Heritage Bank v. Woodward (In re Woodward)

537 B.R. 894

In re Suzette WOODWARD, Debtor.

Heritage Bank, Creditor–Appellant

v.Suzette Woodward, Debtor–Appellee.

National Association of Consumer Bankruptcy Attorneys, Amicus on Behalf of Appellee(s).

BAP No. 15–6001.

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: July 22, 2015.

Filed: Aug. 13, 2015.

John C. Hahn, Jeffrey, Hahn, Hemmerling & Zimmerman, Lincoln, NE, for Debtor.

Kent E. Rauert, York, NE, for Appellant.

Tara A. Twomey, San Jose, CA, for amicus brief.

Before FEDERMAN, Chief Judge, SCHERMER, and SHODEEN, Bankruptcy Judges.

Opinion

SCHERMER, Bankruptcy Judge.

Heritage Bank (Heritage) appeals from a Bankruptcy Court order confirming Suzette Woodward's (Debtor) Fifth Amended Chapter 11 Plan. The confirmation order is a final order of the Bankruptcy Court over which we have jurisdiction on appeal. See 28 U.S.C. § 158(b). The Notice of Appeal and Statement of Election also references an April 29, 2014 order denying the Debtor's Third Amended Plan. We believe that the denial of confirmation of the Debtor's Third Amended Plan is not a final order and cannot be the subject of this appeal. Bullard v. Blue Hills Bank, ––– U.S. ––––, 135 S.Ct. 1686, 191 L.Ed.2d 621 (2015). Therefore, the sole basis of this appeal is the order confirming the Debtor's Fifth Amended Chapter 11 Plan. For the following reasons, the confirmation order is reversed and the case is remanded for a new confirmation hearing.

ISSUES

1. Whether an impaired class of claims has accepted the Debtor's Fifth Amended Plan.

2. Whether 11 U.S.C. § 1129(b)(2)(B)(ii)'s absolute priority rule prevents individual debtors in Chapter 11 from retaining property acquired prior to the filing of the bankruptcy petition when not all creditors' claims will be paid in full.

3. Whether the value of the property to be distributed under the Fifth Amended Plan is less than the Debtor's disposable income.

BACKGROUND

The Debtor is a practicing pathologist in Grand Island, Nebraska. She is a member of Pathology Specialists, LLC. On April 4, 2011, the Debtor filed for relief under Chapter 7 of the Bankruptcy Code. Heritage holds an allowed, unsecured claim in the amount of $270,566.00.

On May 15, 2012, the Debtor acquired property at 2604 Arrowhead Road in Grand Island, Nebraska as her principal residence from Leland and Marie Elliott (Elliotts). As part of the purchase price, the Debtor signed a promissory note in favor of the Elliotts in the amount of $169,900, and granted the Elliotts a security interest in the property. The Elliotts perfected their lien in the Debtor's property. In addition to regular monthly payments, the terms of the note required the Debtor to make a balloon payment on June 1, 2013. The Elliotts subsequently agreed to extend the date on which the balloon payment was due by one year.

The case was converted to a proceeding under Chapter 11 on September 10, 2012. The Elliotts filed a proof of claim asserting secured status with respect to the principal residence. Heritage objected to the Elliotts' proof of claim, not because it arose postpetition, but based on the timeliness of its filing. The Bankruptcy Court overruled the objection and allowed the claim in the amount of $158,724.54. Heritage did not appeal the order allowing the claim, but instead continued to object to the Elliotts' voting on the plan as an impaired class, on the ground that the claim was a postpetition claim. At plan confirmation, the Bankruptcy Court essentially held that the Elliotts had an allowed claim, that the plan altered the treatment of their claim, and, thus, that the Elliotts were an impaired class entitled to the vote on the plan.

The Bankruptcy Court entered an order confirming the Debtor's Fifth Amended Plan on December 23, 2014. The Elliotts, the sole members of their class, voted in favor of the plan. No other impaired classes voted to accept the plan. On appeal, Heritage argues that the plan should not have been confirmed because: (1) an impaired class did not accept it; (2) it violated the absolute priority rule; and (3) it does not call for payment of all of the Debtor's disposable income.

STANDARD OF REVIEW

We review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. In re Walker,

528 B.R. 418, 427 (8th Cir. BAP 2015) (citing Heide v. Juve (In re Juve ), 761 F.3d 847, 851 (8th Cir.2014) ). Determining whether the Elliotts may vote on the plan and whether the absolute priority rule applies in individual Chapter 11 cases involve purely legal questions of statutory interpretation. We exercise de novo review with respect to each issue. In re Johnson, 509 B.R. 213, 214–15 (8th Cir. BAP 2014) (citing Graven v. Fink (In re Graven ), 936 F.2d 378, 384–85 (8th Cir.1991) ). We find it unnecessary to reach the third issue.

