Tiffany D. Smith v.
William M. E. Powers, III [ARGUED]
Powers Kirn
308 Harper Drive
Suite 210
Moorestown, NJ 08057
Counsel for Appellant
Kevin De Lyon [ARGUED]
Herbert B. Raymond
Raymond and Raymond
7 Glenwood Avenue
Suite 408
East Orange, NJ 07017
Counsel for Debtor-Appellee
Marie Ann Greenberg
30 Two Bridges Road
Fairfield, NJ 07052
Trustee
JORDAN, Circuit Judge.
Before a court will consider a creditor‘s objections to a bankruptcy plan, the creditor must be timely in the objections. Freedom Mortgage Corporation (“Freedom“) did not object to certain terms in early versions of Tiffany Smith‘s bankruptcy plan, but it now challenges those same terms in her third modified plan. Most of the objections are too late and are foreclosed by res judicata. The only objection not so foreclosed bears on the feasibility of the plan, but the Bankruptcy Court did not clearly err in finding that Smith‘s third modified plan was feasible. Consequently, we will affirm the District Court‘s affirmance of the Bankruptcy Court‘s order confirming the bankruptcy plan.
I. BACKGROUND
In May of 2019, Smith filed a voluntary petition for a Chapter 13 bankruptcy proceeding in the United States Bankruptcy Court for the District of New Jersey.1 In addition to her day-to-day employment as a product manager, she owns a two-unit rental property in Newark, New Jersey (the “Property“). The Property is secured by a mortgage held by Freedom. That mortgage contains an “absolute assignment” of rents provision whereby Smith agreed to “unconditionally assign[] and transfer[] to [Freedom] all the rents and revenues of the Property.” (App. at 94.)
A. The First Modified Plan
Smith filed a Chapter 13 payment plan in the Bankruptcy Court, as required by the Bankruptcy Code.2
The First Modified Plan noted that Smith had paid $8,200 over four months through September of 2019 and proposed that Smith would pay the bankruptcy trustee $450 per month over the remaining 56 months of the 60-month plan.7 The First Modified Plan also called for the Property‘s rental income of $1,600 per month to be remitted directly to Freedom and that such income would reduce the amount of Freedom‘s crammed-down secured claim.8
Freedom objected to the First Modified Plan. In particular, it protested the cramdown of its secured claim, the Property‘s listed valuation of $95,000, the Property‘s rents being applied to reduce its secured claim, and the feasibility of the overall plan. The Bankruptcy Court held a hearing in November of 2019 to address Freedom‘s objections. At the hearing, Freedom clarified that it was not, in fact, disputing the listed value of the Property. To confirm its understanding of Freedom‘s assertion, the Bankruptcy Court asked, “You‘re okay with ninety-five [thousand] [a]s the value[?]” (App. at 202.) Freedom responded: “Correct.” (App. at 202.)
Later in the hearing, the Bankruptcy Court explained that “the big issue” was how the Property‘s rents were to be applied: whether Freedom was required to use the rents received to reduce its secured claim, or if it could apply them “towards [its] unsecured claim and retain [its] entire secured claim in full.” (App. at 210.) The parties characterized that issue as the “Jason Realty [] issue,” naming it after a case that similarly involved an absolute assignment provision in a bankruptcy proceeding. (App. at 199 (emphasis added).) In In re Jason Realty, L.P., we held that the rents at issue were “unavailable for use, allocation or utilization” in the debtor‘s proposed bankruptcy plan. 59 F.3d 423, 431 (3d Cir. 1995).
During the hearing, the parties disputed whether In re Jason Realty‘s holding prohibited the Bankruptcy Court from requiring Freedom to use the rents it would receive from the Property to reduce its secured claim. The Court stated that it did not believe In re Jason Realty prohibited the rents from being used to reduce the secured claim. Freedom‘s counsel asked the Bankruptcy Court, “So the rent payment would go to pay down the $95,000 plus interest over the 55 months, that payment will pay ... down that amount, correct?” (App. at 216-17.) The Court answered, “Yes,” and explained that Smith would still be responsible to reimburse Freedom for any carrying costs it had incurred on the Property. (App. at 217.) Freedom‘s counsel responded, “That‘s fine. Then I will discuss that with my client on that issue, okay. Let them know where the Court is going in its decision process.” (App. at 217.) Subsequently, the Bankruptcy
Shortly after the November hearing, the parties resolved their differences and filed a consent order (the “Consent Order“). In that Consent Order, the parties agreed, in relevant part, to the following terms:
a. The Property has a fair market value of $95,000. As such, Freedom‘s secured lien on the Property shall be reduced to $95,000. ... The remaining [amount] shall be treated as an unsecured claim and paid out with the unsecured creditors.
