TIMOTHY A. BARNES, Judge.
Before the court is Trustee Marilyn O. Marshall's Objection to Confirmation [Dkt.
The Chapter 13 Trustee objects to the Plan insofar as it is structured to provide payments to a secured creditor beginning as minimal, adequate protection payments and thereafter stepping up those payments to a more fulsome amount — a so-called "step" plan. Here, the increase in payments occurs when payments to the Debtor's counsel, The Semrad Law Firm, LLC ("
For the reasons more fully stated below, the court agrees. The Objection will be sustained and confirmation of the Plan denied.
The federal district courts have "original and exclusive jurisdiction" of all cases under title 11 of the United States Code, 11 U.S.C. § 101, et seq. (the "
A bankruptcy judge to whom a case has been referred may enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Bankruptcy judges must therefore determine, on motion or sua sponte, whether a proceeding is a core proceeding or is otherwise related to a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(3). As to the former, the court may hear and determine such matters. 28 U.S.C. § 157(b)(1). As to the latter, the bankruptcy court may hear the matters, but may not decide them without the consent of the parties. 28 U.S.C. §§ 157(b)(1) & (c). Instead, the bankruptcy court must "submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c)(1).
In addition to the foregoing considerations, a bankruptcy judge must also have constitutional authority to hear and determine a matter. Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Constitutional authority exists when a matter originates under the Bankruptcy Code or where the matter is either one that falls within the public rights exception, id., or where the parties have consented, either expressly or impliedly, to the bankruptcy court hearing and determining the matter. See, e.g., Wellness Int'l Network, Ltd. v. Sharif, ___ U.S. ___, 135 S.Ct. 1932, 1939, 191 L.Ed.2d 911 (2015) (parties may consent to a bankruptcy court's jurisdiction); Richer v. Morehead,
Matters involving confirmation of a debtor's chapter 13 plan may only arise in a bankruptcy case, concern the administration of the bankruptcy estate and are, thus, within the court's core jurisdiction. 28 U.S.C. § 157(b)(2)(A), (L); In re Williams, 583 B.R. 453, 455 (Bankr. N.D. Ill. 2018) (Hunt, J.) ("Matters relating to confirmation of a plan are core proceedings under 28 U.S.C. § 157(b)(2)(L)."). The matter is therefore core and within the court's jurisdiction. The Debtor has submitted itself to this core jurisdiction and authority by bringing the above-captioned case.
As a result, this court has jurisdiction, statutory authority and constitutional authority to hear and determine this matter.
In considering the Objection, the court has considered the Plan, the prior plans presented by the Debtor, National Form B113 (the "
On December 7, 2017, the Debtor presented its original Chapter 13 Plan [Dkt. No. 13] (the "
On January 25, 2018, the court conducted the first of four confirmation hearings in this matter (collectively, the "
Early in this case Semrad, the Chapter 13 Trustee and the court were also actively engaged in a similar matter, wherein Semrad and other chapter 13 debtors' counsel attempted to change the priority scheme in chapter 13 plans to permit counsel to be paid ahead of other creditors. See In re Gilliam, 582 B.R. 459, 470-75 (Bankr. N.D. Ill. 2018) (Barnes, J.). Because objections to plans must be in writing, see Fed. R. Bankr. P. 3015(f), and because the matters herein turned, at least in part, on the issues in Gilliam, the court continued the matter for an objection to be filed and for Gilliam to be decided.
After the Objection was filed, a briefing schedule was set and, as later modified, complied with by the parties. The Gilliam decision having been rendered on March 28, 2018, after the matter was fully briefed, the court conducted a final confirmation hearing on the Plan. At that hearing on
The court has taken into consideration all of the foregoing, as well as the arguments of the parties at the Hearings. The court has taken judicial notice of the contents of the docket in this case. See Levine v. Egidi, Case No. 93C188, 1993 WL 69146, at *2 (N.D. Ill. Mar. 8, 1993) (authorizing a bankruptcy court to take judicial notice of its own docket); In re Brent, 458 B.R. 444, 455 n.5 (Bankr. N.D. Ill. 1989) (Goldgar, J.) (recognizing same).
Having considered all of the foregoing, this Memorandum Decision constitutes the court's determination of the matters under advisement.
The matter before the court is one of several similar matters recently brought before the bankruptcy courts in this District, wherein counsel for chapter 13 debtors seek to manipulate the priority and payment schemes set forth in chapter 13 cases in order to ensure such counsel's payments. While not the only firm engaging in such practices, Semrad, the counsel herein, has led the way in this behavior.
In the Gilliam matter noted above, Semrad sought to alter the priority scheme in chapter 13 plans to afford Semrad payment in advance of those payments to which it would otherwise be entitled. Gilliam, 582 B.R. at 470-75. In Gilliam and fifty other cases determined by the court concurrently therewith, the court found that Semrad's changes to the priority of payments under chapter 13 plans were solely for Semrad's benefit and potentially harmful to Semrad's clients' interests. Id. As a result, and because Semrad could demonstrate neither client consent nor full disclosure to the court of this self-dealing, the court reduced Semrad's compensation and imposed rigid disclosure requirements of any similar agreements going forward. Id. at 475-77.
