In re Miceli
Associated Bank, N.A., a secured creditor, objects to confirmation of the amended Chapter 13 Plan proposed by Anthony Miceli. (ECF No. 30.) Associated Bank objects to the Debtor's proposal to distribute smaller monthly payments to the secured creditor for its mortgage arrearage claim until the allowed claim of the Debtors attorneys is paid in full, after which the payments to the creditor will increase. The creditor contends that this arrangement violates the requirement for confirmation that periodic payments under section 1325(a)(5)(B)(iii)(I) be "in equal monthly amounts." The Debtor argues in response that subsection (B)(iii)(I) does not prohibit a pro rata distribution to certain creditors and, in any case, the requirement does not apply to mortgage arrearage claim at issue here. For the reasons discussed below, this Court concludes that the plan provides for periodic, pro rata payments on secured claims that do not satisfy the equal monthly amount requirement. Because this arrangement is not accepted by the affected creditor the plan as proposed cannot be confirmed and the objection will be sustained.
JURISDICTION AND PROCEDURE
The Court has jurisdiction to decide this matter pursuant to
BACKGROUND
The facts are largely undisputed. The Debtor filed his Chapter 13 Petition on December 7, 2017. Two proofs of claim were timely filed and both claimants assert their claims to be fully secured. Of particular interest is the claim of Associated Bank for $72,202.62 secured by a mortgage in the Debtor's principal residence. In it the bank alleges that $23,943.42 of its claim is the "[a]mount necessary to cure any default as of the date of the petition."
The Debtor prepared his plan on Official Form 113, the new national model plan implemented in December 2017. The plan treats Associated Bank's arrearage claim as secured in Part 3.1, captioned "Maintenance of payments and cure of default, if any." Under the plan the Debtor will continue to pay his monthly contractual installments, currently $477.83, directly to Associated Bank.
General Order No. 17-02 of this Court took effect on December 1, 2017. It provides that:
Unless otherwise provided in a chapter 13 plan, claims of creditors will be paid pro rata in the following order: (1) current mortgage payments under 1322(b)(5); (2) monthly payments on non-mortgage secured claims; (3) costs of administration; (4) mortgage arrears under 1322(b)(5); (5) priority unsecured claims other than costs of administration; and (6) other unsecured claims.
Mr. Miceli's plan provides for sixty monthly payments of $500 to be paid to the trustee, totaling $30,000. From this amount, the Debtor estimates that the trustee will distribute $5,743.00 on administrative expenses and priority claims over the term of the plan, including an estimated $1,800 in trustee's fees and $3,600 attorney's fees.
In an apparent attempt to square the plan's $0.00 proposed monthly payment with the anticipated total arrearage distribution of $23,943.42, the Debtor states in his response to the objection that his plan intends to pay the Associated Bank arrearage from the Debtor's $500 monthly installments. He explains that the trustee will distribute the funds according to the "waterfall" distribution arrangement provided in General Order No. 17-02. The plan proposes to treat the first 6% of each of the trustee's $500 monthly distribution as a cost of administration. The remainder of the trustee's monthly distribution will be paid first to the Debtor's attorney for his fees "estimated to total $1,800" until the attorney's claim is paid in full. After that, the remainder will be distributed to Associated Bank to pay in full its mortgage arrearage claim.
The parties stand on their briefs and oral argument. The Chapter 13 trustee takes no position on the objection. This determination is based upon these submissions, and takes judicial notice where appropriate of the court's docket of the case and the filings therein and with consideration of the argument of counsel. See, e.g., Lulay Law Offices v. Rafter,
DISCUSSION
A. Equal Monthly Payment Required by Section 1325(a)(5).
The court must confirm a Chapter 13 Plan that satisfies the criteria of
(i) the plan [must] provide[ ] that--
(I) the holder of such claim retains the lien securing such claim until the earlier of--
(aa) the payment of the underlying debt determined under nonbankruptcy law; or
(bb) discharge under section 1328; and
(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;
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and
(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
(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.
11 U.S.C § 1325(a)(5)(B).
With respect to the allowed secured claim of Associated Bank, the Debtor proposes to keep its real property collateral without the creditor's consent. The plan proposes to pay Associated Bank only its current monthly contractual payment, now estimated to be $477.83, for the first 8 or 9 months, after which the monthly distribution will bump up $470 to $947.83 for the remainder of the plan (with a slightly lower payment in the month the attorney's fees are paid off). Thus, the principal issue for confirmation is whether the plan provisions for the Associated Bank secured claim complies with the in equal payment provisions of section 1325(a)(5)(B)(iii)(I) of the Bankruptcy Code where it provides for the trustee to distribute to the creditor lesser monthly payments until the attorney's fees are paid off.
Courts are divided whether a Chapter 13 plan can provide for such a two-step repayment arrangement for paying off attorneys' fees without the secured creditor's consent.
