National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

§ 1322 – Contents of plan

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Debtor’s Right to Propose Chapter 13 Plans Affirmed by Fourth Circuit: Flexibility Over Local Form Defaults

Holding

The Fourth Circuit Court of Appeals reversed the district court’s decision, holding that Sheila Ann Trantham had standing to appeal the bankruptcy court’s ruling and that the bankruptcy court erred in denying confirmation of her Chapter 13 plan based on a local form’s vesting provision. The court affirmed that a debtor has the right to propose a Chapter 13 plan with provisions that may deviate from local form defaults, provided they comply with the Bankruptcy Code.

Facts

Sheila Ann Trantham filed for Chapter 13 bankruptcy and proposed a plan that included a provision for the property of the estate to vest in her upon plan confirmation. The bankruptcy court, however, required adherence to the local form plan, which mandated that property vest only upon the entry of the final decree. Trantham’s plan was rejected by both the bankruptcy court and the district court, leading to her appeal.

Analysis

The Fourth Circuit first addressed the issue of standing, analyzing whether Trantham had the constitutional standing to appeal. The court found that Trantham suffered an injury in fact because the bankruptcy court’s requirement to adhere to the local form plan increased her procedural burdens and restricted her control over her property. Specifically, under the local form, her property remained encumbered by creditor claims and required court approval for certain actions, such as selling property, which resulted in tangible harms including the potential for increased costs and procedural delays. The court further held that Trantham was not required to meet the “person aggrieved” standard of prudential standing, as she was the party directly involved and affected by the bankruptcy court’s decision.

The court then focused on the debtor’s right to propose a Chapter 13 plan. The Fourth Circuit emphasized that the Bankruptcy Code grants debtors significant flexibility in designing their repayment plans, including the timing of when property vests in the debtor. The court criticized the bankruptcy court’s mandatory application of the local form’s vesting provision, arguing that it improperly constrained the debtor’s substantive right under the Bankruptcy Code to propose a plan. The court underscored that while local forms can promote efficiency, they must not abridge, modify, or enlarge the substantive rights provided by the Bankruptcy Code. The court ruled that Trantham’s plan, which called for vesting at confirmation, was permissible under the Code and should not have been rejected solely because it deviated from the local form’s default provision. The court concluded that the bankruptcy court’s decision to require adherence to the local form’s vesting schedule without considering the specifics of Trantham’s plan violated her rights under the Bankruptcy Code.

Conclusion

The Fourth Circuit reversed the district court’s ruling and remanded the case for further proceedings, instructing that Trantham’s plan should be assessed based on its compliance with the Bankruptcy Code, rather than on adherence to the local form’s default provisions.

NACBA and NCBRC submitted an amicus brief authored by Richard Cook, who also participated in the oral arguments. Additionally, NCBRC conducted a moot court session to prepare Appellant and Amici’s counsel for the oral arguments.

Trantham v. Tate 4th Cir Opinion rev dist court

Trantham Appellant’s Brief

Trantham Amici Brief – NACBA-NCBRC

Trantham Appellee’s Brief

Trantham Appellant’s Reply Brief

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Ninth Circuit To Determine Whether Section 1322(c)(2) Allows Birfurcation of Residential Mortgage Claims

In Mission Hen LLC v Lee, Case No. 23-4220 (9th Cir. 2023), the Ninth Circuit is considering whether the Ninth Circuit B.A.P. erred by concluding that a chapter 13 plan may modify and bifurcate an undersecured lien secured by the debtor’s principal residence pursuant to 11 U.S.C. § 1322(c)(2).

Mission Hen argues that the plan violates the anti-modification provision of § 1322(b)(2). It argues that a chapter 13 plan may not modify a lien secured only by a debtor’s principal residence, including a claim that is undersecured. While § 1322(c)(2) allows a modification of a “payment of the claim” if the final payment falls within the plan term, Mission Hen argues that the statute allows for modification of only the payment term, not the claim itself.   Mission Hen also asserts that the reasoning of Nobelman v. American Savings Bank, 508 U.S. 324 (1993), prohibits the bankruptcy court from modifying anything other than the repayment terms of its claim. In Nobelman, the bankruptcy court denied confirmation of a chapter 13 plan that would have allowed the debtors to bifurcate the secured creditor’s lien on their real property into unsecured and secured claims and to make payments on only the secured portion.

