In re Shelton

592 B.R. 193

IN RE: Larry SHELTON, Debtor.

Case No. 17bk35941

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed September 14, 2018

Attorney for Debtor: Rodion Leshinsky, The Semrad Law Firm, LLC, Chicago, IL

Attorney for Chapter 13 Trustee: Lauren L. Tobiason, Office of the Chapter 13 Trustee, Marilyn O. Marshall, Chicago, IL

MEMORANDUM DECISION

TIMOTHY A. BARNES, Judge.

Before the court is Trustee Marilyn O. Marshall's Objection to Confirmation [Dkt. No. 37] (the "Objection") brought by the chapter 13 trustee (the "Chapter 13 Trustee") in opposition to an amended Chapter 13 Plan dated February 13, 2018 [Dkt. No. 31] (the "Plan") presented by Larry Shelton, the debtor in the above-captioned case (the "Debtor").

The Chapter 13 Trustee objects to the Plan insofar as it is structured to provide payments to a secured creditor beginning as minimal, adequate protection payments and thereafter stepping up those payments to a more fulsome amount—a so-called "step" plan. Here, the increase in payments occurs when payments to the Debtor's counsel, The Semrad Law Firm, LLC ("Semrad"), are scheduled to be complete. The Chapter 13 Trustee alleges that such a payment structure violates the express requirements of chapter 13 plans, exists solely to benefit Semrad and is proposed in bad faith.

For the reasons more fully stated below, the court agrees. The Objection will be sustained and confirmation of the Plan denied.

JURISDICTION

The federal district courts have "original and exclusive jurisdiction" of all cases under title 11 of the United States Code, 11 U.S.C. § 101, et seq. (the "Bankruptcy Code"). 28 U.S.C. § 1334(a). The federal district courts also have "original but not exclusive jurisdiction" of all civil proceedings arising under the Bankruptcy Code or arising in or related to cases under the Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).

A bankruptcy judge to whom a case has been referred may enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Bankruptcy judges must therefore determine, on motion or sua sponte , whether a proceeding is a core proceeding or is otherwise related to a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(3). As to the former, the court may hear and determine such matters. 28 U.S.C. § 157(b)(1). As to the latter, the bankruptcy court may hear the matters, but may not decide them without the consent of the parties. 28 U.S.C. §§ 157(b)(1) & (c). Instead, the bankruptcy court must "submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c)(1).

In addition to the foregoing considerations, a bankruptcy judge must also have constitutional authority to hear and determine a matter. Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Constitutional authority exists when a matter originates under the Bankruptcy Code or where the matter is either one that falls within the public rights exception, id. , or where the parties have consented, either expressly or impliedly, to the bankruptcy court hearing and determining the matter. See, e.g. , Wellness Int'l Network, Ltd. v. Sharif , ––– U.S. ––––, 135 S.Ct. 1932, 1939, 191 L.Ed.2d 911 (2015) (parties may consent to a bankruptcy court's jurisdiction); Richer v. Morehead , 798 F.3d 487, 490 (7th Cir. 2015) (noting that "implied consent is good enough").

Matters involving confirmation of a debtor's chapter 13 plan may only arise in a bankruptcy case, concern the administration of the bankruptcy estate and are, thus, within the court's core jurisdiction. 28 U.S.C. § 157(b)(2)(A), (L) ; In re Williams , 583 B.R. 453, 455 (Bankr. N.D. Ill. 2018) (Hunt, J.) ("Matters relating to confirmation of a plan are core proceedings under 28 U.S.C. § 157(b)(2)(L)."). The matter is therefore core and within the court's jurisdiction. The Debtor has submitted itself to this core jurisdiction and authority by bringing the above-captioned case.

As a result, this court has jurisdiction, statutory authority and constitutional authority to hear and determine this matter.

PROCEDURAL HISTORY

In considering the Objection, the court has considered the Plan, the prior plans presented by the Debtor, National Form B113 (the "National Plan") upon which each plan was based¹ and the Debtor's Response to Trustee's Objection to Confirmation [Dkt. No. 45] (the "Response").

On December 7, 2017, the Debtor presented its original Chapter 13 Plan [Dkt. No. 13] (the "Original Plan").² The Original Plan contained a provision with an effect similar to the one at issue in the Plan, though with substantially different language used to obtain that effect. See Original Plan § 8.1.

