Opinion
Case No. 97-16705-SSM, Chapter 13
September 28, 2000
Ronald B. Cox, Esquire, Woodbridge, VA, Counsel for the debtors.
John T. Donelan, Esquire, Alexandria, VA, Counsel for Chrysler Financial Co., LLC.
Gerald M. O'Donnell, Esquire, Alexandria, VA, Chapter 13 trustee.
MEMORANDUM OPINION
A hearing was held in open court on September 12, 2000, on the objection filed by Chrysler Financial Company, L.L.C. ("Chrysler"), to confirmation of the debtors' fourth amended plan. Chrysler and the debtors were present by counsel. The chapter 13 trustee was present in person. The issue is whether the debtors, having previously obtained confirmation of a plan that valued Chrysler's collateral, a 1993 Ford Pickup, at $10,625.00, may modify their plan two and a half years later to surrender the collateral and to reduce Chrysler's secured claim to the depreciated value of the vehicle.
Background
Michelle Rae Conley and Timothy Lamont Conley are wife and husband. They filed a joint voluntary petition in this court on September 10, 1997, for an adjustment of their debts under chapter 13 of the Bankruptcy Code. Among those debts was $17,820.57 owed to Chrysler Financial Corporation, secured by a 1993 Ford pickup truck. The debtors' second amended plan was confirmed on March 9, 1998. It required the debtors to pay the chapter 13 trustee $265.00 per month for two months, followed by $618.00 per month for 58 months, and projected a 40% dividend on unsecured claims. With respect to Chrysler's secured claim, the plan provided for the debtors to retain the collateral and for the trustee to pay the fair market value of the truck — fixed by the plan at $10,625.00 — over 60 months with interest at 9% in monthly installments of $220.56. Chrysler did not object to the plan and, prior to confirmation, filed an amended proof of claim in the amount of $10,625.00.
On June 19, 2000 — 27 months after the second amended plan was confirmed — the debtors filed a third amended plan. The third amended plan appears to have been filed primarily to deal with post-petition mortgage arrearages that had been the subject of repeated hearings on relief from the automatic stay. The plan also provided, however, for the Ford pickup to be surrendered to Chrysler for an estimated credit of $5,000.00, with the balance of the claim to be treated as unsecured and paid, together with the other unsecured claims, at 40 cents on the dollar.
The chapter 13 trustee and Chrysler objected to the third amended plan, and on July 17, 2000, the debtors filed a fourth amended plan. That plan increases payments to the trustee to $1,517.00 per month for the remaining 32 months of the plan term, and, like the previous plan, provides for the surrender of the 1993 Ford pickup. The plan treats Chrysler's claim as secured only to the extent of the $3,845.00 already paid by the chapter 13 trustee and the $5,000.00 "surrender value," with the remaining portion ($8,975.00) of Chrysler's original claim ($17,820.00) treated as unsecured. It is to this treatment that Chrysler objects.
No testimony was presented concerning the reason for the proposed surrender, but Chrysler did not take issue with the representations made by the debtors in their brief filed in response to Chrysler's objection. Briefly, Mr. Conley was a self-employed home improvement contractor at the time the plan was confirmed and used the truck in his business. In order to save his home, he has now taken a job with a more reliable income. Mrs. Conley's mother has purchased a used car for the family's use, and Mr. Conley no longer needs the truck.
Discussion
As a general proposition, there can be no doubt that a chapter 13 plan may provide for the surrender of collateral securing a claim, with any deficiency treated as unsecured. § 1325(a)(5)(C), Bankruptcy Code. Chrysler does not contend otherwise. The issue, rather, is whether a confirmed plan that originally provided for payment of a secured claim may be modified after confirmation — and after the collateral has substantially depreciated in value — to provide instead for surrender of the collateral and for a secured claim based on the depreciated value of the collateral.
A.
Modification of a confirmed chapter 13 plan is governed by Section 1329, Bankruptcy Code, which provides in relevant part as follows:
(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to —
(1) increase or reduce the amount of payments on claims of a particular class provided for by the plan;
(2) extend or reduce the time for such payments; or
(3) alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan.
