Opinion
CASE NO. 12-69268-BEM
05-20-2014
IN RE: VALERIE ELAINE FANNING, Debtor. VALERIE ELAINE FANNING, Movant, v. RIVER WALK FARMS HOMEOWNERS ASSOCIATION, INC., Respondent.
CHAPTER 13 Contested Matter ORDER
This matter came before the Court for hearing on February 25, 2014 (the "Hearing") on Debtor's Post-Confirmation Modification of Plan and Request for its Approval (the "Modification") [Doc. No. 41] and the Objection to Debtor's Post-Confirmation Modification of Plan (the "Objection") [Doc. No. 44] filed by River Walk Farms Homeowners Association, Inc. ("RWF" or "Respondent"). Thomas Reichard appeared on behalf of the Debtor. Wes Dunlap appeared on behalf of RWF. After hearing arguments, the Court took the matter under advisement. After careful consideration of the pleadings of record, applicable authorities and the argument of counsel, the Court now enters the following findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052. Jurisdiction
The Court has jurisdiction over the parties and the subject matter of this case pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), and (O). Procedural Background and Facts
Debtor filed her voluntary Chapter 13 petition on August 3, 2012. [Doc. No. 1]. Debtor filed her proposed Chapter 13 plan the same day (the "Plan"). [Doc. No. 2]. The Plan provided for Debtor to retain her residence. Id. at 3. There are two claims identified in the Plan secured by the residence, RWF's claim relating to home owner's association assessments, and a mortgage held by Bank of America. Id. Each of these claimants filed proofs of claim identifying their claim as secured. See, claim no. 1; claim no. 7. The Plan provided for payment to RWF in the amount of its secured claim. Id. Debtor filed an Amended Chapter 13 Plan on September 27, 2012 (the "Amended Plan"). [Doc. No. 18]. The Amended Plan did not alter the treatment of RWF or Bank of America's claims. Id. at 3. No objection to either claim was filed prior to confirmation and the claims are thus allowed secured claims. See, 11 U.S.C. §502; 11 U.S.C. §1327.
On October 24, 2012, the Court entered an Order Confirming Plan (the "Confirmation Order") [Doc. No. 23] confirming the Amended Plan (the "Confirmed Plan"). The Confirmed Plan is a one hundred percent (100%) plan, that is, it provides for payment in full to holders of timely filed and allowed general unsecured claims.
Debtor filed the Modification on January 10, 2014. [Doc. No. 41]. The Modification provides for surrender of Debtor's residence and vehicle. Debtor argues that the claim filed by RWF should be treated as unsecured because Debtor is surrendering the residence. RWF objects to the change in classification of its claim post-confirmation and argues that because the Confirmed Plan treated RWF's claim as secured, Debtor is required to pay the claim in full, even if the collateral is surrendered. [Doc. No. 44] See generally, In re Newton, 2006 WL 6591601 (Bankr. N.D. Ga.); In re Taylor, 2011 WL 7070518 (Bankr. N.D. Ga.)(Judge Diehl stated, in dicta, that change in treatment of secured claim under § 1329 is not proper).
At the Hearing, the Debtor's counsel proffered that Debtor is no longer living in the property, because her estranged husband is and she has had to move. Debtor's estranged husband is not a co-debtor on the RWF claim. The Debtor argues that 11 U.S.C. § 1329 allows for modification to surrender property and reclassify a claim secured by the surrendered property. Debtor argues further that in this case, if the modification is allowed, RWF would still be paid in full because the Confirmed Plan is a 100% plan. RWF's stated concern is that if there is a change in circumstances for the Debtor, Debtor could seek to modify the Confirmed Plan to reduce the distribution to unsecured creditors. Discussion
The Court notes that prior to filing the Modification, Debtor filed an Objection to RWF's claim in which she sought to disallow the claim because of the surrender of collateral. [Doc No. 42] The objection was subsequently withdrawn, however, the objection gives credence to RWF's concern that the Debtor may seek to pay it less than 100%.
A confirmed Chapter 13 plan is binding on "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, accepted, or rejected the plan." See, 11 U.S.C. § 1327(a). Notwithstanding the binding effect of confirmation, the Code provides that a debtor, trustee or unsecured creditor may modify a confirmed plan in certain respects as long as the modifications comply with §§ 1322(a) and (b), 1325(a) and 1323(c) of the Code. See, 11 U.S.C. § 1329.
Section 1329(a) of the Code states in relevant part:
At any time after confirmation of the plan but before completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to-- (1) increase or reduce plan payments on claims of a particular class, provided for by the plan; (2) extend or reduce the time for such payments; (3) alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary ot take account of any payment of such claim other than under the plan; or under the plan to account for payments made outside of the plan, . . .11 U.S.C. § 1329(a).
The question before the Court is whether a post-confirmation modification to surrender property and treat any deficiency claim as an unsecured claim is allowable under § 1329. Because the "statutory language of Section 1329(a)(1) . . . is certainly subject to at least two interpretations. . . ." it is not surprising that this question has divided the Courts. See In re Coleman, 231 B.R. 397, 399 (Bankr. S.D. Ga. 1999).
