In an opinion that was not precedential but should have been, the Ninth Circuit Bankruptcy Appellate Panel began laying out the standards for deciding when an individual’s chapter 11 plan may permissibly preclude enforcement of a nondischargeable claim during the life of the plan.
In 2003, the West Coast BAP ruled in a case where an individual’s chapter 11 plan paid a nondischargeable claim in full over the life of the plan but enjoined the creditor from otherwise enforcing the nondischargeable judgment as long as the debtor was not in default. The BAP upheld confirmation, ruling that there is no per se rule prohibiting a collection injunction. Computer Task Group Inc. v. Brotby (In re Brotby), 303 B.R. 177 (B.A.P. 9th Cir. 2003).
In the new case decided by the BAP on July 31, the debtor was saddled with a $2.2 million nondischargeable judgment. The plan precluded the creditor from enforcing the judgment during the five-year life of the plan. The creditor would have been paid about 6% to 9% of the claim over the life of the plan.
Over the creditor’s objection, the bankruptcy court confirmed the plan. The creditor with the nondischargeable claim appealed successfully to the BAP.
In the per curiam opinion, the BAP said that the principal amount of the nondischargeable debt would actually grow during the pendency of the plan from the accrual of interest on the judgment. The panel reversed confirmation because there was “no provision for any meaningful payment” of the nondischargeable debt. In substance, the panel said the plan “essentially neuters [the creditor’s] right to be paid, and thus does not meet the good faith requirement.”
Taking up where Brotby left off, the panel said that Section 1142(d)(2), precluding discharge of a nondischargeable debt in an individual’s chapter 11 case, “does not prohibit a plan from placing conditions on the creditor’s right to collect such a claim.” Otherwise, Brotby said, the holder of a nondischargeable claim would hold “a veto over the reorganization process.” Id. at 189-190.
The panel went on to say that the court may confirm “a plan that merely delays, but does not imperil, the payment of a nondischargeable claim.” To determine if the plan is confirmable, the BAP called for invoking “a simple application of the injunctive relief standards” by determining “the likelihood of ultimate payment (feasibility), as well as balanc[ing] relative hardships.”
In the case on appeal, the panel said that delay, “which is effectively denial of payment, is not outweighed by any benefit to” to the creditor.
The panel was careful to say that the BAP was not laying down a per se rule requiring payment of a nondischargeable debt in full over the life of the plan, because the case “simply does not provide us with the opportunity nor the analytical framework to make such a declaration.”