Judge Karlin

08-40016 Steele (Doc. # 72) - Document Text

Case 08-40016 Doc# 72 Filed 04/07/09 Page 1 of 13

SIGNED this 07 day of April, 2009.


In re: )
UNA KAY COLON-STEELE, ) Case No. 08-40016
) Chapter 13
Debtors. )



This matter is before the Court on Debtors’ Motion to Modify Chapter 13 Plan Language.1
Debtors propose to modify their Chapter 13 plan to change the treatment of a mortgage on their
homestead. The parties have filed a Joint Stipulation of Facts,2 which the Court adopts, and have
also filed briefs. The Court has jurisdiction to decide this matter,3 and it is a core proceeding.4

1Doc. 29.

2Doc. 56.

328 U.S.C. § 1334.

428 U.S.C. § 157(b)(2)(L).

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The Court makes the following findings of fact in connection with this motion, based upon
the stipulations entered into between the parties,5 the record in this case, and facts the parties have
admitted within their pleadings. On January 9, 2008, Debtors filed their Chapter 13 bankruptcy
petition. At the time of filing, Debtors were approximately $2,500 delinquent on the note secured
by a real estate mortgage on their homestead located in Topeka, Kansas. Debtors listed this home
as exempt, pursuant to Kansas law, on Schedule C, and valued the house at $128,400 on Schedule

In their original Chapter 13 plan, which was confirmed in February 2007, Debtors proposed
to cure the arrearage owed to First Horizon Home Loans (“First Horizon”) over the life of the plan.
On January 29, 2008, First Horizon filed a secured proof of claim in the amount of $133,798.10.
At the time of the bankruptcy filing, First Horizon had not filed the mortgage with the Shawnee
County Register of Deeds.

On June 4, 2008, Debtors filed the current Motion to Modify Chapter 13 Plan Language. In
that motion, Debtors sought to add the following language to their Chapter 13 plan:
It appears the mortgage with First Horizon Home Loan aka First Tennessee Bank,

N.A. is imperfected (sic) as the mortgage was not filed as of the date of the filing of
the petition and as such my be avoidable by the Chapter 13 Trustee. Until that issue
is resolved Debtors will make their normal monthly house payment to the trustee.
The trustee will hold the money for distribution until the issue involving the
mortgage is resolved. If the lien is in fact unperfected as to the property known as Lot
9 Block F, Meadow View Subdivision in Shawnee County, Kansas, Commonly
known as 2840 SE Peck Road Topeka, Kansas, the debtors will pay the amount of
the monthly house payment of $1,170.58 per month to the trustee for a period
of 60 months in exchange for an Order by the trustee releasing any claims held by
the Chapter 13 Trustee and First Horizon Home Loan aka First Tennessee Bank,
5Doc. 56 filed February 6, 2009.

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N.A. as to this property. If the lien is found to be valid, the trustee will turn over the
monies held to First Horizon Home Loan and the Debtors will once again begin
making payments to this creditor.” (Emphasis added)
On June 10, 2008, First Horizon objected to the motion to modify,6 and on September 9, 2008, AIG
filed an objection to the motion, as well, purportedly on behalf of First Horizon.7 AIG is the insurer
for Alpha Title, which may be the title company used in the 2007 loan closing that resulted in the
mortgage not being recorded.

The Trustee also filed an objection to First Horizon’s proof of claim on June 20, 2008.8 That
objection was sustained on August 10, 2008, without objection by First Horizon. The order finds
that “Proof of Claim No. 3 filed herein by First Horizon Home Loans shall be disallowed as a

On February 13, 2009, the Trustee filed an Adversary Proceeding, pursuant to 11 U.S.C. §
544, against Defendants First Horizon and Midfirst Bank. Midfirst appears to be the present owner
and holder of the note and mortgage. Although those Defendants filed a Clerk’s Motion for Ten Day
Extension (and it was granted), neither Defendant filed an answer by the extended answer date,
March 30, 2009, and they are both now in default.

The parties all seem to agree that the mortgage on Debtors’ home can be avoided by the
Trustee pursuant to 11 U.S.C. § 544(a)(3), and that the mortgage is automatically preserved for the

6Doc. 29

7Doc. 40.

8Doc. 32.

9Doc. 35.


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benefit of the Chapter 13 estate pursuant to § 551. That’s where their agreement ends, however,
because both First Horizon and AIG contend there are several reasons the treatment of the mortgage
in the proposed plan is not allowed by the bankruptcy code.

Although the main issue for the Court is whether the proposed plan language is statutorily
permissible, the Court must address two preliminary matters before moving to the merits of the

A. Standing Issues
The first issue is the Trustee’s claim that neither First Horizon nor AIG, the only objecting
parties, have standing to object to the motion to modify this Chapter 13 plan.10 The Trustee claims
that AIG, as an insurer for First Horizon or someone in privity with it, is not a real party in interest
and lacks standing to object. The Court agrees.

