In re Pagan

638 B.R. 887

IN RE: Robin PAGAN, Debtor.

Case No. 19-20047-beh

United States Bankruptcy Court, E.D. Wisconsin.

Signed January 24, 2022

Scott Lieske, Chapter 13 Trustee, Milwaukee, WI, Trustee, Pro Se.

Michael J. Watton, Milwaukee, WI, for Debtor.

DECISION AND ORDER ON GLOBAL LENDING SERVICES LLC'S OBJECTION TO PLAN CONFIRMATION

Beth E. Hanan, United States Bankruptcy Judge

The questions presented here are of first impression in this Court. Does a Chapter 13 plan's special provision in section 8.1 alter the lien rights of a secured creditor from those rights initially set out in section 3.3 of the plan? In particular, does the special provision require the creditor to release its lien after the vehicle securing its claim has been totaled and the creditor receives payment from the insurance proceeds in the amount set forth in the debtor's plan to satisfy its claim? Relatedly, does the plan prohibit the secured creditor from applying the insurance proceeds to satisfy its claim as calculated under nonbankruptcy law—i.e. , with a higher interest rate than that provided in the plan? The relevant facts are undisputed and so the issues are questions of law.

JURISDICTION

The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334 and 151, and the standing order of reference in this district. The matter is core, pursuant to 28 U.S.C. § 157(b)(2)(L). This decision constitutes findings of fact and conclusions of law, pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014.

FACTS

The debtor filed her petition for relief, schedules, and Chapter 13 plan of reorganization on January 3, 2019. ECF Nos. 1–2. Her Schedule D included a debt for $17,229.33 owed to Global Lending Services ("GLS") that was secured by the debtor's 2014 Chevrolet Malibu. ECF No. 1, at 18. GLS filed a proof of claim in the amount of $17,272.33, disclosing that the vehicle was purchased within 910 days of the petition (see Claim No. 12-1, at 5), meaning that the debtor was required to treat GLS's claim as wholly secured in her Chapter 13 plan, regardless of the value of the collateral. See 11 U.S.C. § 1325(a) (hanging paragraph). The plan principally addressed GLS's debt in section 3.3, proposing to pay the full amount of the debt identified in the proof of claim at 6% interest over the course of the 60-month plan, for an estimated total payout of around $20,000. ECF No. 2, at 3. Section 3.3 of the plan also included the following prefatory language:

The holder of any claim listed below as having value in the Amount of claim column will retain the lien on the property interest of the debtor(s) or the estate(s) until the earlier of:

(a) payment of the underlying debt determined under nonbankruptcy law, or

(b) discharge of the underlying debt under 11 U.S.C. § 1328, at which time the lien will terminate and be released by the creditor.

Id.¹

The plan includes another provision, however, from which the parties derive their current dispute. Section 8.1—reserved for atypical plan provisions—provides:

Creditors with secured claims shall retain their mortgage, lien or security interest in collateral until the earlier of (a) the payment in full of the secured portion of their proof of claim, or (b) discharge under 11 U.S.C. § 1328.

ECF No. 2, at 6. Global Lending Services did not object to the plan and it was confirmed on July 3, 2019. ECF No. 27.

On September 19, 2021, the debtor submitted a request to modify her plan, explaining that the Malibu recently was involved in an accident and deemed a total loss by her insurer. ECF No. 86, at 2. The proposed modification would pay the remainder of GLS's secured claim in full as provided by the plan using the insurance proceeds, with the balance of the insurance proceeds to go to the debtor. Id. ("The insurance proceeds will be used to pay Global Lending Services[’] secured claim in full for the 2014 Chevy Malibu. Any remaining insurance proceeds will be refunded to the Debtor (less administrative expenses).").

ARGUMENTS OF THE PARTIES

Global Lending Services objected to confirmation of the modified plan, first focusing on the applicable interest rate. GLS argues that, as of the date of the accident, the contractual payoff amount under non-bankruptcy law² of $18,380.05 exceeded the value of the insurance proceeds, and thus all proceeds should be paid to/kept by GLS. ECF No. 88, at 2; No. 92, at 2. GLS clarified that the insurance company already had forwarded $17,957.30 in proceeds to GLS, and not to the Chapter 13 trustee. In an amended objection to confirmation, GLS pointed to an ambiguity between two terms in the confirmed plan: the model plan language in section 3.3 and the special provision in section 8.1. ECF No. 92, at 3. GLS also filed a motion to apply the entirety of the funds it received from the insurance company to satisfy its claim. ECF No. 91-1.

