4th Cir.: Trantham v. Tate- Nonstandard Chapter 13 Bankruptcy Provisions

By Ed Boltz, 2 November, 2024

Summary:

The Fourth Circuit Court of Appeals reversed the decisions by the bankruptcy and district court decision that rejected Trantham's proposed Chapter 13 bankruptcy plan, which allowed for property to vest in her at the plan’s confirmation rather than at the final decree, as mandated by the local form. The lower courts had required adherence to the local form's default vesting provision for consistency and efficiency, despite finding that Trantham's plan was "not contrary to" the Bankruptcy Code.

The appellate court emphasized that the debtor has the exclusive right to propose a plan, including its vesting terms, as long as it adheres to the Bankruptcy Code. Since the Code allows property to vest in the debtor upon plan confirmation (with that actually being the express Congressional default), the court ruled that the local form’s default provision could not override this right. If the trustee objects, it is the Trustee who bears the initial burden of “going forward with evidence as to [her] objection.”

Commentary:

A really great victory by Todd Mosley, with assistance from Richard Cook and NCBRC.

Vesting Provisions

The specific nonstandard provision in this case concerned when assets of the estate would revest in the debtor, with the option generally either being at confirmation or discharge.

Some commentators have fretted or threatened vesting assets in the debtor at confirmation would allow creditors to enforce their liens when the debtor defaults in making the payments post-confirmation without seeking relief from the automatic stay. And while some sections of 11 U.S.C. § 362(a) only prohibit actions against "property of the estate", (a)(5) in contrast prohibits "any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title...." (Emphasis and color added.) Mortgage servicers, who nearly always bring foreclosures against the named owners of the property and not in rem, would also be restricted by (a)(1) in the "commencement or continuation ... of [an] action or proceeding against the debtor." The same would hold for pre-petition judgment creditors under (a)(2). It would be surprising to learn that in the 7th Circuit, where, following In re Cherry, 963 F.3d 717, 718 (7th Cir. 2020), it seems like it is the unbreakable "norm" that property vests in the debtor at confirmation, creditors are completely unfettered by the automatic stay.

The Fourth Circuit did clearly reaffirm that when a debtor experiences a “substantial and unanticipated” change of income from selling property that vested in him at plan confirmation, the trustee maintains the ability to seek to modify the debtor’s plan so that unsecured creditors can recoup such income. See Murphy v. O’Donnell (In reMurphy), 474 F.3d 143, 154 (4th Cir. 2007)

Many Chapter 13 Trustees nonetheless seem terrified (and elation by some debtors attorneys ) that if assets vest in the debtor at confirmation, the power and information asymmetries will allow debtors to sell assets and quickly and quietly make final payments under their plans, such that the Trustee will not have an opportunity to discover and recover any appreciation in those assets and seek a modification under 11 U.S.C. § 1329 to modify the dividend to unsecured creditors.

Those fears (and giddiness) are undercut by the simple fact that most such sales will still involve lenders, either being paid off and/or providing financing, who will continue to insist on obtaining bankruptcy court approval. Explicitly placing an obligation of disclosure to the Trustee of direct payments (other than as provided in the plan) on creditors in Local Rules would bolster this further.

These scales can also be further rebalanced if more bankruptcy trustees take a page from the long-standing practice in the Middle District of North Carolina of recording a notice of bankruptcy with every County Registrar of Deed where a debtor owns real property. That would put real estate attorneys and title insurers on notice of the bankruptcy and even an obligation to disclose a sale, since apparently those parties are unable to otherwise spend 10¢ on a PACER search.

General Provisions

More important, however, than the vesting question (which tends to occupy the attentions of both judges and debtor's attorneys most noted for their intransigence), Trantham stands for the proposition that Chapter 13 debtors have the "exclusive right to propose plans" that include any "provision [that] is consistent with the Code and isn’t otherwise proposed in bad faith or forbidden by law, the bankruptcy court “shall confirm” the plan with that tailored provision." Confirmation with such provisions is permitted even over the objection of a creditor if the Disposable Income test and Hypothetical Liquidation Requirement are satisfied.

Too often Chapter 13 Trustees and bankruptcy judges insist that all consumer cases must be cookie cutter versions of each other (while at the same time bemoaning that kind of representation by consumer debtors' attorneys), making “efficiency and consistency” for administration by the Trustee essential. The sort of bespoke plan provisions that are approved de rigueur in Chapter 11 plans are then rejected out of hand. See, e.g. , In re Parkman, 589 B.R. 567 (S.D.Miss. 2018.)

That pearl clutching aside, attached is also a set of potential non-standard plan provisions, drawn from many of Buzzy Stubb's individual Chapter 11 cases and the wisdom of Max Gardner, which do not violate the Bankruptcy Code and would often greatly benefit Chapter 13 debtors . The Buchanan provisions, allowing participation in Income Driven Repayment plans for student loans during Chapter 13 are another example of the creativity and flexibility that Trantham now clearly allows.

Similarly, an "estimated duration" plan, which allows the debtor can request discharge, as soon as she satisfies her priority and secured obligations and any required dividends to unsecured creditors, regardless of the number of estimated months the plan was proposed and anticipated to last, was favorably cited to by the 4th Circuit here from In re Sisk, 962 F.3d 1133 (9th Cir. 2020). Whether the plan could require the Trustee, rather than the debtor herself, to move for plan completion and discharge would again now depend on if shifting that obligation was contrary to the Bankruptcy Code, not just burdensome to the Trustee.

Concurrence:

Judge Wilkinson's concurrence is as important as the gravemen in this case-

The absolutist positions taken by the district court and the debtor here both neglect an essential ingredient in the bankruptcy process: “[N]egotiation and collaboration among numerous parties.” In re Ottawa Bus Serv., Inc., 498 B.R. 281, 288 (D. Kan. 2013). The principle of collaboration was lacking in this case. (Emphasis added.)

This absolutist lack of collaboration (which could also be imputed to the Chapter 13 Trustee and the bankruptcy court) was and unfortunately can be particularly problematic in Chapter 13 cases where overzealous and obdurately stubborn parties stake out doctrinaire positions with little interest or incentive to seek accommodation. Hopefully Judge Wilkinson's admonition for "negotiation and collaboration" to us "soldiers on the ground" will be heeded by all sides.

Prudential Standing for Appeal

While leaving a full decision of this "open question" for another day, the 4th Circuit, relying on In re Sisk, 962 F.3d 1133 (9th Cir. 2020), also expressed skepticism regarding an overly strict application of prudential standing "when the appellant is the party below and remains integrally connected to the issues on appeal.” This could mean that debtors have the right to object to claims even when the lack of a pecuniary interest might make them a "person only slightly aggrieved."