Credit Acceptance Corp. v. Thompson

610 B.R. 595

CREDIT ACCEPTANCE CORPORATION, Appellant,

v.Dennis THOMPSON, Sr., Appellee.

1:19-cv-1802-JMS-TAB

United States District Court, S.D. Indiana, Indianapolis Division.

Signed October 2, 2019

Dennis Mark Ostrowski, Reimer Law Co., Louisville, KY, for Appellant.

John Andrew Sawin, Richard John Shea, Jr., Sawin & Shea LLC, Indianapolis, IN, for Appellee.

ORDER ON APPEAL FROM THE UNITED STATES BANKRUPTCY COURT

Hon. Jane Magnus-Stinson, Chief Judge

Dennis Thompson, Sr. initiated a proceeding in the United States Bankruptcy Court for the Southern District of Indiana by voluntarily filing a petition for relief under Chapter 13 of the United States Bankruptcy Code. [Filing No. 5 at 71-72 ]. Credit Acceptance Corporation ("Credit Acceptance") filed a Proof of Claim, asserting a claim in the amount of $11,887.20 secured by a 2013 Hyundai Sonata. [Filing No. 5 at 72.] Mr. Thompson proposed a bankruptcy plan, to which Credit Acceptance objected, arguing that the plan erroneously deferred its monthly payments to provide for the accelerated payment of fees to Mr. Thompson's attorney. The Bankruptcy Court overruled the objection and confirmed the plan, and Credit Acceptance appealed to this Court.

I. STANDARD OF REVIEW

Pursuant to 28 U.S.C. § 158(a), this Court has jurisdiction to hear appeals from final judgments, orders, and decrees of Bankruptcy Courts. An order confirming a proposed plan constitutes a final judgment. See United Student Aid Funds, Inc. v. Espinosa , 559 U.S. 260, 269, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010). When reviewing a Bankruptcy Court's decision, questions of law—such as questions of statutory interpretation—are reviewed de novo. First Weber Grp., Inc. v. Horsfall , 738 F.3d 767, 776 (7th Cir. 2013).

II. BACKGROUND

The following facts are largely taken from the Bankruptcy Court's April 8, 2019 order, [Filing No. 5 at 70-76 ], and are undisputed by the parties. Where appropriate, additional details or references to other documents—which also are not disputed by the parties—are included.

On September 12, 2018, Mr. Thompson filed his first proposed Chapter 13 plan ("the Plan"), which provided that, prior to confirmation, the trustee would pay adequate protection payments to each secured creditor in the amount of 1% of the secured claim. [Filing No. 5 at 18; Filing No. 5 at 72.] The Plan also listed an administrative claim for attorney's fees in the amount of $3,900. [Filing No. 5 at 18.]

Relevant here, the Plan also provided that equal monthly amount ("EMA") payments to secured creditors were "to begin approximately in month 21 of the plan after administrative claims are paid in full." [Filing No. 5 at 20; Filing No. 5 at 72.] Credit Acceptance's claim was the only secured claim, while Mr. Thompson's attorney's fee was the only claim for administrative expenses. [Filing No. 5 at 72.]

Credit acceptance objected to the Plan, arguing in pertinent part that the Plan violated 11 U.S.C. § 1325(a)(5)(B)(iii)(I) ("the equal payment provision") because the EMA payments did not begin upon confirmation of the Plan, but instead would be deferred until Mr. Thompson's attorney's fees were paid in full, resulting in unequal payments over the course of the Plan. [Filing No. 5 at 21; Filing No. 5 at 73 ]. After the parties briefed the issue, the Bankruptcy Court overruled Credit Acceptance's objection and ordered that an amended plan be filed so that a monetary value for the EMA payments could be specified. [Filing No. 5 at 72.] An amended plan ("Amended Plan") was later filed, containing the same provisions as the original Plan and specifying that the EMA payments to Credit Acceptance would be in the amount of $285. [Filing No. 5 at 63-67; Filing No. 5 at 72.] Credit Acceptance again objected, asserting a violation of the equal payment provision. [Filing No. 5 at 68.]

The Bankruptcy Court overruled the objection, applying the reasoning from an earlier order in the case of In re Muhammad , Case No. 05-33234-FJO-13, doc. 55 (Bankr. S.D. Ind. July 25, 2006), and concluding that: (1) the Amended Plan correctly provided that adequate protection payments under 11 U.S.C. § 1326(a)(1)(C) were required to be paid to Credit Acceptance from 30 days after the filing of the case until the EMA payments began; (2) the EMA payments were not required to begin upon confirmation; and (3) administrative claims, including attorney's fees, could be paid prior to the commencement of EMA payments. [Filing No. 5 at 74-76.] The Bankruptcy Court noted that, since Muhammad , "other bankruptcy courts in the 7^th Circuit have addressed this issue and come down on both sides," but nonetheless concluded that the Amended Plan did not violate the equal payment provision. [Filing No. 5 at 74-76.] Thereafter, the Bankruptcy Court issued a separate order confirming the Amended Plan, [Filing No. 5 at 79-82 ], and Credit Acceptance appealed, [Filing No. 1 ].

