Summary of a Recent
Judicial Development in
Bankruptcy

Chapter 12 Debtor's Confirmed Plan Vacated

Lynn Cox
National AgLaw Center Research Assistant

In an action brought by a creditor seeking to have vacated a debtor's confirmed Chapter 12 bankruptcy plan, the United States Bankruptcy Court for the Central District of Illinois has ruled that the debtor's confirmed plan should be vacated even though the creditor failed to appear and object to the debtor's plan at the confirmation hearing. In re Hunt, 293 B.R. 191, 198 (Bankr. C. D. Ill. 2003).

Debtor, Douglas Hunt, filed a Chapter 12 bankruptcy petition on April 16, 2002. See id. at 193. Hunt filed his first proposed Chapter 12 plan on July 9, 2002. See id. Heartland Ag, Inc. ("Heartland"), a creditor that held a secured interest in the Hunt's real property, objected to the plan because "as a third mortgagee it felt the . . . property was undervalued." Id. In a letter dated August 30, 2002, Heartland and Hunt agreed to a proposed valuation of the secured property and agreed that Heartland would receive the full $68,966.74 value of its secured claim in addition to costs and attorney's fees. See id. The parties also agreed that the plan would be amended to reflect repayment of the $68,966.74 owed with interest at eight percent per year over a period of twenty years. See id. On October 8, 2002, Hunt filed an amended bankruptcy plan. See id.

On October 8, 2002, Heartland received a proposed order confirming Hunt's Chapter 12 proposed amended plan. See id. Under the proposed plan, Heartland would receive its first payment on January 1, 2003. See id. The proposal contained the provisions that Heartland and Hunt agreed to in the August 30, 2002, letter. See id. The bankruptcy court ultimately did not confirm Hunt's October 8, 2002, amended plan and ordered Hunt to submit a second amended plan. See id. The court instructed Hunt to include certain provisions in the second amended plan, none of which involved Heartland's claims. See id.

Heartland did not receive a copy of Hunt's second amended plan prior to the confirmation hearing, although it was notified of the hearing. See id. Heartland believed that the agreement between Heartland and Hunt was accurately reflected in the October 8, 2002, proposed amended plan "and not anticipating this agreement would be modified by the second amended plan, . . . did not appear at the final confirmation hearing for the second amended plan." Id. The second amended plan was confirmed by the bankruptcy court on October 29, 2002. On November 4, 2002, notice of the confirmed plan was served upon the creditors, including Heartland. See id.

Upon reviewing the confirmed plan, Heartland discovered that it contained all of the provisions of the agreement between Heartland and Hunt except for the requirement that the first payment date would occur on January 1, 2003. See id. The confirmed plan provided that the first payment would occur on January 15, 2004. See id. On November 22, 2002, Heartland requested that Hunt change the first payment date to January 1, 2003, to reflect what Heartland believed was the agreed-upon date in the proposed order received on October 8, 2002. See id. Hunt declined to make this change. See id.

Heartland filed a motion with the bankruptcy court seeking to vacate Hunt's confirmed bankruptcy plan. See id. Hunt objected, arguing that "the confirmed second amended plan conformed to their agreement and Heartland had waived any right to object to the confirmed second amended plan through its failure to appear at the confirmation hearing." Id.

The court explained that the general rule is that an order confirming a bankruptcy plan is binding on both creditors and debtors and that "the Seventh Circuit has long recognized the sanctity of confirmation orders." Id. at 194. Recognizing that there are several exceptions to this general rule, the court explained that Bank. R. 9024, which incorporates Fed. R. Civ. P. 60, authorizes relief from a final order or judgment on specified grounds. See id. It further explained that the plain language of these rules "establishes that a court may relieve a party from a final judgment or order upon the filing of a motion without initiating an adversary proceeding" and that "when a moving party fails to specify the rule under which it makes a post judgment motion, the characterization is left up to the court." Id. The court stated that Heartland's motion was not specific but characterized the motion as one under Fed. R. Civ. P. 60(b) for relief from judgment pursuant to Bank. R. 9024. See id.

Fed. R. Civ. P. 60(b) provides that

[o]n motion and upon such terms as are just, the court may relieve a party or a party's legal representative from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect . . . or (6) any other reason justifying relief from the operation of the judgment.

Id. (quoting Fed. R. Civ. P. 60(b)).

