First Nat. Bank v. Allen, 1996 DSD 22

FIRST NATIONAL BANK
and EUREKA STATE BANK,
Appellants,
v.
HERBERT WARREN ALLEN III
and DONNA MAE ALLEN,
Appellees.

United States District Court
District of South Dakota - Northern Division
Civ 95-1045

MEMORANDUM OPINION AND ORDER

Filed April 30, 1996

Richard L. Battey, District Judge

NATURE AND PROCEDURAL HISTORY

[¶1] This is a bankruptcy appeal filed by First National Bank of Eden and Eureka State Bank (Banks), {fn1} creditors of Herbert Warren Allen III {fn2} and Donna Allen (debtors). The Banks appeal the bankruptcy court's {fn3} decision of October 30, 1995, which held that the Banks were no longer unsecured or undersecured claimholders entitled to receive disposable income payments under debtors' amended Chapter 12 plan. The bankruptcy clerk has transmitted to this Court the record on appeal.

STANDARD OF REVIEW

[¶2] This Court has jurisdiction over this appeal under 28 USC 158(a). This Court must review the bankruptcy court's legal conclusions de novo, and its findings of fact under the clearly erroneous standard providing due regard to the opportunity of the bankruptcy court to judge witness credibility. Fed. R. Bankr. P. 8013. See also In re Miller, 16 F3d 240, 242-43 (citations omitted).

FACTS

[¶3] On February 19, 1987, debtors filed a petition for relief under Chapter 12 of the Bankruptcy Code. Schedule A-2 indicated obligations to First National Bank of Eden in the amount of $66,247.87, plus interest, and to Eureka State Bank in the amount of $285,022.64, plus interest. {fn4} The debt owed to the Banks was secured by real estate mortgages on approximately 1129 acres of farmland.

[¶4] On May 19, 1987, debtors filed their first Chapter 12 plan of reorganization. Debtors proposed to pay the Banks $99,140 over a period of 35 years with interest at 9.25 percent for an annual payment of $9,872.16. According to Schedule B of the plan, the Banks held an undersecured claim for the amount of $185,887.64. Schedule B also listed Richard Bjerk as a holder of an unsecured claim for the amount of $60,000 and Hoysler Associates as a holder of an unsecured claim for the amount of $1,400. The Banks objected to conformation of the proposed plan on the basis that the plan did not provide that all of debtors' projected disposable income was required to be applied to payments under the plan.

[¶5] On October 20, 1987, debtors filed an amended Chapter 12 plan. The designation of classes of claims section of the amended plan listed the combined value of the Banks' secured interest to be $130,410, which according to debtors left the Banks with a substantial undersecured debt of approximately $154,612. Furthermore, the undersecured portion of the treatment of claims section made no mention of any undersecured claim on the part of First National Bank of Eden. The secured portion of the treatment of claims section of the amended plan did provide that First National Bank of Eden held a secured claim for the amount of $31,270, which was to be paid over a 10-year period with interest at 10.5 percent. The treatment of claims section also recognized that Eureka State Bank was a holder of both secured and undersecured claims; however, because debtors and the bank were unable to reach an agreement on the value of the bank's collateral, the plan provided that the value of the claims would be included in a supplemental plan.

[¶6] On November 20, 1987, the bankruptcy court entered an order confirming the amended Chapter 12 plan. The order provided that each holder of a secured claim had accepted the amended plan except for Eureka State Bank. The amended plan was confirmed as to that creditor provided that the debtors and Eureka State Bank reached an agreement as to the value of its secured and undersecured claims. The Banks did not appeal the confirmation order. On October 25, 1988, debtors and Eureka State Bank stipulated that the value of the bank's secured claim was $125,000. Neither the stipulation nor the bankruptcy court's order of December 27, 1988, approving the stipulation made reference to any unsecured or undersecured claim of Eureka State Bank.