...
d. The Parties agree that the total amount the Debtor is to pay towards the cram down amount will be ... [the] $95,000.00 Crammed Down Value + ... interest and ... post-petition escrow.
...
f. The Parties agree that all rental payments that are held by the Debtor or Debtor‘s counsel shall be immediately paid to the Chapter 13 Trustee. On a go forward basis, the Debtor shall tender all rental payments to the Chapter 13 Trustee.
(App. at 120-21.) Thus, Freedom‘s claim on the Property was bifurcated into a secured claim of $95,000, plus interest, and an unsecured claim for the remaining amount. Additionally, the rental payments would go to the bankruptcy trustee, rather than directly to Freedom, to be used to pay off the crammed-down secured claim. The parties agreed that the Consent Order would “be incorporated into and become part of any Order Confirming Plan[.]” (App. at 122.) In January of 2020, the Bankruptcy Court confirmed the First Modified Plan, which reflected the terms of the Consent Order.
B. The Second Modified Plan
Shortly after the inception of the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act“), which, among other things, added a temporary provision to the Bankruptcy Code that allowed Chapter 13 debtors to extend the duration of their bankruptcy plans up to 84 months, two years longer than the normal 60-month maximum, if “the debtor [was] experiencing or ha[d] experienced a material financial hardship” because of the COVID-19 pandemic.
Freedom did not object to the Second Modified Plan, and the Bankruptcy Court confirmed it in July of 2020, stating that “it appear[ed] that the applicable provisions
C. The Third Modified Plan
In December of 2020, Smith filed a third modified plan (the “Third Modified Plan“), the one at issue here. She again sought to extend the payment term — this time to the CARES Act statutory maximum of 84 months — because she had delinquent tenants, and she could not evict them due to pandemic-related eviction moratoriums. The Third Modified Plan maintained the $95,000 cramdown value and called for stepped-up monthly payments of $1,500 per month for eight months and then $2,010 per month for the remaining fifty-seven months.
Freedom objected to the Third Modified Plan. It argued, among other things, that (1) the use of rental income to pay the secured claim was foreclosed by In re Jason Realty; (2) the plan‘s stepped-up monthly payments violated
The Bankruptcy Court held a hearing in March of 2021 to consider Freedom‘s objections to the Third Modified Plan. At the hearing, the Bankruptcy Court questioned Freedom about why it was challenging the use of rental income to pay off its secured claim when it had consented to that arrangement previously: “[I]n January of 2020, a little over a year ago, [Freedom] was okay with using the rents to apply against plan payments. They consented to it. And ... now you‘re saying you don‘t want to do that anymore[?]” (App. at 241.) In response, Freedom argued that the Third Modified Plan was “a new plan” to which it had not consented, stating that “[t]here was nothing in [the Consent Order] that required the creditor to consent to future plans, different plans.” (App. at 241.) It also asserted that the Property‘s value needed to be redetermined. The Bankruptcy Court was not convinced by Freedom‘s arguments:
But it‘s really not a whole new plan for you. You‘re still getting the present value of $95,000 that you agreed to initially. ... [W]hat‘s troubling me is, you know we had this Covid situation and Congress has come down and provided some legislation that is relief for debtors. And ... here you have a debtor who is trying to take advantage of that provision by extending her plan out two years and all of a sudden the bank doesn‘t like the deal that it did way back when and it‘s using this as an opportunity to, you know renegotiate or void previous agreed to terms.
