Summary
permitting modification of secured claim after surrender of collateral under 1329, using 502(j) as a fulcrum and noting the good faith requirements of 1325, reasoning that despite a debtor's best intentions at confirmation, financial hardships or other changes in circumstances can necessitate surrender of collateral and debtors should be permitted to make good faith modifications to a confirmed plan
Summary of this case from In re TorresOpinion
CASE NO. 01-40647-BKC-RAM
April 1, 2003
MEMORANDUM OPINION AND ORDER GRANTING MOTION TO MODIFY PLAN
The Debtor in this confirmed Chapter 13 case has filed a motion to modify plan ("Motion to Modify") in which he seeks to surrender one item of collateral to a creditor whose claim was treated as partially secured in the original plan. The issue is whether a modification that will reduce the secured claim and treat any deficiency as unsecured is permissible. For the reasons that follow, the Court is granting the Motion to Modify.
Factual and Procedural Background
The Debtor filed this Chapter 13 case on October 5, 2001. On the petition date, creditor, Jose Puiggros ("Puiggros") held two claims under two separate notes executed by the Debtor. Puiggros filed a secured claim under the first note ("First Note") in the amount of $24,695.12. The First Note is secured by a lien on the Debtor's mobile home and a lien on his 1976 Ford Truck. Puiggros filed a secured claim under the second note ("Second Note") in the amount of $39,710.10. The Second Note is secured by a lien on the Debtor's 1986 Kenworth Truck.
Puiggros objected to confirmation of Debtor's proposed plan which sought to value the Kenworth Truck securing the Second Note at $16,500, and sought to value the collateral securing the First Note in the total amount of $13,500, based upon a proposed value of $8,500 for the mobile home and $5,000 for the Ford Truck.
Following an evidentiary hearing, Visiting Judge Thomas Utschig entered a March 18, 2002 Order Valuing Collateral which valued the Kenworth Truck securing the Second Note at $19,500. The Order also valued the collateral securing the First Note at a total of $19,500, consisting of $14,000 for the mobile home and $5,500 for the Ford truck. Debtor's Third Amended Plan incorporated the Court ordered valuations and provided for a 60-month payout of the secured claims with interest at 10%. The Third Amended Plan was confirmed on April 8, 2002.
After confirmation, the Court granted stay relief to the lessor of the lot on which the Debtor's mobile home was located. The Court found cause to grant stay relief because the Debtor was unable to cure building code violations arising from certain unpermitted structures Debtor erected on the property. When the Debtor was evicted from the lot, he chose to surrender the mobile home to Puiggros.
On September 3, 2002, Debtor filed the Motion to Modify. The proposed modified plan seeks to discontinue plan payments on the previously valued $14,000 portion of the $19,500 secured claim on the First Note, namely the portion of the payments attributable to the surrendered mobile home. The secured claim on the First Note is reduced to the $5,500 value of the Ford truck and payments on that amount of the secured claim continue. Payment of the allowed secured claim under the Second note is not affected by the proposed modification. The modified plan explicitly provides Puiggros the right to amend his proof of claim for any deficiency that may arise if Puiggros is unable to sell the mobile home at a price sufficient to satisfy the remaining unpaid balance of its $14,000 value.
Puigross filed an objection to the Motion to Modify arguing that a plan's valuations are binding upon confirmation. He argued further that Bankruptcy Code § 1329, which specifically addresses post-confirmation modifications, does not permit the reclassification of claims.
Discussion
Section 1329 permits modification of a confirmed plan for the purposes enumerated within that section. Courts differ on the scope of modifications allowable under § 1329. While § 1329(a) clearly permits a debtor to modify the timing of payments, or to increase or reduce payments to a particular class, it does not expressly authorize a modification that reclassifies a claim. More specifically, a number of courts have held that a debtor cannot modify a plan by surrendering collateral to a secured creditor, having the creditor liquidate the collateral and apply the proceeds toward the claim, and having any deficiency reclassified as an unsecured claim. See, e.g. In re Nolan, 232 F.3d 528 (6th Cir. 2000); In re Smith, 259 B.R. 323 (Bankr. S.D.Ill. 2001); In re Coleman, 231 B.R. 397 (Bankr. S.D.Ga. 1999). In Nolan, the Sixth Circuit reasoned that "Section 1329(a)(1) should not be read so broadly as to authorize the reclassification of claims." Id. at 533. The court found that § 1329(a) allowed for a reduction in the payment of claims, but not for a reduction or modification of the claim itself. Id. at 535.
11 U.S.C. § 1329(a)(b) provides:
(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee or the holder of an unsecured claim, to —
(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.
(b)(1) Sections 1322(a), 1322(b) and 1323(c) of this title and the requirements of § 1325(a) of this title apply to any modification under subsection (a) of this section.
(2) The plan as modified becomes the plan unless, after notice and a hearing, such modification is disapproved.
