Plan Requirements: What Can You Do When a Party Fails To Comply With a Plan? – Good Question

In re Fierke, 567 B.R. 322 (Bankr. W.D. Mich. 2017)

A chapter 13 debtor requested sanctions against a creditor for a delay in releasing its lien on the debtor’s manufactured home as required under the debtor’s confirmed plan. After completing the payments required under the plan, the debtor had asked the lender to release its lien as required under the plan and applicable state law. The lender failed to act in a timely manner despite more than one request from debtor’s counsel.

Under the plan, the lender was entitled to receive ~$15,000 for its secured claim, and was required to release its lien on the earlier of (1) payment of the debt under non-bankruptcy law and (2) the debtor’s receipt of the discharge. In particular, the lender was obligated to release its lien and provide documentation of the release within 30 days after entry of an order of discharge.

As background, the debtor intended to sell his manufactured home immediately after conclusion of the chapter 13 case and had scheduled the closing for March 15. Under the plan, the deadline for release based on the debtor’s discharge was February 23. The debtor’s counsel contacted the lender to arrange for the release both before the February 23 deadline and again on February 27. When the lender failed to respond, on March 7 the debtor’s counsel filed a motion for sanctions consisting of $435 (allegedly for additional rent incurred as a result of the delay) and $500 (attorney fees). Three days later the lender finally released its lien.

As authority for the motion, the debtor cited section 105(a) of the Bankruptcy Code, which authorizes a court to issue “any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” In particular, the debtor relied on a court’s inherent power to issue sanctions for failing to comply with the terms of a confirmed plan.

Unfortunately for the debtor, the court denied his motion. The court advised that it did not regard section 105 as “a license to right all wrongs, preferring instead to tether relief to more specific provisions in the Bankruptcy Code or Rules, or applicable non-bankruptcy law.” Further its “inherent powers must be exercised with restraint and discretion.” It also noted that the “American Rule,” which generally requires a party to bear its own attorney fees, is applicable in bankruptcy.

The court acknowledged that under limited circumstances it might shift fees as a sanction, but only where a party acts “in bad faith, vexatiously, wantonly, or for oppressive reasons.” Here the explanation offered by lender’s counsel was:

[The lender], which presumably operates in a number of districts, was slow to perceive and adjust to the idiosyncratic lien release requirements included within our District’s model chapter 13 plan. The response may seem sluggish, ill-advised, or even incompetent, but it does not smack of bad faith. Repeated delays, if called to the court’s attention, might have suggested a pattern tending towards misconduct, but the record does not support such a finding.

As a side note, the court commented that a more recent version of the District’s model chapter 13 plan provides that a debtor may move for an order declaring a lien released if the holder refuses to do so when required. The court felt that for future cases this relief was more closely tailored to problems of the type identified in the motion. However, in this case the court was unwilling to grant the relief requested without a showing of bad faith or a pattern of misconduct.

This result is not very satisfying. What is so idiosyncratic or hard to understand about a requirement that a lien be released within 30 days after a discharge order is entered? Even without bad faith there ought to be consequences if a party fails to comply with unambiguous terms of a confirmed plan – particularly when it has been reminded of its obligations in advance of the deadline for performance.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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