Journal Issue
Column Name
Pursuant to §1329 of the Bankruptcy Code, after confirmation but prior to final
payment, a chapter 13 plan may be modified at the request of the debtor, the
trustee or the holder of an allowed unsecured claim. The modification may
increase or reduce the amount of payments to a particular class of claims,
extend or reduce the time for such payments or alter a distribution to take
into account an event outside the plan. There have been varied results in the
courts when the debtor has attempted to modify the plan to surrender collateral
and treat any deficiency as an unsecured claim after proceeds are applied to
the secured claim. Commentators have also disagreed on the proper approach. Two
treatises suggest that a chapter 13 plan can be modified to surrender
collateral and reclassify a deficiency1 while another says the majority trend
is otherwise.2
In
re Taylor3 involved a motion to
modify, which was filed three weeks after confirmation. The debtor wanted to
give a vehicle back to the creditor due to mechanical problems. The parties
stipulated that, prior to hearing on the motion, the creditor took possession
of the vehicle by voluntary surrender, sold it at auction and that there was a
deficiency. The motion stated that the plan was not feasible without the
modification. The creditor responded that it was entitled to a secured claim
for the remaining balance under the terms of the confirmed plan. The court
found that the risk of loss on the collateral became the creditor's once
they took possession of and sold the vehicle even though such action was taken
to preserve the position of the parties by stipulation. In spite of a
confirmation order, the court found a "novation" had occurred and
that the creditor "received the indubitable equivalent of its claim."
despite the decision being based on the facts of this case, it is inconsistent
with other decisions.
For
example, In re Nolan4 involved a debtor
who sought to modify a plan one year after confirmation after substantial use
and depreciation of a vehicle. The debtor sought to surrender the vehicle and
reclassify the deficiency as an unsecured claim. The debtor also sought
authority to incur credit to buy another car. The district courts of the Sixth
Circuit were divided on the issue of plan modification prior to In re
Nolan.
The Nolan court refused to allow the plan modification, setting out the following reasons:
- 11 U.S.C. §1329(a) does not allow alteration, reduction or
reclassification of a previously allowed secured claim, only alteration of the
timing or amount of specific payments. - 11 U.S.C. §1325(a)(5)(B) mandates that a secured claim is fixed in
amount and status and must be paid in full once allowed. - There is no evidence of any congressional intent to give debtors the option to
shift the burden of depreciation to a secured creditor after confirmation. - There is no converse statutory authority to allow a secured creditor to
reclassify its claim if the collateral appreciated in value. - Modification is only allowed as to payments, not as to reclassification of claims, according to the plain language of 11
U.S.C. §1329.
Contemporaneously with the Nolan court, the bankruptcy
court in Michigan reached the same conclusion applying the same legal analysis. In re Goos5 involved an attempted
plan amendment 18 months after confirmation. GMAC objected to having to accept
surrender of the collateral along with an unsecured deficiency claim. Prior to
hearing, the parties stipulated to surrender and sale, preserving their
respective positions, and a secured deficiency claim was filed. The court did
not shift the risk of loss as the Taylor court did.
The Nolan court found the modification to
treat the deficiency as an unsecured claim was not permitted, stating
"once a chapter 13 plan is confirmed, an undervaluation or an appreciation
of collateral inures to the benefit of the debtor." In a footnote
(discussed below), the Goos court
stated that its decision did not deal with the issue of when collateral is
involuntarily taken by a secured creditor pursuant to relief from stay.
Two Texas bankruptcy courts also disagree with the Taylor court. In re Coffman6 involved debtors who were having mechanical
problems with a car. Frustrated, the debtors left the car in the
creditor's parking lot and sought a plan modification to treat any
deficiency balance as unsecured. The creditor objected. After stating that a
confirmed chapter 13 plan is binding and res judicata, the court then discussed the statutory exception in 11
U.S.C. §1329. Citing In re Nolan, the Coffman court agrees
with its limitation denying modification. It is important to note that two
other arguments to modify not raised in Coffman were rejected anyway. 11
U.S.C. §502(j) was held not to apply to reclassification
because it dealt only with allowance. In addition, the court found that none of
the exceptions for "cause" under Fed.R.Civ.P.
60(b) were met.
In re Cameron7 also involved a debtor who had
mechanical difficulty with a car. One year after confirmation, the debtor
sought to surrender the car in satisfaction of the secured claim. Agreeing with In re Nolan, the court pointed
out that a debtor has three options in dealing with a secured creditor: (1) an
agreement for plan treatment, (2) cramdown or (3) surrender. Once an option is
chosen and becomes part of a confirmed plan, the plain meaning of §1329
cannot be read to allow the debtor a different method of satisfying an allowed
secured claim.
Relief from Stay Shifts Risk
The relief from stay exception discussed in the footnote in In re Goos was the issue in a recent case cited in In re Taylor. In re Knappen8 involved debtor plan payment defaults followed by
relief from stay, repossession and sale, resulting in a deficiency. The debtor
sought plan modification to treat the deficiency as unsecured. Finding an even
split among the federal district courts and rejecting any 11
U.S.C. §503 adequate protection claim, the court stated that
the Nolan court misconstrued the
language and intent of 11
U.S.C. §1329. Finding that repossession, sale and application
of the proceeds is "a payment other than under the plan," the plan
modification was allowed. This decision is at odds with the plain meaning of
the statute, which talks about "amount," not classification of a
claim.
These seven decisions continue to lend confusion to reclassification of deficiency
claims. Creditors may find that not only do they have to fight valuation
questions at confirmation, they may suffer the risk of collateral depreciation
as well. The question disappears upon chapter 7 conversion and one wonders why
a debtor losing a modification motion would not convert if the proper
bankruptcy planning were done.
Footnotes
1 Lundin, Keith M., "Chapter 13 Bankruptcy" §6.49 at 6-126 (1993), 8 Collier on Bankruptcy §1329.02 at 1329-4 (Lawrence P. King ed. 15th Ed. 1992). Return to article
2 5 Norton, William L. Jr., Norton Bankruptcy Law and Practice §124:3 at 124-39 (2nd Ed. 1997). Return to article
3 2003
WL 22019812 (Bankr. E.D. Tex.). Return to article
4 232
F.3d 528 (6th Cir. 2000). Return to article
5 253
B.R. 416 (Bankr. W.D. Mich. 2000). Return to article
6 271
B.R. 492 (Bankr. N.D. Tex. 2002). Return to article
Journal Date