(App. at 256.) Regardless, the Court reserved decision on the Third Modified Plan.11
A confirmation hearing was held the following month. The Bankruptcy Court held that “the issues of value, the use of the rents [to pay down the secured claim,] and the step up in payments [were] res judicata” because of the Consent Order and Smith‘s Second Modified Plan. (App. at 11.) It then examined the plan‘s feasibility. After analyzing Smith‘s financial schedules, the Court found that Smith had sufficient income, after subtracting expenses, to make the payments proposed in the Third Modified Plan. The Court also received confirmation from the bankruptcy trustee that Smith was up to date on her
I don‘t think anyone has a crystal ball, all we can do is project. Certainly, there is a hope and expectation that things might get back to some normalcy soon. I have no idea when the eviction moratorium is going to be lifted but I do know that people are getting back to work.
...
I didn‘t do the math, but at the end of the day, [Freedom] is going to get [$]95,000 plus interest at the percentage that was bargained for and was going to get reimbursed for anything it went out of pocket for and would be adequately protected going forward by the payment of taxes and insurance. That was the deal that was approved and bargained for and then approved again last summer[,] ... the President extended the CARES Act[,] ... the debtor wants more time because Covid has gone on longer than anticipated[,] ... and the law gives the debtor the right to seek more time[.] ... So for those reasons, I‘m inclined to confirm the amended plan.
(App. at 13-14.)
The Bankruptcy Court then confirmed the Third Modified Plan in a written order, stating that it “considered the objection filed by [Freedom] ... and for reasons stated on the record at the ... confirmation hearing[,] creditor‘s objection is overruled[,]” and it again noted that “it appear[ed] that the applicable provisions of the Bankruptcy Code have been complied with[.]” (App. at 194.)
Freedom appealed the Bankruptcy Court‘s order to the District Court, which affirmed it, holding that all of the issues that Freedom raised, including feasibility, were precluded by res judicata.12 Freedom has now timely appealed to us.
II. DISCUSSION13
Freedom argues that, for five reasons, the District Court erred in affirming the Bankruptcy Court‘s confirmation of the Third Modified Plan: (1) the District Court incorrectly applied res judicata, (2) the Third Modified Plan unlawfully allowed Smith to use the Property‘s rental income to pay the secured claim, (3) the cramdown value of the Property must be updated to its current value, rather than the $95,000 value specified in Smith‘s previously confirmed bankruptcy plans, (4) the Third Modified Plan violated the Bankruptcy Code by calling for unequal monthly
We agree with both the Bankruptcy Court and the District Court that res judicata precludes Freedom‘s objections to Smith‘s use of rental income to pay its secured claim, to the valuation of the Property, and to the plan‘s stepped-up payment schedule. And, while the District Court should not have held that feasibility was barred by res judicata, we conclude that the Bankruptcy Court did not clearly err when it determined the Third Modified Plan to be feasible.
A. Res Judicata Applies
The doctrine of res judicata “preclude[s] parties from contesting matters that they have had a full and fair opportunity to litigate[.]” Montana v. United States, 440 U.S. 147, 153 (1979). It “protect[s] against ‘the expense and vexation attending multiple lawsuits, conserve[s] judicial resources, and foster[s] reliance on judicial action by minimizing the possibility of inconsistent decisions.‘” Taylor v. Sturgell, 553 U.S. 880, 892 (2008) (cleaned up) (quoting Montana, 440 U.S. at 153-54).
Accordingly, “[c]onfirmation has preclusive effect, foreclosing relitigation of ‘any issue actually litigated by the parties and any issue necessarily determined by the confirmation order.‘” Bullard v. Blue Hills Bank, 575 U.S. 496, 502 (2015) (quoting 8 Collier on Bankruptcy ¶ 1327.02[1][c]). Further, confirmation “bars all challenges to the plan that could have been raised.” In re Arctic Glacier Int‘l, Inc., 901 F.3d 162, 166 (3d Cir. 2018), as amended (Oct. 24, 2018) (emphasis added); In re Szostek, 886 F.2d 1405, 1408 (3d Cir. 1989) (“Under § 1327, a confirmation order is res judicata as to all issues decided or which could have been decided at the hearing on confirmation.“).
