Individual Chapter 11 cases present many challenges to mortgage servicers, but one which creates continuing challenges is determining when a loan may be closed from bankruptcy and returned to general servicing following confirmation. Upon plan implementation, many servicers seek to remove the bankruptcy hold as quickly as possible. But determining when a servicer may safely do so without running afoul of the automatic stay, the confirmation order, or the discharge injunction, is often a vague and difficult analysis which many servicers are unable, or unwilling, to undertake.
At the core of the issue is the practice in most, if not all, bankruptcy courts to permit an individual debtor to close a case without discharge or dismissal while the debtor performs the plan in order to avoid filing quarterly reports and paying quarterly fees to the U.S. Trustee under 28 U.S.C. § 1930. The practice is known as an “administrative close” and developed because confirmation of a plan, upon objection, under § 1129(a)(15) requires an individual debtor to commit to unsecured claims receiving less than full payment the debtor’s projected disposable income for five years. Consequently, most individual reorganization plans provide for the partial payment of unsecured claims over the first five years of the plan. Once plan performance has commenced, the debtor will typically move to “administratively” close the case without discharge, with at least a stated intention to reopen the case at the conclusion of five years to request entry of the discharge.
Therefore, to remove a bankruptcy hold from an allowed, secured loan in Chapter 11 following plan confirmation, the creditor must answer the following questions: Have the plan terms been implemented? Has the automatic stay lifted? Has the debtor been granted a discharge of the debt? Following the debtor’s default, does the creditor have obligations and remedies in the bankruptcy court, and if so, are those remedies superior to the rights preserved under the plan for exercise in state court?
Termination of the automatic stay arising under § 362 is typically determined by § 362(c). Section 362(c) has two components: the stay against property of the estate, and the stay of any other act.
The stay with respect to property of the estate “continues until such property is no longer property of the estate[.]” A seemingly obvious dictum, but when is property of the estate no longer of the estate? Property of the estate includes not only all interests of the debtor on the petition date as set forth in § 541, but under § 1115 also includes for individual debtors all property set forth in § 541 that a debtor acquires after the filing of the petition “but before the case is closed, dismissed, or converted”. And, property of the estate includes all “earnings from services performed by the debtor after commencement of the case but before the case is closed, dismissed, or converted”.
Contrast the broadly inclusive scope of §§ 541 and 1115 with § 1141(b), which states that unless a confirmed plan provides otherwise, confirmation vests all property of the estate in the debtor. Therefore, the stay against property of the estate, at least with respect to property acquired through confirmation, lifts upon confirmation provided the confirmed plan does not otherwise dictate. As to property acquired post-confirmation and prior to the case closing, the courts are split.
But, what about the automatic stay with respect to “any other act under subsection (a) [of § 362]”? Section 362(c)(2) states the automatic stay continues until the earliest of the time the case is closed, dismissed, or a discharge is granted or denied. The difficulty with the “administrative close” is that the case is not dismissed, discharge has been neither granted nor denied, and while the case is labelled “closed”, it is an interim closure, without finality, and with the stated intent to reopen.
The prudent takeaway would be to assume the automatic stay remains in individual Chapter 11 cases until (1) the confirmed plan expressly vests property of the estate in the debtor (or by silence implicitly vests property of the estate in the debtor under § 1141(b)) and (2) the court enters an order closing the case. But consider the following language taken from actual closing orders entered in individual Chapter 11 cases:
“ORDERED that entry of this Order shall not operate to close the case for purposes of 11 U.S.C. § 362(c)(2)(A) or Fed. R. Bankr. P. 4006;” (In re Bacho, Bk. Ct. West. Dist. of Washington, Case No. 12-13447, Docket No. 187 entered 3/28/14).
“This Order shall not constitute an order closing the case for purposes of 28 U.S.C. § 1930 Appendix (11), 11 U.S.C. § 362(c)(2)(A), or Fed. R. Bankr. P. 4006.” (In re Wolfe, Bk. Ct. Middle Dist. of Florida, Case No. 12-00625, Docket No. 203 entered 4/16/13).
“As to all claims that arose against the Debtor or his assets prior to the date of this order and that are provided for by the Plan, and except as explicitly provided otherwise in the Plan, the automatic stay in 11 U.S.C. § 362 shall remain in effect until payments on the Plan are completed and the Debtor requests and receives a discharge but, absent an order of extension, in no event later than the date five years from the date of then confirmation order;” (In re Bahal, Bk. Ct. Dist. of Mass., Case No. 12-16460, Docket No. 122 entered 5/31/13).
“ORDERED that the automatic stay shall remain in full force and effect until such time as a discharge is granted or the automatic stay is lifted or modified by further order of this Court.” (In re Hughitt, Bk. Ct. Northern Dist. of Texas, Case No. 12-40653, Docket No. 179 entered 2/28/13).
The examples cited have ordered the automatic stay remain in place until discharge is granted, which typically follows completion of pro rata payments to unsecured claims over five years, and, is dependent upon the debtor incurring the legal and court fees to return to the court five years after confirmation to demonstrate plan performance and to request discharge. By then, most debtors will have moved on, and many creditors will have already recognized a discharge of their claims, even when no discharge has been granted.
For creditors and servicers seeking ways to systematize the closing of loans in Chapter 11, there are currently no short cuts or alternatives to individualized case reviews, which requires at a minimum a review and understanding of the confirmation order(s), the confirmed plan, the motion to close, and the case closing order(s). Only upon review of the controlling documents for the actual terms and language employed, or the lack thereof, can one make a prudent determination whether the collateral in question has re-vested in the debtor and the automatic stay has lifted. And, even if there are no impediments to state court remedies following plan default, have those remedies been altered, or is the potential for recovery greater by returning to the bankruptcy court rather than moving through state court under the plan’s terms, just because the creditor can? Such are important issues to consider on another day in another article.
Published by Hutchens Law Firm on February 15, 2017