On January 25, 2018, the court conducted the first of four confirmation hearings in this matter (collectively, the "Hearings"), at the time considering the Original Plan. Early in the Hearings, the Chapter 13 Trustee voiced concerns over nonstandard provisions in the Debtor's plans. While the Debtor revised the Original Plan when filing the Plan at issue here, the problematic effect of the nonstandard provisions remains unchanged.

Early in this case Semrad, the Chapter 13 Trustee and the court were also actively engaged in a similar matter, wherein Semrad and other chapter 13 debtors' counsel attempted to change the priority scheme in chapter 13 plans to permit counsel to be paid ahead of other creditors. See In re Gilliam , 582 B.R. 459, 470-75 (Bankr. N.D. Ill. 2018) (Barnes, J.). Because objections to plans must be in writing, see Fed. R. Bankr. P. 3015(f), and because the matters herein turned, at least in part, on the issues in Gilliam , the court continued the matter for an objection to be filed and for Gilliam to be decided.

After the Objection was filed, a briefing schedule was set and, as later modified, complied with by the parties. The Gilliam decision having been rendered on March 28, 2018, after the matter was fully briefed, the court conducted a final confirmation hearing on the Plan. At that hearing on May 10, 2018, the matter was taken under advisement.

The court has taken into consideration all of the foregoing, as well as the arguments of the parties at the Hearings. The court has taken judicial notice of the contents of the docket in this case. See Levine v. Egidi , Case No. 93C188, 1993 WL 69146, at *2 (N.D. Ill. Mar. 8, 1993) (authorizing a bankruptcy court to take judicial notice of its own docket); In re Brent , 458 B.R. 444, 455 n.5 (Bankr. N.D. Ill. 1989) (Goldgar, J.) (recognizing same).

Having considered all of the foregoing, this Memorandum Decision constitutes the court's determination of the matters under advisement.

DISCUSSION

The matter before the court is one of several similar matters recently brought before the bankruptcy courts in this District, wherein counsel for chapter 13 debtors seek to manipulate the priority and payment schemes set forth in chapter 13 cases in order to ensure such counsel's payments. While not the only firm engaging in such practices, Semrad, the counsel herein, has led the way in this behavior.

In the Gilliam matter noted above, Semrad sought to alter the priority scheme in chapter 13 plans to afford Semrad payment in advance of those payments to which it would otherwise be entitled. Gilliam , 582 B.R. at 470-75. In Gilliam and fifty other cases determined by the court concurrently therewith, the court found that Semrad's changes to the priority of payments under chapter 13 plans were solely for Semrad's benefit and potentially harmful to Semrad's clients' interests. Id. As a result, and because Semrad could demonstrate neither client consent nor full disclosure to the court of this self-dealing, the court reduced Semrad's compensation and imposed rigid disclosure requirements of any similar agreements going forward. Id. at 475-77.³

As noted, it is not just Semrad engaging in this behavior before the undersigned. See, e.g. , In re Williams-Hayes , Case No. 17bk27961, 2018 WL 2207897, at *1-5 (Bankr. N.D. Ill. Mar. 28, 2018) (Barnes, J.). Further, it is not just the undersigned that has been required to address these issues. See, e.g. , In re Miceli , 587 B.R. 492, 495 (Bankr. N.D. Ill. 2018) (Lynch, J.) (reduced payments on secured claims); In re Carr , 584 B.R. 268, 275 (Bankr. N.D. Ill. 2018) (Thorne, J.) (same); Williams , 583 B.R. at 456-57 (same); In re Jimmar , Dkt. No. 88, Case No. 17bk11666 (Bankr. N.D. Ill. filed Apr. 13, 2017) (Hunt, J.) (unpublished) (compensation in light of altered priority).

Further, the broader question of law presented herein—reduction of payments to secured creditors under a chapter 13 plan—is also not an issue of first impression in this District, though the courts disagree on the propriety of such practice. Miceli , 587 B.R. at 502 (sustaining objection); Carr , 584 B.R. at 275 (overruling objection); Williams , 583 B.R. at 458 (sustaining objection); In re Hernandez , Case No. 08bk72148, 2009 WL 1024621, at *6 (Bankr. N.D. Ill. Apr. 14, 2009) (Barbosa, J.) (overruling objection); In re Marks , 394 B.R. 198, 201 (Bankr. N.D. Ill. 2008) (Cox, J.) (overruling objection).

In order to understand this variation and the parties' positions, it is necessary to first understand what exactly the Plan proposes.

After having done so, the court will consider the Objection in full, including the...