As noted, it is not just Semrad engaging in this behavior before the undersigned. See, e.g., In re Williams-Hayes, Case No. 17bk27961, 2018 WL 2207897, at *1-5 (Bankr. N.D. Ill. Mar. 28, 2018) (Barnes, J.). Further, it is not just the undersigned that has been required to address these issues. See, e.g., In re Miceli, 587 B.R. 492, 495 (Bankr. N.D. Ill. 2018) (Lynch, J.) (reduced payments on secured claims); In re Carr, 584 B.R. 268, 275 (Bankr. N.D. Ill. 2018) (Thorne, J.) (same); Williams, 583 B.R. at 456-57 (same); In re Jimmar, Dkt. No. 88, Case No. 17bk11666 (Bankr. N.D. Ill. filed Apr. 13, 2017) (Hunt, J.) (unpublished) (compensation in light of altered priority).
Further, the broader question of law presented herein — reduction of payments to secured creditors under a chapter 13 plan — is also not an issue of first impression in this District, though the courts disagree on the propriety of such practice. Miceli, 587 B.R. at 502 (sustaining objection); Carr, 584 B.R. at 275 (overruling objection); Williams, 583 B.R. at 458 (sustaining objection); In re Hernandez, Case No. 08bk72148, 2009 WL 1024621, at *6 (Bankr. N.D. Ill. Apr. 14, 2009) (Barbosa, J.) (overruling objection); In re Marks, 394 B.R. 198, 201 (Bankr. N.D. Ill. 2008) (Cox, J.) (overruling objection).
In order to understand this variation and the parties' positions, it is necessary to first understand what exactly the Plan proposes.
The Plan presented to the court by the Debtor is what is known locally as a step plan. Step plans are plans that set artificially low payments to secured creditors for a period of time immediately following the plan's confirmation, then stepping up those payments to a more fulsome amount later in the term of the plan. During this period, the debtor's payments to the Chapter 13 Trustee remain unchanged.
In cases such as this one, where the step is included for the counsel's benefit, the lower initial amount theoretically frees up funds to pay the debtor's counsel, which allows counsel's fees to be paid more quickly. After counsel fees are paid, the amount paid to the secured creditors increases. There are other, more legitimate, uses of step plans. For example, a debtor might seek to reduce payments to secured creditors for a period to allow multiple secured debts to be paid prior to the maturity of one or more of those debts, then step up payments after the mature debts are no longer being paid.
Disregarding the effect of the step for the moment, the Debtor's Plan requires him to pay $900.00 per month for 60 months to the Chapter 13 Trustee. Plan, at § 2.1. The Plan sets distributions from those plan payments to nonmortgage secured creditors as follows: Ally Financial in the amount of $166.00 per month for a car; and American First Financial in the amount of $20.00 per month for furniture. Plan, at § 3.3.
The step is implemented with the following nonstandard plan provisions:
Plan, at § 8.1; see also Plan, at § 1.3 (checking the "Included" box for nonstandard Plan provisions). The net effect of these provisions is that both Ally Financial and American First Financial (the "
In considering the Objection, the court is mindful that the burden here lies with the Debtor, as the proponent of the plan. In re Love, 957 F.2d 1350, 1354-55 (7th Cir. 1992). In Love, the Seventh Circuit was presented with a motion to dismiss under section 1307, but the parties disagreed over whether it was the movant or the debtor who bore the burden of showing that the case was commenced in good faith. Id. at 1353-55. The Seventh Circuit compared and contrasted the duties of showing good faith under sections 1307 and 1325 and in so doing observed
In furtherance of that burden, the Debtor has made legal arguments but has offered no reorganization purpose underlying the step payments. Nonetheless, neither of the Secured Creditors has objected to this treatment. The Chapter 13 Trustee has objected, however, and it is to that Objection that the court now turns.
The Chapter 13 Trustee objects to the Plan on three separate grounds, as follows: (1) alleged noncompliance with section 1325(a)(5)(B)(iii) of the Bankruptcy Code; (2) alleged lack of good faith under section 1325(a)(3) of the Bankruptcy Code; and (3) alleged noncompliance with section 1325(a)(1) of the Bankruptcy Code.
The Chapter 13 Trustee's Objection calls into question the propriety of step plans, especially where that step exists solely for the benefit of a debtor's counsel. The court will investigate each of the Chapter 13 Trustee's arguments, in turn.
The Chapter 13 Trustee's first objection relies on section 1325(a)(5) of the Bankruptcy Code, one of a series of confirmation requirements set forth in section 1325(a). A chapter 13 plan may not be confirmed under this section, unless
11 U.S.C. § 1325(a)(5) (emphasis added).
The purpose of section 1325(a)(5)(B)(iii)(I) is not set forth in the statute and the legislative history is silent. In re Benedicto, 587 B.R. 573, 576-77 (Bankr. S.D. Fla. 2018). In Benedicto, the court stated:
Id.