Notwithstanding a confirmed plan being res judicata,
Modifications under
The question in this case is whether res judicata applies to a confirmed plan when the debtor properly seeks to modify plan terms under
challenge. In other words, Freedom says that all of the terms of Smith‘s plan can be reconsidered when she asks to modify the plan under
Freedom contends that In re Conrad supports its position. 604 B.R. 163 (Bankr. M.D. Pa. 2019). The bankruptcy court in that case was tasked with determining whether
Based on that, Freedom asserts that res judicata does not apply to any terms of a post-confirmation modified plan. But it misreads In re Conrad‘s holding. The court held that res judicata does not apply to “post-confirmation modification[s] sought pursuant to § 1329(a).” Id. at 173. It did not hold that res judicata is inapplicable to the other terms of the debtor‘s previously confirmed plan. See id. at 173, 175.
Moreover, In re Conrad is a single bankruptcy court decision. Other bankruptcy courts have found that a confirmed plan is a res judicata bar “to issues related to the confirmed plan that are unrelated to a proposed modification.” In re Loden, 572 B.R. 211, 219 (Bankr. W.D. Ark. 2017) (emphasis added). For example, in Massachusetts Housing Finance Agency v. Evora, a creditor argued that the unmodified amount of its secured claim needed to be revalued after the debtors sought to modify the payment terms under
We agree with that reasoning. Allowing all the terms of a previously confirmed plan to be reconsidered during a modification proceeding would be “inconsistent with the general policy favoring the finality of confirmed plans[.]” In re Szostek, 886 F.2d at 1414. If Freedom‘s position were to prevail, then overdue objections could be shoehorned into the confirmation proceedings, even though unrelated to a debtor‘s proposed modification. Such a result would violate
The binding effect of the plan should ... bar creditors from raising, at the time of a motion for modification of the plan, issues that could have been raised at the time the plan was originally confirmed. If the word “bind” in section 1327(a) is to have any meaning, it cannot be the case that any provision of the plan may be challenged at a later date.
8 Collier on Bankruptcy ¶ 1327.02[1][c] (16th ed. 2023).
Accordingly, we hold that res judicata prevents creditors from challenging the terms of a previously confirmed bankruptcy plan, except for those terms that the debtor seeks to modify under
1. Rental Income Issue
The applicability of res judicata settles the argument over In re Jason Realty. In that case, we held that rents were “unavailable for use, allocation or utilization” in the debtor‘s proposed bankruptcy plan because of an absolute assignment agreement on the property in question. 59 F.3d at 431. Bankruptcy courts in our Circuit have since disagreed about the proper application of the precedent as it relates to paying down secured claims. In In re Parks, the bankruptcy court held that a debtor could pay down a secured claim using a property‘s rents, notwithstanding that the creditor had legal title to the rents. No. 12-13045, 2012 WL 3561738, at *3 (Bankr. D.N.J. Aug. 16, 2012). In contrast, in In re Surma, the court held that a creditor was not required to use rents received from the debtor‘s property to reduce a secured claim. 504 B.R. 770, 774 (Bankr. D.N.J. 2014). We need not decide whether or how In re Jason Realty applies in this case, however, because Freedom consented to the In re Parks approach via the Consent Order.
The Consent Order stated that “all rental payments that are held by [Smith] ... shall be immediately paid to the Chapter 13 Trustee” and that “[o]n a go forward basis, [Smith] shall tender all rental payments to the Chapter 13 Trustee.” (App. at 121.) Freedom does not dispute that, by consenting to have the rents go directly to the Trustee, it agreed that the Property‘s rents would reduce its secured claim. But it argues that “there can be no issue preclusion where [Freedom] never consented to the Third Modified Plan and there is nothing in the [C]onsent [O]rder resolving the objection to the First Modified Plan that bars [Freedom]‘s objection to [Smith] using or allocating the assigned rents to fund the Third Modified Plan.” (Opening Br. at 21.) Thus, once again, Freedom‘s position is that the Third Modified Plan is a new plan and that the Consent Order should have no impact on it.
That position is inconsistent with the res judicata principles just discussed. The parties resolved Freedom‘s use-of-rents objection when they agreed to the In re Parks approach in the Consent Order. Accordingly, the District Court correctly concluded that Freedom‘s objection about the use of the rental income is foreclosed by res judicata.
