy Rules, or the [MFP].
The Special Provision does not pertain to the particular circumstances of Debtors, but rather relates to an issue that is present in numerous Chapter 13 cases. Moreover, the issue which is the subject of the Special Provision, that being the effect of confirmation on the determination of value of a mortgage holder's collateral, is specifically addressed in subsection B(3) of the MFP. Pursuant to General Order No. 7, Debtors are required to use the MFP unless they seek leave to use some variation. Because the Special Provision alters the form language of the MFP, the Plan is effectively a variation of the MFP. Debtors, however, never sought leave to alter the MFP. Therefore, Debtors' Plan violates General Order No. 7.
III. CONCLUSION
The Court finds that the provisions of the MFP do not violate the Bankruptcy Code or related rules, and that the Bankruptcy Code does not require value of collateral to be established in order to proceed to confirmation. The Special Provision violates General Order No. 7 because the Special Provision does not pertain to the particular circumstances of Debtors and because they did not obtain leave of Court before filing a plan inconsistent with the MFP.
It is, therefore, ORDERED and ADJUDGED that the Trustee's Objection is SUSTAINED, and Special Provision #3 of Debtors' Plan is stricken. The Order Confirming Chapter 13 Plan remains in full force and effect in all other respects.
The Court conditionally confirmed a plan in other Chapter 13 cases, which plan contained the same special provision as was present in the instant case. Trustee shall submit an order in each of those cases sustaining the Trustee's objection and striking the special provision.
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IT IS SO ORDERED. Copies to:
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