[¶7] On February 17, 1990, debtor Herbert Warren Allen III inherited approximately 3156 acres of land from his mother's estate. On September 18, 1993, the Chapter 12 trustee moved the bankruptcy court for an order removing debtors as debtors-in-possession based upon a delay in the probate process which precluded the trustee from determining the existence or availability of net disposable income. An evidentiary hearing on objections to debtors' discharge and the trustee's motion for removal of the debtors as debtors-in-possession was held on August 23, 1994. At the hearing, debtors' counsel provided the following testimony concerning the negotiations with Eureka State Bank:

Q: (By Curt R. Ewinger) Phil, Herb [Allen] testified something about the fact that his real estate was valued at like fifty-nine or sixty thousand dollars but he ended up paying and treating the Eureka Bank as a secured creditor to the extent of a hundred and twenty-five thousand dollars. Do you know why that came about?

A: (By Philip Morgan) Well, I'm not positive at this stage but my recollection is that we had a conditional affirmation, confirmation and the land was -- was the difficult part. So Herb -- Mr. and Mrs. Allen and I with Carlyle Richards' acquiescence -- he being the attorney for the bank -- went over to the bank and talked to some people over there and worked out -- we worked out a compromise with them, as I recall.

See Bankruptcy Docket #175 at 41.

[¶8] On January 13, 1995, the bankruptcy court entered its memorandum opinion and order denying the trustee's motion to remove debtors, setting deadlines for debtors to file amended schedules, and directing the trustee or unsecured creditors to file a motion to modify the plan. The memorandum opinion set forth debtors' September 1, 1994, financial statement which listed unsecured claims under the plan to be in the amount of $154,612. (See Bankruptcy Docket #149 at 3). The bankruptcy court went on to conclude that

In their September 1, 1994 financial statement, Debtors have overstated the amount of unsecured claims to be paid under their plan. As noted above, in a stipulation approved after confirmation of Debtors' plan, Eureka State Bank was not given any under or unsecured claim. Instead, the stipulation and testimony of Debtors' bankruptcy counsel, Philip Morgan, indicates the Bank received a higher secured claim in exchange for not being included in the class of unsecured claim holders. Thus, the only unsecured plan creditors are Richard Bjerk and Hoysler Associates, whose claims total $61,637.84.

Id. at 4, 5. In essence, the bankruptcy court found that the stipulation merged Eureka State Bank's secured and undersecured claims resulting in a greater secured claim. However, the January 13, 1995, decision did not address whether First National Bank of Eden retained an undersecured claim. The Banks did not appear at the August 23, 1994, evidentiary hearing, nor did they make an objection to the entry of the bankruptcy court's order.

[¶9] On January 31, 1995, debtors moved to amend Schedule A of their petition to include the inherited real estate. The Chapter 12 trustee moved to modify debtors' plan to include the inherited property. The modification further provided for payment to only two unsecured creditors, namely Richard Bjerk in the amount of $60,000 and Hoysler Associates in the amount of $1,637. On June 28, 1995, the Banks objected to the trustee's motion to modify, asserting that the plan should be modified and amended to recognize their undersecured claims. On July 25, 1995, the Banks moved the bankruptcy court for an order requiring the amendment of debtors' plan to recognize the Banks' undersecured claim in a modified plan. On August 28, 1995, the bankruptcy court held a hearing on the trustee's motion to modify the plan, the Banks' objections to the trustee's motion to modify, and the Banks' motion to determine the undersecured status of the Banks' claims.

[¶10] On October 30, 1995, the bankruptcy court filed its memorandum decision and order denying the Banks' motions to determine their undersecured claims. The bankruptcy court based its determination on five main points. First, the treatment of claims section of debtors' amended Chapter 12 plan did not recognize that the First National Bank of Eden was a holder of an undersecured claim. Second, that although the amended plan recognized that the Eureka State Bank was a holder of both secured and undersecured claims, the stipulation entered into between debtors and the Eureka State Bank did not mention unsecured or undersecured claims. Third, both Banks failed to appeal from the orders of confirmation. Fourth, a finding that the Banks retained undisclosed, unsecured claims would greatly prejudice debtors and the unsecured claimholders Richard Bjerk and Hoysler Associates. As a final point, the bankruptcy court did note that the Banks' failure to appear at the August 23, 1994, hearing on the motion to remove debtors as debtors-in-possession and the Eureka State Bank's failure to appeal the January 13, 1995, bankruptcy court's finding that the stipulation merged Eureka State Bank's secured and undersecured claims resulting in a greater secured claim did not aid in the Banks' current position. The Banks have appealed the bankruptcy court's determination contending that the above reasons are insufficient to bar the recognition of their unsecured or undersecured claims.

