Cohen v. Lopez (In re Lopez)
Ninth Circuit Case No. 07-56337
December 24, 2008
On Christmas Eve the Ninth Circuit issued an opinion, in an appeal for which oral arguments had been heard less than two weeks earlier, by simply "adopt[ing] as [their] own the well-reasoned published opinion of the Bankruptcy Appellate Panel." This Bulletin reviews this BAP opinion which is now serves as the Ninth Circuit's opinion.
This relatively lengthy opinion--33 pages--addressed the issue referred to in the title of this Bulletin: may a Chapter 13 debtor's Plan provide for the debtor to make regular monthly payments directly to the mortgage creditor(s) while paying pre-peitition arrearage payments to the same mortgage creditor(s) inside the Plan? The simple answer is: yes.
The BAP took 33 pages to say "yes," in part to defeat the Chapter 13 trustee's argument "that, despite longstanding practice in this and other circuits and the comments of the leading treatise on Chapter 13, pre-BAPCPA Ninth Circuit precedent does not permit debtors to make direct payments in these circumstances." The Court also refuted the trustee's arguments that BAPCPA's amendments do not permit such direct payments. Perhaps one other reason the opinion was relatively long is to fully address the amicus brief of the National Association of Chapter 13 Trustees filed on behalf of the trustee's position.
The In re Fulkrod Precedent
The BAP carefully analyzed the precedent in question, a pre-BAPCPA Chapter 12 case, Fulkrod v. Barmettler (In re Fulkrod), 126 B.R. 584 (9th Cir. BAP 1991), aff’d sub. nom. Fulkrod v. Savage (In re Fulkrod), 973 F.2d 801 (9th Cir. 1992). In that case "a Chapter 12 debtor filed a plan providing for direct payment to three creditors with 'impaired' claims," the bankruptcy court required that these payments be made through the plan, and the BAP and the Ninth Circuit both affirmed. Somewhat surprisingly, "Fulkrod assumed that the issue was controlled by the trustee fee statute, 28 U.S.C. § 586," which provides that Chapter 12 trustees are to be paid a fee "not to exceed ten percent of the payments made under the plan." The BAP opinion affirming the bankruptcy court interpreted this phrase "payments made under the plan"
But after its detailed analysis, the BAP decided that Fulkrod was "not binding or determinative." The Court distinguished Fulkrod in the following ways: 1) although 28 U.S.C. § 586 also applies to cases under Chapter 13, however the "under the plan" clause quoted above and analyzed by Fulkrod applies specifically only to cases under Chapter 12, although the same words are in the clause which applies to Chapter 13; 2) the "under the plan" phrase "is not particularly illuminative . . . the language indicates that trustees should receive a fee for all amounts they receive 'under plans,' but it does not purport to define what types of payments should be received 'under plans,' which is the issue in the present case;" and 3) "[t]here are significant differences between Chapter 12 and Chapter 13 that make the distinctions regarding their treatment under 28 U.S.C. § 586 appropriate," such as Chapter 12 being much more permissive "regarding the scope of allowed modifications of secured debt, particularly regarding modifications of claims secured by residences."
The Court then focused on Fulkrod's reference to not permitting "impaired claims" to be paid directly to creditors. It determined that mortgage arrearages are impaired whereas mortgage payments which become due post-petition are not, since "impairment occurs when the plan purports to pay an obligation as originally scheduled notwithstanding a creditor's nonbankruptcy rights other than the right to accelerate the debt’s maturity date."
§ 1322(a)(1)
The BAP then analyzed § 1322(a)(1) of the Bankruptcy Code, which states that the Chapter 13 plan "shall -- (1) provide for the submission of all or such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan". Contrary to the trustee's argument that this language requires all creditor payments to be paid through the trustee, the Court held that the subsection does not say "what exactly must be paid through the plan."
BAPCPA Amendments
The BAP next responded to the trustee's arguments arising from the BAPCPA amendments to § 1326 (a), which required plan payments to begin within 30 days after filing of a Chapter 13 case (not from the plan's filing date) and provided "for specific types of debts that can be paid by the debtor outside of the plan." The Court relied on § 1326 (c), which pre-dates BAPCPA and states: “Except as otherwise provided in the plan or in the order confirming the plan, the trustee shall make payments to creditors under the plan.” The Court held that these two subsections read together lead "to the conclusion that Congress intended that some debts other than those specifically enumerated in Section 1326(a)(1) could also be paid by the debtor outside of the plan, so long as either the plan itself or the order confirming the plan allows it."
Rejection of NACCTT's Arguments
Finally, the BAP addressed public policy issues raised by an amicus brief filed by the National Association of Chapter Thirteen Trustees (NACTT). As to the argument "that the various statutory duties of the Chapter 13 Trustee manifest a presumption that the trustee will be the principal disbursing agent," to Court retorted: "While the panel sympathizes with the NACTT’s concerns, it nevertheless does not view the [indicated] statutory responsibilities as creating any inherent presumption that all payments must be made by the trustee." As to the "potential revenue effects" for the trustee, after noting that thirty-two of the thirty-five trustees within the Ninth Circuit received the maximum compensation of $170,524 in 2006, the Court concluded: "Considering that many jurisdictions have allowed debtors to make maintenance payments outside of the plan for the past 20 years, and this has not lead to the insolvency of the standing Chapter 13 trustee program, the addition of fees for ongoing maintenance payments is not required for the financial health of the program."
This relatively lengthy opinion--33 pages--addressed the issue referred to in the title of this Bulletin: may a Chapter 13 debtor's Plan provide for the debtor to make regular monthly payments directly to the mortgage creditor(s) while paying pre-peitition arrearage payments to the same mortgage creditor(s) inside the Plan? The simple answer is: yes.
