Summary of a Recent
Judicial
Development in
Bankruptcy
Proposed Plan Must Comply with Lien Retention
Requirement under Section 1225(a)(5)(B)
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In In re Huckell, No. 04-31716, 2006 Bankr. LEXIS 4033 (Bankr. D.N.D. Jan. 4, 2006), the United States Bankruptcy Court for the District of North Dakota held that a debtor had failed to prove that his plan complied with the lien retention requirement under section 1225(a)(5)(B).
Background
Debtors filed their Chapter 13 petition in September 2004, and converted their case to Chapter 12 and submitted their proposed Chapter 12 plan shortly thereafter. Id. at *1. The plan proposed to divide the 280-acre tract on which Farm Service Agency (FSA) held a first mortgage in an irregular manner and to sell parts of it for $70,000. Id. at *3. The plan provided that the Debtors would pay FSA $70,000 within 10 days following entry of an order confirming the sale, and upon receipt of the payment, "FSA shall release its lien in the 80 acres of land." Id. FSA objected to the plan. Id. at *2. A certified licensed appraiser had opined that the proposed sale would decrease the value of the remaining parcels approximately 40% because of their resulting odd shapes and accessibility problems. Id. at *3-4.
Arguments
FSA argued that the plan did not sufficiently provide for the retention of its lien under § 1225(a)(5)(B)(i). Id. at *5.
The Debtors argued that they could force FSA to accept a cash payment in exchange for the release of its lien on the 80 acres because the sale was for fair market value and FSA would remain fully secured after the sale. Id.
Analysis and Holdings
The court reviewed § 1225(a)(5)(B), which requires that when a secured creditor objects to the terms of the plan and the debtor is not surrendering the property to the creditor, the plan must satisfy two requirements: 1) under § 1225(a)(5)(B)(i), the plan must provide that the creditor "retain the lien securing such claim," and 2) under § 1225(a)(5)(B)(ii), the plan must provide that the secured creditor receive property having a present value not less than the allowed amount of the claim. Id. at *4-5. The court held that the Debtors had failed to prove they had satisfied § 1225(a)(5)(B) because the terms of the plan explicitly stated that "FSA shall release its lien in the 80 acres of land." Id. at *6. Although FSA would retain a lien in the Debtors' remaining property, it would not retain the lien that it held at that time because the extent and quality of its lien would be substantially compromised, and therefore the court denied confirmation. Id.
The case was decided on January 4, 2006.