The chapter 13 debtor filed a plan proposing to modify a claim secured by a reverse mortgage on a duplex that he inherited from his mother. The claim holder objected to confirmation, asserting that 11 U.S.C. §1322(b)(2) bars the proposed modification of the claim because it is "secured only by a security interest in real property that is the debtor's principal residence" and that §1322(c)(2), which provides an exception to §1322(b)(2)'s bar on claim modification, does not apply because "the last payment on the original payment schedule" for the claim is not due until the note's stated maturity date, December 9, 2081, long after "the final payment under the plan is due". The debtor responded that the real property includes but is not only his principal residence (his sister rents the duplex's other unit), so §1322(b)(2) does not bar the proposed modification of the claim, and that, even if it does, §1322(c)(2) applies because the debt matured when his mother died, before the petition was filed. The court concluded that §1322(b)(2)'s anti-modification provision applies because the claim is secured only by a security interest in real property that is the debtor's principal residence (even if it is also an income-generating rental property) but that §1322(c)(2) nevertheless permits the proposed modification because the parties to the note and mortgage intended that the borrower's death would fix (but not accelerate) the contingent maturity of the debt and, as a result, the last payment on the original payment schedule for the claim has been due since the prepetition death of the debtor's mother (the borrower), which occurred "before the date on which the final payment under the plan is due". The court also considered but found unconvincing the claim holder's remaining arguments, including that permitting modification of the claim would impermissibly undermine a federal mortgage insurance program designed to increase the use of reverse mortgages, and overruled the objection to confirmation.
In re Lupton Consulting LLC, Case No. 20-27482-BEH, 2022 WL 850056 (March 2022) -- Judge B.E. Hanan
After the court denied confirmation of two related debtors’ joint plan of reorganization—finding that it contained impermissible nonconsensual third-party releases and injunctions, was not feasible, and was not proposed in good faith—the debtors voluntarily requested that their cases be dismissed, and the debtors’ law firm filed its final application for fees and costs. The U.S. Trustee objected, asserting that the application should be denied in its entirety because counsel failed to demonstrate that its services were necessary or reasonably likely to provide any benefit to the debtors’ estates. Specifically, the U.S. Trustee argued that counsel should have known that the reorganization would not succeed based on its stated goal of obtaining (nonconsensual) releases of guaranties for the debtors’ principal and other insiders, and that the cases were never intended to benefit the debtors’ estates, or even the debtors, but instead the debtors’ principal. As a secondary argument, the U.S. Trustee objected to discrete billing entries, asserting that they should be disallowed for being vague, containing “block-billing,” and reflecting clerical work. The court overruled the first objection, declining to find that counsel's services in pursuing confirmation were not reasonably likely to benefit the estates at the time they were rendered, or that the debtors’ pursuit of third-party releases for the benefit of its principal came at the expense of the debtors’ estates and their creditors, in part because the debtors obtained consent from several creditors for the releases. The court credited the U.S. Trustee’s second objection in part and disallowed certain discrete billing entries for the reasons described above.
In re Harris, Case No. 21-26280-beh, 2022 WL 953483 (March 2022) -- Judge B.E. Hanan
Under a plain reading of 11 U.S.C. § 1322(c)(2), a debtor may bifurcate an undersecured first mortgage on her principal residence that matured prepetition. Section 1322(c)(2) creates an exception to the anti-modification provision of 11 U.S.C. § 1322(b)(2) for “claim[s] secured only by a security interest in real property that is the debtor's principal residence” on which “the last payment on the original payment schedule . . . is due before the date on which the final payment under the plan is due.” For such claims, section 1322(c)(2) allows a debtor’s plan to “provide for the payment of the claim as modified pursuant to section 1325(a)(5)” of the Code—which includes the option of bifurcating the claim into secured and unsecured portions under 11 U.S.C. § 506, and paying the present value of the allowed secured claim while treating the portion of the mortgage that exceeds the value of the home as unsecured. As used in section 1322(c)(2), the verb “modify” is not limited to “payment of the claim,” but instead allows modification of the claim itself.