Without the benefit of guidance from Congress, the court is left to consider the statute's purpose in light of its function, what one court has referred to as "educated speculation." Cochran, 555 B.R. at 901. That purpose appears, as noted above in Benedicto, to be to prevent the manipulation of payments to secured creditors without the consent of the affected creditors. Benedicto, 587 B.R. at 576; accord Miceli, 587 B.R. at 502 n.13 (referring to the "nearly universal line of cases which had held that the subsection prohibits balloon payments"). By requiring payments to secured creditors to be in equal monthly payments and not less than the adequate protection owed to the affected creditors, section 1325(a)(5)(B)(iii)(I) prevents debtors from ballooning payments to such creditors (delayed creditors), thereby shifting the risk of early failure of plans to be borne by the delayed creditors while diverting payments from delayed creditors to creditors of less protected status.
Ballooning of payments and shifting of risk is exactly what the Debtor proposes here, however. As such, without acceptance of the Plan under section 1325(a)(5)(A), the Plan would unquestionably be unconfirmable. So, has that acceptance occurred?
Andrews has become the source of a series of cases, none of which rely on its actual holding. These cases take away from Andrews two crucial points of dicta.
The first is that the absence of an objection from a secured creditor constitutes acceptance by that creditor for the purposes of section 1325(a)(5)(A). Andrews, 49 F.3d at 1409 ("Here, § 1325(a)(5) is fulfilled because subsection (A) was satisfied when the holders of the secured claims failed to object. In most instances, failure to object translates into acceptance of the plan by the secured creditor.").
The second is that an objection from a chapter 13 trustee under section 1325(a)(5) alone may be disregarded, as the treatment is personal to the affected creditors and not therefore an issue on which trustees may be heard. Id. ("[W]e find it problematic to confer standing under § 1325(a)(5)."). Andrews was recently followed in this District on both of these points. Carr, 584 B.R. at 275.
Both of those assumptions are problematic.
One problem with relying on Andrews is obvious. Neither of these two points were central to the court's ruling, which determined standing under section 1325(a)(1) for an objection as to whether the plan complied with section 361. Andrews, 49 F.3d at 1406-09. These discussions are therefore dicta and nonbinding. Bank of Am. Nat. Tr. & Sav. Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 434, 460, 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999) (even Supreme Court dicta binds neither that Court nor the lower federal courts); Wilder v. Apfel, 153 F.3d 799, 803 (7th Cir. 1998) ("Dicta are the parts of an opinion that are not binding on a subsequent court, whether as a matter of stare decisis or as a matter of law of the case."). As the Seventh Circuit said in Wilder,
Id.
A second and equally obvious problem is that an opinion from outside of this Circuit is not binding. United States v. Glaser, 14 F.3d 1213, 1216 (7th Cir. 1994) ("Opinions `bind' only within a vertical hierarchy.").
Andrews is not, therefore, controlling law on the matter. Further, Andrews is
For those more used to reorganizations under chapter 11 of the Bankruptcy Code, chapter 13 is a strange bird. Both chapters allow debtors to effectuate plans, which are essentially enforced agreements between debtors and creditors. They achieve that result in materially different ways, however. As Judge Lynch has aptly described this:
In re Turner, 558 B.R. 269, 280 (Bankr. N.D. Ill. 2016) (Lynch, J.).
Chapter 13 was arguably intended as a simplified, cut down approach to reorganizations for individuals with less complex cases and regular income. See H.R. Rep. No. 95-595, at 116-18 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 6076, 6078 (describing the need to simplify consumer reorganizations). Eliminating voting, however, in chapter 13 has forced both the Bankruptcy Code and the courts to anticipate what might otherwise be handled in the voting and confirmation process in chapter 11 and instead impose those standards. In chapter 11, for example, a unanimously accepted plan — which acceptance will be gaged based on the requirements of section 1126 — might be confirmed even if it otherwise would not satisfy the so-called "absolute priority rule" embodied in section 1129(b). See, e.g., 11 U.S.C. §§ 1129(a)(7)(A)(i), (a)(8).
Voting is not mandated by statute in chapter 13 cases and thus there is no equivalent to section 1126 in chapter 13.
In this context, many courts have concluded that silence by a secured creditor constitutes acceptance for the purpose of section 1325(a)(5)(A).
There is, of course, no question that, in the absence of any objection at all, the court may conclude that the requirements of section 1325(a)(3) have been met without the need for evidence in that regard. The Bankruptcy Rules provide as much. See Fed. R. Bankr. P. 3015(f) ("If no objection is timely filed, the court may determine that the plan has been proposed in good faith and not by any means forbidden by law without receiving evidence on such issues."). No such provision exists, however, within the Bankruptcy Rules with respect to section 1325(a)(1) or, by extension, section 1325(a)(5).
Nonetheless, the Andrews dicta and its progeny stand for the proposition that, in the absence of an objection, the court may conclude that a plan has been accepted. This is a very different thing.
