UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

The debtor's chapter 13 plan duly came before the court for confirmation on May 19, 1995. A second amended chapter 13 plan was filed May 25, 1995. Because there are several problems with the second amended chapter 13 plan, confirmation will be denied for the reasons set forth hereafter.

As a preface to my comments, I note that the plans presented to the court represent a great deal of effort by counsel for the debtor. My comments are not intended to discourage his industry. Rather, I hope to point out problems that can be resolved through the filing of additional pleadings and an amended plan that address the court's concerns and provide a workable framework for reorganization of the debtor and his creditors.

Analysis

There are a number of problems with the debtor's second amended chapter 13 plan. I will address the issues which I feel make confirmation of the debtor's second amended plan untenable in a narrative fashion. These issues are not listed in order of their importance, but attempt to follow the debtor's plan, provision by provision.

Local Bankruptcy Rule 65(a)(1) provides:

Unless otherwise ordered by the court, the chapter 13 plan shall conform to AK LBF 5 and shall contain the plan analysis and liquidation analysis attached to AK LBF 5.

The debtor has not filed a motion to submit a non-conforming plan. Therefore, the second amended plan is in violation of AK LBR 65(a)(1). Additionally, the second amended plan does not contain the plan analysis required by the local bankruptcy forms. The plan analysis is very significant. It illustrates exactly what will occur with funds deposited pursuant to the plan. The absence of a plan analysis makes a finding of feasibility difficult.

The liquidation analysis submitted by the debtor does not conform to the liquidation analysis set forth in AK LBF 5. First, it doesn't contain the value of property recoverable under a Chapter 7 trustee's avoiding powers. Second, it incorrectly states that liquidation of the Crazy Loon Saloon would result in a $38,203.01 deficiency to unsecured creditors. Liquidation of the Crazy Loon Saloon realty for less than the amount of outstanding liens would not decrease the amount of unencumbered funds available to unsecured creditors. It was inappropriate to take a $38,203.01 deduction for losses on the sale of real property in the liquidation analysis. The appropriate entry would be zero, as the estate would receive no funds upon liquidation. Finally, the debtor's liquidation analysis fails to show the dividend for scheduled unsecured creditors under chapter 7 and a dividend for scheduled unsecured creditors under the plan, as required by local rule.

Paragraph I.A. of the plan deals with funding the plan through contributions of "net income" from the Crazy Loon Saloon. There is no way a court can find a "net income" plan feasible or practicable without mandatory minimum payments sufficient to satisfy the confirmation requirements of the Code. Proposed minimum payments must be justified by the debtor's operating history. I can not approve an open-ended plan with no minimum payments. It is impossible to monitor for compliance purposes. I suggest that the plan be modified to provide for definitive payments and that any "net income" provision be modified or eliminated.

It appears that the debtor and Thomas Kouremetis have agreed upon the treatment of Mr. Kouremetis's claim. The claim appears to be fully secured. The plan calls for a balloon payment on April 1, 1999. The debtor must demonstrate the feasibility of such a balloon payment. It does not appear that such a balloon payment can be generated through operations. The debtor states at page 3 of the plan: "Upon documentation       4 ABR 139  of charges, the reasonable, documented costs and attorney's fees of the secured creditor in his nonjudicial foreclosure, in a total not to exceed $1,000 will be added to the category of accrued interest." I am not sure what this means. If Kouremetis has a secured claim, accrued attorney's fees and interest are part of that secured claim. 11 U.S.C. § 506. If the debtor and Kouremetis cannot agree on the proper amount of the secured claim, the amount of the secured claim must be litigated through objections to claims. An additional problem is that the plan's description of the Kouremetis claim does not state what the full amount of the secured claim is or will be as of the date of confirmation of the plan. The full amount of the secured claim, together with interest, must be paid over the life of the plan. If it can't be paid within five years, the debtor may have to convert this case to chapter 11 and attempt a longer amortization, or, if appropriate, reinstate the terms of the initial first deed of trust through curing of any arrearages and defaults through the Chapter 13 plan. Should the debtor and Kouremetis be unable to agree as to treatment under the plan, the debtor must come forward with cramdown evidence in accordance with 11 U.S.C. § 1325(a)(5)(B)(ii). The plan must provide that the holder of the secured claim retain its lien and "(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim. . ." The debtor must submit evidence of the market rate of interest and market term of the loan to support his treatment of secured claims.