DECISION

A. FIRST NATIONAL BANK OF EDEN

[¶11] The bankruptcy court based its determination that the First National Bank of Eden was no longer an unsecured or undersecured claimholder entitled to receive disposable income payments under debtors' amended Chapter 12 plan largely upon its finding that the treatment of claims section of debtors' amended Chapter 12 plan did not recognize that the First National Bank of Eden was a holder of an undersecured claim. An examination of the amended Chapter 12 plan demonstrates that the bankruptcy court was correct in its assessment. (See Bankruptcy Docket #28).

[¶12] The designation of classes of claims section of the amended plan listed the combined value of the Banks' secured interest to be $130,410, which according to debtors left the Banks with a substantial undersecured debt of approximately $154,612. Interestingly, the $154,612 figure arrived at by the debtors represents an amount equal to the undersecured portion of the Eureka State Bank's original $285,022.64 claim. Any undersecured claim of First Bank of Eden is not encompassed by this figure. While the secured portion of the treatment of claims section of the amended plan did provide that First National Bank of Eden held a secured claim for the amount of $31,270, the undersecured portion of the treatment of claims section made no mention of any undersecured claim on the part of First National Bank of Eden. The bank should have objected to the November 20, 1987, order confirming the amended Chapter 12 plan if its position was that it retained an allowable undersecured claim. The provisions of the confirmed plan bind First Bank of Eden whether or not its undersecured claim is provided for by the plan. See 11 USC 1227(a). It is true that a holder of an allowed unsecured claim may request modification of a plan after confirmation. Id. at 1229. However, by the terms of the confirmed amended Chapter 12 plan, First National Bank of Eden does not hold an allowable unsecured claim.

[¶13] Accordingly, the First National Bank of Eden is not an unsecured or undersecured claimholder entitled to receive disposable income payments under debtors' amended Chapter 12 plan.

B. EUREKA STATE BANK

[¶14] In both its January 13, 1995 and October 30, 1995 decisions the bankruptcy court determined that the stipulation merged Eureka State Bank's secured and undersecured claims resulting in a greater secured claim. The bankruptcy court based this factual determination on its review of the amended plan, the stipulation, and testimony provided by debtor's counsel, Philip Morgan. Applying the appropriate standard of review, this Court concludes that the bankruptcy court's finding of fact was not clearly erroneous. Fed. R. Bankr. P. 8013. See also In re Miller, 16 F3d at 242-43.

[¶15] The treatment of claims section of the amended Chapter 12 plan did recognize that Eureka State Bank was a holder of both secured and undersecured claims; however, because debtors and the bank were unable to reach an agreement on the value of the bank's collateral, the plan provided that the value of the claims would be included in a supplemental plan. The debtors and Eureka State Bank then entered into a stipulation which set the value of Eureka State Bank's secured claim at $125,000. The stipulation resulted in a combined secured claim for the Banks of an amount in excess of $150,000, wherein the original plan of reorganization proposed to pay the Banks only $99,140. The bankruptcy court's finding that counsel Philip Morgan's testimony at the August 23, 1994 evidentiary hearing further evidenced that the Eureka State Bank received a higher secured claim in exchange for not being included in the class of unsecured claim holders was not clearly erroneous especially in light of counsel's mention of a "compromise." See Fed. R. Bankr. P. 8013 ("due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witness.").

[¶16] Based on the foregoing, the Eureka State Bank of Eden is not an unsecured or undersecured claimholder entitled to receive disposable income payments under debtors' amended Chapter 12 plan. Accordingly, it is hereby

ORDERED that the bankruptcy court's order of October 30, 1995, denying the Banks' motions to determine their undersecured claims is affirmed.

Footnotes

fn1. Eureka State Bank and First National Bank of Eden are both owned by Great Plains Bank Corporation, a bank holding company.

fn2. Debtor Herbert Warren Allen III passed away on January 27, 1995.

fn3. The Honorable Irvin N. Hoyt, Chief Bankruptcy Judge, US Bankruptcy Court for the District of South Dakota.

fn4. The actual proof of claim filed by First National Bank of Eden on April 6, 1987, was in the amount of $77,554.41. Eureka State Bank's proof of claim filed after April 10, 1987, was in the amount of $321,567.18.