August 1, 2013
by Andrew S. Cannella
Bendett & McHugh, P.C
USFN Member (Connecticut, Maine, Vermont)
The term “hybrid plan” is used to describe a Chapter 13 plan that modifies the balance of a secured claim by reducing the secured portion to the fair market value of the collateral (less any senior encumbrances) pursuant to Bankruptcy Code § 1322(b)(2) (this is commonly referred to as a “cramdown”), while also using § 1322(b)(5) to cure the pre-petition arrearage and maintain the regular monthly contractual payments beyond the life of the plan until the modified balance is paid in full. Because traditionally any modified claim must be paid in full during the life of the plan, but to propose the same with a mortgage claim would result in a plan payment not feasible for the debtor, a hybrid plan attempts to provide the debtor with a feasible plan that serves to accomplish a cramdown of the secured claim.
The origins of this type of plan, which is permitted in a significant minority of jurisdictions, seem to be in rulings from the Bankruptcy Court for the District of Massachusetts in the 1990s. In re McGregor, 172 B.R. 718 (Bankr. D. Mass. 1994); In re Brown, 175 B.R. 129 (Bankr. D. Mass. 1994); In re Murphy, 175 B.R. 134 (Bankr. D. Mass. 1994).
On July 24, 2012, a Massachusetts bankruptcy court decided In re Bullard, 475 B.R. 304 (Bankr. D. Mass. 2012) and held that a “hybrid” Chapter 13 plan is impermissible pursuant to the terms of the Bankruptcy Code. The basis for the decision was twofold. First, the court held that the combined code provisions contained in the plan violated the prohibition on plans exceeding five years in duration contained in § 1322(d). Second, the court held that the plan failed to comply with § 1325(a)(5)(B)(ii), which requires the plan to distribute the allowed amount of the secured claim as of the effective date of the plan.
The Bankruptcy Appellate Panel (BAP) for the First Circuit granted the debtor’s motion for leave to appeal from the bankruptcy court’s order denying plan confirmation and affirmed the bankruptcy court’s order. However, the BAP used a different rationale that was not based on the § 1322(d) prohibition on plans exceeding five years or the provisions of § 1325(a)(5)(B)(ii). Instead, the court held that the hybrid plan proposed by the debtor was impermissible because, based on the provisions of § 1328(a)(1) and § 1325(a)(5)(B)(i)(I), modification of a claim pursuant to § 1322(b)(2) and the cure and maintenance of payments beyond the life of the plan pursuant to § 1322(b)(5) are mutually exclusive. This is because § 1325(a)(5)(B)(i)(I) provides that the secured creditor retain its “lien securing such claim until the earlier of — (aa) the payment of the underlying debt determined under nonbankruptcy law; or (bb) discharge under section 1328.”
However, since claims treated pursuant to § 1322(b)(5) are not dischargeable pursuant to § 1328(a)(1), the creditor retains its lien until it is paid the full amount of the entire debt secured by its lien on the subject property as determined by state law. Consequently, if a Chapter 13 plan seeks to cure a pre-petition arrearage and maintains the regular contractual payment regarding a secured claim, the plan cannot also seek to reduce the balance owed on said claim as determined by applicable state law.
While the BAP’s ruling in Bullard is not binding precedent, it has already had an impact. The U.S. Bankruptcy Court for the District of Rhode Island has stated that it intends to follow the ruling and will no longer confirm a hybrid plan over a creditor’s objection.
The debtor filed a notice of intent to appeal to the U.S. Court of Appeals for the First Circuit on June 19, 2013.
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