The BAP took 33 pages to say "yes," in part to defeat the Chapter 13 trustee's argument "that, despite longstanding practice in this and other circuits and the comments of the leading treatise on Chapter 13, pre-BAPCPA Ninth Circuit precedent does not permit debtors to make direct payments in these circumstances." The Court also refuted the trustee's arguments that BAPCPA's amendments do not permit such direct payments. Perhaps one other reason the opinion was relatively long is to fully address the amicus brief of the National Association of Chapter 13 Trustees filed on behalf of the trustee's position.
The In re Fulkrod Precedent
The BAP carefully analyzed the precedent in question, a pre-BAPCPA Chapter 12 case, Fulkrod v. Barmettler (In re Fulkrod), 126 B.R. 584 (9th Cir. BAP 1991), aff’d sub. nom. Fulkrod v. Savage (In re Fulkrod), 973 F.2d 801 (9th Cir. 1992). In that case "a Chapter 12 debtor filed a plan providing for direct payment to three creditors with 'impaired' claims," the bankruptcy court required that these payments be made through the plan, and the BAP and the Ninth Circuit both affirmed. Somewhat surprisingly, "Fulkrod assumed that the issue was controlled by the trustee fee statute, 28 U.S.C. § 586," which provides that Chapter 12 trustees are to be paid a fee "not to exceed ten percent of the payments made under the plan." The BAP opinion affirming the bankruptcy court interpreted this phrase "payments made under the plan"
to mean those payments which result from the operation of Chapter 12 bankruptcy law. Those payments should be made by the trustee, and the trustee’s fee should be assessed against the funds received from the debtor for that purpose.But then the BAP in Fulkrod provided some confounding dicta:
[a] contrary provision in a plan or an order confirming a plan is permissible because the [C]ode contemplates flexibility in the payment of claims, and would allow direct payment of an impaired claim without trustee compensation in appropriate circumstances.The Ninth Circuit in its own Fulkrod opinion addressed this dicta with its own dicta:
[a]lthough the BAP hinted that Chapter 12 might permit a debtor to make direct payments to impaired creditors without trustee compensation in certain limited circumstances, that statement is neither necessary to its decision nor supported by statute.It is this sentence, and presumably especially the last phrase, upon which the Chapter 13 trustee in the present Lopez case sought to base his argument. And the BAP in our case stated that "[a]lthough dicta, Fulkrod . . . nonetheless deserves consideration in any determination as to what debts may be paid outside of a Chapter 13 plan."
But after its detailed analysis, the BAP decided that Fulkrod was "not binding or determinative." The Court distinguished Fulkrod in the following ways: 1) although 28 U.S.C. § 586 also applies to cases under Chapter 13, however the "under the plan" clause quoted above and analyzed by Fulkrod applies specifically only to cases under Chapter 12, although the same words are in the clause which applies to Chapter 13; 2) the "under the plan" phrase "is not particularly illuminative . . . the language indicates that trustees should receive a fee for all amounts they receive 'under plans,' but it does not purport to define what types of payments should be received 'under plans,' which is the issue in the present case;" and 3) "[t]here are significant differences between Chapter 12 and Chapter 13 that make the distinctions regarding their treatment under 28 U.S.C. § 586 appropriate," such as Chapter 12 being much more permissive "regarding the scope of allowed modifications of secured debt, particularly regarding modifications of claims secured by residences."
The Court then focused on Fulkrod's reference to not permitting "impaired claims" to be paid directly to creditors. It determined that mortgage arrearages are impaired whereas mortgage payments which become due post-petition are not, since "impairment occurs when the plan purports to pay an obligation as originally scheduled notwithstanding a creditor's nonbankruptcy rights other than the right to accelerate the debt’s maturity date."
§ 1322(a)(1)
The BAP then analyzed § 1322(a)(1) of the Bankruptcy Code, which states that the Chapter 13 plan "shall -- (1) provide for the submission of all or such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan". Contrary to the trustee's argument that this language requires all creditor payments to be paid through the trustee, the Court held that the subsection does not say "what exactly must be paid through the plan."
BAPCPA Amendments
The BAP next responded to the trustee's arguments arising from the BAPCPA amendments to § 1326 (a), which required plan payments to begin within 30 days after filing of a Chapter 13 case (not from the plan's filing date) and provided "for specific types of debts that can be paid by the debtor outside of the plan." The Court relied on § 1326 (c), which pre-dates BAPCPA and states: “Except as otherwise provided in the plan or in the order confirming the plan, the trustee shall make payments to creditors under the plan.” The Court held that these two subsections read together lead "to the conclusion that Congress intended that some debts other than those specifically enumerated in Section 1326(a)(1) could also be paid by the debtor outside of the plan, so long as either the plan itself or the order confirming the plan allows it."
Rejection of NACCTT's Arguments
Finally, the BAP addressed public policy issues raised by an amicus brief filed by the National Association of Chapter Thirteen Trustees (NACTT). As to the argument "that the various statutory duties of the Chapter 13 Trustee manifest a presumption that the trustee will be the principal disbursing agent," to Court retorted: "While the panel sympathizes with the NACTT’s concerns, it nevertheless does not view the [indicated] statutory responsibilities as creating any inherent presumption that all payments must be made by the trustee." As to the "potential revenue effects" for the trustee, after noting that thirty-two of the thirty-five trustees within the Ninth Circuit received the maximum compensation of $170,524 in 2006, the Court concluded: "Considering that many jurisdictions have allowed debtors to make maintenance payments outside of the plan for the past 20 years, and this has not lead to the insolvency of the standing Chapter 13 trustee program, the addition of fees for ongoing maintenance payments is not required for the financial health of the program."
by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
PLEASE NOTE that this Litigation Report and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
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