The leading case holding that a plan cannot be modified to affect a post-confirmation surrender and change in treatment of a secured claim is In re Nolan, 232 F.3d 528 (6th Cir. 2000). In Nolan, the debtor sought to surrender a vehicle and reclassify the creditor's claim as unsecured. The debtor in Nolan had driven the vehicle approximately 100,000 miles in three years and had changed the oil 2 or 3 times. Id. at 530. The Sixth Circuit agreed with, and adopted the reasoning of the Coleman court in holding that modification to surrender collateral was not permitted by the Code. The Nolan court determined that post-confirmation surrender was not allowable because:
(i) § 1329(a) does not expressly allow the debtor to alter, reduce or reclassify a previously allowed secured claim ; (ii) such a modification would violate § 1325(a)(5)(B), which requires that a secured claim fixed in amount and status be paid in full once it is allowed; (iii) reclassification of a secured claim through a modification contravenes section 1327 and supposes an unlikely congressional intent to give debtors the option to shift the burden of depreciation to the secured creditor; and (iv) allowing such a modification would create an inequitable situation in which a secured creditor could not reclassify its claim to benefit from appreciation of collateral even though the debtor could reclassify or revalue the collateral if it declined in value.Id. at 532-534.
In contrast, in Bank One, N.A. v. Leuellen, 322 B.R. 648 (S.D. Ind. 2005), the Court concluded that § 1329 allows for post-confirmation surrender of collateral and reclassification of a secured claim. In Leuellen, the leading case holding that post-confirmation surrender is allowable, debtors sought to surrender one of their two vehicles in an effort to retain their home after the debtor wife lost her job. The court reasoned that because § 1323(c) applies to modifications, § 1329 necessarily allows for a change in treatment of secured claims. The court reasoned further that changing a claim from secured to unsecured amounts to a change in the amount of payments from "the amount stated in the original plan down to zero, after surrender of the collateral" such that § 1329(a) provides for modification to reclassify a secured creditor's claim. Id. at 657. The Leuellen court was persuaded by the argument that because the creditor could protect itself by objecting to the plan and requiring sufficient adequate protection payments to insure that its claim was equal to the value of the collateral at all points in the case that post-confirmation modification did not unfairly allocate additional risk of depreciation to the secured creditor. Id. at 659. The court concluded that protecting the secured creditor against the risk of depreciation, a risk that the secured creditor "always bears," provided a windfall for the secured creditor because the interest rate on the loan and the bargained for adequate protection payments already protected the creditor from the risk of depreciation. Id. at 660. The court concluded that prohibiting reclassification of secured claims through post-confirmation surrender and bifurcation of secured claims upended the balance between debtors and creditors intended by Congress such that surrender post confirmation must be allowed. Id.
Thus, the split in authority on this issue is attributable, at least in part, to differing views on which result was intended by Congress when it provided for post-confirmation modification. In this court's view, the correct result is that which preserves the balance between the debtor's right to reorganize and the creditor's rights which are established under applicable nonbankruptcy law. The Code allows a debtor to treat creditors' claims less favorably than is possible outside of bankruptcy. See eg: 11 U.S.C. § 1322(b). This is not, however, a one sided proposition, because the Code seeks to balance the benefits and burdens between debtors and creditors. See eg: 11 U.S.C. § 361; See also: Lend Lease v. Briggs Transp. Co. (In re Briggs Transp. Co.), 780 F.2d 1339, 1342 (8th Cir. 1985)(By providing a creditor with a means of protecting its interest by requiring adequate protection the competing interests of the debtor's need to reorganize and the secured creditor's entitlement to constitutional protection of its bargained for property interests are reconciled).
In a chapter 13 case, the Code provides for valuation of a secured claim on the effective date of the plan and payment in full of that value. 11 U.S.C. § 1325(a)(5)(B). In general, the secured portion of the creditor's claim is limited to the value of the collateral determined at confirmation. See, 11 U.S.C. § 506(a) ; but cf 11 U.S.C. § 1322(b)(2). This treatment is clearly less favorable to the creditor than is available outside of bankruptcy, but strikes a balance that allows the Debtor to seek to reorganize while providing protection of the secured creditor's interest in property. It would not be equitable, and the Court does not believe, Congress intended through enactment of § 1329 to impose the additional burden of valuing collateral after confirmation and after additional depreciation has occurred with the resulting reduction of the amount paid to secured creditors. Additionally, allowing such a result is unfair to secured creditors who do not have the ability to propose a modification under § 1329 but are bound by the confirmed plan as provided in § 1327. See In re Stevens., 130 F.3d 1027 (11th Cir. 1997) (secured creditor was bound by plan and amount of allowed secured claim).
Section 506(a) states in part: An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property . . . [s]uch value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.
Adequate protection payments will "usually not eliminate a deficiency claim for two reasons. First, the adequate protection payments are based on liquidation value, whereas the amount of the claim is based on retail value under 11 U.S.C. 506(a)(2). Second, the claim accrues interest, which is not covered by adequate protection payments. HON. W. HOMER DRAKE, JR. CHAPTER 13 PRACTICE AND PROCEDURE 529 (2012-2 ed., Thomson Reuters 2012, vol. 2).
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For these reasons, the Court concludes that post-confirmation surrender with the effect of reclassifying a secured claim is not allowed under § 1329. Accordingly, it is now,
ORDERED that RWF's Objection is SUSTAINED and the proposed modification is DENIED.
IT IS ORDERED as set forth below:
Date: May 20, 2014
/s/_________
Barbara Ellis-Monro
U.S. Bankruptcy Court Judge
END OF ORDER
Distribution List
Valerie Elaine Fanning 270 Homestead Way Covington, GA 30014 E. L. Clark Clark & Washington, PC Bldg. 3 3300 Northeast Expressway Atlanta, GA 30341 Mary Ida Townson Chapter 13 Trustee Suite 2200 191 Peachtree Street, NE Atlanta, GA 30303-1740 Wes Dunlap 3009 Chapel Hill Road Suite B Douglasville, GA 30135