The Ninth Circuit B.A.P. held “Mission Hen’s argument based on Nobelman fails. The Court’s decision was founded on statutory interpretation. About a year after the Nobelman decision, Congress amended the statute by enacting current § 1322(c)(2). Congress undoubtedly has the power to overcome the Supreme Court’s interpretation of a statute by amending the statute. Nobelman does not help us construe the amended statute. See In re Collier-Abbott, 616 B.R. 117, 122 (Bankr. E.D. Cal. 2020) (“When the Supreme Court issued its ruling in Nobelman, there was not, and there could not have been, consideration of the then yet to be enacted exception to 11 U.S.C. § 1322(b)(2) residence secured claim valuation limitation.”). …Although the Ninth Circuit has not squarely addressed whether § 1322(c)(2) permits the bifurcation and stripdown of an undersecured, soon-to-mature claim, the  Fourth Circuit, Eleventh Circuit, and other courts have answered in the affirmative. … Therefore, because Mission Hen’s secured claim matures during the plan term, the plain language of § 1322(c)(2) allows the Debtors to bifurcate and cram down the Mission Hen claim. The bankruptcy court did not err in holding that Mission Hen’s claim was not protected by the anti-modification provision.”

The case will likely be scheduled for oral argument in October or November of 2024.

NCBRC and NACBA filed an amicus brief supporting the Debtor and urging the court to affirm the B.A.P.

Mission Hen v Lee Appellants Brief

Mission Hen v Lee – Appellees Brief

Mission Hen v Lee – NCBRC-NACBA Amicus Brief

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The Fourth Circuit Examines Whether a Local Rule Can Mandate The Timing When Property Vests in Chapter 13 Cases

UPDATE: The Fourth Circuit has since decided this case. Click here to read our article discussing their ruling.

The Fourth Circuit is considering the issue whether a local bankruptcy rule can dictate the timing of vesting of estate property in chapter 13 cases.  This is an appeal from the United States District Court in Trantham v. Tate, 647 B.R. 139 (W.D.N.C. 2022).

The Bankruptcy Court for the Western District of North Carolina mandates the use of a local form chapter 13 plan.  This plan includes a provision that the property of the estate will not vest in the debtor until the final decree in the case.  The Debtor filed a plan that strikes through this language and included a nonstandard provision that property vests in the debtor upon confirmation.  The bankruptcy court sustained the trustee’s objection to this language and was affirmed by the district court.

The argument on appeal is that the determination of the date when property vests is controlled by the debtor pursuant to 11 U.S.C. § 1322(b)(9) which states “the plan may — provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity.”  Since 1322(b) contains discretionary provisions for the debtor to choose from, a local rule that mandates the timing of vesting therefore modifies the debtor’s right to choose.  This is in violation of 28 U.S. Code § 2075 which states in pertinent part that “[s]uch rules shall not abridge, enlarge, or modify any substantive right.”

The District Court held “The Bankruptcy Court has determined that all chapter 13 plans should include the standard provision that property of the estate vests in the estate until the final decree is entered. An attempt to include a nonstandard provision in a plan filed in the Western District of North Carolina, that contradicts this standard provision, is inappropriate, and a plan that includes such a contradicting nonstandard provision cannot be confirmed.”  Trantham v. Tate, 647 B.R. 139, 145 (W.D.N.C. 2022).

NCBRC and NACBA submitted an amici curiae brief in support of the debtor.  The brief was written and submitted by NACBA member Richard P. Cook of Richard P. Cook, PLLC in Wilmington, North Carolina.  The Debtor/Appellant is represented by NACBA member Todd Mosley of the Mosley Law Firm, P.C. in Asheville, North Carolina.

The briefing, in this case, is complete and an order-setting oral argument is expected shortly.

Amici Curiae brief of NACBA and NCBRC

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“Equity Abhors a Forfeiture”

Where the debtor had paid over 70% of the purchase price of real property, the court found that equitable principles precluded granting relief from stay to allow the seller to enforce a provision in the sales documents requiring the defaulting debtor to “forfeit not only the property, but all deposits, improvements and payments made.” Allied Ventures, LLC. v. Cruz, No. 22-23864 (Bankr. W.D. Tenn. Feb. 23, 2023).The debtor entered into an agreement with Allied, titled Seller-Financed Industrial Purchase Agreement, to purchase property Allied had bought at a tax sale. As the “Buyer,” the debtor was able to take possession of the property and was obligated to pay $290,000 in accordance with a schedule of payments beginning with a $30,000 initial payment and $6,500 monthly payments once Allied obtain title. Once the purchase price was satisfied, Allied would transfer title to the Buyer. Allied exercised control over the property only to the extent that the agreement required the Buyer to use it for a purpose that was legal and that the Buyer provide insurance as specified by Allied.

The debtor also signed a promissory note as “Buyer/Borrower” obligating him to pay the entire purchase price of $290,000. Both the Purchase Agreement and the Promissory Note provided that, in the event of default, “[i]f the scheduled amount of payment is not made in sixty (60) days after the invoice date, you will forfeit not only the property, but all deposits, improvements and payments made.”

