Addressing a question that the Seventh Circuit hasn’t decided, Bankruptcy Judge David D. Cleary of Chicago “respectfully” disagreed with the Sixth Circuit and sided with the majority by holding that a chapter 13 debtor may modify a plan after confirmation by surrendering collateral and reclassifying the remainder of a secured lender’s claim as unsecured.
The chapter 13 debtor owned a car valued at $9,500. The lender’s claim was almost $12,000. In the confirmed plan, the debtor had elected to retain the car and pay the lender’s $9,500 secured claim with interest over the life of the plan. The remainder of the claim, some $2,500, was classified as unsecured. Unsecured creditors would be receiving about 10% of their claims.
“Stuff” happens in life. In this case, someone stole and damaged the debtor’s car a year after confirmation. To make matters worse, the police had towed the car but couldn’t find it. To make matters even worse, the debtor’s insurance had lapsed.
The Motion to Modify
Needing a car, the debtor filed a motion for authority to take down a loan to buy a used car. Simultaneously, the debtor filed a motion to modify the plan by surrendering the car to the lender, modifying the amount of the secured claim to zero and reclassifying the secured claim as unsecured.
There being no objection, Judge Cleary granted the motion for a loan to buy another car. However, the U.S. Trustee objected to amending the plan, based on the Sixth Circuit’s decision in In re Nolan, 232 F.3d 528 (6th Cir. 2000).
In his November 27 opinion, Judge Cleary characterized Nolan as holding that “a plan cannot be modified to change a secured creditor’s treatment from payment of the claim to surrender of the collateral, unless that creditor accepts the change.” He said that Nolan is the minority position.
“Recognizing that life events can negatively affect a debtor’s financial situation over” the life of a plan, Judge Cleary referred to Section 1329 and said that “the Bankruptcy Code provides a mechanism for the debtor to modify his plan.” He found that two of the four grounds under Section 1329 for modifying a plan would allow the debtor to amend the plan by eliminating payments on the lender’s secured claim and reclassifying the lender’s claim as unsecured.
Reduce Payments on a Class of Claims
To account for surrendering the car to the lender, the debtor reasoned that the secured claim should be reduced to zero under Section 1329(a)(1). That subsection permits amendments to “increase or reduce the amount of payments on claims of a particular class.”
In the case before him, the lender was in a class of its own. “Therefore,” Judge Cleary said, “a reduction in the amount of payments to one or more secured creditors is a permitted modification under § 1329(a)(1).”
Judge Cleary explained that a “chapter 13 debtor who proposes a plan modification that would surrender a secured creditor’s collateral is not changing the creditor’s claim.” Instead, he said that the debtor is “reducing the amount of payments ‘on the creditor’s secured claim from the amount stated in the original plan down to zero, after surrender of the collateral,’” quoting In re Leuellen, 322 B.R. 648, 654 (S.D. Ind. 2005). (Note: Leuellen was written by District Judge David F. Hamilton before his elevation to the Seventh Circuit, where he now resides as a Senior Circuit Judge.)
But there was more.
Modifying a Distribution for Payments Outside the Plan
Section 1329(a)(3) permits a plan modification to “alter the amounts of a distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan.”
Judge Cleary explained that the subsection permits a plan modification “to change the amount of payment to a secured creditor when it receives its collateral — or the insurance proceeds from its collateral.” He went on to say that the subsection “does not distinguish between secured and unsecured creditors when it allows this type of modification.”
Judge Cleary added that “Congress could have chosen to limit this type of modification to unsecured creditors, just as it limited the power to seek modification to unsecured creditors, but it did not.”
To close the circle, Judge Cleary once more quoted Circuit Judge Hamilton while he was on the district court bench:
“Accordingly, Congress’s explicit incorporation of section 1322(b) and section 1325(a) into the standards for post-confirmation modification under section 1329(a) makes clear that Chapter 13 debtors retain the option to seek court permission to modify a confirmed plan by surrendering collateral to pay a secured claim.” Leuellen, 322 B.R. at 653.
Critique of Nolan
Judge Cleary found five deficiencies in Nolan, which he declined to follow “respectfully.” We recommend reading the opinion in full text for Judge Cleary’s critique of Nolan.
Judge Cleary also was obliged to deal with two bankruptcy court opinions in 2001 and 2006 from his own district, which held the same as Nolan. He described them as following Seventh Circuit authority based on the notion of the binding nature of a confirmation order.
Judge Clearly pointed out that the two prior bankruptcy court decisions in his district focused on the binding nature of a confirmation order but “did not analyze the Code provisions that allow modification.”
Judge Cleary “respectfully” declined to follow his predecessors, approved modification of the plan and said that “a change in the rights of a holder of a secured claim through a plan modification is expressly contemplated by the Bankruptcy Code.”
Specifically, Judge Cleary held that a reduction in the amount of the claims in a class is permitted by Section 1329(a)(1) and that Section 1329(a)(3) allows modification of a distribution resulting from a payment outside of the plan.
Addressing a question that the Seventh Circuit hasn’t decided, Bankruptcy Judge David D. Cleary of Chicago “respectfully” disagreed with the Sixth Circuit and sided with the majority by holding that a chapter 13 debtor may modify a plan after confirmation by surrendering collateral and reclassifying the remainder of a secured lender’s claim as unsecured.
The chapter 13 debtor owned a car valued at $9,500. The lender’s claim was almost $12,000. In the confirmed plan, the debtor had elected to retain the car and pay the lender’s $9,500 secured claim with interest over the life of the plan. The remainder of the claim, some $2,500, was classified as unsecured. Unsecured creditors would be receiving about 10% of their claims.
“Stuff” happens in life. In this case, someone stole and damaged the debtor’s car a year after confirmation. To make matters worse, the police had towed the car but couldn’t find it. To make matters even worse, the debtor’s insurance had lapsed.