The U.S. Bankruptcy Appellate Panel for the Eighth Circuit vacated the bankruptcy court's order confirming a farm debtor's chapter 12 plan, concluding that the bankruptcy court erred by failing to hold an evidentiary hearing to determine the value of a bank's collateral where the collateral was disputed. The Panel also concluded that the bank needed to file a proof of claim.
The panel explained that, until the bankruptcy court held the requisite evidentiary hearing and determined the value of the bank's collateral, it was impossible to know whether the bank would be paid the allowed amount of its secured claim through the debtor's plan.
In addition, the Panel concluded that the record amply supported the bankruptcy court's finding of disposable income under 11 U.S.C. § 1225(b)(1)(B).
A copy of the opinion is available at: Link to Opinion
The farmer debtor filed a petition for relief under chapter 12 of the U.S. Bankruptcy Code. The debtor listed the bank as a secured creditor on his schedules. With his petition, the debtor filed a motion to obtain secured credit. The bank objected. The bank's "primary objection" was that the debtor's motion failed to recognize a lien the bank asserted. The bankruptcy court ultimately granted the debtor's motion.
Meanwhile, the bankruptcy clerk notified creditors of the need to file proofs of claim and the deadline for doing so. The bank did not file a proof of claim. After failing to obtain confirmation of two earlier plans, the debtor filed his second modified plan ("plan"). The bank objected. The bank alleged the debtor's plan failed to provide distributions of the bank's secured claim. The bank also alleged the debtor's plan was not filed in good faith, because it purported to disallow the bank's unsecured claim. The bank believed it did not need to file a proof of claim to share in any distribution to unsecured creditors. Finally, the bank alleged that the debtor's plan failed to contribute all of the debtor's disposable income.
The bankruptcy court accepted the debtor's valuation of the bank's collateral and thus the amount of the bank's secured claim as set forth in the debtor's plan. The bankruptcy court did so without receiving evidence, reasoning that the difference between the bank's valuation and the debtor's valuation was "minor" and did not warrant an evidentiary hearing. The bank timely appealed.
The bank first challenged the bankruptcy court's decision not to hold an evidentiary hearing to determine the value of the bank's collateral
The Panel noted that the Eighth Circuit cases First Federal Savings & Loan Association of Bismarck, Inc. v. Hulm (In re Hulm), 738 F.2d 323 (8th Cir. 1984) and Critique Services, LLC v. Reed (In re Reed), 888 F.3d 930 (8th Cir. 2018) both support the proposition that a bankruptcy court cannot make a finding regarding a disputed fact without holding an evidentiary hearing. The Panel held that while the difference in the bank's valuation and the debtor's valuation may or may not have been minor, the value of the bank's collateral was disputed. Thus the bank was entitled to an evidentiary hearing on this issue.
The bank next challenged the bankruptcy court's decision to disallow the bank's unsecured claim because the bank failed to file a proof of claim. The Panel observed that a creditor must file a proof of claim for its claim to be allowed. 11 U.S.C. B' 502(b)(9); Fed. R. Bankr. P. 3002(a).
The relevant portion of § 1111 provides:
A proof of claim or interest is deemed filed under section 501 of [the bankruptcy code] for any claim or interest that appears in the schedules filed under section 521(a)(1) or 1106(a)(2) of [the bankruptcy code], except a claim or interest that is scheduled as disputed, contingent, or unliquidated.
The bank argued that § 1111 applies in chapter 12 cases, but the Panel held the opposite.
Alternatively, the bank argued that its limited objection to the debtor's motion to obtain secured credit qualified as an informal proof of claim.
The elements necessary to achieve status as an informal proof of claim are well known. To qualify as an informal proof of claim, the document must state the nature and amount of the claim as well as indicate the claimant's intent to hold the debtor liable and pursue the claim. Maynard Savings Bank v. Michels (In re Michels), 286 B.R. 684, 691 (B.A.P. 8th Cir. 2002) (citations omitted).
A creditor may hold both a secured and an unsecured claim arising out of the same transaction or transactions.
An allowed claim of a creditor secured by a lien on property in which the estate has an interest is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property and is an unsecured claim to the extent that the value of such creditor's interest is less than the amount of such allowed claim. 11 U.S.C. § 506(a)(1) (in relevant part).
In this case, the Panel concluded that the bank held both a secured and an unsecured claim.
However, the Panel noted that the bank did not allege it held an unsecured claim pursuant to § 506(a)(1) or otherwise. In fact, the word "unsecured" did not appear anywhere in the bank's objection. On the other hand, the bank did allege it was entitled to post-petition "interest, fees, charges and attorneys' fees, costs and expenses."
The Panel concluded that the bank would not have been entitled to these items if any portion of its claim was unsecured. See 11 U.S.C. § 506(b). Thus, the Panel held that anyone reviewing the bank's objection would reasonably conclude that the bank's claim was oversecured. The bank's objection did not indicate that the bank intended to hold the debtor liable for an unsecured claim or to pursue an unsecured claim. Consequently, the Panel agreed with the bankruptcy court: the bank's objection did not qualify as an informal proof of an unsecured claim.
The bank next argued that once the bankruptcy court's order confirming the debtor's plan became a final order upon the conclusion of the appeal, the bank would be permitted to file a proof of its unsecured claim that would be timely under Fed. R. Bankr. P. 3002, which provides, in relevant part:
An unsecured claim which arises in favor of an entity or becomes allowable as a result of a judgment may be filed within 30 days after the judgment becomes final if the judgment is for the recovery of money or property from that entity or denies or avoids the entity's interest in property.
Fed. R. Bankr. P. 3002(c)(3) (emphasis added). However, the Panel held that what the bank may or may not do in the future afforded it no basis for questioning the bankruptcy court's decision to disallow the bank's unsecured claim.
Finally, the Panel held that the record supported the bankruptcy court's finding that committing the debtor's disposable income for plan purpose payments was appropriate under § 1225(b)(1)(B). This is because neither the trustee nor anyone who was the holder of an allowed unsecured claim objected to confirmation. Additionally, the Panel determined that the requirement in § 1225(b)(1)(B) was not triggered here because the plan proposed to pay unsecured creditors in full. 11 U.S.C. § 1225(b)(1)(A). Finally, notwithstanding the fact that the requirement in § 1225(b)(1)(B) was not triggered in this case, the Panel concluded that the debtor's plan providing that the debtor's disposable income would be applied to make payments was not clearly erroneous under Fonder v. U.S., 974 F.2d 996, 999-1000 (8th Cir. 1992).
Accordingly, the Panel vacated the bankruptcy court's order confirming the debtor's plan and remanded for further proceedings consistent with the opinion.
Ralph T. Wutscher
Maurice Wutscher LLP
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