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From Banking and Finance Law Daily, May 4, 2015

Since order denying bankruptcy plan not appealable, debtor’s ‘split claim’ against bank not recognized

By Thomas G. Wolfe, J.D.

Addressing a Chapter 13 bankruptcy case, the U.S. Supreme Court has unanimously ruled that a bankruptcy court’s order denying confirmation of a debtor’s proposed repayment plan—impacting a mortgage lending bank and other creditors—did not constitute a final, appealable order. As a result, in keeping with the bankruptcy court’s decision declining to confirm the debtor’s proposed repayment plan to, among other things, split his approximately $346,000 mortgage debt owed to the bank into a $245,000 secured claim and a $101,000 unsecured claim, the debtor’s proposed “hybrid” treatment of the mortgage debt was not allowed (Bullard v. Blue Hills Bank, May 4, 2015, Roberts, J.).

Background. According to the Court’s opinion, written by Chief Justice John Roberts, Louis Bullard filed a petition for Chapter 13 bankruptcy in federal court in Massachusetts in December 2010. In keeping with bankruptcy procedure, Bullard filed a proposed repayment plan “listing the various claims he anticipated creditors would file and the monthly amounts he planned to pay on each claim over the five-year life of his plan.”

Bullard’s chief debt was the roughly $346,000 he owed to Blue Hills Bank in connection with the mortgage the bank held on Bullard’s “multifamily house.” After filing his bankruptcy petition, Bullard amended his proposed repayment plan three times before submitting it for court approval. Notably, the plan indicated that the mortgage was significantly “underwater;” Bullard’s house was worth substantially less than the $346,000 amount that Bullard owed Blue Hills Bank.

Proposed repayment plan. Under his third amended repayment plan, Bullard proposed a “hybrid treatment” of the mortgage debt owed to the bank. Essentially, the debtor proposed “splitting the debt into a secured claim in the amount of the house’s then-current value (which he estimated at $245,000), and an unsecured claim for the remainder (roughly $101,000).” Under this proposal, Bullard would continue making his regular mortgage payments to Blue Hills Bank on the secured claim, “which he would eventually repay in full, long after the conclusion of his bankruptcy case.” However, Bullard planned on treating the unsecured claim “the same as any other unsecured debt, paying only as much on it as his income would allow over the course of his five-year plan.” Along these lines, “Bullard’s plan called for him to pay only about $5,000 of the $101,000 unsecured claim” by the end of the five-year plan, and any remaining balance on the unsecured portion of the loan would be discharged.

Procedural context. After Blue Hills Bank objected to Bullard’s proposed repayment plan and a hearing was held, the bankruptcy court declined to confirm it. Although the bankruptcy court acknowledged that some other bankruptcy courts within the First Circuit had allowed split-claim arrangements, the court concluded that “Chapter 13 did not allow Bullard to split the Bank’s claim as he proposed unless he paid the secured portion in full during the plan period.” Consequently, the bankruptcy court ordered the debtor to submit a new plan for approval.

Instead of submitting a new repayment plan, Bullard appealed to the Bankruptcy Appellate Panel (BAP) of the First Circuit. In turn, the BAP determined that the bankruptcy court’s order denying confirmation of the proposed repayment plan was not final because Bullard was “free to propose an alternate plan.” Still, the BAP decided to exercise its discretion to hear an interlocutory appeal, and considered the merits of the Bullard’s appeal. However, in upholding the bankruptcy court’s decision, the BAP agreed that Bullard’s proposed “hybrid treatment” of the bank’s claim was not permitted.

Bullard then appealed the BAP’s ruling to the First Circuit. The First Circuit adopted the majority view among the federal circuits that a court’s order denying confirmation of a proposed repayment plan “is not final so long as the debtor remains free to propose another plan.” Subsequently, the U.S. Supreme Court granted the debtor’s petition to hear the case.

Court’s decision. The U.S. Supreme Court noted that an appeal of a bankruptcy matter was nuanced under the Bankruptcy Code, allowing an appeal as of right from “final judgments, orders, and decrees … in cases and proceedings.” The debtor argued that each time a bankruptcy court reviews a proposed plan, “it conducts a separate proceeding.” Thus, in both Bullard’s and the Solicitor General’s view, regardless of whether a bankruptcy court issues an order denying confirmation or granting confirmation of a repayment plan, “both terminate that proceeding, and both are therefore final and appealable.”

In contrast, Blue Hills Bank contended that, in the bankruptcy area, the relevant “proceeding” is “the entire process of considering plans, which terminates only when a plan is confirmed or—if the debtor fails to offer any confirmable plan—when the case is dismissed.” In other words, an order denying confirmation is not final, “so long as it leaves the debtor free to propose another plan.” The U.S. Supreme Court agreed.

In reaching its decision, the Court reasoned that only plan confirmation or a dismissal of the case, not plan denial, “alters the status quo and fixes the rights and obligations of the parties. When the bankruptcy court confirms a plan, its terms become binding on debtor and creditor alike.” In juxtaposition, a denial of confirmation of a repayment plan “changes little,” the Court asserted. “The automatic stay persists. The parties’ rights and obligations remain unsettled. The trustee continues to collect funds from the debtor in anticipation of a different plan’s eventual confirmation. The possibility of discharge lives on.”

Moreover, the Court rejected the debtor’s argument that “interlocutory appeals are ineffective because lower courts have been too reticent in granting them.” Rather, in the Court’s view, lower courts could be expected to “certify and accept interlocutory appeals from plan denials in appropriate cases” as a remedial “safety valve.”

The case involves petition No. 14-116.

Attorneys: James A. Feldman (University of Pennsylvania Law School) for Louis B. Bullard. Douglas Hallward-Driemeier (Ropes & Gray LLP) for Blue Hills Bank.

Companies: Blue Hills Bank; Hyde Park Savings Bank

MainStory: TopStory DebtCollection Loans Mortgages

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