592 B.R. 193
Bankr. N.D. Ill.2018Background
- Debtor Larry Shelton proposed a Chapter 13 "step" plan that pays reduced amounts to secured creditors initially, then increases those payments after debtor's counsel (The Semrad Law Firm, LLC) finishes receiving accelerated fee payments.
- Trustee Marilyn O. Marshall objected, arguing the step structure violates § 1325(a)(5)(B)(iii) (equal monthly payments/adequate protection), is proposed in bad faith, and conflicts with § 1325(a)(1).
- No secured creditor objected to the plan; the Trustee nevertheless contested confirmation and asserted her statutory right to be heard under § 1302(b).
- The court considered district and bankruptcy jurisprudence (including prior local rulings addressing Semrad's practices) and analyzed whether a secured creditor's silence equates to acceptance under § 1325(a)(5)(A).
- The court concluded the Debtor failed to carry the burden of proving acceptance and good faith, and that the step provisions impermissibly shift risk to secured creditors to expedite counsel payment.
- Holding: Trustee's objection sustained; confirmation of the plan denied.
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Debtor) | Held |
|---|---|---|---|
| Whether silence by secured creditors equals "acceptance" under §1325(a)(5)(A) | Silence does not equal acceptance; debtor must show actual acceptance when a plan targets specific creditors with nonstandard provisions | Debtor relied on Andrews dicta and argued absence of secured creditor objection constitutes acceptance | Court held silence ≠ acceptance here; debtor failed to prove express acceptance and plan unconfirmable |
| Whether step payments violate §1325(a)(5)(B)(iii) (equal monthly payments/adequate protection) | Step-plan balloons secured payments and shifts early-plan failure risk onto secured creditors, contravening subsection's purpose | Debtor argued §1326(b) permits paying counsel before creditors and that nonstandard terms may alter timing | Court held step provisions impermissibly effectuate ballooning without creditor consent and conflict with §1325(a)(5)(B)(iii) |
| Whether plan was proposed in good faith under §1325(a)(3) | Step provisions were proposed to benefit counsel, not the debtor; scheme lacks fundamental fairness and abuses Chapter 13's purpose | Debtor argued procedural permissibility and statutory payment flexibility | Court held plan lacked good faith; intent to prioritize counsel fees at secured creditors' expense defeats confirmation |
| Whether plan complies with §1325(a)(1) (plan must comply with the Code) | Because plan fails §§1325(a)(3) and (5), it also fails the catchall §1325(a)(1) | Debtor relied on technical readings of §§1325/1326 to justify timing | Court held §1325(a)(1) not satisfied; confirmation denied |
Key Cases Cited
- Andrews v. Loheit (In re Andrews), 49 F.3d 1404 (9th Cir. 1995) (dicta suggesting silence may be treated as acceptance for §1325(a)(5) purposes)
- Love v. United States Trustee (In re Love), 957 F.2d 1350 (7th Cir. 1992) (plan proponent bears burden under §1325)
- United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010) (courts must ensure unobjected-to plans comply with the Code)
- ReGen Capital I, Inc. v. UAL Corp. (In re UAL Corp.), 635 F.3d 312 (7th Cir.) (confirmation can preclude later challenges when parties fail to object)
- Schaitz v. Wood (In re Schaitz), 913 F.2d 452 (7th Cir. 1990) (good-faith inquiry asks whether debtor is genuinely trying to pay creditors)
- Ravenot v. Rimgale (In re Rimgale), 669 F.2d 426 (7th Cir. 1982) (good-faith factors and "fundamental fairness" inquiry)