In re Greenpoint Tactical Income Fund LLC, Case No. 19-29613 (February 2022) -- Chief Judge G.M. Halfenger
Before the debtor filed its chapter 11 petition, one of its equity security holders commenced an arbitration against the debtor and other non-debtor entities for, among other things, rescission and securities fraud under Wis. Stat. §551.509. The debtor and non-debtor entities settled the arbitration with the equity security holder by agreeing to pay him $14 million or, if that payment was not made, transferring $15 million in assets to him. The parties did not pay the $14 million or transfer the assets. Before the equity holder could enforce the settlement agreement, the debtor filed bankruptcy and then rejected the agreement. The arbitration proceeded against the non-debtor respondents, and the arbitrator awarded the equity holder $13,625,000 in damages against the non-debtors for breaching the settlement agreement. The equity holder filed proofs of interests in the debtor's case and filed a claim against the debtor for breach of the settlement agreement. The court subordinated the equity holder's claim under §510(b).
After the equity holder obtained the $13 million award against the non-debtor entities, the debtor objected to the equity holder's proofs of interest. The debtor argued that the equity holder's request for rescission, settlement, and award of damages for non-performance of the settlement agreement defeated his ability to enforce his equity interests under nonbankruptcy law.
The court rejected this argument. It also rejected the debtor's alternative argument that the equity interests were unenforceable under the doctrine of election of remedies.
In re Syverson, Case No. 21-26184-beh, 2022 WL 318221 (February 2022) -- Judge B.E. Hanan
The court granted a mortgage creditor’s motion for in rem relief from the automatic stay under 11 U.S.C. § 362(d)(4), based on the debtor’s history of unsuccessful bankruptcy filings and lack of apparent effort to pay or to adequately address her mortgage debt. The debtor had filed six Chapter 13 cases in fewer than six years. All five of her prior cases were dismissed without a confirmed plan, and the fifth was dismissed with a 180-day bar to future bankruptcy filings. During her prior cases, the debtor neglected basic obligations under the Bankruptcy Code--including the duty to timely file her schedules and plan and to attend the § 341 meeting of creditors--and repeatedly failed to comply with court orders requiring her to timely file amended feasible plans (or successfully participate in mortgage modification mediation) and to resume payments to her mortgage creditor. When she filed her sixth case, the debtor was entering her eighth consecutive year of mortgage default. Based on this record, the court concluded that the debtor’s conduct demonstrated a scheme to delay or hinder the mortgage creditor’s efforts to protect its interest in the property, warranting in rem relief under § 362(d)(4).
In re Pagan, Case No. 19-20047-BEH, 2022 WL 209612 (January 2022) -- Judge B.E. Hanan
The Chapter 13 debtor’s special plan provision in section 8.1 providing that secured creditors would retain their liens until the earlier of payment in full of the secured portion of the creditor’s proof of claim or discharge was ambiguous when compared with the model plan language in section 3.3 mirroring lien retention rights in 11 U.S.C. § 1325(a)(5)(B)(i)(I). Section 3.3 provided that the named car creditor would retain its lien until discharge or the payment of the underlying debt under nonbankruptcy law. The creditor did not object to plan confirmation. After an accident that totaled her car, the debtor proposed a plan modification to keep the balance of the insurance proceeds that exceeded the remainder of her plan payments on this claim. The creditor objected, arguing that it was entitled to retain the lien on the entirety of the proceeds because they were less than the amount the debtor owed on the claim under applicable nonbankruptcy law. The creditor also sought to be paid at the contractual interest rate instead of the lower rate prescribed in the confirmed plan. The court found the special provision language ambiguous and construed it against the drafter. The interest rate language was not ambiguous. Accordingly, the creditor could retain its lien on the entirety of the proceeds during the term of the plan, with the disputed balance held in trust to allow the debtor an opportunity to obtain a discharge and retain the excess proceeds. The creditor’s objection as to the interest rate was overruled.