Although courts have divided as to whether a threshold showing of a change in financial circumstances is required before a modification of a plan is allowed under § 1329(a), the Fourth Circuit appears to have sided with those that require some change in circumstances affecting the debtor's ability to pay. Arnold v. Weast (In re Arnold), 869 F.2d 240 (4th Cir. 1989) (bankruptcy court did not err in requiring increased monthly payment and extending plan period on creditor's motion after unanticipated substantial increase in debtor's income).
The specific question of whether a post-confirmation plan modification may provide for the surrender of collateral and the reclassification of any deficiency as an unsecured claim has divided the courts. See In re Fowler, No. 96-15386, 1998 WL 748643 (Bankr.E.D.Va., Oct. 27, 1997) (collecting cases). In particular, some courts read Section 1329 broadly in light of chapter 13's rehabilitative goals so as to permit such modification, while others hold that res judicata prohibits modifications that recharacterize a previously allowed secured claim.
See, e.g., In re White, 169 B.R. 526, 530-31 (Bankr.W.D.N.Y. 1994); In re Rimmer, 143 B.R. 871, 874-75 (Bankr.W.D.Tenn. 1992); In re Williams, 108 B.R. 119, 121-22 (Bankr.N.D.Miss. 1989); In re Jock, 95 B.R. 75, 77 (Bankr.M.D.Tenn. 1989); In re Stone, 91 B.R. 423, 425 (Bankr.N.D.Ohio 1988); cf. Grundy Nat'l Bk. v. Rife, 102 B.R. 57, 59-60 (W.D.Va. 1987) (suggesting that a secured creditor would be entitled to filed an amended proof of claim asserting an unsecured deficiency were the debtor to modify a confirmed plan by surrendering the collateral), rev'd on other grounds, 876 F.2d 361 (4th Cir. 1989); In re Cromer, 185 B.R. 1, 3-4 (Bankr.N.D.N.Y. 1994) (holding that a creditor holding a second mortgage and believing it was the holder of an allowed secured claim before confirmation of the debtors' plan, may file an amended proof of claim post-confirmation asserting an unsecured claim once the first mortgage holder foreclosed its interest and no equity remained for the second mortgage holder).
See, e.g., In re Cooper, 167 B.R. 889 (Bankr.E.D.Ark. 1994); In re Banks, 161 B.R. 375, 378-79 (Bankr.S.D.Miss. 1993); In re Sharpe, 122 B.R. 708, 710 (E.D.Tenn. 1991); In re Abercrombie, 39 B.R. 178, 179-80 (Bankr.N.D.Ga. 1984).
B.
The argument for restricting the kinds of modifications that can be made under Section 1329(a) is simply stated. The Bankruptcy Code expressly provides that "[t]he provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan." § 1327(a), Bankruptcy Code (emphasis added). As a leading commentator explains:
Upon becoming final, the order confirming a chapter 13 plan represents a binding determination of the rights and liabilities of the parties as ordained in the plan. Absent timely appeal, the confirmed plan is res judicata and its terms are not subject to collateral attack. The res judicata effect of confirmation may be eliminated only if confirmation is revoked, or if the case is later dismissed or converted to another chapter.
8 Collier on Bankruptcy ¶ 1327.02[1], at 1327-3 (Lawrence P. King, ed., 15th ed. rev. 1997). To be sure, the provisions of Section 1329(a) explicitly permitting plan modification are manifestly at odds with the notion that a confirmed plan is carved in stone. At the very least, it seems clear that Congress, as the Fourth Circuit recognized in Arnold, intended that the debtor's ability to pay could be reevaluated during the plan term if there was a significant and unanticipated change in the debtor's financial circumstances. Courts that take a strict view of Section 1329(a), however, harmonize its language with Section 1327(a) by limiting permissible plan modifications to those justified by a debtor's changed financial circumstances and by treating the confirmation order as res judicata as to all other issues. See, e.g., in re Fowler (confirmation of plan that provided for secured creditor to be paid by third party could not be modified at creditor's request to provide for unsecured deficiency claim after car was repossessed).