The court stated that Heartland's claim "could fall within Fed. R. Civ. P. 60(b)(1) as surprise or excusable neglect, or under the catch all provision of Fed. R. Civ. P. 60(b)(6)." Id. It noted that relief under Fed. R. Civ. P. 60(b)(6) could only be addressed if the grounds for relief did not fit under any of the other provision of Fed. R. Civ. P. 60(b). See id. It explained that a motion under Fed. R. Civ. P. 60(b) "must be equitably and liberally construed to achieve substantial justice." Id. It also explained that "a petitioner only warrants relief under Rule 60(b)(1) when he demonstrates that a mistake is attributable to special circumstances and not simply an erroneous legal ruling." Id. at 195. The court added that "in situations in which the failure to comply with a court order is attributable to negligence on the part of the movant, the 'excusable neglect' standard is appropriate." Id. It noted, however, that the Seventh Circuit "has specifically held that neither ignorance or carelessness on the part of a litigant or an attorney will be grounds for relief under Rule 60(b)." Id. (citations omitted).

The court explained that the determination of whether the neglect was excusable required "an equitable determination taking into account all relevant circumstances of the petitioner." Id. (citing Pioneer Inv. Serv. Co. v. Brunswick Assoc. Ltd. P'ship, 507 U.S. 380 (1993)). In Pioneer, the United States Supreme Court explained that when determining whether neglect is excusable the relevant factors to be analyzed include "(1) the danger of prejudice to the debtor, (2) the length of the delay and its potential impact on judicial proceedings, (3) the reason for the delay, including whether it was within the reasonable control of the movant, and (4) whether the movant acted in good faith." Id. (citing Pioneer, 507 U.S. at 380).

After considering the Pioneer factors, the court determined that Heartland's failure to object "amount[ed] to excusable neglect, if negligence at all, and justifie[d] relief from the Court's previous order confirming Hunt's second amended plan." Id. It stated that relief from the order confirming the second amended plan would cause Hunt very little, if any, prejudice and noted that the confirmed second amended plan did not appear to be mathematically sound. See id. It stated that

Hunt's counsel lists payments of $1,144.02, $113.00, $15,177.38, and $7,590.03 to the trustee, GMAC Mortgage Corp., Farm Service Agency, and Heartland Ag., Inc., respectively. According to Hunt's counsel, this results in a payment total of $22,880.41, when, if added correctly, this amounts to a payment total of $24,024.43. Error of addition is not the only problem with this section of Hunt's second amended plan. The $113.00 Hunt's counsel lists as payment to GMAC is actually what GMAC is owed on a monthly basis; the payments for all of the other secured creditors is determined on a yearly basis. Therefore, the payment to GMAC should also be calculated on a yearly basis, amounting to an actual figure of $1,356.00, and leaving a total annual payment of $25,267.43., after corrections are made for both the proper amount of GMAC's payment and the mathematical error. The problem does not stop here, however, as Hunt's counsel also miscalculated Hunt's expenses as $94,068.00 when Hunt's actual listed expenses only add up to $84,068.00.

Id. at 195-96.

It also stated that in addition to the mathematical errors in the bankruptcy plan, there was little difference between the October 8th and October 29th bankruptcy plans. See id. at 196. The court determined that "[b]ecause the two plans are so amazingly similar, the Court can discern no real reason why it would prejudice Hunt to begin payments to Heartland on January 1, 2003, the date all other secured creditors are paid and as originally provided in the October 8th amended plan." Id.

The court also determined that by vacating the order there would be little adverse impact on the judicial proceedings. See id. It stated that

[a]t most there has been only one . . . payment each to the Trustee and Farm Service Agency and a maximum of four . . . relatively small monthly payments to GMAC totaling $452.00. Unsecured and undersecured creditors are not due to receive their first payment until 2004. None of these obligations would be affected by vacating the order confirming the October 29th second amended plan.

Id. at 196-97.

The court further determined that the delay caused by the filing of Heartland's motion was insignificant. See id. at 197. It noted that Heartland notified Hunt three weeks after receiving a copy of the confirmed second amended plan and more than a month before any payments were to begin under the second amended plan of what Heartland believed to be an incorrect date for the first payment. See id. It also noted that Heartland brought the motion on December 19, 2002, after Hunt informed Heartland that the January 15, 2004, payment date was intentional and would not be voluntarily corrected. See id. It concluded that any delay caused by Heartland's filing of its motion to vacate was reasonable, "especially in light of Heartland's reasonably held belief that the date its payments were to begun would not change from the October 8th proposed amended plan, and the reasonable assumption upon finding the change that is was nothing more than a clerical error amenable to quick and easy correction." Id.

The court acknowledged that "it is a creditor's responsibility to ensure proper treatment of its claims in a debtor's plan, which would include making any relevant objections at a plan's confirmation hearing." Id. It concluded, however, that "[w]hile it was technically negligent for Heartland not to ensure the treatment of its claim was unchanged, Heartland had no reason to believe its claim would be altered, especially considering Hunt's counsel never bothered to serve Heartland's counsel with a copy of the October 29th second amended plan." Id.

The case was decided on Apr. 15, 2003; this summary was posted Nov. 10, 2003.