In response to GLS's motion, the debtor stated that, as of November 2021, the trustee had paid GLS $7,059.90 through the debtor's plan ($4,593.62 toward principal and $2,466.28 toward interest), leaving a remaining principal balance of $12,678.71, along with additional interest of $190.17 having accrued since the trustee's last disbursement. ECF No. 95, at 1. She wants to use the balance of the proceeds (which would total $5,088.42 according to the numbers above) to purchase a new vehicle. Id . at 2. Addressing GLS's arguments about the interest rate and the tension between plan sections 3.3 and 8.1, the debtor asserts that GLS is bound by the clear terms of her confirmed plan, pursuant to 11 U.S.C. § 1327(a). The debtor first notes that the confirmed plan requires her to pay GLS's claim in full at 6.0% interest. She maintains that 11 U.S.C. § 1329(a) deprives GLS of standing to modify the plan by reverting back to the contractual interest rate under nonbankruptcy law. Id. at 2. Second, because GLS did not object to the confirmed plan, which includes a special provision that the debtor reads as requiring GLS to release its lien upon payment of its claim in accordance with the plan (the full amount identified in GLS's proof of claim at 6% interest), GLS should be deemed to have accepted that special provision under In re Foley, 606 B.R. 790, 795 (Bankr. E.D. Wis. 2019). ECF No. 95, at 3. In the debtor's reading, the special provision in section 8.1 "replaced the standard language in Section 3.3 about when a creditor must release its lien." Id. at 3.

Confronting dicta in Foley, Pagan contends that the special provision is neither vague nor ambiguous, and that the meaning of "the payment in full of the secured portion of their proof of claim" is clear. Id. at 4. She asserts that the meaning of "secured claim" is defined in § 506 and is uniformly used throughout the Bankruptcy Code. ECF No. 95, at 4. Pagan argues the plan obligates GLS to release its lien upon payment of its claim. Id.

At a hearing on these pending matters, counsel for GLS urged its view that the text of the special provision is vague, especially when compared to the text of section 3.3 of the plan. GLS asserts that because section 3.3 is (this district's) model plan language mirroring § 1325(a)(5)(B)(i)(I) of the Code and is unambiguous, that section should control the distribution of the insurance proceeds. The debtor maintains that the requirements of § 1325(a)(5)(B)(i)(I) are not binding here, because GLS accepted the plan under § 1325(a)(5)(A).

DISCUSSION

A. GLS's Nonbankruptcy Rights in the Insurance Proceeds

To secure the loan from GLS, the debtor granted GLS a security interest in her 2014 Chevrolet Malibu and "[a]ll money or goods received (proceeds) for the vehicle." Claim No. 12-1, at 6. Wisconsin's Uniform Commercial Code defines "proceeds," to include "insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral," but only "[t]o the extent of the value of collateral and to the extent payable to the debtor or the secured party." Wis. Stat. § 409.102 (1)(ps)(5).

When debtor Pagan's vehicle was damaged and her insurer deemed it a total loss, the insurer paid a benefit that it considered to be equal to the value of the vehicle. Neither party has disputed the equivalence of the insurance company's payment with the value of the collateral at the time of loss. The entire amount of the insurance payment therefore constitutes "proceeds" under Wis. Stat. § 409.102 (1)(ps)(5), and GLS's security interest extends to those funds under applicable nonbankruptcy law. GLS's rights in those proceeds, however, have been modified by the debtor's confirmed Chapter 13 plan.

B. GLS's Rights in the Insurance Proceeds, as Modified by the Confirmed Plan

Section 1325 of the Bankruptcy Code sets forth the requirements for confirmation of a Chapter 13 plan. Subsection (a)(5) dictates the treatment of "each allowed secured claim provided for by the plan," and requires that one of three conditions must be satisfied before a plan may be confirmed: (1) the holder of the secured claim has accepted the plan, § 1325(a)(5)(A) ; (2) the debtor surrenders the property securing such claim to the secured creditor, § 1325(a)(5)(C) ; or (3) the plan meets the "cramdown" requirements of § 1325(a)(5)(B), which include that the holder of the secured claim retains the lien securing such claim until payment of the debt under nonbankruptcy law or discharge, § 1325(a)(5)(B)(i)(I).

As to the first option, the lack of objection by a creditor is tantamount to its acceptance. See In re Bruce, 610 B.R. 603, 605, 609 (Bankr. E.D. Wis. 2019) ("A confirmed Chapter 13 plan defines, and may alter, obligations between the debtor and creditors.... Provisions of a confirmed Chapter 13 plan bind the debtor and each creditor ... whether or not the creditor has objected to, has accepted, or has rejected the plan.") (internal quotation marks omitted). Here, because GLS did not object to confirmation of the debtor's now-confirmed Chapter 13 plan, GLS is deemed to have accepted the plan within the...