C.
The leading case for a broad reading of Section 1329(a) appears to be In re Jock, 95 B.R. 75 (Bankr.M.D.Tenn 1989). In Jock, the creditor was secured by the debtors' car, and the plan treated the claim as fully-secured. Five months after confirmation, the debtors sought approval of a plan modification under which the automobile would be surrendered and any deficiency treated as an unsecured claim. Not surprisingly, the secured creditor objected. In concluding that the proposed modification was permissible, the court observed that the fact that "the debtor could convert this Chapter 13 case to Chapter 7, surrender the car to [the bank] and (probably) discharge the deficiency is . . . evidence that Congress contemplated modification of a Chapter 13 plan to permit the surrender of collateral to the holder of an allowed secured claim." In re Jock, 95 B.R. at 78. Other courts have noted a debtor could also voluntarily dismiss his or her case, surrender the collateral, and then refile for relief under chapter 13. In light of that option, it is argued, judicial economy is best served by allowing a plan modification that accomplishes the same result. See e.g., In re Frost, 123 B.R. 254, 259 (S.D. Ohio 1990); In re Jourdan, 108 B.R. 1020, 1021-22 (Bankr.N.D.Iowa 1989); In re Stone, 91 B.R. 423, 425 (Bankr.N.D.Ohio 1988); and 5 Collier On Bankruptcy ¶ 1300.02, at 1329-4 (Lawrence P. King, ed., 15th ed. rev. 1997).
The pro-modification rationale is also supported by the theory that a debtor should be free to exercise all available options under the Bankruptcy Code in order to facilitate the success of his or her Chapter 13 case. As one writer has expressed it, "[d]ebtors who have problems performing under the existing plan `should be facilitated, not suffocated, by judicial interpretation.'" David S. Cartee, Surrendering Collateral Under Section 1329: Can the Debtor Have Her Cake and Eat it Too?, 12 Bankr. Dev. J. 501, 517 (1996) (quoting Keith M. Lundin, Chapter 13 Bankruptcy, Section 6.49, at 6-127 (1991)). Accordingly, Section 1129 should be read in a way that allows a debtor to "more freely amend and shape a plan that is responsive to his [or her] own financial situation." Id. at 519. Such an interpretation, according to Cartee, clearly "corresponds with Congress' intention of encouraging Chapter 13 filings instead of liquidation proceedings." Id. (citing H.R. Rep. No. 595, 95th Cong., 1st Sess. 117-118, reprinted in 1978 U.S.C.C.A.N. 5787, 6077; and 5 Collier On Bankruptcy ¶ 1300.02, at 1300-23 to 1300-24 (Lawrence P. King, ed., 15th ed. 1995)).
D.
To be sure, Chrysler does not actually object to the surrender of its collateral. What it really objects to is the recharacterization of its secured claim. Under § 506(a), Bankruptcy Code, a claim for which a creditor has a security interest is treated as secured to the extent of the value of the collateral, with the balance of the claim being treated as unsecured. Unsecured claims in chapter 13 may be, and often are, paid at mere pennies on the dollar. A secured creditor, by contrast, is entitled either to surrender of its collateral or to payments having a present value equal to the allowed amount of its claim. § 1325(a)(5), Bankruptcy Code.
When a lender's collateral is depreciating in value (as is typically the case with automobile loans) much depends, obviously, on when valuation occurs. Most courts hold that collateral is generally valued in chapter 13 as of the effective date of the plan. 4 Collier on Bankruptcy ¶ 506.03 at 506-69 (15th ed. rev. 1999). Chrysler's concern here is obvious. When the case was filed and the present plan confirmed, its collateral had a value of $10,625.00. The plan provided for the payment of that amount, together with interest at 9%, over a 60 month term. Chrysler has received payments to date that total $3,845.00. The modified plan estimates a liquidation value for the Ford pickup truck of $5,000.00. Assuming the accuracy of that figure, Chrysler's collateral has depreciated by $5,625.00 in the 28 months since plan confirmation, but Chrysler has received only $3,845.00 in plan payments. The bottom line is that the modified plan effectively takes away $1,780.00 of Chrysler's original $10,625.00 secured claim.
