District Court Upholds Local Rule Requiring Statements of Compliance

Posted by NCBRC - August 20, 2021

Finding the requirement to be procedural rather than substantive, the District Court for the Northern District of California upheld the district’s General Order requiring chapter 13 bankruptcy debtors who elect to pay their mortgages directly rather than through the trustee to submit regular notifications of compliance to the bankruptcy court. Gordon v. Bronitsky (In re Gordon), No. 21-643 (N.D. Cal. July 15, 2021).

Here, the debtor challenged General Order 34 which provides:

“Debtor shall file with the bankruptcy court a declaration signed under penalty of perjury stating that debtor has made the post-petition payments debtor proposed to be made directly to each applicable named Class 1 Creditor, and attach to each declaration proper documentary evidence of the payments made (the “Declaration”). Prior to confirmation of the plan, such Declaration(s) shall be filed five days before the original and all continued meetings of creditors and any contested confirmation hearings, or continued contested confirmation hearings. The bankruptcy court will not confirm a Chapter 13 plan (and may dismiss the Chapter 13 case) if the Debtor is not current on these post-petition/pre-confirmation payments. Post confirmation of each year the plan is pending, such Declarations shall be filed on a quarterly basis no later than January 20, April 20, July 20, and October 20 . . . The bankruptcy court may dismiss the Chapter 13 case if the Debtor is not current on these post-confirmation payments.”

In her first amended plan, the debtor proposed to pay off her mortgage arrears within the first 10 months, and in addition to the language quoted above, included the self-executing language: “These non-conduit declarations shall no longer be required after November 2020 when payment of the pre-petition arrears is complete.”

Upon the trustee’s objection, the bankruptcy judge denied confirmation on the grounds that the reporting requirement was a necessary part of the debtor’s plan even after she had completed payment of the arrears. The debtor then filed a second amended plan omitting the disputed self-executing language and the court confirmed. The debtor appealed both the denial of confirmation of her first amended plan and the confirmation of her second.

On appeal, the debtor argued that her direct payments were outside the plan and that, under In re Sisk, 962 F.3d 1133 (9th Cir. 2020), the court could not impose requirements for confirmation that were more onerous than those imposed by the Bankruptcy Code. In Sisk, the Ninth Circuit held that, in the absence of objection and so long as the plan complied with minimum and maximum time limitations, the debtor could propose a plan of estimated duration. The court reasoned that where the Code does not impose a fixed plan duration, the court’s doing so would impinge upon the debtor’s substantive payment obligations. Specifically, the Ninth Circuit explained that “[b]ecause the text and structure of the Code do not mandate a fixed term requirement for all Chapter 13 plans, we should not add one without clear direction from the statute.”

The court here found that Sisk applied the “different, more burdensome” standard to strike down provisions that substantively altered the debtor’s payment obligations. The court found that that standard was not applicable here because General Order 34 is a procedural requirement that does not limit the debtor’s substantive right to pay her mortgage directly. The court was persuaded in part by the fact that, while failure to make the direct payments to her mortgagee would be cause for dismissal, failure to comply with the reporting requirement would not “necessarily” lead to dismissal. In light of that finding, the court found the correct legal standard arose out of Bankruptcy Rule 9029(b) and the Rules Enabling Act, section 2075.

Rule 9029(b) provides that a bankruptcy court may “regulate practice in any manner consistent with federal law, these rules, Official Forms, and local rules of the district.” The Rules Enabling Act section 2075 provides that “The Supreme Court shall have the power to prescribe by general rules . . . the practice and procedure in cases under title 11. Such rules shall not abridge, enlarge, or modify any substantive right.”

The debtor argued that General Order 34 is inconsistent with sections 1325(a), which mandates confirmation of a plan that complies with statutory requirements, and 521, which lists a bankruptcy debtor’s duties and includes a limited time period in which the trustee is able to obtain the debtor’s financial information.

The court disagreed. With respect to section 1325(a), paragraph (a)(6) requires that “the debtor will be able to make all payments under the plan and to comply with the plan.” Where the debtor is making payments directly to the mortgagee, the court found that General Order 34 provides the necessary assurance of feasibility for payments. Citing In re Mrdutt, 600 B.R. at 81 (B.A.P. 9th Cir. 2019), the court specifically found that non-conduit payments are considered to be “under the plan.”

With respect to section 521, the court relied on Reichard v. Brown, 829 F. App’x 812 (9th Cir. 2020), cert. denied, No. 20-1075, 2021 WL 1520806 (U.S. Apr. 19, 2021), to reject the debtor’s argument that the terms of that provision constituted an exclusive list of the debtor’s obligations. In Reichard, the debtor objected to the local rule requiring periodic filing of her tax returns that did not mirror the procedural requirements the trustee must go through under section 521 to obtain a debtor’s tax returns. The Ninth Circuit found that there were alternative means of obtaining the debtor’s tax returns that authorized the local rule without violating section 521.

Likewise, the court here found other means of obtaining a debtor’s financial information. Specifically, the court pointed to Rules 2004, 3002.1(g), and 7034, all of which relate to collection of the debtor’s financial information outside the strictures of section 521. Where the debtor would be required to show compliance with her non-conduit mortgage payments for final discharge, General Order 34, like the rule in Reichard, merely requires the debtor to comply in a specific manner with an obligation she had in any case.

The court found that the policy purpose of catching default during the court of the plan, while the debtor or trustee would have an opportunity to seek modification, was further justification for General Order 34’s reporting requirement. The requirement also placed the non-conduit debtor on similar footing with the conduit mortgage debtor whose failure to make a mortgage payment would be readily visible to the trustee.

Finally, the court rejected the debtor’s argument that the reporting obligation should cease once she paid the mortgage arrears, stating, “Because General Order 34’s reporting requirement serves to keep all interested parties informed of a debtor’s continuing ability to satisfy his or her proposed obligations, Gordon’s challenge of General Order 34 fails.”

The court affirmed.

The debtor has appealed to the Ninth Circuit.

Gordon ND Cal July 2021


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