The DeSardi line of cases reason that the equal monthly payment provision
But neither the plan proposed in this case nor the plans considered in the DeSardi line of cases propose to pay the secured creditor equal periodic payments over a single period. In DeSardi, the debtors proposed to pay the secured creditor a minimal amount as required to provide adequate protection by section 1325(a)(5)(B)(iii)(II) from the inception of the plan for several months followed by larger payments over the remainder of the plant's term sufficient to amortize and pay off the claim. The plan in this case proposes distributing only the current mortgage payments on the mortgage for the initial several months only after which it will include the arrearage payments.
The court in DeSardi concluded that "adequate protection payments are not meant to be considered when fulfilling the requirements of the equal payment provision." In re DeSardi,
This court finds no such conflict between 1325(a)(5)(B)(iii) and section 1326(b). Section 1326(b) only requires payment
Periodic payments to a secured creditor under a Chapter 13 plan in an amount necessary to protect the creditor's interest in depreciating collateral are "periodic payments" as such term is used in section 1325(a)(5)(B)(iii)(I). Labeling them as "adequate protection" does not change that result, but rather invites the "elevat[ion] of form over substance ... to sidestep statutory requirements." In re Hamilton ,
The second line of cases that permit the two-stage approach, the so-called Erwin approach ", holds that section 1325(a)(5)(B)(iii) only requires equal monthly plan payments by the debtor to the trustee, and not mandate equal monthly payments to a creditor. In re Erwin,
But this court finds Erwin's reading of subsection (5)(B)(iii) to be no less strained than the approach proposed by the DeSardi line of cases. As the court in In re Williams, we "can find no support for the holding ... that the term 'equal monthly amounts' in § 1325(a)(5)(B)(iii) references payments to the trustee, as opposed to a creditor."
To the contrary, by its express terms section 1325(a)(5) applies "with respect to each allowed secured claim provided for by the plan."
Nor can we agree with Erwin's suggestion that a trustee is not bound by or can disregard the terms of a confirmed plan. As the bankruptcy court noted in In re Reid, the case law "overwhelmingly holds that a confirmed plan binds the trustee."
Subsection 1325(a)(5)(B)(iii)(I) provides that "if property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts."
Chapter 13 proceedings can "benefit debtors and creditors alike" by allowing debtors to retain certain assets and allowing creditors to "usually collect more under a Chapter 13 plan than they would have received under a Chapter 7 liquidation." Harris v. Viegelahn, --- U.S. ----,
The necessity and benefit of counsel for the efficient functioning of the
appreciates the policy reasons cited by the Erwin court and recognizes the quandary that debtors and their attorneys face when the equal payments requirement is interpreted to prohibit the long-standing practice in this District of paying the debtor's attorney's fees pro rata with secured creditors. But the statute permits no other interpretation. The equal monthly payments required by the Bankruptcy Code are not those made to the trustee, but rather to the creditor.
Moreover, even less than in Lamie , today's ruling does not deprive the Debtor of all methods of repaying his attorney. It merely holds that the Debtor cannot expedite repayment to his attorney by forcing a two-tier repayment schedule on Associated Bank without its consent. The Debtor can either repay the attorney pro rata with Associated Bank or, if the Debtor desires to expedite repayment to his attorney, he can attempt to convince the secured creditor to accept a plan with unequal payments or restructure it to comply with section 1325(a)(5)(B)(iii).
B. Debtor's Arguments.
The Debtor argues in his response that section 1325(a)(5)(B)(iii)(I)"was meant to apply to depreciating assets, such as automobile loans, which is why the provision goes on to address adequate protection payments in 1325(a)(5)(B)(iii)(II)." (Resp., ECF No. 36, ¶ 4.)
We are not persuaded otherwise by the Debtor's reference to obiter dicta from In re Cochran that there "are good arguments that § 1325(a)(5)(B)(iii)(I) should be read in connection with § 1325(a)(5)(B)(iii)(II) to address pre-BAPCPA practices that harmed secured creditors with depreciating collateral."
One decision has held that section 1325(a)(5)(B) does not apply to the cure of a mortgage arrearage pursuant to section 1322(b)(5). In re Davis,
At issue in Rake was whether the pre-1994 iteration of section 1325(a)(5)(B) required payment of interest on the arrearage, regardless of whether the secured creditor was entitled to interest under non-bankruptcy law, and the Supreme Court held that the creditor was so entitled.
In re Davis held that the enactment of section 1322(e) overruled not only Rake 's ruling on interest on arrearages, but its broader ruling that section 1325(a)(5) does not apply to claims cured and maintained under section 1322(b)(5). It concluded that "equal monthly payments are not required as the claim at issue is one in which arrears on long term debt are being cured."
C. Associated Bank's Additional Arguments
Having found that Associated Bank has demonstrated that the proposed plan fails to satisfy section 1325(a)(5)(B)(iii)(I) as to its claim, the court will briefly address two additional objections that the Bank raised in its brief in support of its objection.