Given how courts often handle motion practice, this conclusion is understandable even if misplaced. In American jurisprudence, the absence of an objection is often significant. In civil matters, provided that due process has been afforded, courts may conclude that the silence of affected parties equates to their acceptance. See, e.g., Dooley v. Weil (In re Garfinkle), 672 F.2d 1340, 1347 (11th Cir. 1982) ("Silence or acquiescence may be sufficient conduct to create an estoppel if under the circumstances there was both a duty and opportunity to speak."); cf. In re Kazi, 985 F.2d 318, 322 (7th Cir. 1993) (failure to object in light of duties under Rule 4003 foreclosed that opportunity). Andrews itself, in reaching this conclusion, relies on its own prior precedent regarding plan confirmation and preclusion, not on acceptance itself. Andrews, 49 F.3d at 1406-09 (citing to Lawrence Tractor Co. v. Gregory (In re Gregory), 705 F.2d 1118, 1121 (9th Cir. 1983)).
Equating lack of objections, preclusion, or waiver with acceptance is, however, wrong on a number of levels.
First, voting and objections have different meanings and consequences in bankruptcy matters. Compare 11 U.S.C. § 1129(a)(9), (b) (providing specific treatment predicates to confirming a chapter 11 plan for nonaccepting creditors) with 11 U.S.C. § 1129(a)(15) (providing specific treatment predicates to confirming a chapter 11 plan as to creditors who object to the plan). In chapter 11 cases, acceptance for the purposes of voting may be deemed, see, e.g., 11 U.S.C. § 1126(f), but such deemed acceptance does not equate to actual
Second, equating the failure to object to be acceptance runs contrary to the express language of the Bankruptcy Code itself. In interpreting the Bankruptcy Code, the court is required to apply principles of plain language interpretation. Ryan v. United States (In re Ryan), 725 F.3d 623, 626 (7th Cir. 2013) ("It is the province of the legislature to choose language that maximizes its own purposes, and for the courts to give that language its plain meaning or, where it is ambiguous to interpret it in the manner most consistent with the statutory language as a whole, its purpose, and in a manner that will render it constitutional."). Those principles look to the meaning and structure of the statute itself before looking elsewhere. Here, Congress chose the term "accepted." The plain meaning of "accept," without further context, is either to make a favorable response (by an affirmative act) or to endure without protest or reaction (silence), though the definitions seem to run toward the former, not the latter.
Looking at the language in context, it is clear to the court that, even in chapter 13, objections and acceptances are not the same. Congress used both terms in section 1327(a), which states that "[t]he provisions of a confirmed plan bind the debtor and each creditor, ... whether or not such creditor has objected to, has accepted, or has rejected the plan." 11 U.S.C. § 1327(a). Equating acceptance with lack of objection renders section 1323(c) nearly incomprehensible. 11 U.S.C. § 1323(c)
Third, placing the burden with regard to confirmation of a plan on the creditor incorrectly inverts the burdens under section 1325. As noted at the outset, the burden of showing satisfaction of the elements of section 1325 falls on the plan's proponent, in this case, the Debtor. Love, 957 F.2d at 1354-55. As the plan proponent, especially one proposing a nonstandard provision applicable only to specified creditors, the Debtor has the burden of demonstrating acceptance. Forcing a creditor to object to preserve its rights removes that burden from the Debtor. It is not unreasonable or out of the context with the overall statutory theme in chapter 13 to require a debtor to carry its burden by affirmatively seeking acceptance from creditors who a debtor is individually targeting with nonstandard provisions. Cf. Briseno v. Mut. Fed. Savs. & Loan Ass'n (In re Briseno), 496 B.R. 509, 515 (Bankr. N.D. Ill. 2013) (Baer, J.) (plan proponent bears the burden of establishing value for lien stripping contained in chapter 13 plan); In re Zimmerman, 276 B.R. 598, 603 (Bankr. C.D. Ill. 2001) (setting out the up-front burdens that fall on a debtor as plan proponent with respect to specific lien stripping, even in advance of an objection).
Fourth and perhaps most important, equating the lack of objection to acceptance requires two logical leaps. The court must conclude that somehow preclusion and waiver equate to acceptance. The court must also conclude that the Chapter 13 Trustee's objection must be disregarded.
That former assumption collapses preclusion and waiver into that of acceptance. It is true, as noted above, that the confirmation of a plan may be preclusive on many issues. ReGen Capital I, Inc. v. UAL Corp. (In re UAL Corp.), 635 F.3d 312, 321 (7th Cir. 2011) ("By failing to object to or appeal the plan's confirmation, [creditor] lost any opportunity to seek an exemption from or to challenge this provision.").