III. DISCUSSION

Credit Acceptance argues that the Bankruptcy Court erred in confirming the Amended Plan because it does not comply with the statutory requirement that all payments to secured creditors be in equal amounts beginning at confirmation. [Filing No. 8 at 23-27.] Furthermore, it argues that nothing in the Bankruptcy Code requires that administrative claims be paid prior to claims by secured creditors, and instead the statutory language permits both types of claims to be paid simultaneously. [Filing No. 8 at 27-29.]

Mr. Thompson responds that the Amended Plan was properly approved because, consistent with longstanding practice, the Bankruptcy Code does indeed require full payment of attorney's fees before EMA payments to secured creditors. [Filing No. 9 at 11-15.] He also argues that EMA payments are not required to be made over the entire life of the plan, but instead creditors can receive adequate protection payments under § 1326(a)(1)(C) until their EMA payments commence, regardless of whether the adequate protection payments are equal in amount to the EMA payments. [Filing No. 9 at 17-20.]

In reply, Credit Acceptance maintains that the proper interpretation of the Bankruptcy Code is that EMA payments must be made to secured creditors beginning when the plan is confirmed, and because Mr. Thompson's plan did not so provide, it should not have been confirmed. [Filing No. 11 at 7-10.]

"The language of section 1325(a) sets forth the specific and limited universe of requirements that must be met by a debtor in his or her proposed Chapter 13 plan." Petro v. Mishler , 276 F.3d 375, 378 (7th Cir. 2002). If those requirements are met, the plan shall be approved, unless the trustee objects. Id. Relevant here, the equal payment provision, which applies "with respect to each allowed secured claim provided for by the plan," requires that:

(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; ...

11 U.S.C. § 1325(a)(5)(B)(iii)(I)-(II).

In addition, the Code provides that, unless the Bankruptcy Court orders otherwise, the debtor shall begin making payments to certain secured creditors within 30 days after the filing of the plan, in an amount that provides adequate protection to the creditor. 11 U.S.C. § 1326(a)(1)(C). Payments under this section will be referred to as "adequate protection payments."

Furthermore, "[b]efore or at the time of each payment to creditors under the plan, there shall be paid ... any unpaid claim of the kind specified in section 507(a)(2)...." 11 U.S.C. § 1326(b)(1). Section 507(a)(2) references administrative expenses allowed under § 503(b), which in turn provides for the payment of reasonable attorney's fees. 11 U.S.C. § 507(a)(2) ; 11 U.S.C. § 503(b)(4).

The question presented in this appeal is whether these provisions, taken together, permitted the approval of the Amended Plan providing for the EMA payments to Credit Acceptance—which were higher than the adequate protection payments—to begin 21 months into the plan, after Mr. Thompson's attorney has been paid in full. As the parties and the Bankruptcy Court note, Bankruptcy Courts within this Circuit and across the country are split as to how to answer this question of statutory interpretation, and it does not appear that any higher court has resolved this issue. The Court will begin with a brief overview of three prominent approaches that Bankruptcy Courts have taken in answering this question. See e.g. , In re Miceli , 587 B.R. 492, 496 (Bankr. N.D. Ill. 2018) (discussing the three approaches and collecting cases).

The first approach originated with In re DeSardi , in which the Bankruptcy Court for the Southern District of Texas concluded that "the equal payment provision requires that payments be level once they begin and terminate once the lender is fully paid," but not that payments be equal throughout the entire life of the plan beginning at confirmation. 340 B.R. 790, 806 (Bankr. S.D. Tex. 2006). In doing so, the court noted that § 1325(a)(5)(B)(iii) does not explicitly state that payments must be equal as of the effective date of the plan, which is in direct contrast to other provisions—such as § 1325(a)(5)(B)(ii) —which do specifically reference confirmation or "the effective date of the plan." DeSardi , 340 B.R. at 805. The court went on to conclude that "adequate protection payments [mandated by § 1326(a)(1)(C) ] are not meant to be considered when fulfilling the requirements of the equal payment provision." Id. Accordingly, a creditor may continue to receive adequate protection payments after confirmation and later begin receiving EMA payments, regardless of whether the adequate protection and EMA payments are equal in amount. Id. at 806-08. In addition, the court pointed out that its...