November 14, 2013
by Edward J. Boll III
Lerner, Sampson & Rothfuss
USFN Member (Kentucky & Ohio)
“There is nothing wrong with change, if it is in the right direction.” Winston Churchill
The committee that advises the U.S. Supreme Court on bankruptcy rules and forms has a plan for what a Chapter 13 bankruptcy debtor’s blueprint should look like in each case. Literally.
In all Chapter 13 bankruptcy cases, the debtor must file a repayment plan with the bankruptcy petition or within fourteen days after the petition is filed (Fed. R. Bankr. P. § 3015). A plan must be submitted for court approval and must provide for fixed payments to the trustee on a regular basis. The Chapter 13 trustee then distributes the funds to creditors according to the terms of the plan; which may offer creditors less than full payment on their claims, depending upon classification of the claim.
For the past two years, the Advisory Committee on Bankruptcy Rules, chaired by U.S. Bankruptcy Judge Wedoff (N.D. Ill.), has studied the creation of a national form plan for Chapter 13 cases. The examination has been driven with the primary purposes of bringing more uniformity to Chapter 13 practice, lowering costs, making bankruptcy education easier, and simplifying the review of Chapter 13 plans by debtors, courts, trustees, and creditors. Despite the Constitutional mandate that bankruptcy law is to be uniform, Chapter 13 plans are inconsistent and vary throughout the nation, although many local jurisdictions have created and implemented form Chapter 13 plans for years through localized general orders, rules, and practice.
Federal rules of procedure are adopted by the Supreme Court, subject to contrary Congressional legislation. In exercising its rulemaking authority, the Supreme Court acts through the Judicial Conference of the Unites States. In turn, the Judicial Conference delegates the responsibility for rules proposals to its Committee on Rules of Practice and Procedure, otherwise known as the Standing Committee. The Standing Committee is advised by five advisory committees. Each one deals with a particular set of federal rules: civil, criminal, evidence, appeals, and bankruptcy. Bankruptcy is governed under the United States Constitution, which authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.” U.S. Const., art. I, § 8, cl. 4.
On August 15, 2013, new bankruptcy rules and forms were unveiled that would mandate a form Chapter 13 plan to be used nationally. Bankruptcy rules, and the forms that implement them, begin in the Advisory Committee on Bankruptcy Rules. Rule amendments generally require at least three years from initial drafting to becoming effective, and forms require at least two years.
The latest proposals seek to press creditors with aggressive timelines and potential penalties and are in line with the sweeping bankruptcy rules and forms changes that were implemented in 2011. (Fed. R. Bankr. P. § 3002.1, effective December 1, 2011, requires mortgage creditors to file notices of payment changes; file notices of post-petition fees, expenses and charges; and to affirmatively respond to notices of final cure within 21 days, under the threat of being ordered to pay expenses and attorneys’ fees and being precluded from presenting any omitted information as evidence in any contested matter or adversary proceeding in the case for failing to comply.)
Historically, creditors, creditors’ counsel, and trustees have carried the burden of poring over scores of Chapter 13 plans — many as unique as a snowflake in content and structure — to determine how the creditor was to be treated. The lurking risk was always that something would be overlooked or that a creditor’s rights would be violated by ambush with illegal plan provisions that were deeply hidden.
Creditors often suggested that uniformity when it came to plan format would be useful and afford appropriate notice of treatment. However, the need for a national form plan became an urgent priority when the U.S. Supreme Court, in 2010, held that an order confirming a Chapter 13 plan, even which included illegal plan provisions, was nevertheless binding. United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010). The Supreme Court went on to hold that bankruptcy judges must independently review Chapter 13 plans for conformity with applicable law. It was this reminder to bankruptcy judges by the Supreme Court that shifted thinking to what many creditors have said all along: there has to be an easier and more uniform way to do this.
The proposed national Chapter 13 plan is the product of more than two years of study and consultation by the advisory committee. The form includes ten parts and two exhibits.
• Part 1: Check-the-box notices intended to highlight to interested parties when the plan includes nonstandard provisions, seeks to limit the amount of a secured claim, and/or requests the avoidance of a lien or security interest.