However, holding that the failure to object to a potentially defective plan provision equates to acceptance of that provision runs contrary to the Supreme Court's ruling in United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010). In Espinosa, the Supreme Court articulated the importance of bankruptcy courts ensuring that plans are confirmed only if they comply with the Bankruptcy Code. In the context of an unobjected to plan which attempted to discharge student loan debt without demonstrating undue hardship, the Court stated that "[f]ailure to comply with this self-executing requirement should prevent confirmation of the plan even if the creditor fails to object, or to appear in the proceeding
Espinosa is, of course, binding on this court where Andrews is not. Further, Espinosa is fifteen years more recent than Andrews, and much of the case law following Andrews has occurred in between. Nonetheless, some courts have continued to follow Andrews irrespective of the language in Espinosa. See, e.g., Wachovia Dealer Servs. v. Jones (In re Jones), 530 F.3d 1284, 1291 (10th Cir. 2008) ("[T]he failure to object constitutes acceptance of the plan."); Austin v. Bankowski, 519 B.R. 559, 563 (D. Mass. 2014) (mentioning Espinosa but providing no explanation of its role in following Andrews); Scotiabank de Puerto Rico v. Lorenzo (In re Lorenzo), Case No. 15-011, 2015 WL 4537792, at *6 (1st Cir. BAP July 24, 2015) ("[F]ailure to prosecute its objection constituted acceptance of the plan for purposes of § 1325(a)(5)(A)."); Bronitsky v. Bea (In re Bea), 533 B.R. 283, 290 (9th Cir. BAP 2015) (rejecting Espinosa's application to an adequate protection determination under section 1325(a)(5)(B)(iii)(II) as that provision is not self-executing); Carr, 584 B.R. at 274-75 (same); In re Olszewski, 580 B.R. 189, 193 (Bankr. D.S.C. 2017) (mentioning Espinosa but providing no explanation of its role in following Andrews).
Several courts have broken with Andrews in light of Espinosa. See, e.g., In re Brown, 559 B.R. 704, 708 (Bankr. N.D. Ind. 2016) ("While a creditor may `accept' or `agree to' plan provisions that could not otherwise be imposed upon it, the failure to object is not acceptance. If it were, the Supreme Court's comments in Espinosa would be meaningless.") (citations omitted).
Other courts have never allowed silence as acceptance in this context. In re Northrup, 141 B.R. 171, 173 (N.D. Iowa 1991) (in the context of acceptance under section 1322(a)(2), "the court agrees with the bankruptcy court that an express affirmation of consent is required"); In re Madera, 445 B.R. 509, 514 (Bankr. D.S.C. 2011) ("Section 1325 does not suggest that the absence of an objection equals confirmation, but rather supports the principle of the need for judicial supervision of the plan confirmation process."); In re Montoya, 341 B.R. 41, 46 (Bankr. D. Utah 2006) (rejecting implied acceptance under the facts of that case); In re Ferguson, 27 B.R. 672, 673 (Bankr. S.D. Ohio 1982) (rejecting chapter 13 plan for proposal contained therein to alter treatment to priority creditors without such creditors' express agreement); see also, e.g., In re Bethoney, 384 B.R. 24 (Bankr. D. Mass. 2008) (following Montoya); In re Montgomery, 341 B.R. 843 (Bankr. E.D. Ky. 2006) (same).
Both Bea in favor of silence as acceptance and Montoya against are instructive. In Bea, the Bankruptcy Appellate Panel for the Ninth Circuit discussed Espinosa and concluded that it did not apply to the fact driven analysis under section 1325(a)(5)(B)(iii)(II). Bea, 533 B.R. at 290.
In Montoya, the court found that silence may be deemed acceptance only if the plan is otherwise unobjectionable. It stated that:
Montoya, 341 B.R. at 45 (footnotes omitted) (emphasis added).
The Montoya conclusion is striking under the facts at bar, where it is clear that the Debtor here has intentionally proposed a plan inconsistent with section 1325(a)(5)(B)(iii)(I) and, rather than affirmatively seek acceptance by the affected secured creditors, has lain in wait to see if the creditor objects.
Thus while silence might equal acceptance of a chapter 13 plan generally, it is difficult to find it so under the facts at bar. It is even more difficult to do so in light of the Objection from the Chapter 13 Trustee.
The Bankruptcy Code as we know it today is the product of hard fought reforms in the 1970s. Prior to the enactment of the Bankruptcy Reform Act of 1978 which, when codified, became the Bankruptcy Code, the bankruptcy law of the land was primarily that contained in the Nelson Act, Bankruptcy Act of 1898, Pub. L. No. 55-541, 30 Stat. 544 (superseded by the Bankruptcy Code), as substantially amended in 1938 by the Chandler Act. Bankruptcy Act of 1938, Pub. L. No. 75-696,
As detailed in the legislative history to the Bankruptcy Code, prior to the Bankruptcy Code's enactment, bankruptcy law was mired in the "horse and buggy" era and had fallen into "disrepair." H.R. Rep. No. 95-595 (1977), 1st Sess. 1977, reprinted in 1978 U.S.C.C.A.N. 5963, 5965 (the "
As most are aware, the Bankruptcy Code addressed the former of these two problems by attempting to give "the bankruptcy court the independence it needs to operate in today's complex bankruptcy world." Id. at 5965. While that effort was successful in many respects, in large part it failed. In the past ten years, bankruptcy court authority has been repeatedly and severely eroded by Supreme Court and other jurisprudence. See, e.g., Stern, 564 U.S. at 464, 131 S.Ct. 2594 (holding that the Bankruptcy Code unconstitutionally vested authority in the bankruptcy courts). Such is the result that bankruptcy courts are no longer certain whether they can hear the simplest and most crucial matters within bankruptcy cases, such as fraudulent conveyance actions.
