Yarnall v. Erickson Partnership (In Re Erickson Partnership)Yarnall v. Erickson Partnership (In Re Erickson Partnership)
MEMORANDUM OPINION AND ORDER
The United States Trustee and the standing Chapter 12 Trustee take this appeal from an order of the Bankruptcy Court dated August 27,1987, confirming debtors’ Chapter 12 plan of reorganization. Specifically, the trustees argue it was error for the lower court to confirm debtors’ plan because it allowed debtors to make direct payments to a secured creditor holding a modified claim, thereby avoiding the ten percent trustee fee assessed on payments made through the trustee.
FACTS
The facts leading up to the debtors’ filing of their Chapter 12 reorganization plan are set out in
In re Erickson Partnership,
Debtors’ plan provides for the payment of one priority creditor, six creditors with secured claims, and payments to holders of unsecured and undersecured claims. In their plan, debtors provided that payments to two secured claim holders, First Federal Savings and Loan Association (First Federal) and Metropolitan Life Insurance Company (Metropolitan), will be made directly by the debtors, thereby avoiding assessment of the ten percent trustee fee on those payments. The Bankruptcy Court confirmed debtors’ plan over the objection of the trustees to debtors’ proposed direct payments.
On appeal, the trustees concede that debtors may properly make direct payments on First Federal’s claim, as that claim is current, and debtors’ plan proposes that First Federal be paid according to the terms of the original note and mortgage. The trustees argue, however, that it was error for the Bankruptcy Court to allow debtors to make direct payments to Metropolitan because Metropolitan's claim is modified by debtors’ reorganization.
STANDARD OF REVIEW
When reviewing a bankruptcy court decision, the appropriate standard of review is clearly erroneous for findings of fact and de novo for conclusions of law.
Wegner v. Grunewaldt,
ISSUE
The issue on appeal is what limits does the bankruptcy code place on a judge’s discretion to allow Chapter 12 debtors to make direct payments to creditors under Chapter 12 reorganization plans, thereby
DISCUSSION
The parties and the Executive Office also agree that Chapter 12 debtors may make direct payments under reorganization plans. The parties disagree, however, on the circumstances under which direct payments may be made. Debtors contend that by its language, Chapter 12 allows direct payment on secured claims. The trustees argue that the language of Chapter 12 does not allow direct payment, but that direct payments on unmodified secured claims may be made based upon a body of Chapter 13 case law construing Chapter 13 provisions similar to those in Chapter 12.
When interpreting a statute, courts must begin by looking at the language of the statute itself.
See Premachandra v. Mitts,
In setting out the requirements for the contents of a Chapter 12 plan, section 1222(a)(1) provides that: “(a) The plan shall —(1) provide for the submission of all or such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan.” (emphasis added). When Chapter 12 debtors provide for direct payments, submission to the trustee of that portion of their future income needed to make those direct payments is not necessary for the execution of the plan. Thus, under section 1222(a)(1), that portion of future income needed to make direct payments does not need to be submitted to the trustee.
Similarly, when describing how payments are to be made, section 1226(c) requires the trustee to make payments to creditors under the plan “[e]xcept as otherwise provided in the plan or in the order confirming the plan.” This exception to the requirement that the trustee make payments is met when a bankruptcy court confirms a Chapter 12 plan that provides for direct payments by the debtor.
The best expression of congressional intent on this issue, however, is found in section 1225. Section 1225(a)(5)(B)(ii), which provides the requirements for “cram-down” under Chapter 12, speaks in terms of “property to be distributed by the trustee or the debtors.” (emphasis added). By this language, Congress clearly recognized debtors’ ability to make direct payments.
Finding that by its language, Chapter 12 allows debtors to make direct payments under their plans, the issue becomes what, if any, limits does Chapter 12 place on a bankruptcy court’s discretion to approve those direct payments.
The only explicit limit is found by comparing Chapter 12’s confirmation requirements for unsecured claims with its confirmation requirements for secured claims.
See
The only other limitations Chapter 12 places on direct payments by debtors are the general limitations found in
The lower court found that debtors’ proposed direct payments to Metropolitan complied with section 1222(a)(3) because Metropolitan agreed to the direct payments and because the debtors proposed to pay Metropolitan the stipulated value of its secured claim.
Erickson,
None of the parties have referred this Court to any other code limitations on a bankruptcy court’s discretion to allow debtors to make direct payments under their Chapter 12 plans and I can find none. The trustees argue, however, that a body of case law developed under Chapter 13, and more recently Chapter 12, acts to limit a bankruptcy court’s discretion. Specifically, the trustees argue that this body of case law supports their position that a bankruptcy court can allow debtors to pay only unmodified secured claims directly. I disagree.
The Chapter 13 cases cited by the trustees were decided under a prior version of
It should also be noted that the cram-down provision of Chapter 13, section 1325(a)(5)(B)(ii), does not contain the “or the debtor” language of
The Chapter 12 cases cited by the trustees can be divided into two groups. One group of these cases is from non-pilot districts, where the amended
The second group of Chapter 12 cases cited by the trustee are from pilot districts. Even so, two of these cases did not consider the language of amended
Other than the provisions of
I am aware that this ruling will result in a reduction in fees collected by Chapter 12 standing trustees. I note, however, that this reduction in fees corresponds to a reduction in work. Chapter 12’s trustee fee scheme contemplates compensating trustees only for services performed.
See
ORDERED ACCORDINGLY.