• Part 2: Amount, source, and duration of the debtor’s plan payments
• Part 3: Treatment of secured claims
• Part 4: Treatment of the trustee’s fees, administrative claims, and other priority claims
• Part 5: Treatment of unsecured claims not entitled to priority
• Part 6: Treatment of executory contracts and unexpired leases
• Part 7: Order of distribution of payments by the trustee under the plan
• Part 8: Defines when property of the estate will revest in the debtor. One choice must be selected: upon plan confirmation, upon closing the case, or upon some other specified event.
• Part 9: Gives the debtor the opportunity to propose provisions that are not in the form plan
• Part 10: Signature box, including certification by the debtor’s counsel that the plan is identical to the national form plan
• Exhibit A: Calculation of Lien Avoidance Exhibit
• Exhibit B: Estimated Amounts of Trustee Payments Exhibit
The ten-part plan, along with the proposed rule changes suggested to implement the national Chapter 13 plan, contains a number of significant changes impacting creditors. Most of them will require creditors and their counsel to sprint out of the gate whenever a bankruptcy is filed to meet the accelerated timeframes, mandatory participation, and higher stakes.
Secured Creditors Would Have to File POCs
According to the advisory committee, when they surveyed bankruptcy judges and trustees regarding Chapter 13 practice, dissatisfaction with the current proof of claim (POC) filing rules was frequently expressed. The existing Fed. R. Bankr. P. § 3002(a) provides: “Necessity for Filing. An unsecured creditor or an equity security holder must file a proof of claim or interest for the claim or interest to be allowed, except as provided in Rules 1019(3), 3003, 3004, and 3005.” This has caused debate about whether and when secured creditors must file proofs of claim in Chapter 13 cases. And for those that believe a secured creditor must file a POC, the 90-day deadline from the meeting of creditors has been viewed as far too much time, despite the increased complexity and itemization required by the current rules and forms governing proofs of claims. Fed. R. Bankr. P. § 3002(c) provides, in part: “Time for Filing. In a ... Chapter 13 individual’s debt adjustment case, a proof of claim is timely filed if it is filed not later than 90 days after the first date set for the meeting of creditors called under § 341(a) of the Code ... .”
The proposed amended Rule § 3002(a) would require a secured creditor to file a POC in order to have an allowed claim. However, the amendment also makes clear that the failure of a secured creditor to file a proof of claim does not render the creditor’s lien void.
Proposed POC Bar Date — According to the advisory committee, the consensus of the bench, debtors’ Bar, and trustees is that the Chapter 13 process would benefit from creditors filing POCs before plan confirmation. Accordingly, setting the claims bar date so that it is likely to fall before confirmation is a cornerstone of the suggested changes to the rules governing the claims bar deadline. The proposed rule change would amend the calculation of the claims bar date. Rather than 90 days from the meeting of creditors under Bankruptcy Code § 341, the bar date would be 60 days after the petition is filed in a Chapter 13 case.
Creditors could file a motion, if filed before the claims bar date, to extend the time to file a POC by up to 60 days from the date the motion is granted. Creditors would be afforded this safe harbor when the debtor fails to timely file the list of creditors’ names and addresses, if the notice was insufficient under the circumstances to give the creditor a reasonable time to file a POC, or notice of the time to file a proof of claim was mailed to the creditor at a foreign address.
Proposed POC Bar Date for Claims Secured by Debtor’s Principal Residence: A Two-Step Process — Early concerns to the new proposed rules were expressed by mortgage servicers regarding the difficulty of filing timely POCs within the proposed bar date of 60 days after the filing of the Chapter 13 petition. While 60 days might be sufficient time to determine certain information, such as the amount of the arrearage on a mortgage, it would not be sufficient time to produce all necessary supporting documents, such as a copy of the recorded mortgage.
In reaction to those concerns, the latest proposed rules carve out a concession where the claim is secured by the debtor’s principal residence. The current draft bifurcates the bar date in these circumstances. The proposed Rule § 3002(c)(2) provides that a POC is timely filed if it is filed within 60 days of the petition date and includes the mortgage proof of claim attachment form, which details the principal and interest due, a statement and itemization of prepetition fees, expenses, and charges, and a statement of the amount necessary to cure the default.
