Rochelle's Daily Wire

Unlike the majority of courts, the Sixth Circuit doesn’t permit a chapter 13 debtor to surrender collateral, modify a confirmed plan and classify the deficiency as an unsecured claim.

Bound by Sixth Circuit precedent, Bankruptcy Judge Nancy B. King of Nashville, Tenn., devised a partial workaround in her June 24 opinion. She allowed the debtors to surrender the car while paying the remainder of the secured claim without interest. In other words, surrendering the car after confirmation allowed the debtor to avoid paying interest, despite still being required to pay the depreciated value of the car in full.

The Old Car

The debtors filed a chapter 13 plan in 2023 and confirmed a plan. Their ten-year-old car had an agreed value of almost $14,000. The plan treated the car loan as fully secured with interest payable under the plan at 10.5%.

The debtors had acquired the car within 910 days of filing, precluding them from bifurcating the auto loan under the hanging paragraph following Section 1325(a)(9).

After confirmation, the car had mechanical problems, and the debtor had financial difficulties. The debtors moved to modify the confirmed plan by surrendering the car and paying the $10,000 remaining agreed value of the car, but without interest.

The lender objected, contending that the debtor must continue paying interest under authority of two Sixth Circuit decisions, Chrysler Fin. Corp. v. Nolan (In re Nolan), 232 F.3d 528 (6th Cir. 2000), and Ruskin v. DaimlerChrysler Servs. N. Am. (In re Adkins), 425 F.3d 296 (6th Cir. 2005).

Nolan and Adkins

Judge King quoted Nolan as holding that a chapter 13

“debtor cannot modify a plan under section 1329(a) by: (1) surrendering the collateral to a creditor; (2) having the creditor sell the collateral and apply the proceeds toward the claim, and (3) having any deficiency classified as an unsecured claim.” 232 F.3d 528, 535 (citation omitted) (emphasis added).

Judge King described the Sixth Circuit in Nolan as having focused “on debtors manipulating the system by using the collateral post-confirmation until all the value has been wrung out of it, then surrendering the collateral and modifying the plan to reduce the payment to the secured creditor.”

Judge King went on to say that the circuit in Adkins “doubled down on the holding in Nolan” by “extend[ing] the holding to include not just voluntary surrender, but also the more prevalent circumstance of debtors seeking to modify the treatment of a secured creditor who has obtained relief from the automatic stay and foreclosed.”

“The majority of courts outside the Sixth Circuit have found Nolan and Adkins unduly restrictive,” Judge King said. She quoted Bankruptcy Judges David D. Cleary and William R. Sawyer as having said that the decisions were “simply wrong.” She quoted Judge Sawyer as saying that “the Sixth Circuit erected several artificial restrictions on post confirmation plan modification.” In re Scarver, 555 B.R. 822, 833-834 (M.D. Ala. 2016).

Judge King described the “two main criticisms of Nolan and Adkins” as follows:

(1) The Sixth Circuit’s interpretation of 11 U.S.C. § 1329 is unnecessarily narrow and/or restrictive, and (2) Nolan and Adkins do not leave room for reconsideration of a claim under 11 U.S.C. § 502(j).

Quoting In re Disney, 386 B.R. 292, 304 (Bankr. D. Colo. 2008), Judge King said, “Most courts . . . point out that when 11 U.S.C. § 1329(a) ‘is read in context with claim reconsideration under § 502(j), it is apparent that § 1329(a) permits modifications to be made to a plan that reflect the reality of changed circumstances.’”

The Partial Workaround

Judge King said she was bound by Sixth Circuit precedent unless there “is a legitimate distinguishable basis to rule otherwise.”

Distinguishing the case before her, Judge King said that “the Debtors are not seeking to ‘reclassify’ [the lender’s] claim, not seeking to foist depreciated collateral values on [the lender], and not seeking to discharge the balance owed to [the lender].”

Instead, Judge King said that the debtors were “proposing to pay [the lender] the value of the claim determined at confirmation, albeit without additional post-surrender interest.” [Emphasis in original.] As a result, she said that the lender “bears no greater risk than any other Chapter 13 creditor who no longer has collateral to protect its claim.”

Consequently, Judge King said that the “concerns of Nolan and Adkins are not present under the facts of this case.”

Judge King found a “meaningful distinction.” Where Nolan focused on preventing a debtor from thrusting the economic burden on the lender, she said, “That policy concern does not arise when the debtor is paying the value of the claim as determined at confirmation, albeit without further interest.” She went on to say that “modification to surrender collateral is expressly authorized in 11 U.S.C. § 1329(a)(1) and (3)” and “nothing in Nolan nor Adkins holds to the contrary.”

Distinguishing the two circuit decisions, Judge King said that the “Debtors are not attempting to reclassify but are instead seeking only to modify the amount of the payment to take into account the surrender and sale of the collateral” and “are still paying the secured creditor the full value of its allowed claim as was set at confirmation, but without post-surrender interest.”

Judge King held that the proposed plan modification “fits squarely within 11 U.S.C. § 1329 and within the boundaries of what is permissible in the Sixth Circuit under Nolan and Adkins.” She overruled the objection and granted the motion to modify the plan.

Observations

A direct appeal would give the Sixth Circuit an opportunity to sit en banc and consider aligning the circuit’s authority with the majority of courts.

A decision by former Bankruptcy Judge Keith M. Lundin contrary to Nolan and Adkins is cited in Judge King’s decision. She also quotes and cites Judge Ludin’s treatise, LundinOnChapter13.com.

Judge Lundin provided the following commentary to ABI:

If Judge King’s decision goes up, it would offer the Sixth Circuit an opportunity to create a small space for chapter 13 debtors around its (mistaken) decisions in Nolan and Adkins. More than two decades of contrary decisions from other courts amply demonstrates that Nolan was misguided. As much as I wish for en banc correction of Nolan, Adkins signals that the Sixth Circuit will stubbornly stick to its lonesome path.