Assuming a 9% discount rate, the present value of those payments would be approximately $400.00 less than the gross amount.
In this particular instance, it must be stressed, there is no evidence suggestive of bad faith. It is an unfortunate fact of life that motor vehicles sometimes depreciate more rapidly than the debt against them is paid down. The modified plan before the court appears to be motivated solely by a desire to cut expenses so that the debtors can cure post-petition mortgage arrearages and thereby save their home. It would not be difficult, however, to imagine circumstances in which a debtor simply runs a creditor's collateral into the ground and then, once the vehicle is worthless, proposes to surrender it in full satisfaction of the secured claim. At the same time, a secured creditor is not unprotected against such conduct. A modified plan must comply with the provisions of § 1325(a), Bankruptcy Code. See § 1329(b)(1), Bankruptcy Code. Among those is the requirement that "the plan has been proposed in good faith and not by any means forbidden by law[.]" § 1325(a)(3), Bankruptcy Code. Abusive depreciation between the original confirmation and plan modification is a factor that may properly be considered on the issue of good faith. In re Jock, 95 B.R. at 78.
As Jock also points out, a secured creditor concerned that its collateral may depreciate faster than its secured claim is paid down can object to confirmation on that basis. 95 B.R. at 78. If the plan were confirmed over the creditor's objection and the property later surrendered at a loss, the creditor would arguably be entitled to an administrative claim under § 507(b), Bankruptcy Code, for failure of adequate protection. But see Jock, 95 B.R. at 78 n. 1 (questioning whether the concept of adequate protection applies post-confirmation).
E.
Recognizing that there is a split of authority, the court concludes that the better reasoned view — one that gives effect both to the binding effect of plan confirmation under § 1327(a) and to the right under § 1329(a) to modify a confirmed plan — is to permit a post-confirmation plan modification that provides for the voluntary surrender of collateral, and for the payment of any deficiency as an unsecured claim, even though the effect is to reduce the payment the secured creditor would have received under the original plan. This, of course, is subject to the qualification that the modification has been proposed in good faith and, in particular, that there has been no abusive depreciation of the secured creditor's collateral. As previously noted, however, no evidence has been presented in this case suggestive of bad faith or of abusive depreciation. Accordingly, the court concludes that Chrysler's objection to confirmation of the modified plan should be overruled.
Even without depreciation, surrender will nearly always reduce the amount the secured creditor receives. This arises from the fact that when a debtor proposes to retain collateral, he or she must pay the secured creditor its replacement value. Associates Commercial Corp. v. Rash, 520 U.S. 953, 117 S.Ct. 953, 138 L.Ed.2d 148 (1997). When collateral is surrendered, however, the secured creditor most often disposes of it for its wholesale value, which may be significantly less than its replacement value.
One additional point requires brief comment. It is not entirely clear whether the fourth amended plan fixes, or merely estimates, the liquidation value of the vehicle upon surrender. Nothing in Chrysler's objection addresses or disputes the $5,000.00 valuation placed on the vehicle. On the other hand, the debtors have not yet surrendered the vehicle, and there is no way of determining what the condition of the vehicle will be upon its surrender. Accordingly, the court treats the $5,000.00 figure as an estimate, and Chrysler will be allowed, within 60 days of the surrender of the vehicle, to file an amended proof of claim setting forth its deficiency claim to be paid in this case.
F.
A separate order will be entered overruling Chrysler's objection and confirming the debtor's fourth amended plan. Confirmation has the effect of terminating the automatic stay against enforcement of the security interest, thereby permitting Chrysler to sell the vehicle in accordance with state law. Chrysler will have 60 days from the date the truck is surrendered to sell the vehicle and file a proof of claim for any deficiency.