Laney v. Second Chance Auto, Inc.

RYAN L LANEY, Debtor-Appellant, v. SECOND CHANCE AUTO, INC, Creditor-Appellee.

No. 20-cv-1312-DWD

Bk. No. 19-40789

United States District Court, S.D. Illinois

September 13, 2021

MEMORANDUM AND ORDER

DAVID W. DUGAN United States District Judge

This is an appeal from the bankruptcy court's November 23, 2020 order overruling Debtor Ryan Laney's Objection to Creditor Second Chance Auto, Inc/s Claim 9. In re Laney, S.D. Ill. Bankr. Case No. 19-40789, Doc. 118. For the reasons set forth below, the Court AFFIRMS the bankruptcy court's order.

Background

On or about June 13, 2019, Debtor Ryan Laney ("Debtor") entered into a Retail Installment Contract and Security Agreement ("Agreement") with Creditor Second Chance Auto, Inc. ("SCA") for the purchase and financing of a 2007 Ford Edge SEL (the "Ford Edge") (Doc 4-1, p. 25). Under the parties' Agreement, Debtor agreed to pay the principal amount of $9, 580.38 plus finance charges accruing on the unpaid balance at the rate of 22% for a total sale price of $15, 081.84, to be paid in seventy-two (72) bi-weekly installment payments beginning on June 27, 2019 (Id.).

On October 23, 2019, Debtor filed his Chapter 13 bankruptcy petition (Doc. 4, p. 2). SCA filed a proof of claim for the 2007 Ford Edge on November 20, 2019 ("Claim 3-1") (In re Laney, Claims Register, at 3-1). SCA asserted a claim amount of $12, 122.00 (Id.).^[1] On December 11 2019, the Bankruptcy Court found that SCA's Ford Edge claim fell within the parameters of a "910-claim" under Section 1325(a), such that Debtor would be required to pay the claim in full under his Chapter 13 plan (In re Laney, Bk. Doc. 67, pp. 10-11)).

Debtor filed his Second Amended Chapter 13 Plan on March 2, 2020 (Doc. 4-1, p. 42). The Second Amended Plan was confirmed on March 24, 2020 (the "Confirmed Plan") (Id.). Section 4 of the Confirmed Plan treats SCA's Ford Edge Claim as a 910-claim that would be "paid in full, with interest". (Doc. 4-1, p. 43; Bk. Doc. 78, pp. 5-6). The Confirmed Plan listed an Estimated Claim amount for the Ford Edge as $12, 112.00, with an interest rate of 7.25 percent, and an estimated monthly payment of $375.37 (Id.). In its entirety, Section 4(A) of the Confirmed Plan, provides:

4. SECURED CLAIMS AND VALUATION OF COLLATERAL UNDER 11 US.C SECTION 506

A) Secured claims to which 11 U.S.C. Section 506 valuation is NOT applicable ("910 Claims"):

Claims listed in this subsection are debts secured by a purchase money security interest in a personal motor vehicle acquired for the personal use of the Debtor, incurred within 910 days preceding the date of the filing of bankruptcy, or debts secured by a purchase money security interest in any other thing of value incurred within one year preceding the date of the filing of the bankruptcy. These claims will be paid in full, with interest as provided below.

Creditor

Collateral

Estimated Claim

Interest Rate

Estimated Monthly Payment

Second Chance Auto

2012 Chrysler 300

$10, 870. 00

7.25%

$336.8 8

Chase Auto Finance

2008 Chrysler Aspen

$500.00

7.25%

$15.50

Second Chance Auto

2007 Ford Edge

$ 12, 112.0 0

25%

$ 375.37

(Doc. 4-1, p. 43; In re Laney, Bk. Doc. 78, pp. 5-6).

On March 9, 2020, and prior to confirmation, SCA filed a statement of attorney's fees (Doc. 4-1, p. 42). Debtor objected to these fees, and the hearings concerning this fee dispute continued past confirmation (See generally, In re Laney, Bk. Docs. 85-91; 96, 99- 103). On July 27, 2020, the bankruptcy court directed SCA to file an amended proof of claim to add SCA's attorney's fees (Doc. 4-1, p. 42). SCA filed its amended proof of claim for the Ford Edge ("Claim 9") on August 7, 2020 (Doc. 41-1, p. 21). Claim 9 amended SCA's Claim 3 (Id.). Claim 9 asserted a claim for $15, 584.46, itemized as:

Balanced owed on the Ford Edge, as of October 23, 2019:

$11, 912.00;

Attorney's fees and costs incurred through March 9, 2020:

$1, 929.86; and

Attorney's fees and costs incurred after March 9, 2020:

$1, 742.60

(Doc. 4-1, pp. 21, 31). Debtor filed his Objection to Claim 9 on October 5, 2020 (Doc. 4-1, p. 2).