The same is true with regard to Valerie Therrien's two notes. Assuming that they are fully secured, and Ms. Therrien agrees to her treatment under the plan, no cramdown evidence need be submitted. On the other hand, if there is any variance between the secured claim of Ms. Therrien in the sum of $53,271.47 and the debtor's proposed treatment under the plan, an objection to the claim of Ms. Therrien must be filed. Should Ms. Therrien accept the treatment of her claims under the plan, her written acceptance should be filed or the court will require evidence in accordance with 11 U.S.C. § 1325(a)(5)(B)(ii). The boxed information contained regarding the Therrien claims is interesting but difficult to follow in the context of allowance and payment of a secured claim in accordance with the Code. Statements like "past due payments will be       4 ABR 140  added to the end of the note, thereby extending the term" must be made more specific.

Similarly, with the Adam Wool note, if Wool accepts the plan as proposed, which apparently he does, his consent should be set forth in writing or cramdown evidence must be presented at confirmation.

With regard to the Swan Drilling note, no proof of claim has been filed. In the absence of the written consent of Swan Drilling to its treatment under the plan, the debtor must be prepared to present cramdown evidence under 11 U.S.C. § 1325(a)(5)(B)(ii).

Similarly, if Sears has agreed to the treatment of its secured claim provided in the second amended chapter 13 plan, Sears's acceptance of the plan should be stated affirmatively in a pleading filed of record. If not, cramdown evidence should be presented.

With regard to the claim of Suzanne Hall, Ms. Hall did not submit a claim within the time limits set forth in the initial notice to creditors. The nature of her security interest in the liquor license cannot be adjudicated in the context of a confirmation hearing. Any relief as to Hall must come in the form of either an adversary action to determine the nature of her secured status or in the form of an objection to claim, should Ms. Hall file a claim or should the debtor file a claim on her behalf. 11 U.S.C. § 501; Fed. R. Bankr. P. 3002, 3004, 3007.

The liquor license liens of Odom Company, Fairbanks Sand & Gravel, and Comco cannot be adjudicated in the chapter 13 confirmation process. Separate objections to claims have to be filed regarding each claim in order for the debtor to treat the claims as unsecured under the plan. The language "Confirmation of this Plan will cause those creditors to be treated as general, unsecured creditors under this Plan," is incorrect and the plan cannot determine these creditors' secured or unsecured status.

Again, with regard to paragraph 7(C) of the plan, Loftus Engineering Associates has submitted an unsecured non-priority claim in the sum of $12,179. Loftus is not seeking treatment as a secured creditor in this bankruptcy. Should the debtor regard Loftus' lien as invalid, however, and seek to have the cloud on his title removed, he may do so appropriately in an adversary proceeding. Confirmation of the plan will not have any effect on the validity or invalidity of the materialmens'       4 ABR 141  lien and will not act to clear title to the debtor's property.

Provision 9(C), (requiring that all payments to secured creditors be made through the trustee), could have a negative impact upon feasibility. When payments to all secured creditors are made through the trustee, they are subject to his 10% commission. In most chapter 13s, payments to major secured creditors are made directly by the debtor and payments to unsecured and priority creditors are made through the trustee. There are exceptions to the rules, and in cases of cramdowns, the trustee may require the payments be made through him.