DISCUSSION

1. An Impaired Class of Claims has Accepted the Plan

Heritage asserts on appeal that since the Debtor's obligation to the Elliotts arose postpetition, the Elliotts were not “creditors,” as that term is defined in § 101(10), and so the Elliotts were not entitled to vote on the plan. Thus, Heritage asserts, the Bankruptcy Court erred in treating them as a consenting class under § 1129(a)(10). We disagree and think that Heritage's argument misses the mark under the circumstances of this case.

The issue is not whether the Elliotts were “creditors” under § 101(10), as Heritage asserts, because the time to litigate the Elliotts' creditor status has long since passed. As a result, Heritage is now foreclosed from raising the argument on appeal. Although it is true that Heritage objected to the Elliotts' proof of claim, the objection was based on the timeliness of its filing. Heritage never objected to the claim's foundation in postpetition debt. Heritage did not appeal the Bankruptcy Court's order allowing the Elliotts' claim, and review is now precluded by principles of res judicata. Heritage may not raise the issue now. We hold that the Elliotts have an allowed claim.

We do question, however, whether the Elliotts should have been holders of an allowed claim because we are not convinced that the Bankruptcy Code allows for a postpetition claim such as this. See, e.g., Bankr. Law Manual § 6:24 (5th ed.) (although recognizing that the Code provides for specific, identified, exceptions to the rule, stating that “[i]n general, only those claims that exist as of the date of the filing of the bankruptcy petition, commonly referred to as prepetition claims, may be allowed as claims against the estate.”).

Nevertheless, because the Elliotts were the “holders of a[n] [allowed] claim,” they were entitled to vote on the plan under the plain language of § 1126(a). That section provides that “[t]he holder of a claim or interest allowed under section 502 of this title may accept or reject a plan” (emphasis added). Furthermore, § 1129(a)(10) provides that, in order to confirm a plan, “[if] a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider” (emphasis added). “[A] class of claims or interests is impaired under a plan, unless,” as relevant here, the plan “leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest.” 11 U.S.C. § 1124. We believe that the Elliotts' claim is impaired. They agreed to alter their rights under the note when they extended the date on which the balloon payment was due. In so doing, the Elliotts also waived § 1123(b)(5)'s prohibition against the modification of security interests in a debtor's principal residence. The antimodification provision can be waived by the creditor holding such a claim.¹ See, e.g., In re Arns, 372 B.R. 876, 882–83 (Bankr.N.D.Ill.2007) (holding that a lender can waive the antimodification provision in § 1123 by agreeing to the plan and not pursuing an objection to confirmation); In re Canovali, 2011 WL 307374 at *6 (Bankr.E.D.N.C. Jan. 27, 2011) (same); In re Mayberry, 487 B.R. 44, 46 (Bankr.D.Mass.2013) (“Absent the creditor's agreement the debtor cannot obtain confirmation of a chapter 13 plan which proposes to modify a claim secured by the debtor's principal residence. If the creditor opts to agree to different treatment, it is certainly free to do so. ”) (quoting In re Wofford, 449 B.R. 362, 365 (Bankr.W.D.Wis.2011) (emphasis added); In re Smith, 409 B.R. 1, 4 (Bankr.D.N.H.2009) (“[N]othing prevents a secured creditor from consenting to the modification of its claim.”).

Heritage cites In re Kliegl Bros. Universal Electric Stage Lighting Co., which held that, since § 1126(a) provides that only the holder of a claim or interest allowed under § 502 may accept or reject a plan, and since postpetition secured lenders are not mentioned or implied in § 502, the class containing such a postpetition lender as its sole member was not entitled to vote on the plan. 149 B.R. 306, 307 (Bankr.E.D.N.Y.1992) (citations omitted). However, in contrast to this case, Kliegl Bros. did not say whether the lender there actually had an allowed claim, as the Elliotts do here. Again, maybe the Elliotts should not have had an allowed claim, but the fact is, they do. To the extent Kliegl Bros. can be read to prohibit the Elliotts—as the holders of an allowed claim impaired by the plan—from voting on the plan, we believe such a reading is contrary to the language of the statutes discussed above.

Consequently, we do not believe that the Bankruptcy Court erred in permitting the Elliotts' ratifying vote to serve as the sole basis for the satisfaction of § 1129(a)(10)'s requirement that an impaired class of claim holders vote in favor of the plan. As the holders of an allowed claim and sole members of their impaired class, the Elliotts' ratifying vote satisfied § 1129(a)(10).

2. The Absolute Priority Rule Applies in Individual Chapter 11 Cases

“[T]he absolute priority rule...