In re Randell, Case No. 21-25175-BEH, and In re Sellers, Case No. 21-25284, 2022 WL 174210 (January 2022) -- Judge B.E. Hanan
On motions for reconsideration of orders sustaining an objection to confirmation and requiring equal monthly payments to a secured creditor, the court did not accept the debtors’ argument that cure-and-maintain mortgage claims paid “within a reasonable time” in accordance with 11 U.S.C. § 1322(b)(5) were exempt from § 1325(a)(5)(B)(iii)(I)’s mandate that property be distributed “in equal monthly payments,” relying in part on Rake v. Wade, 508 U.S. 464 (1993). The fact that the debtors’ plans proposed to pay only prepetition mortgage arrearages through the plans did not alter the conclusion that the enactment of § 1322(e) (which partially abrogated Rake v. Wade) did not remove cure payments from coverage under § 1325(a)(5). The court also reminded that an order denying plan confirmation is not a final, appealable order subject to reconsideration under Fed. R. Civ. P. 60(b) or 59(e), but instead exercised its discretion to reconsider its interlocutory order.
In re Gregory, No. 21-20607 (Bankr. E.D. Wis. Dec. 23, 2021) (December 2021) -- Judge K.M. Perhach
A mortgage creditor objected that its claim was secured only by a security interest in real property that was the Chapter 13 debtors’ principal residence and 11 U.S.C. § 1322(b)(2)’s anti-modification provision prohibited the debtors’ proposed modification of its claim. After conducting an evidentiary hearing, the Court sustained the objection to confirmation. Based on the testimony and evidence presented at the hearing, the Court found that at the time the petition was filed, the debtors were living in the property at issue as their principal residence. Section 1322(b)(2) prohibited the debtors’ proposed cramdown of the mortgage creditor’s claim.
In re Urgent Care Physicians, Ltd., Case No. 21-24000-BEH, 2021 WL 6090985 (December 2021) -- Judge B.E. Hanan
The U.S. Trustee objected to confirmation of a nonconsensual Chapter 11, Subchapter V, plan of reorganization, asserting that the debtor should be required to extend the plan’s three-year term to five years to satisfy the “fair and equitable” test of 11 U.S.C. § 1191(c)(2)). Finding the text of the Code silent as to how bankruptcy courts should “fix” the term of a Subchapter V plan under § 1191(c)(2), the court considered analogous Code provisions applicable to Chapter 12 plans, as well as the legislative history of Subchapter V, to conclude that the debtor’s proposed three-year plan term was fair and equitable in the circumstances, as it properly balanced the risks and rewards for all stakeholders.
In re Eatertainment Milwaukee, LLC, No. 21-25733 (Bankr. E.D. Wis. Nov. 19, 2021) (November 2021) -- Judge K.M. Perhach
The Chapter 11 debtor was the successor to a former tenant of the Punch Bowl Social bar and restaurant in downtown Milwaukee. The new tenant of the Punch Bowl Social location filed an “Emergency Motion for Relief from the Automatic Stay, to the Extent it May Apply,” asking the Court to determine whether the debtor had abandoned property at the leased premises and, if not, what property was property of the bankruptcy estate. The new tenant argued that much of the property was a fixture, the stay did not apply to those fixtures, and the fixtures should remain at the premises. The debtor argued that almost none of the property was a fixture and that the property was property of the estate and could easily be removed. After conducting an evidentiary hearing, the Court concluded that the debtor had not abandoned any of the property at issue at the premises. The Court determined that certain property was a fixture and therefore not property of the debtor/bankruptcy estate, determined that certain other property was property of the debtor/bankruptcy estate, and found that it could not determine the status of the remaining property at issue given the evidence presented at the evidentiary hearing.