Paragraph 9(B), found on page 7, contains several errors. First, the Fairbanks North Star Borough may not be a priority creditor. It has submitted a secured claim in the sum of $3,766.72. If the debtor seeks to object to the claim of Fairbanks North Star Borough as a secured claim he must do so through appropriate objections to the claim and not in the plan. Similarly, the claims of Robert Emmitt and Dorene Fitzgerald appear inappropriate under subsection (B), where they are listed at $3,500 each. Emmitt has submitted a claim for $2,000 as a priority claim, as has Fitzgerald. The discrepancy may arise because the priority allotted under 11 U.S.C. § 507(a)(3) has been increased from $2,000 to $4,000 under the Bankruptcy Reform Act of 1994. Emmitt and Fitzgerald may have been using outdated forms. They may need to file amended claims. In any event, the discrepancies must be rectified. The plan is not confirmable as submitted because the treatment of some creditors differs from their filed proofs of claim.

Page 8, paragraph C(2), must be deleted. It states:

The Debtor reserves the right to approach individual unsecured creditors, negotiate a discount for early payment, and, using funds not committed to the chapter 13 plan, pay those negotiated unsecured claim (sic) preferentially. As to each such negotiated settlement, acceptance of payment with funds outside the plan shall terminate the right of that creditor to receive further monies under the Plan.

This provision not only nullifies the basic tenant of bankruptcy, equality of distribution, but permits the debtor to circumvent the entire spirit and intent of the chapter 13 proceeding and violates 11 U.S.C. § 1325(a)(3). Additionally, the provision will make it impossible for the       4 ABR 142  Trustee to administer the case. Should the debtor proceed under this provision, he would compromise the confirmation order and possibly commit a felony under the Bankruptcy crime statutes. This type of provision is inappropriate in any chapter 13 plan.

Conclusion

There are several problems with this chapter 13 plan. The court suggests that the debtor first determine either through litigation or, as appropriate, settlement negotiations, the amount and character (secured or unsecured) of all contested or disputed claims. After those claims have been determined, a third amended chapter 13 plan which follows the local rules and forms should be filed and brought before the court for confirmation. In instances where the debtor intends to cramdown secured creditors, the debtor should indicate in the plan the amount of the secured claim, the portion of the claim that may be unsecured under 11 U.S.C. § 506(b), and the treatment of the secured claim. The plan must specify the interest rate, the term and the payment amount for secured claims. It will be very difficult to determine the interest rate of secured claims when past due payments are added to the end of the term. This has a net effect of reducing the interest rate due to the time value of money. It needlessly complicates the cramdown process.

The court is mindful that secured creditors would like to receive payments immediately. Secured creditors have the right to file a motion for relief from stay at any time. However, in instances where creditors are adequately protected, e.g., where the delay in confirmation is not injuring them or jeopardizing their secured status, relief from stay will generally not be given. For instance, in the case of Thomas Kouremetis, if the value of the real property collateral is $260,000 and his secured claim is $111,000, and the property is insured, his interest appears to be adequately protected. Relief from stay would be inappropriate at this stage of the proceeding.

This may not be true of the holders of secondary security interests in the same real property. As interest accrues on the underlying collateral, they may be damaged if their interests are not adequately protected. Nothing contained in this order or in any prior proceeding before this court prevents any creditor from moving for relief from stay       4 ABR 143  or for dismissal or conversion of this case at any time.

For the foregoing reasons, IT IS ORDERED:

1. The debtor's second amended chapter 13 plan is denied confirmation.

2. The debtor will be given until JUNE 30, 1995 within which to file and notice hearings for all objections to claims in conjunction with the case as well as any motions for valuation of collateral pursuant to Rule 3012, Fed. R. Bankr. P.

3. The debtor is given leave to file an amended plan no later than seven days following court determination of the validity of all objected claims and the merits of any motions for valuation. The failure of the debtor to follow this procedure may constitute grounds for dismissal or conversion of the case.

Attached to this order are copies of relevant local bankruptcy rules and forms as well as selected pages from In re McKay, 14 M.B.R. 296, 304-307, (Bankr. D. Mont 1995) which detail the claim problems I've mentioned in the context of a Chapter 11 reorganization. The same considerations apply to Chapter 13 confirmations.

DATED: June 23, 1995.

BY THE COURT
DONALD MacDONALD IV
United States Bankruptcy Judge