Following a hearing on November 23, 2020, the bankruptcy court overruled Debtor's objection to Claim 9 and Claim 9 was allowed (Doc. 4-1, p. 36). In overruling Debtor's objection, the bankruptcy court found that the language in the Confirmed Plan provided for SCA's claim to be paid in full, that the relevant Agreement provided for the payment of SCA's attorney's fees, and the attorney's fees claimed by SCA's attorneys were reasonable and necessary (Doc. 4-1, pp. 44, 46-47). The court also reasoned that Debtor's counsel had knowledge of these attorney's fees prior to confirmation, and that compelling reasons existed to allow SCA to amend its original Claim 3 to include these fees (Doc. 4-1, pp. 45-46). The compelling reasons included that multiple events had occurred in the bankruptcy proceedings after SCA filed its original claim which required SCA to file responses and attend additional hearings to protect its claim (Id.).

Debtor timely filed his Notice of Appeal of the November 23, 2020 Order on December 7, 2020 (Doc. 4-1, p. 37). Debtor argues that Claim 9 should not have been allowed for four reasons: (1) SCA's Claim 9 operates as a post-confirmation amendment, effectively modifying the Confirmed Plan in violation of Section 1327(a); (2) SCA is not entitled to attorney's fees incurred post-confirmation; (3) the Bankruptcy Court wrongfully relied on Holstein v. Brill 987 F.2d 1268 (7th Cir. 1993) when it permitted SCA to amend its claim to increase its claim after confirmation because Holstein is inapplicable to Chapter 13 cases; and (4) SCA's fees were unnecessary (Doc. 4). In response, SCA argues that its fees and Claim 9 were both properly allowed because (1) the fee request was filed before - and was under initial consideration - prior to confirmation, (2) Debtor knew that attorney fees were recoverable under the parties' Agreement, (3) the Confirmed Plan provided that SCA's claim would be paid in full, and (4) the fees incurred were reasonable and necessary (Doc. 10).

Standard of Review

A federal district court has jurisdiction to hear appeals from the rulings of the bankruptcy court pursuant to 28 U.S.C. § 158. This Court reviews the bankruptcy court's findings of fact for clear error and reviews its conclusions of law de novo. In re Kempff, 847 F.3d 444, 448 (7th Cir. 2017); Kovacs v. United States, 614 F.3d 666, 672 (7th Cir. 2010). Evidentiary and discovery rulings are reviewed for abuse of discretion. In re Salem, 465 F.3d 767, 778-79 (7th Cir. 2006).

Analysis

Chapter 13 of the Bankruptcy Code affords a reorganization remedy for consumers with relatively small debts. Johnson v. Home State Bank, 501 U.S. 78, 82 (1991). A debtor who qualifies for Chapter 13 relief may submit a plan of repayment that modifies the rights of their secured and unsecured creditors. See 11 U.S.C. § 1322(b). If the plan satisfies the requirements of 11 U.S.C. § 1325(a), the bankruptcy court will confirm it. 11 U.S.C § 1325(a). Once confirmed, the "provisions of the confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan." 11 U.S.C. § 1327(a).

On December 11, 2019, the Bankruptcy Court found that SCA's Ford Edge claim fell within the parameters of a "9lO-claim"^[2] under 11 U.S.C. § 1325(a) such that Debtor would be required to pay the claim in full (In re Laney, Bk. Doc. 67, pp. 10-11). Debtor does not dispute that SCA's Ford Edge claim is a proper 910-claim. (See Doc. 4, p. 5). And the Confirmed Plan treats SCA's Ford Edge claim as a 910-claim "to be paid in full" with interest. (Doc. 4-1, pp. 42-43; In re Laney, Bk. Doc. 78).

For Chapter 13 plans, a qualifying "910 claim" is not subject to the claim valuation process in Section 506 of the Bankruptcy Code, 11 U.S.C. § 506^[3] by virtue of the "hanging paragraph of" Section 1325(a)(9). See 11 U.S.C. § 1325(a)(9) ("section 506 shall not apply to a claim ... if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day [sic] preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle ... acquired for the personal use of the debtor"). Therefore, in determining the treatment of "910-claims" under a Chapter 13 plan the parties look to "their contractual entitlements" as provided for in their security agreement. In re Wright 492 F.3d 829, 829 (7th Cir. 2007); see also In re Howard, 597 F.3d 852, 855-857 (7th Cir. 2010).

Here, the parties' security agreement, provides for the recovery of SCA's attorney's fees upon default:

If you default, you agree to pay our costs for collecting amounts owing, including, without limitation, court costs and reasonable attorneys' fees as permitted by a court of law, that we incur to collect or enforce this Contract, and fees for repossession, repair, storage and sale of the Property securing this Contract.

(Doc. 4-1, p. 28).

Further SCA's purchase money security interest attaches to those attorney fees. The question of whether attorney's fees are included in SCA's purchase money security interest is a question of state law. See Butner v. United States, 440 U.S. 48, 55 (1979) ("Property interests are created and defined by state law."); In re Howard, 597 F.3d 852, 855 (7th Cir. 2010); Matter of Federal Press Co., Inc., 104 B.R. 56, 59 (Bankr. N.D. Ind. 1989) ("In bankruptcy proceedings, state law controls the construction and validity of ordinary contracts."). Here, the Agreement is silent on the governing state law that applies;...