The Bankruptcy Code addressed the latter problem by attempting to remove the supervisory functions from the judge. House Report, 1978 U.S.C.C.A.N. at 5966. Those functions were transferred in large part to the United States Trustee's Office and the standing chapter 13 trustees. Id. The stated goal was to "involve[] the judge only when a dispute arises." Id. This second effort has been largely successful, but for two very important changes. First, the volume of cases heard by bankruptcy judges has risen disproportionately with the number of bankruptcy judges. In 1978, there were approximately 200 bankruptcy judges hearing approximately 227,000 cases. John E. Shepard, The 1981 Bankruptcy Court Time Study, Federal Judicial Center (1982), 33, 49-50, https://www.fjc.gov/sites/default/files/2012/1981Bank.pdf. In 2017, there are approximately 365 bankruptcy judges hearing over 1 million pending cases. U.S. Bankruptcy Courts Federal Judicial Caseload Statistics, Administrative Office of the United States Courts (March 31, 2018), http://www.uscourts.gov/statistics/table/f/federal-judicial-caseload-statistics/2018/03/31. In 2011, prior to the Stern decision, the caseload exceeded 1.5 million. Thus less than twice the number of judges are hearing four times or more cases.
The second change is that the Bankruptcy Code has become enormously more complex while efforts to create uniformity in the national bankruptcy system such as the national chapter 13 plan have been met
As a result, the bankruptcy court has become more and more dependent on chapter 13 trustees to raise concerns and objections to chapter 13 plans. Such trustees may, by statute, "appear and be heard at any hearing that concerns ... confirmation of a plan ...." 11 U.S.C. § 1302(b). The wording of this section confers on chapter 13 trustees a right to be heard in matters such as the one at bar. It also, by phrasing the foregoing in the context of "shall," confers an affirmative duty on the trustee. Id.; Andrews, 49 F.3d at 1408; see also In re Foulk, 134 B.R. 929, 931 (Bankr. D. Neb. 1991) ("The trustee must either recommend confirmation or object to confirmation. The chapter 13 standing trustee should thus review all Chapter 13 plans in detail and should file objections to confirmation and claimed exemptions where warranted.") (emphasis added).
It is against this backdrop that the Debtor asks the court to ignore the Objection under section 1325(a)(5)(B), arguing that the Chapter 13 Trustee lacks the standing to be heard on a section that appears to be personal to secured creditors' rights.
With respect to standing,
In re Whitlock-Young, 571 B.R. 795, 803 (Bankr. N.D. Ill. 2017) (Barnes, J.).
In light of these requirements, there is little question that chapter 13 trustees have no traditional standing to be heard under section 1325(a)(5)(B). But the same would hold true for all bankruptcy matters. Chapter 13 trustees have no personal stake in the outcome of bankruptcy matters, including those under section 1325(a)(5)(B).
Instead, chapter 13 trustees have something better. They have an unfettered statutory right to be heard. They need not establish standing to be heard.
Andrews appears to miss this point when it considered standing under section 1325 and concluded that while a trustee has standing to raise a section 1325(a)(5) issue in the context of section 1325(a)(1) —
To the extent that Andrews stands for the proposition that chapter 13 trustees may not be heard directly under section 1325(a)(5), it is misguided. That approach diminishes without basis the trustee's right to be heard. The Chapter 13 Trustee has the right to be heard on all matters concerning plan confirmation. 11 U.S.C. § 1302(b). That right applies whether the question is one under section 1325(a)(1), section 1325(a)(5) or otherwise.
What Andrews and the courts that express concern with a trustee's standing under section 1325(a)(5) appear to be doing is trying to find the right framework within which to consider a trustee's objection. The common element in the cases that have discounted a chapter 13 trustee's objection under section 1325(a)(5) seems to be some view that the chapter 13 trustee's role is limited under that section. Andrews, 49 F.3d at 1407; Carr, 584 B.R. at 275.
Nothing in the statute, however, leads to that result. Chapter 13 trustees are directed by statute to appear and be heard "at any hearing that concerns ... confirmation of a plan." 11 U.S.C. § 1302(b)(2)(B). In addition, section 1325(b) is expressly predicated on a trustee's ability to object to a plan, and nothing in Bankruptcy Rule 3015, which governs objections, states otherwise. Further, a trustee's role frequently crosses the hypothetical line drawn in these cases between general duties of a trustee and creditor-specific actions. For example, a trustee is expressly authorized by statute and by rule to file claims on behalf of all creditors. 11 U.S.C. § 501(c); Fed. R. Bankr. P. 3004; see also Yoon v. VanCleef, 498 B.R. 864, 867 (N.D. Ind. 2013) ("The provisions at issue contain no qualifications as to why or to what end the trustee may file such claims. These provisions are clear and unambiguous, and expressly permit the trustee file these claims."). Trustees also act in a representative capacity when they bring avoidance actions or objections to claims. Hope v. Acorn Fin., Inc., 731 F.3d 1189, 1193 (11th Cir. 2013) ("The trustee, moreover, acts in a representative capacity when she seeks post-confirmation avoidance."). "[T]he primary purpose of the Chapter 13 trustee is not just to serve the interests of the unsecured creditors, but rather, to serve the interests of all creditors." Overbaugh v. Household Bank N.A. (In re Overbaugh), 559 F.3d 125, 129-30 (2d Cir. 2009); Andrews, 49 F.3d at 1407; In re Maddox, 15 F.3d 1347, 1355 (5th Cir. 1994).