A creditor has 120 days after the petition date to file a copy of the writing upon which the claim is based and evidence that the creditor’s security interest has been perfected as a supplement supporting the POC. Simply put, creditors have 60 days to file the POC with the figures and 120 days to file the loan documents. Unfortunately, the 120-day limit does not apply to much more than the loan documents. If an escrow account has been established in connection with the claim, the deadline to file the required escrow account statement prepared as of the date the bankruptcy was filed, with the POC, will be 60 days from the bankruptcy filing.
Does the Plan or Proof of Claim Control?
Despite early versions of the proposed rule changes that allowed a debtor to establish the amount of a creditor’s claim with the figures listed in the plan, the current draft of the national Chapter 13 plan provides that the amounts listed on a POC as to the current payment amount and arrearage for secured claims will control over contrary amounts listed in the plan. The debtor will estimate the amounts of such claims, with proofs of claim controlling over the plan as to those amounts. The debtor will therefore have to object to the claim to contest those amounts if there is a dispute.
Plan Objections and Confirmation Hearings — The proposed amendments to the rules require a creditor to file objections to confirmation of a Chapter 13 plan at least seven days before the confirmation hearing [proposed Fed. R. Bankr. P. § 3015(f)]. The clerk is required to send out notices to creditors giving creditors at least 21 days’ notice by mail of the time fixed for filing objections to confirmation of a Chapter 13 plan and notices giving creditors at least 28 days’ notice by mail of the confirmation hearing date and time.
Cramdowns and Strip-offs
The current rules provide for the valuation of a secured claim by motion only, and do not address the determination of the amount of a priority claim [Fed. R. Bankr. P. § 3012]. The proposed rules allow for the determination of the amount of secured claims in a proposed plan, subject to objection and resolution at the confirmation hearing. Further, the proposed rules provide an exception to the need to file a POC objection if a determination with respect to that claim is made in connection with plan confirmation, which is necessary to make parts of the form plan operational. Because the proposed rule will permit the value of certain secured claims to be determined through a plan, the language of the proposed rules addresses the determination of the “amount” of a claim rather than its “allowance.” The proposed amendment to Fed. R. Bankr. P. § 4003(d) provides, in keeping with proposed amended Fed. R. Bankr. P. § 3012, that chapter 12 and Chapter 13 plans may seek the avoidance of liens encumbering exempt property pursuant to § 522(f) of the Bankruptcy Code.
Where a debtor proposes to avoid a lien in a Chapter 13 plan, the debtor must take prescribed steps to make sure certain creditors receive a copy of the plan. For example, unless the court has ordered otherwise, if the debtor proposes a plan seeking to avoid a lien held by an “insured depository institution,” the debtor must serve a copy of the plan by certified mail addressed to an officer of the institution unless the institution has appeared by its attorney, in which case the attorney shall be served by first-class mail. The committee note to proposed Fed. R. Bankr. P. § 4003 provides: “A plan that proposes lien avoidance in accordance with this rule must be served as provided under Rule 7004 for service of a summons and complaint. Lien avoidance not governed by this rule requires an adversary proceeding.”
Order Declaring Lien Satisfied — The new rules provide for a procedure for the debtor to obtain an order confirming that a secured claim has been satisfied [proposed Fed. R. Bankr. P. § 5009]. This may be particularly important to debtors who need, for title purposes, documentation showing that an unsecured second mortgage or other lien has been eliminated.
Adversary Rules Changes — The adversary rules list a number of disputes that are required to be conducted by adversary proceeding, including a proceeding “to determine the validity, priority, or extent of a lien or other interest in property.” Fed. R. Bankr. P. § 7001. The proposed rules exclude certain proceedings already handled at the plan confirmation stage, such as determinations of the amount of a secured claim through confirmation of a chapter 12 or Chapter 13 plan.
Comments concerning the proposed amendments are due by February 15, 2014. After the public comment period, the advisory committee will decide whether to submit the proposed amendments to the Committee on Rules of Practice and Procedure and will likely publish a new version of the plan and rules with a new comment period ending August 15, 2014. The proposed amendments would then become effective on December 1, 2015, if they are approved, and if Congress does not act to defer, modify, or reject them.
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Autumn 2013 USFN Report