The debtor missed a payment and Allied sought to enforce the default provision. It obtained a state court judgment for possession in June 2022, and for reasons that weren’t explained, accepted a payment from the debtor in July, 2022. The debtor posted an $86,000 bond and appealed the state court judgment.

The debtor filed for chapter 13 bankruptcy in September, 2022. In his 100% plan he proposed to treat the debt to Allied as a secured debt and pay the remaining balance through the plan.

The case came before the court on Allied’s motion for relief from stay to allow it to possess and sell the property with forfeiture by the debtor of all payments and improvements made. In its motion, Allied argued that the debtor’s plan incorrectly treated its claim as secured when in fact it was a lease agreement, and that the debtor had failed to propose a feasible plan.

In response, the debtor argued the Allied’s interest was protected by the $417,400 actual value of the property and the insurance he had obtained. His proposed plan included adequate protection payments of $1,800 per month. With respect to the nature of the agreement, the debtor took the position that if the court found it was not a secured loan but an executory contract, he would assume the lease, pay any arrearage through the plan and maintain monthly payments directly. The debtor further “propose[d] to use the $86,000.00 presently being held by the Shelby County Circuit Court Clerk to satisfy any such post-petition arrearage, and to otherwise be applied to the plan as may be determined by the Court.”

The court began its analysis with the nature of the underlying claim. It observed that the seller delivered possession of the property to the debtor and, with limited exceptions, the debtor undertook full responsibility for it. The promissory note created an absolute obligation on the debtor to pay $290,000, and title would transfer at the end of the payment period. The court found that “[a]lthough there is some ambiguity in the arrangement contemplated by the parties, the Court believes and finds for purposes of the pending Motion for Relief from Stay that the agreement between the parties is best characterized as an installment land sales contract.” It noted that, under Tennessee law, such contracts create a situation like a deed of trust where “the vendee is regarded as the owner, subject to liability for the unpaid price, and the vendor is regarded as holding only the legal title in trust for the vendee from the time a valid contract for the purchase of land is entered into.”

The court went on to determine whether the language of repossession and forfeiture in the agreement and the note justified granting Allied’s motion for relief from stay. For that analysis, the court looked to equitable principles. By the time the case came before the court, the debtor had paid 71-77% of the total purchase price. If Allied had its way, the debtor’s more than $200,000 in payments would be forfeit to Allied’s right to sell to another buyer.

This was unpalatable to the court. “Equity abhors a forfeiture.” The court observed that states often deny a vendor the right to sell against a defaulting buyer “when forfeiture would be unreasonable or inequitable.” The trend is to allow the buyer an opportunity to pay the remaining purchase price or the defaulted payments, in a redemption-type solution.

In light of the fact that the confirmation hearing was coming up, the court found no good reason to “short circuit that process.” It denied Allied’s motion for relief from stay.

Allied has appealed this decision to the Bankruptcy Appellate Panel for the Sixth Circuit, case no. 23-8009.

Cruz Bankr WD Tenn Feb 2023

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Plan Confirmation Does Not Defeat Antimodification Provision

Although the debtor’s confirmed chapter 13 plan included a provision for release of the mortgage lien upon payment of the lender’s claim, the bankruptcy court erred in releasing the lien when the claim was for arrearages only, there remained outstanding principle at the end of the plan, and the mortgagee challenged release of the lien prior to discharge. Mortgage Corp. of the South v. Bozeman, No.21-10987 (11th Cir. Jan. 10, 2023).

The chapter 13 debtor’s bankruptcy schedules listed her mortgage debt as $17,393.04 plus $6,817.42 in arrearages. The mortgagee filed a proof of claim for the arrearages only. Though the life of the debt extended beyond the terms of the plan making it amenable to the “cure and maintain” option, the debtor listed the mortgage claim as “a secured claim paid through the plan.” Another provision guaranteed secured creditors’ retention of their liens until all payments under the plan were completed but provided that “[c]reditors must file a proof of claim to be paid.” The bankruptcy court identified the plan as a “full payment” plan under which the debtor’s entire mortgage debt would be considered paid at the end of completion of the plan payments.

The debtor completed her plan after less three years and after paying only the mortgage arrearage in full. With $15,032.73 remaining on the loan principle, the mortgagee sought to foreclose. The debtor responded with a motion for an order releasing the lien. The bankruptcy court found that the debtor had complied with the terms of her confirmed plan and granted the debtor’s discharge including release of the lien. The district court affirmed. The mortgagee appealed to the Eleventh Circuit.