Put another way, a chapter 13 trustee is permitted to stand in the shoes of creditors — including secured creditors — provided those creditors are not standing in those shoes themselves.
As previously discussed, the bankruptcy courts are overburdened and chapter 13 trustees play a significant role in policing plan confirmations. Many times the trustee is privy to the interactions between the debtor and its creditors that the court is not. Thus, while in the absence of any objection a court might presume a creditor's silence is acceptance, in the face of a chapter 13 trustee's objection, how could it therefore possibly be inappropriate to require the debtor to carry its burden expressly? These are specifically targeted, nonstandard plan provisions. All a debtor need do is confirm the affected creditor's acquiescence and report that to the court. Cf. Fed. R. Bankr. P. 3018 (requiring acceptance of chapter 9 and chapter 11 plans to be in writing, but not providing a similar
Further, when a plan provision is proposed in clear contravention of both the express language and purpose of section 1325(a)(5)(B)(iii)(I) for the sole reason to manipulate payments to parties to benefit a debtor's attorney, holding a creditor to a higher standard of actual, express acceptance is appropriate. Montoya, 341 B.R. at 46.
In light of nature of the step proposed here and the Chapter 13 Trustee's objection to the same, the Debtor has failed to carry its burden under section 1325 by failing to demonstrate actual acceptance under 1325(a)(5)(A). As a result, the Objection is well taken and confirmation of the Plan will be denied.
The Chapter 13 Trustee also asserts that the Plan is not compliant with section 1325(a)(3), the good faith requirement.
"Under section 1325(a)(3), as a condition for confirmation of a chapter 13 plan, the court must find that `the plan has been proposed in good faith and not by means forbidden by law ...." In re Tabor, 583 B.R. 155, 195 (Bankr. N.D. Ill. 2018) (Barnes, J.).
Those courts that have found the practice engaged in here permissible have focused on the factors of Andrews but not considered that a plan that satisfies the requirements of section 1325(a)(5) (governing treatment of secured claims) might nonetheless violate section 1325(a)(3) (requiring that a plan be proposed in good faith). This is incorrect, as these tests are independent. To hold that satisfaction of section 1325(a)(3) is subsumed into satisfaction of section 1325(a)(5) is to read section 1325(a)(3) out of existence. Thus irrespective of the court's conclusion under section 1325(a)(5), the Plan must meet the good faith requirement of this section.
Good faith, however, is not defined in the statute nor discussed in the legislative history.
The Seventh Circuit has stated that "[i]n determining whether a plan is filed in good faith, the court is tasked with questioning whether the debtor is `really trying to pay the creditors to the reasonable limit of his ability or is he trying to thwart them?'" In re Schaitz, 913 F.2d 452, 453 (7th Cir. 1990); see also Tabor, 583 B.R. at 195. "`Broadly speaking, the basic inquiry should be whether or not under the circumstances of the case there has been abuse of the provisions, purpose, or spirit of (Chapter 13) in the proposal.'" Rimgale, 669 F.2d at 432 (quoting Tenney v. Terry (In re Terry), 630 F.2d 634, 635 (8th Cir. 1980)). "[F]or purposes of determining good faith under ... section 1325(a)(3), the important point of inquiry is the plan itself and whether such plan will fairly achieve a result consistent with the objectives and purposes of the Bankruptcy Code." Madison Hotel, 749 F.2d at 425. That must be done on a "case-by-case basis as the courts encounter various problems in the administration of chapter 13's provisions," Rimgale, 669 F.2d at 431 (quotations omitted), and the inquiry should "`mitigat[e] the danger of abuse.'" In re Smith, 286 F.3d 461, 466 (7th Cir. 2002) (quoting In re Young, 237 F.3d 1168, 1174 (10th Cir. 2001)).
Tabor, 583 B.R. at 195-96 (paraphrased from Rimgale, 669 F.2d at 431). "These broad sets of factors ultimately merge into a generic `totality of the circumstances' test." In re Smith, 848 F.2d 813, 818 (7th Cir. 1988); Tabor, 583 B.R. at 196.
The totality of the circumstances here is that the step payment in the Plan and the way that the Debtor has sought to enforce it over known creditors is not fundamentally fair. It is not in keeping with the objectives and the purposes of the Bankruptcy Code.