First, Associated Bank argues that the proposed plan is unclear and ambiguous in stating both that it will be paid "$0 per month" on the arrearage and that total payments by trustee on the arrearage will be $23,943.42. Although the Debtor clarified in his response to the objection his intent to pay the arrearage pro rata from monthly trustee payments after payment of attorney's fees, the court agrees that the plan is confusing and ambiguous when it indicates both that the trustee will pay over twenty-three thousand toward the arrearage and that the Debtor's monthly payments will be $0. The model plan provides for listing monthly payments in a set amount in section 3.1. If a debtor seeks to propose another form of payment, he should provide for that in his list of non-standard provisions found in section 8 of the form.
Second, Associated Bank contends that delaying the arrearage payments until after the attorney's fees are paid is not a cure "within a reasonable time" required by section 1322(b)(5). Because the court finds that the proposed repayment scheme violates section 1325(a)(5)(B)(iii)(I), we need not determine whether it would have
Finally, Associated Bank "question[s] whether the Debtor received proper disclosure of how his attorney's compensation would be paid" noting that the plan provides for payment to the Debtor's attorney ahead of the mortgage arrears (Associated Bank's brief, ECF No. 35, at *6.) This concern appears to be based on nothing more than speculation and irrelevant to the Bank's objection to confirmation.
Accordingly, Associated Bank's objection to confirmation of the Amended Plan will be sustained and confirmation denied. The Debtor will be given until August 9, 2018 to file an amended plan consistent with the court's rulings. A separate order shall be entered giving effect to the determinations reached herein.
Notes
Claim 2-1 alleges that the annual interest rate for the claim as of the date of the petition consists of both a fixed rate of 6.69% and a "variable" rate of 5.00% and attaches a copy of a purported mortgage and equity loan plan account agreement. According to the agreement, the loan is a revolving line of credit with no fixed term that, instead, requires monthly minimum payments of the "accrued interest for the statement" or 1.5% or $50 depending on the nature and amount of the balance.
Associated Bank does not seem to dispute the amount of the current installment payment, having stated it to be "currently in the amount of $477.83" in its original objection filed February 2, 2018. (Objection to Confirmation of Plan, ECF No. 20, ¶ 8.)
$1,800 plus $3,600 is only $5,400. The plan is unclear who will receive the additional $343 in payments or why, though the Debtor's attorney's fee application filed in the case seeks reimbursement of expenses of $310 for the filing fee and $33 in "other expenses" for which only $10 for a credit counseling course is explained.
Virtually all of these cases involve allowed claims secured by personal, as opposed to real, property. The cases considered proposals for "adequate protection" payments to lenders while paying attorneys' fees, followed by larger payments after the fees are paid in full. Neither party here contends that the collateral at issue here, real estate, is depreciating in value or that Associated Bank is not adequately protected by the retention of its lien or that subsection (B)(iii)(II) somehow applies.
See In re Williams,
Unless the collateral happened to depreciate at a level such that the adequate protection payments would be equal and fully amortize the loan within the term of the plan.
See, e.g., In re Romero,
See, e.g., In re Marks,
See also In re Cochran,
While the court bases this interpretation on the plain language of the statute, not policy concerns we also note that an interpretation requiring actual distributions to secured creditors to be made in equal monthly amounts may present negative consequences for secured creditors, as well as prove to be administratively unworkable. While section 1326(a)(1)(C) permits certain adequate protection payments to be made directly to secured creditors, section 1326(a)(2) requires all other preconfirmation plan payments to the trustee to be retained by the trustee until confirmation and then distributed in accordance with the plan "as soon as is practicable" thereafter.
For example, in Lamie v. U.S. Trustee , the Supreme Court held in the context of Chapter 7 that despite over 100 years' history in which "debtors' attorneys have been considered by Congress and the courts to be an integral part of the bankruptcy process" and despite some indication that deletion of Chapter 7 debtors attorneys from a list of professionals entitled to assert a claim of administrative expense against the estate "was a scrivener's error," the Court followed "conventional doctrines of statutory interpretation [to] hold that § 330(a)(1) does not authorize compensation awards to [Chapter 7] debtors' attorneys from estate funds."
Most of the Debtor's response consists of ad hominum attacks against Associated Bank's counsel, for what he contends to be mischaracterizations of the courts' General Order 17-02 and of the standing Chapter 13 trustee's ability to process payments to secured creditors where a plan does not state a specific monthly amount. The court is aware of the contents of General Order 17-02 and has already addressed the substantive arguments elsewhere in this ruling.
Cochran took a unique and questionable approach on the issue of section 1325(a)(5)(B)(iii)(I), departing from the nearly universal line of cases which had held that the subsection prohibits balloon payments and instead held that a balloon payment by definition does not occur "repeatedly or regularly."
To the extent that Associated Bank seeks an examination of the Debtor's transactions with his attorney, he has not made a request in accordance with Bankruptcy Rule 2017. Nor is it clear that it would have standing to do so. While Rule 2017(a) permits "any party in interest" or the court sua sponte to move to question a prepetition payment to an attorney, Rule 2017(b) permits only the debtor, the United States trustee or the court sua sponte to question a postpetition payment "or any agreement therefor" to an attorney.