Other courts have held that a plan modification which reclassifies a deficiency as unsecured is permitted under § 1329(a). See, e.g., In re Frost, 123 B.R. 254 (S.D.Ohio 1990); In re Hernandez, 282 B.R. 200 (Bankr. S.D.Tx. 2002); In re Townley, 256 B.R. 697 (Bankr. D.N.J. 2000);In re Day, 247 B.R. 898 (Bankr. M.D.Ga. 2000); In re Conley, 2000 WL 1805324 (Bankr. E.D.Va. 2000). In Day, the court reasoned that "[t]he requirements for post-confirmation modifications, which include a good faith requirement, have the needed protection to ensure that secured claimants are adequately protected." Day, 247 B.R. at 903. See also 11 U.S.C. § 1329(b)(1), stating that a modification proposed pursuant to § 1329(a) must adhere to the requirements of § 1325, which include § 1325(a)(3)'s good faith requirement.
Judge Lundin's bankruptcy treatise, Lundin, Chapter 13 Bankruptcy (3d. ed. 2000) ("Lundin Treatise"), includes a comprehensive review of numerous published decisions and a well-reasoned analysis of the applicable statutory provisions. Judge Lundin concludes that § 1329 permits modification of a confirmed plan to surrender collateral to a secured claim holder:
If the original Chapter 13 plan provided for payment of the secured claim, then a modified plan that surrenders the collateral and changes the payments to the claim holder falls squarely within § 1329(a).
Lundin Treatise, § 264.1, p. 264-2.
The Lundin Treatise found no policy reasons for denying modifications after surrender. As the treatise explains, "[r]epossession or surrender of collateral after confirmation should not adversely affect the rights of secured claim holders if the lienholder protected itself at confirmation." Id. at p. 264-28. Courts have expressed the same view noting that a creditor may be protected from the potential adverse consequences of a post-confirmation modification by objecting to a plan in which the timing and amount of payments do not at least equal the rate of depreciation of the collateral. Townley, 256 B.R. at 700. This Court agrees with Judge Lundin's treatise and the cases which have permitted modification under § 1329(a) after surrender of collateral.
Moreover, as an alternative statutory basis for relief, this Court notes that some courts have held that while § 1329 standing alone might not authorize reclassification of a secured claim, § 502(j) provides the necessary authorization to reconsider a claim and allow the type of plan modification requested in this case. In In re Johnson, 247 B.R. 904 (Bankr.S.D.Ga. 1999), the court reasoned that an analysis which focuses solely on § 1329 to reclassify a claim is misplaced since § 502(j) controls the allowance or disallowance of claims. The court stated that "[a]fter surrender of collateral, the deficiency portion of the claim is no longer actually secured. A claim simply cannot be secured when nothing secures it." Id. at 908. According to In re Zeider, 263 B.R. 114 (Bankr.D.Ariz. 2001) and Johnson, a court may consider the equities of the case pursuant to § 502(j) and modify a plan such that the balance of a secured claim following the liquidation of collateral may be reclassified as unsecured. Zeider, 263 B.R. at 117;Johnson, 247 B.R. at 909.
11 U.S.C. § 502(j) provides in pertinent part as follows:
(j) A claim that has been allowed or disallowed may be reconsidered for cause. A reconsidered claim may be allowed or disallowed according to the equities of the case.
As a practical matter, it may not matter whether the type of plan modification proposed in this case can be accomplished within the four corners of § 1329(b) or must be justified under § 502(j). All modifications proposed under § 1329(a) must satisfy § 1329(b) which states that a modification proposed pursuant to § 1329(a) must adhere to the requirements of § 1325, including § 1325(a)(3)'s good faith requirement. Similarly, reconsideration of claims under § 502(j) must be justified by the "equities of the case." Under either standard, the Court finds that under the circumstances in this case, once the Debtor surrendered the collateral, cause existed to reduce the value of the First Note secured claim and reclassify any deficiency portion as unsecured. See Zeider, 263 B.R. 114, 117.
Puiggros does not allege that the Debtor abused or neglected the collateral causing excessive depreciation between confirmation and the proposed modification. In those circumstances, some courts have denied relief finding that the Debtor is not entitled to shift the burden of that depreciation to the creditor. See In re Butler, 174 B.R. 44, 48 (Bankr.M.D.N.C. 1994) (modification was not in good faith where collateral, a car, lost most of its value in an accident and debtor failed to maintain insurance). Although the Debtor here made an unauthorized addition to the mobile home and did nothing to bring the structure into compliance or demolish the structure post-confirmation, Puigross has not shown or even alleged that the Debtor's action caused excessive depreciation to the collateral between confirmation and the proposed modification. Further, Puigross has not alleged that the value of the collateral has excessively depreciated or that it was the Debtor's action that caused excessive depreciation. Therefore, the Court concludes that the Debtor has proposed the modifications in good faith and that the equities of the case permit modification of the plan and reconsideration of the allowed secured claim under the First Note. The Debtor may remove that portion of the First Note secured claim that relates to the Debtor's mobile home and treat the deficiency as an unsecured claim as provided in the modified plan.
Conclusion
Despite best intentions at confirmation, many debtors encounter post-confirmation financial hardships or other changed circumstances which necessitate surrender of collateral that provided the basis for an allowed secured claim. Upon surrender, debtors should be permitted to modify their plans to change the treatment of previously secured claims provided that the modification has been proposed in good faith and there has been no abusive depreciation of the collateral.
For the foregoing reasons, it is —
ORDERED that the Motion to Modify is GRANTED and Debtor's First Modified Chapter 13 Plan is approved.