2. Valuation Issue
Freedom argues that the Property‘s value should have been re-evaluated before confirmation of the Third Modified Plan. It relies on
Once again, Freedom‘s objection is barred by res judicata. “[A] creditor may not after confirmation assert ... that the plan should give a higher valuation to a particular property[.]” 8 Collier on Bankruptcy ¶ 1327.02[1][c] (16th ed. 2023); see also Evora, 255 B.R. at 343 (“While section 1329(a)(1) provides that a plan may be modified to increase or reduce the amount of payments[,] it does not state that the plan may be modified to increase or reduce the amount of the secured claim.“).
3. Unequal Payments Issue
So too for Freedom‘s complaints about unequal payments. The Bankruptcy Code states that any periodic payments under a Chapter 13 bankruptcy plan are to “be in equal monthly amounts[.]”
In Espinosa, a creditor “filed a motion under Federal Rule of Civil Procedure 60(b)(4) asking the Bankruptcy Court to rule that its order confirming the plan was void because the order was issued in violation of the [Bankruptcy] Code[.]” Id. at 264. The creditor asserted that the confirmation discharged a portion of student loan debt even though the bankruptcy court did not first find undue hardship, which it was required to do. Id. at 263-65. Nevertheless, the Supreme Court upheld the Bankruptcy Court‘s confirmation, reasoning that “Rule 60(b)(4) strikes a balance between the need for finality of judgments and the importance of ensuring that litigants have a full and fair opportunity to litigate a dispute.” Id. at 276. Because the creditor in Espinosa had actual notice of the plan and its contents, the creditor could not “sleep on [its] rights.” Id. at 275.
The Supreme Court explained that
Espinosa‘s principles, although stated in the context of a Rule 60(b)(4) dispute, are applicable here because the plan modification context involves the same kind of finality concerns. Finality is so critical in a bankruptcy proceeding that we have called confirmation‘s preclusive effect “a principle that anchors bankruptcy law[.]” In re Arctic Glacier, 901 F.3d at 166. Allowing a creditor to object to previously uncontested
Applying Espinosa‘s principles is consistent with our own precedent favoring finality over a plan‘s compliance with the Bankruptcy Code. In In re Szostek, we were “faced ... with a clash between two seemingly divergent policies involved in the Bankruptcy Code[,] ... the policy of finality, as evidenced by § 1327, ... [and] § 1325(a)[,] which provides that a court shall confirm a plan which meets the conditions listed in that section.” 886 F.2d at 1408. We explained that, “[w]hile we do not understate the importance of the obligation of the bankruptcy court to determine that a plan complies with the ... Bankruptcy Code prior to” plan confirmation, “we nonetheless recognize that the affirmative obligation to object to the [debtor‘s] plan rested with [the creditor], not with the bankruptcy court[.]” Id. at 1414. For that reason, we concluded that, “after [a] plan is confirmed the policy favoring the finality of confirmation is stronger than the bankruptcy court‘s ... obligations to verify a plan‘s compliance with the [Bankruptcy] Code.” Id. at 1406.
Here, Smith included a stepped-up payment plan in the Second Modified Plan. Freedom was on notice of the provisions of that plan.19 Having received such notice, Freedom was “obligated to take an active role in protecting [its] claim[].” Id. at 1414. Yet, it did not object to the Second Modified Plan. The Bankruptcy Court confirmed the plan, stating that “it appear[ed] that the applicable provisions of the Bankruptcy Code ha[d] been complied with[.]” (Supp. App. at 26.) Thus, the Court did not confirm the plan only because there was no objection from a creditor. Whether the Bankruptcy Court was correct in its ruling is not what matters at this juncture. Freedom‘s objection is barred by res judicata, even if such a payment plan violated the Bankruptcy Code.20
B. Feasibility
Before a bankruptcy court confirms a Chapter 13 plan, the feasibility requirement stated in
1. Standard of Review
We have not written precedentially on the appropriate standard of review for a feasibility determination. The District Court said that a feasibility determination is reviewed for abuse of discretion.22 Feasibility, however, is a question of fact and must be reviewed for clear error.