The circuit court framed the issue as a contest between the anti-modification provision of section 1322(b) and the finality of a confirmation order under section 1327.

The court began with section 1322, observing that because the mortgage extended beyond the life of the plan, the “short -term” exception to the anti-modification provision did not apply. Nor did the debtor’s plan fall into the “cure and maintain” avenue of mortgage provision because the plan specifically contemplated either repayment of the entire mortgage early, or repayment only of the arrearages and release of the remaining debt and lien. The court found that when the bankruptcy court deemed the mortgagee’s claim satisfied and the lien released, it modified the mortgagee’s state-established right to full repayment of the original debt at the agreed upon interest rate.

The court found its decision was controlled by Universal Am. Mortg. Co. v. Bateman (In re Bateman), 331 F.3d 821, 822 (11th Cir. 2003). In that case, the confirmed chapter 13 plan provided for only partial payment of mortgage arrears. The court reasoned that the anti-modification provision prohibited modifications to the mortgagee’s rights and therefore the creditor’s “secured claim for arrearage survived the plan, and the creditor retained its right to full satisfaction of its claim.” The Bateman court stated that, “[a]llowing the confirmed plan to extinguish the mortgagee’s rights would deny the effect of the antimodification provision.”

In this case, the court found the bankruptcy court erred by eliminating the mortgagee’s entire claim and lien upon payment only of the arrearages. “Supreme Court and our precedent require us to conclude that declaring a homestead-mortgagee’s lien satisfied before the debt the lien secures is paid in full constitutes an impermissible modification of the homestead-mortgagee’s rights under the antimodification provision.” Because Nobelman v. Am. Savs. Bank, 508 U.S. 324, 332 (1993) emphasized that the anti-modification provision protects the “rights” rather than “claims” of the creditors, it was irrelevant that the debtor may have treated the mortgage in accordance with the claim as filed by the mortgagee.

The conflict arose out of the conflict between the antimodification provision and the res judicata effect of plan confirmation in section 1327. That section provides: “[t]he provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.”

In United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010), the Supreme Court held that the interest of finality requires that parties be held to the terms of a confirmed plan. In that case the bankruptcy court confirmed a plan which discharged the interest on the debtor’s student loan without fulfilling the requisite showing of undue hardship. The Supreme Court found that where the creditor had notice of the plan terms and did not object, the res judicata effect of plan confirmation outweighed the fact that the plan terms were contrary to other requirements of the Code. This is so even if the plan contains provisions that are impermissible under the Code.

The debtor argued that Espinosa abrogated Bateman.

For five reasons, the court here found that Espinosa had no effect on the release of a lien after a confirmed plan erroneously modified the rights of the lienholder.

First, the court found that Espinosa was expressly limited to challenges brought under Federal Rule of Civil Procedure 60(b)(4), seeking relief from judgment.

Second, the procedural posture of Espinosa differed significantly from Bateman. Espinosa involved a creditor coming back six years after the debt was discharged and ten years after plan confirmation to launch a collateral challenge to the discharge. Bateman, on the other hand, involved a challenge to treatment of a claim after plan confirmation but prior to discharge and was not a collateral attack on the debt that was subject to discharge.

The court here, noted that, like the lender in Bateman, the mortgagee “timely objected to and appealed the bankruptcy court’s decision to release its lien.”

Third, the holding in Espinosa relied on whether a particular judgment was “void,” within the meaning of Rule 60(b)(4). The Supreme Court declined to “expand the universe of judgment errors” that would render an order void under the rule.

Fourth, Bateman was not decided on the basis that the plan was illegally confirmed and therefore, as in the case here, Bateman did not involve a collateral attack on the confirmed plan and was not decided on section 1327 finality.

Finally, the court noted that it had confirmed its holding in Bateman in the post-Espinosa case of Dukes v. Suncoast Credit Union (In re Dukes), 909 F.3d 1306, 1331 (11th Cir. 2018).

The court turned to whether the express terms of the debtor’s plan according to which the bankruptcy court released the mortagee’s lien should have been given effect under the finality rule set forth in section 1327. The court found that, under Bateman, the bankruptcy court should not have released the lien, stating that “even though our cases have recognized the importance of finality, they have also said time and again that secured liens survive bankruptcy proceedings.”

In sum, the court stated: “Although MCS did not timely object to the Plan’s confirmation or appeal the discharge of Bozeman’s debt, MCS did oppose Bozeman’s motion to release its lien, and it timely appealed the bankruptcy court’s order granting her motion. And because releasing MCS’s lien before MCS receives full payment would impermissibly modify MCS’s rights, MCS’s lien must survive the bankruptcy proceeding.”

Bozeman 11th Cir Jan 2023