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In re Hoyt-Kieckhaben, Case No. 11-13705 EEB, February 23, 2016
This case is similar to several recent chapter 13 cases in this district in which the debtor failed to make her direct payments to the mortgage holder for a substantial period of the plan but sought to receive a discharge on the basis of having made all of the payments required to be paid to the trustee. Judge Brown follows the holding of other divisions in this court that both trustee payments and direct mortgage payments are payments "under the plan," and that failure to make any of these payments prohibits the debtor from receiving a discharge.
In determining that the direct mortgage payments were payments â€śunder the plan,â€ť the Court relied heavily on In re Foster, 670 F.2d 478 (5th Cir. 1982), which reviews the historical underpinnings of chapter 13. It recognized that prior versions of the statute required the consent of every secured creditor as a condition of plan confirmation. If the debtor could not secure the consent of a particular secured creditor, the debtor would simply leave this creditor out of the plan altogether. Thus, if the plan made absolutely no provision for a secured creditor, then the debtor could make payments "outside the plan" under the contractual terms of their agreement. But if the plan cures an arrearage or otherwise specifies any treatment for this claim in the plan, then all payments on the claim are deemed "under the plan" regardless of who disburses the payments to the mortgage holder. Judge Brown then traces the Code sections that leave the question of who should act as the disbursing agent of mortgage payments to the court's discretion. Thus, this decision may serve as a foundation for Judge Brown's analysis of upcoming issues in this district as to conduit mortgage payments and whether a debtor may truly make payments on secured debts "outside the plan."
Judge Brown also ruled that the failure to make direct mortgage payments was a â€śmaterial default by the debtor with respect to the term of a confirmed plan,â€ť and was cause to dismiss or convert the case under Â§ 1307(c). Because the Debtor requested conversion of her case if she was not entitled to a chapter 13 discharge, neither the chapter 13 trustee nor the mortgage lender opposed conversion, and there was no suggestion of bad faith, the case was converted to chapter 7.
Posted: 3/21/2016 7:48:25 AM
In re Hoggarth, Case No. 14-24810 EEB, February 23, 2016
The Debtorâ€™s case was converted from chapter 13 to chapter 7 prior to confirmation of a chapter 13 plan. The Debtorâ€™s attorney filed an application for payment of her fees from undistributed plan payments held by the chapter 13 trustee at the time of conversion. The Court ruled that the Supreme Courtâ€™s decision in Harris v. Viegelahn, 135 S. Ct. 1829 (2015) (â€śHarrisâ€ť), required that all undistributed plan payments be returned to the Debtor, without payment of the attorneyâ€™s fees. The attorney argued that because the Debtorâ€™s case was converted prior to confirmation of a plan, and Harris involved a post-confirmation conversion, the Harris case was distinguishable. The Court acknowledged that when a chapter 13 case is dismissed prior to confirmation of a plan, the third sentence of Â§ 1326(a)(2) requires that administrative expenses be paid prior to the return of plan payments to the debtor. However, the Court could not ignore the Supreme Courtâ€™s ruling in Harris that the second sentence of
Â§ 1326(a)(2) and â€śno provision of chapter 13 holds swayâ€ť after a case is converted to chapter 7. The Court found the language and reasoning of Harris broad enough to encompass the situation where a case is converted prior to confirmation. It also found that payment of chapter 13 administrative expenses upon conversion could frustrate the statutory priority scheme of
Â§ 726(b). The attorney also argued that Harris involved payments made to secured and unsecured creditors and did not address whether administrative claims could be paid from plan payments upon conversion. The Court found, however, that the Supreme Court did not appear to use the term â€ścreditorâ€ť in its technical sense, as it is defined by Â§ 101(1) of the Code, or give any indication that it intended to distinguish between payments to â€ścreditorsâ€ť from payments to administrative expense claimants. Rather, the Supreme Court appeared to use the term more broadly to refer to all those entitled to receive distributions of plan payments and was unequivocal that the trusteeâ€™s authority to make plan payments ended at conversion.