This is an example of what the court was concerned with in Montoya. Semrad, on behalf of its client, the Debtor, has proposed a plan that it knows or should know violates both the express provisions and intention of section 1325(a)(5)(B)(iii)(I). As per past practice, Semrad lay in wait to see if the Plan gave rise to an objection from a Secured Creditor, or, as was noted in Montoya, the Plan could catch those creditors sleeping. If an objection had occurred, by Semrad's own admission, it would have removed the provision if it could not reach an agreement with the objecting creditor. By doing so, the Debtor (or Semrad) seeks to delay payment to the Debtor's Secured Creditors without even attempting to procure those creditors' acceptance under section 1325(a)(5)(A). That delay heightens the risks borne by such delayed creditors, solely to reduce risk and accelerate payment to another creditor, Semrad.
It should also be noted that, in advising the Debtor to proceed in this manner, Semrad has prioritized its desire to be paid over the best interests of the Debtor, its client. As this court observed previously in Gilliam, provisions such as those at bar here are harmful to the client. Not only does the delay in payment under the Plan shift risk to the Debtor's delayed creditors, but it leaves unpaid longer a debt that, in the event of failure of the debtor's bankruptcy plan, because it is secured, has superior rights outside of bankruptcy. This could leave the debtor in a worse position that had it not filed for bankruptcy.
These risks and harms are borne by the Debtor for no reason other than to prefer payment to Semrad. Id. at 464 ("[T]he additions are asserted for the benefit of the attorneys alone, not the debtors in whose plans they are contained ...."). "[T]he plan provisions themselves and any effort spent on the plan provisions by Semrad were of no benefit to the estate in question." Id. at 471.
As a result, the court simply cannot conclude that the Plan deals with the Debtor's creditors with fundamental fairness. It creates a problem with administration such as anticipated in Rimgale for no valid bankruptcy purpose.
Thus even if this Plan were to satisfy section 1325(a)(5), it is not proposed in good faith. As a result, the Objection is well taken under this ground as well and confirmation of the Plan will be denied.
Finally, the Chapter 13 Trustee asserts that the Plan does not comply with section 1325(a)(1).
Section 1325(a)(1) requires the Plan to comply "with the provisions of this chapter and with other applicable provisions of this title." 11 U.S.C. § 1325(a)(1). The section, put plainly, is a catch all provision which ensures that chapter 13 plans comply both with the requirements laid out in chapter 13 and the rest of the Bankruptcy Code.
Because this court has concluded that the Plan violates sections 1325(a)(3) and 1325(a)(5), section 1325(a)(1) is also not satisfied. The Plan may not be confirmed.
All but one of the arguments raised by the Debtor in the Response have been discussed above. One, however, remains open and goes to the heart of Semrad's misunderstanding of this matter.
In the Response, the Debtor argues that there is nothing wrong with the Plan's proposal because section 1326 permits claims such as those by Semrad to be paid before the claims of other creditors. Section 1326 states, in pertinent part, that some claims shall be paid "[b]efore or at the time of each payment to creditors under the plan." 11 U.S.C. § 1326(b).
While this argument is more persuasive in the context of the prioritization of payments handled in Gilliam as opposed to the step payments discussed here, it is ultimately unpersuasive in both contexts. As Judge Lynch pointed out in Miceli, there is no conflict between sections 1325(a)(5)(B) and 1326(b). Miceli, 587 B.R. at 497-98. Section 1326(b)'s optionality does not override the requirements of section 1326(a)(5)(B). In cases where there are no secured creditors, section 1326(b) allows the payments to attorneys to occur before the payments to unsecured creditors. However, when there are in fact secured creditors, stepping and therefore delaying payments to secured creditors cannot occur without the consent of the secured creditors, and thus without that consent, the payments under section 1326(b) will happen at the time of the payment to such creditors.
In either case, that is not the crux of the court's ruling today. Remember that it is the payment scheme set forth in the National Plan that Semrad is attempting to change with nonstandard plan provisions. The National Plan follows the payment structure required by the Bankruptcy Code. Does section 1326 allow for a different structure in certain circumstances? Yes, that is one of the points of allowing nonstandard plan provisions. Does the fact that one Bankruptcy Code section permits an action override the specific restraints in another? Of course not. There are uses of the timing set forth in section 1326 that do not offend section 1325(a)(5). But those that do are impermissible.
The ruling today is limited to the question of what constitutes acceptance in light of a chapter 13 trustee's objection to nonstandard plan provisions under section 1325(a)(5), where no express acceptance has been provided to meet the debtor's burden thereunder. It is also about the inherent lack of good faith in pursuing such a plan, which is a determination independent from the statutory permissibility of the proposed provisions in a vacuum.
For all of the foregoing reasons, it is the court's conclusion that the Objection is well taken. As a result and by an order entered concurrently with this Memorandum Decision, confirmation of the Debtor's Plan will be denied.
This matter comes before the court on Trustee Marilyn O. Marshall's Objection to
NOW, THEREFORE, IT IS HEREBY ORDERED:
The Objection is SUSTAINED. Confirmation of the Plan is DENIED.
Because bankruptcy plans, though interpreted under contract law, are first formed under the requirements of the Bankruptcy Code itself, it is not necessary to consider here how a contractual analysis might play out.
