Non-profit debtor corporation that co-owned real property with its former president, confirmed a chapter 11 plan that vested property of the estate in the Debtor upon confirmation “free and clear” of claims and interests. Following confirmation, the former president sought to partition the property in state court, and the Debtor filed a motion seeking a determination whether the plan’s language extinguished the co-owner’s partition rights. The Court determined that neither 11 U.S.C. § 1141(c) nor the Debtor’s plan eliminated the former president’s co-ownership interest in the property or prevented him from seeking partition in the state court.
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Counsel for chapter 11 debtor sought retroactive approval of its employment as counsel for the debtor for the seven-day period between the debtor’s petition date and the date counsel filed its application. The Court denied the request, finding counsel had failed to make the required showing of extraordinary circumstances necessary to obtain nunc pro tunc approval under Tenth Circuit precedent. Even though the delay was relatively short, that factor alone was not an extraordinary circumstance.
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 “under the plan,” 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 “material default by the debtor with respect to the term of a confirmed plan,” and was cause to dismiss or convert the case under § 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.
The Debtor’s case was converted from chapter 13 to chapter 7 prior to confirmation of a chapter 13 plan. The Debtor’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 Court’s decision in Harris v. Viegelahn, 135 S. Ct. 1829 (2015) (“Harris”), required that all undistributed plan payments be returned to the Debtor, without payment of the attorney’s fees. The attorney argued that because the Debtor’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 § 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 Court’s ruling in Harris that the second sentence of § 1326(a)(2) and “no provision of chapter 13 holds sway” 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 § 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 “creditor” in its technical sense, as it is defined by § 101(1) of the Code, or give any indication that it intended to distinguish between payments to “creditors” 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 trustee’s authority to make plan payments ended at conversion.
The Debtor initially filed a chapter 7 case, but immediately converted to chapter 13 when the chapter 7 trustee expressed interest in selling the Debtor's home due to the existence of non-exempt equity. The Debtor did not file a chapter 13 plan within fourteen days after the conversion date and, as a result, the Court entered an order dismissing the case. The chapter 7 trustee and the chapter 13 trustee moved to vacate the order dismissing the case and to re-convert the case to chapter 7. The trustees asserted that the Debtor could take advantage of a larger homestead exemption by allowing his case to be dismissed and then re-filing it under chapter 7 after the effective date of an amendment to the homestead exemption statute. The Court found that its local rules were ambiguous as to whether the failure to file a chapter 13 plan may result in the dismissal of a case pursuant to the United States Trustee's Standing Motion to Dismiss Deficient Cases and that its procedures governing dismissal for failure to timely file a plan failed to satisfy the due process requirements of notice and a hearing for dismissal under § 1307(c). The Court contrasted the Bankruptcy Code's provision for automatic dismissal for the failure to file certain case commencement documents, found in § 521(i), with § 1307(c), which requires "notice and a hearing" prior to dismissal for failure to timely file a chapter 13 plan. The purpose for requiring a notice and opportunity for hearing prior to the dismissal under § 1307(c) is to allow any party who wishes to provide the court with input as to whether dismissal or conversion is in the best interests of creditors to have the opportunity to do so. Here, the only notice regarding the potential dismissal of the case was certain language in the Court's 341 meeting notice. This language failed to satisfy the minimal due process requirements of § 1307(c), therefore the Court vacated the order of dismissal pursuant to Fed. R. Civ. P. 60(b)(4) and reinstated the case.
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