Posted: 3/21/2016 7:44:24 AM
In re VonKreuter, Ch. 13 Case No. 15-13258-MER (Bankr. D. Colo. Feb. 12, 2016) (absent bad faith conversion, any undisbursed postpetition earnings must be returned to the debtor upon conversion to Chapter 7).
In Harris v. Viegelahn, â€“â€“â€“ U.S. â€“â€“â€“, 135 S. Ct. 1829, 191 L. Ed. 2d 783 (2015), the United States Supreme Court concluded any undisbursed postpetition earnings must be returned to the debtor upon conversion from Chapter 13 to Chapter 7 under 11 U.S.C. § 1307(a), absent finding of bad faith under 11 U.S.C. § 348(f)(2). In Harris, the debtor had confirmed a Chapter 13 plan and then sought conversion to Chapter 7.
The issue before this Court was whether allowed administrative expense claims pursuant to 11 U.S.C. §§ 503(b) and 1326(a)(2) may be paid from undisbursed postpetition earnings upon the pre-confirmation conversion of a case from Chapter 13 to Chapter 7. Ultimately, this Court agreed with, joined and adopted the growing post-Harris majority position. In summary, the Court determined Harris applies equally to cases converted from Chapter 13 to Chapter 7 both after confirmation and prior to confirmation. The Court held absent bad faith conversion, allowed administrative expense claims may not be paid from undistributed postpetition earnings, rather those undisbursed earnings must be returned to the debtor upon conversion.
Posted: 2/12/2016 4:17:28 PM
In re Palmer, Case No. 14-21837- HRT; Order entered December 16, 2015 (Student loans are consumer debts under 11 U.S.C. Â§ 707(b)(1)).
The United States Trustee moved to dismiss Debtors' chapter 7 case pursuant to 11 U.S.C. §§ 707(b)(1) and 707(b)(2) or, in the alternative, § 707(b)(3). Debtors filed a response, arguing that a student loan debt, incurred to pay for a doctorate degree in business administration, was non-consumer debt. Before the hearing, the parties stipulated that the only issue before the Court was whether the student loan debt was a consumer debt, defined by § 101(8) as "debt incurred by an individual primarily for a personal, family or household purpose." If so, the parties agreed the granting of relief under chapter 7 would be an abuse of the provisions of chapter 7, and the Debtors would convert to a chapter 13 case within 14 days of the Court's order, failing which the case would be dismissed.
The Court examined In re Stewart, 175 F.3d 796 (10th Cir. 1999), where the Tenth Circuit affirmed a bankruptcy court's decision holding that student loan debts incurred by a debtor to attend medical school were consumer debts. In that case, the Tenth Circuit acknowledged that student loans are not per se consumer debts, and recognized the general principle that a credit transaction is not a consumer debt when it is incurred with a profit motive. The Court also analyzed several recent cases from other jurisdictions classifying student loan debt as consumer or non-consumer debt.
Ultimately, the Court found that the profit motive factor should be interpreted narrowly for purposes of the means test and eligibility to file for chapter 7 under § 707(b). The Court held that in order to show a student loan was incurred with a profit motive, the debtor must demonstrate a tangible benefit to an existing business, or show some requirement for advancement or greater compensation in a current job or organization. The goal must be more than a hope or an aspiration that the education funded, in whole or in part, by student loans will necessarily lead to a better life through more income or profit.
In this case, Debtors did not show the student loan debt was incurred with a motivation to benefit an existing business or in furtherance of an ongoing job or business requirement. Thus, the Court found the student loan debt was a consumer debt, making the provisions of § 701(b)(1) applicable. Pursuant to the parties' agreement, the Court ordered the Debtors to convert to chapter 13 or face dismissal of their case.
Posted: 12/18/2015 3:25:22 PM
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