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Chapter 13 Plan Can Delay Payments to Secured Creditor If No Objection

A very recent Ninth Circuit Bankruptcy Appellate Panel ("BAP") ruling gave debtors a little more leverage in how they pay their secured debts in a Chapter 13 "adjustment of debts" case. (The BAP hears appeals from bankruptcy courts in California and 8 other western states.)

In the In re Bea opinion published on May 29, 2015, this court determined that a person filing a Chapter 13 does not necessarily have to start making payments to secured creditors immediately after the filing of their case as long as those creditors do not object to the payments as proposed. The court said that a Chapter 13 trustee alone does not have the power to stop a bankruptcy court's confirmation (approval) of a payment plan on the basis of the plan's delay in payments earmarked for secured creditors if the creditor itself does not raise the objection.

WHY IS THIS COURT DECISION IMPORTANT?

The main reason why Chapter 13 is an effective way to resolve your debts is its efficiency. That is more important than it sounds. Chapter 13 procedure consists of a delicate balancing of structure and flexibility. A debtor and his or her attorney propose a payment plan based on a firm structure dictated by law but which also provides enough flexibility to address individual circumstances. The structure—the laws saying how a plan can and can't treat creditors—guides the debtor and limits the issues that creditors can object to. With less to argue about, Chapter 13 plans are relatively inexpensive to put together, get approved, and perform, to the benefit of both debtors and creditors.

Accordingly one of the most important considerations in Chapter 13 law is where this balance between structure and flexibility is struck. Specifically, what payments to creditors can a debtor propose and the bankruptcy court approve in a formal payment plan, under what circumstances and on what grounds can those proposed payments be objected to, and who can object? These are crucial questions.

Broadly speaking this is what the In re Bea court addressed, in the practically very important context of payments to secured debts, such as vehicle loans and home mortgages. The ruling effectively gave debtors more leeway in how they make payments to secured creditors, and it limited when the Chapter 13 trustee can object to the proposed payments.

DOESN'T THE BANKRUPTCY CODE SAY THAT PAYMENTS TO SECURED CREDITORS HAVE TO START WITH THE FIRST MONTHLY PLAN PAYMENT?

Not directly, although to a certain extent it's been interpreted to require this. Section 1325(a)(5)(B)(iii) of the Bankruptcy Code states that a bankruptcy judge "shall confirm a plan if---

(5) with respect to each allowed secured claim provided for by the plan—

(B)(iii) if—

(I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and

(II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan . . . ."

In other words, a creditor secured by personal property (anything other than real estate) which is being paid monthly payments in a Chapter 13 plan is entitled to have those payments be equal throughout the life of the plan, and is entitled to have those payments provide the creditor with "adequate protection."

The key here about the timing of the first payment is this legal term, "adequate protection." Adequate protection generally consists of "periodic cash payments" made to a secured creditor to make up for any depreciation of its collateral. Assuming that the collateral is depreciating all the time, a debtor who wants to keep that collateral must arguably make "equal monthly" payments to the creditor starting with the first monthly plan payment in order to meet the adequate protection requirement .

The issue in this Bea case whether the bankruptcy court could approve debtor's plan providing for payoff of the secured creditors' claim through equal monthly payments scheduled to be completed within the allowed length of the plan but those payments would not start going to the secured creditors until the seventh month after the start of the Chapter 13 case.

In particular, if the secured creditors did not object to this could the court approve these plan payment terms even if arguably those terms did not provide adequate protection to the non-objecting secured creditors during the first few months of the plan?

HOW DID THE BAP COME TO ITS DECISION ABOUT THIS?

The court focused on the lack of objection by the secured creditors to the plan payment terms, and how that constituted acceptance of those terms. The IRS, the California Franchise Tax Board, and the City of Oakland all held liens on the debtor's personal property, with the plan proposing to pay their secured claims within about 21 months of the start of the 5-year case, including the first 6 months without any payments.

