On an issue where the courts are divided, Bankruptcy Judge Timothy A. Barnes of Chicago decided he will not permit chapter 13 debtors in his court to confirm so-called step plans, where debt service to secured creditors is diminished in the initial months after confirmation to permit accelerated payment of the debtor’s counsel’s fees.
While not allowing a step plan to put counsel ahead of secured creditors, Judge Barnes did say there “are other, more legitimate, uses of step plans.”
The Step Down by Secured Lenders
In the case at bar, plan payments to two non-mortgage secured creditors would have been $166 and $20 in the initial months after confirmation. Later, the payments would rise to $775 and $104 a month, respectively, a difference of almost $700 a month in the initial months.
In his September 14 opinion, Judge Barnes said the $700-a-month difference “would presumably” go to the payment of counsel fees.
Significantly, the lenders did not object to confirmation of the plan, but the chapter 13 trustee did.
Had the lenders objected, the debtor’s counsel admitted that he would have amended the plan to eliminate the smaller initial payments, because the plan would not have complied with the requirement in Section 1325(a)(5)(B)(iii)(I) that payments to secured creditors be in “equal monthly amounts.”
Andrews and Implied Acceptance
In response to the trustee’s objection, the debtor’s counsel contended that the trustee lacked standing to raise an objection that was personal to the lenders. On the merits, the debtor’s counsel cited the Ninth Circuit for the proposition that a lender’s lack of objection amounts to acceptance of the plan, permitting confirmation under Section 1325(a)(5)(A). Andrews v. Loheit (In re Andrews), 49 F.3d 1404 (9th Cir. 1995).
In Andrews, the Ninth Circuit held that the bankruptcy court properly denied confirmation of a chapter 13 plan for failure to provide adequate protection. In the process, the appeals court held that the chapter 13 trustee had standing to pursue an objection under Section 1325(a)(5), the same statute governing the case at bar.
In terms of influence on later cases, the holding in Andrews has paled in comparison to dicta, where the Ninth Circuit said, “In most instances, failure to object translates into acceptance of the plan by the secured creditor.” Id. at 1409.
Judge Barnes Rejects the Andrews Dicta
Judge Barnes attacked the Andrews dicta head-on. He characterized the statement as “contrary to the basic principles of legal jurisprudence, the nature of the Bankruptcy Code itself, and the functions of trustees in bankruptcy matters.” He said that the dicta “is unpersuasive” and that, in any event, Ninth Circuit authority is not binding in the Seventh Circuit.
Equating silence with acceptance in chapter 13 is “wrong on a number of levels,” Judge Barnes said. “Even in chapter 11, . . . [creditors’] silence does not equate to affirmative acceptance of a plan. To conclude that in chapter 13, where creditors have even less of a say, that their silence is of greater effect, is more than problematic.”
Most persuasively, Judge Barnes built on United Student Aid Funds Inc. v. Espinosa, 559 U.S. 260 (2010), where the Supreme Court held that a plan provision contrary to law is nonetheless binding as a final order.
Judge Barnes latched onto the admonition by Justice Thomas that bankruptcy courts have an independent duty to examine a chapter 13 plan and determine whether it meets the confirmation requirements in Section 1325(a). Id. at 276-277.
Citing the Tenth Circuit and the Bankruptcy Appellate Panels for the First and Ninth Circuits, Judge Barnes candidly admitted that some courts have continued following the dicta in Andrews despite Espinosa. Others have not, he said, and some courts have never equated silence with acceptance.
Although silence might equal acceptance in chapter 13 in some circumstances, Judge Barnes declined to hold that the secured creditors were deemed to have accepted the plan, especially “in light of the objection from the chapter 13 trustee.
Standing and Good Faith
In the absence of an objection from the lenders, the debtor contended that the trustee lacked standing to lodge an objection on behalf of the secured creditors. Judge Barnes held that the trustee had standing to object because Section 1302(b)(2)(B) gives the trustee the right to appear and be heard with regard to confirmation.
In addition to finding that the plan failed to comply with Section 1325(a)(5)(B)(iii)(I), Judge Barnes ruled that the plan was not filed in good faith, as required by Section 1325(a)(3). He said that a step plan “is not fundamentally fair.” He noted the admission by the debtor’s counsel that he would have amended the plan had a lender objected.
Judge Barnes also said that the debtor’s counsel had “prioritized [his] desire to be paid over the best interests of the debtor, [his] client.” By reducing payments to secured creditors, he said that the plan “could leave the debtor in a worse position than had it not filed bankruptcy.”
Finding “no valid bankruptcy purpose” in a step plan, Judge Barnes said it was not filed in good faith and failed confirmation on that score as well.