“Facts include past events, but they are not restricted to historical events.” Kaplun v. Att‘y Gen., 602 F.3d 260, 269 (3d Cir. 2010). “A finding of fact may also stem from an assessment of what is expected to occur in the future[,]” id., so “an assessment of the probability of a future event should generally be categorized as a finding of fact,” In re Fosamax (Alendronate Sodium) Prods. Liab. Litig., 852 F.3d 268, 289 (3d Cir. 2017), vacated and remanded on other grounds sub nom. Merck Sharp & Dohme Corp. v. Albrecht, 587 U.S. 299 (2019). “Of course, to call a likelihood ‘fact’ is not to say that the likely outcome will necessarily occur, but the likelihood itself remains a factual finding that can be made ex ante the actual outcome.” Kaplun, 602 F.3d at 269-70.
A feasibility determination is a prototypical example of a forward-looking factual finding. The bankruptcy court must forecast whether the debtor will make all plan payments over the duration of the plan‘s term. Thus, a bankruptcy court‘s feasibility determination is a question of fact to be reviewed for clear error. In so holding, we join several of our sister circuits that have said as much when considering the appropriate standard of review of a feasibility determination. See In re DBSD N. Am., Inc., 634 F.3d 79, 106 (2d Cir. 2011); In re Save Our Springs (S.O.S.) All., Inc., 632 F.3d 168, 172 (5th Cir. 2011); In re Monnier Bros., 755 F.2d 1336, 1341 (8th Cir. 1985); In re Gentry, 807 F.3d 1222, 1225 (10th Cir. 2015). But see In re Sunnyslope Hous. Ltd. P‘ship, 859 F.3d 637, 647 (9th Cir. 2017), as amended (June 23, 2017) (“A bankruptcy court‘s finding of feasibility is reviewed for abuse of discretion.“).
2. Application of Clear Error Standard
Freedom argues that the Bankruptcy Court‘s remarks during the Third Modified Plan‘s confirmation hearing, including “who knows what‘s going to happen with the rent[,]” “I have no idea when the eviction moratorium is going to be lifted[,]” and “I didn‘t do the math,” (App. at 12-13), “show that there was [] no serious analysis or evidence upon which a factual determination of feasibility was made.” (Opening Br. at 28-29.)
Although the Bankruptcy Court acknowledged the uncertainty of the impact of COVID-19 in the future when it made those statements, it did not clearly err in determining that Smith would be able to meet her payment obligations under the Third Modified Plan. The Court analyzed Smith‘s bankruptcy petition, which showed that she had a monthly income of $6,164 and monthly expenses of $4,111, leaving an excess of $2,053. Because the Third Modified Plan called for payments of $1,500 per month for eight months, and then $2,010 per month for the remaining fifty-seven months, the Court calculated that Smith would have sufficient income, after expenses, to make the payments. So, the
For those reasons, the Bankruptcy Court‘s factual finding that the Third Modified Plan was feasible was not “completely devoid of a credible evidentiary basis[,]” and certainly had a “rational relationship to the supporting data.” Shire US Inc. v. Barr Lab‘ys Inc., 329 F.3d 348, 352 (3d Cir. 2003). In short, the Bankruptcy Court did not clearly err in its feasibility determination.
III. CONCLUSION
For the foregoing reasons, we will affirm the District Court‘s affirmance of the Bankruptcy Court‘s order that confirmed Smith‘s Third Modified Plan.
JORDAN
CIRCUIT JUDGE
Notes
8 Collier on Bankruptcy ¶ 1327.02[1] (16th ed. 2023) (quoting In re Gregory, 19 B.R. 668, 670 (B.A.P. 9th Cir. 1982), aff‘d, 705 F.2d 1118 (9th Cir. 1983)).It would hardly serve the purposes for which the federal bankruptcy laws were intended to permit a dissatisfied creditor to withhold its opinion of the practicality and fairness of a debtor‘s plan until after that plan has been completed. At such a late point in time, a meaningful modification of the plan is difficult, if not impossible, and the objecting creditor is in a position to circumvent the protective shield provided debtors under chapter 13.