Summary of a Recent
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Bankruptcy

Creditor Bound by Confirmed Chapter 12 Plan

Harrison M. Pittman
Staff Attorney

The United States Bankruptcy Court for the Northern District of Iowa has ruled that a creditor who failed to object to the amount of the allowed secured claims provided in two confirmed Chapter 12 bankruptcy plans was bound by the plans' provisions, even if the plans' treatment of the creditor's claims was not otherwise proper. In re Schellhorn, Bankruptcy Nos. 87-00424, 87-00425, Adversary Nos. 01- 9005, 01-9006, 2002 WL 1461897 (Bankr. N.D. Iowa 2002)).

Duane and Nina Schellhorn and Twin River Farms, Inc., filed separate Chapter 12 bankruptcy petitions on February 20, 1987 ("Schellhorn plan" and "Twin River plan," respectively). See id. at *1. Farmers Savings Bank ("Bank") was a secured creditor in both bankruptcy cases. See id. In the Schellhorn case the bank was secured by liens in real estate, personal vehicles, and farm supplies. See id. In the Twin River case the bank was secured by a lien on machinery and crops. See id.

The Schellhorns' bankruptcy plan stated that the amount of the bank's claim was $274,945.00 and that the amount allowed was $85,000.00. See id. The plan provided for a thirty-year term of payment with an annual payment of $8,197.00. See id. The amount of the bank's claim in the Twin River bankruptcy plan was $170,326.00 and the amount allowed was $69,050.00. See id. The plan provided for a twelve-year term of payment with an annual payment of $9,212.73. See id. In both plans a ten percent rate of interest accrued from February 20, 1987, the date the petitions were filed. See id. Twin River completed its twelve years of $9,212.73 annual payments in 2000. See id. The Schellhorns had paid all of their annual payments of $8,197.00. See id.

Twin River's confirmed plan stated that the "'[d]ebtors shall have the right to prepay any amounts owed herein without penalty; upon payment of its claim in full, any liens by a particular creditor shall be released.'" Id. (quoting In re Twin River Farms, Inc., No. 87-00425W, Debtor's Second Amended Chapter 12 Plan at 13 (Bankr. N.D. Iowa October 5, 1988)). The Schellhorns' confirmed plan stated that "'[d]ebtors reserve the right to pre-pay any debts owed hereunder at any time without penalty; in the event that Debtors pre-pay the balance of any debt owed to a secured creditor, all liens on any collateral shall be released at that time.'" Id. (quoting In re Schellhorn, No. 87-00424W, Debtor's Second Amended Chapter 12 Plan at 11-12 (Bankr. N.D. Iowa October 5, 1988)).

The bank argued that Twin River owed $40,284.48 plus ten percent interest from the last payment date, and that the Schellhorns owed a current balance of approximately $119,000.00, rather than the $85,000.00 amount allowed in the confirmed plan. See id. The bank contended that these amounts had to be paid before it could release its liens. See id. at *2. The bank also argued that the prepayment provisions in the separate plans "recognize that the annual plan payments do not completely amortize the debts." Id. The bank claimed that its intention was to have the debtors make the additional payments plus ten percent interest in order to satisfy the entire amount of the allowed claims. See id.

The debtors claimed that they were unaware that the plans failed to amortize the debt in full when the separate plans were confirmed. See id. They argued, however, that as long as the scheduled payments were properly made according to the terms of the confirmed bankruptcy plans, then the debts were paid in full and the bank's liens should be released. See id.

The bankruptcy court ruled that the bank was bound by the provisions of the Chapter 12 plans which were confirmed in October 1988. See id. at *6. The bankruptcy court explained that "[a]s a general rule, failure to raise an objection at confirmation, or on appeal from a confirmation order, precludes an attack on the plan or on any provision of the plan as illegal in a subsequent proceeding." Id. at *4 (citing Adair v. Sherman, 230 F.3d 890, 894 (7th Cir. 2000)). The court added that both the debtor and the creditor are bound by the provisions of a Chapter 12 plan. See id. (citing First Nat'l Bank v. Allen, 118 F.3d 1289, 1294 (8th Cir. 1997)). The court noted that creditors are "precluded from seeking relief from Chapter 12 confirmed plans where they subsequently realize the plan fails to properly treat their claims." Id. (citing In re Matunas, 261 B.R. 129, 131 (Bankr. D.N.H. 2001) (and citing In re Courson, 242 B.R. 288, 290 (Bankr. E.D. Tex. 1999)).

Finally, the court pointed out that a "confirmed plan is a binding contract and res judicata as to all issues decided." Id. (citing In re Laing, 31 F.3d 1050, 1051 (10th Cir. 1994) (and citing In re Commercial Millwright Serv. Corp., 245 B.R. 585, 592093 (Bankr. N.D. Iowa 1998) (considering Chapter 11 plan)). The court concluded that "[e]ven if the plans' treatment of the Bank's claims is not proper under the provisions of Chapter 12, the Bank is precluded from seeking different treatment now." Id. at *6.

This case summary was prepared in August, 2002.