The key question was whether this lack of objection does legally constitute the creditors' acceptance of the plan. That's because, as the BAP said

Section 1325(a)(5)(A) provides: "[T]he [bankruptcy] court shall confirm a [chapter 13] plan if – (5) with respect to each allowed secured claim provided for by the plan – (A) the holder of such claim has accepted the plan." [This] provides an alternative basis for confirming a chapter 13 plan with respect to an allowed secured claim provided for in the plan if the secured creditor retains its lien, and the allowed secured claim is paid in full in equal periodic payments under the plan.

SO WHAT DETERMINES WHETHER "SILENCE GIVES CONSENT" HERE?

That's the heart of the issue.

The Chapter 13 trustee, who was bringing the appeal after losing in the bankruptcy court, argued, as the BAP opinion stated it: "How can a secured creditor's failure to object to a plan provision that is inconsistent with Bankruptcy Code requirements be treated effectively and credibly as acceptance?"

The BAP looked to a relatively recent U. S. Supreme Court case, United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010) as well as bankruptcy courts that had addressed aspects of this.

IF THE U.S. SUPREME COURT HAS SPOKEN ON THIS ISN'T THAT THE END OF THE DEBATE?

As is almost always the situation the Supreme Court's opinion at least arguably does not squarely address the issue at hand, leaving open different ways to interpret its ruling. So, the

Trustee argues that the Plan's provision of a six-months delay in commencing equal monthly payments to the Secured Creditors is "in direct violation" of the adequate protection requirement of § 1325(a)(5)(B)(iii)(II), and in light of Espinosa, a "creditor's silence is not acceptance when the plan expressly violates the Code." The Trustee bases her argument on her conclusion that Espinosa fundamentally altered the rules on secured creditor "silence as acceptance" of a debtor's chapter 13 plan . . . .

The BAP agreed that

the Supreme Court expressed its unanimous view in Espinosa that bankruptcy courts should police chapter 13 plans to ensure that they are consistent with the "clear and self-executing" requirements of the Bankruptcy Code.

So the specific question, according to the BAP, was whether the adequate protection requirement is a "clear and self-executing" one that bankruptcy courts should enforce even if there's no objection from the affected creditor.

SO IS THE ADEQUATE PROTECTION REQUIREMENT A "CLEAR AND SELF-EXECUTING" ONE?

The BAP said no.

It cited a number of cases, but especially In re Thomas, 2010 WL 9498475 (Bankr. E.D. Cal. Sept. 13, 2010), in which a debtor proposed to reduce the interest rate being paid on a vehicle loan to 1.9%, and the creditor did not object. The trustee objected, as in Bea, to the lack of adequate protection, in this case because the low rate of interest would not "compensate them 'for the delay in paying their claims in full.' " However the "bankruptcy court recognized that the 'adequate protection' provision in § 1325(a)(5)(B)(iii)(II) is different from such clear and 'self executing' provisions. 'The requirement of present value is not self executing. It requires evidence and it requires proof.' " (Quoting from In re Thomas.)

Applying this to the Bea facts, the BAP reasoned:

With no objection filed by any of the Secured Creditors, the bankruptcy court had no way of knowing whether the Secured Creditors were satisfied that the payments proposed by the Debtor in the Plan provided them with adequate protection or whether the amounts involved and/or the risk of nonpayment in light of the proposed six-months delay in commencing payments simply did not justify the costs entailed in filing and prosecuting objections to confirmation of the Plan, and neither do we.

So the BAP concluded:

the provision for "adequate protection" in § 1325(a)(5)(B)(iii)(II) is not the type of clear, "self executing" provision of the Bankruptcy Code that would preclude the bankruptcy court from translating the Secured Creditors' failures to object to confirmation as acceptance for purposes of § 1325(a)(5)(A) and confirming the Plan as consistent with the requirements of § 1325(a)(1), under Espinosa.

It affirmed the bankruptcy court in overruling the objection of the trustee and confirming the Chapter 13 plan providing for no payments to the secured creditors during the first 6 months of the plan.

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