Section 1324(a) provides that “[a] party in interest may object to confirmation of the plan.”
Although not specifically defined in the Bankruptcy Code, the phrase “party in interest” has been
interpreted to include “all persons whose pecuniary interests are directly affected by the bankruptcy
proceedings.”11 In general, “party in interest standing does not arise if a party seeks to assert some
right that is purely derivative of another party’s rights in the bankruptcy proceeding.”12

AIG is not a creditor of Debtors, is not the holder and owner of the note or mortgage, and is
thus not a real party in interest in this case. AIG’s pecuniary interests, as an insurer, are not “directly

10See Doc. 58, Trustee’s Motion to Strike Objections to Confirmation.

11In re Davis, 239 B.R. 573, 579 (10th Cir. BAP 1999) (emphasis added).

12In re Refco, 505 F.3d 109, 115 n.10 (2nd Cir. 2007).


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affected” by the bankruptcy proceedings—it is First Horizon whose interests are directly affected.
AIG could, at most, claim some sort of derivative interest in any distributions received from the
estate or potentially have to pay out on its insurance policy, depending on how First Horizon’s claim
is treated and paid. That kind of interest is not sufficient to afford AIG standing to object to Debtors’
proposed Chapter 13 plan.13

Although First Horizon was the holder of Debtors’ mortgage on the date of filing, on the date
it objected to the modification of Debtors’ Chapter 13 plan, and on the date it was served with the
Trustee’s objection to its claim, it apparently transferred its claim to Midfirst Bank, c/o Midland
Mortgage Company, on November 17, 2008.14 As a result, First Horizon is also no longer a real
party in interest in this case and lacks standing to pursue its objection to the plan modification.

First Horizon claims that it is in the process of re-purchasing this claim from Midfirst Bank,
and that upon re-acquiring its rights, the objection to its standing will be moot. The Court agrees,
but this re-purchase must be effectuated forthwith. First Horizon is required, no later than 15 days
prior to the evidentiary hearing scheduled herein, to file the appropriate notice and proof that it has
obtained rights in the claim at issue sufficient to afford it standing in this case. If no such notice is
filed by that time, the Court will grant the Trustee’s motion to strike both the objections filed by AIG
and First Horizon, respectively, to Debtors’ motion to modify their Chapter 13 plan language, and
will grant that motion to modify.

B. Requirement that Trustee must have avoided the lien


14Doc. 49.


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The second preliminary issue the Court must decide concerns First Horizon’s contention that
the Trustee must first avoid the mortgage for the benefit of the estate through an Adversary
Proceeding before the Court can approve the modified plan. The Court finds this timing issue is not
an impediment to confirmation of the modified plan under the facts of this case.

The quick answer to this argument is that the Trustee already filed the adversary proceeding
seeking to avoid the mortgage for the benefit of the estate on February 13, 2009.15 After receiving
an extension of time to March 30, 2009 to respond, neither Defendant AIG nor First Horizon
answered. They are in default. This is probably because both have admitted the lien was not
properly perfected and that it can be avoided.

Coupling this default with the fact that First Horizon also defaulted in responding to the
Trustee’s objection to its Proof of Claim on the same basis, there does not appear to be any real
dispute that the Trustee can avoid this lien for the benefit of the estate. For this reason, it appears
the adversary proceeding will be resolved quickly with either a default judgment or an agreed journal
entry in favor of the Trustee.

More importantly, the proposed plan language clearly provides an alternative procedure for
the handling of the mortgage, depending on whether the mortgage is ultimately avoided for the
benefit of the estate in the adversary proceeding. This alternative language provides protection to
both Defendants in the event they should prevail in the adversary proceeding to which they have

15Adv. No. 09-7012.


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defaulted. Thus, the Court finds there is no need to delay the confirmation process while that
adversary proceeding is concluded.16

C. Debtors’ motion to modify does not conceptually violate the Code.
The Court now turns to the merits of the motion to modify. First Horizon argues that the
Chapter 13 Trustee in this case is essentially “selling” the avoided lien rights in this case. In support
of this objection, First Horizon relies heavily on In re Ramsey.17

In Ramsey, the Chapter 13 Trustee avoided a mortgage on Debtors’ residence for the benefit
of the bankruptcyestate. TheTrustee then made a side agreement with the original mortgagee whose
mortgage had not been properly perfected and whose lien had been avoided. The agreement called
for the Trustee to sell the rights to that avoided mortgage lien back to the original lien holder for

Agreeing with debtor’s objection, the court in Ramsey held that the Chapter 13 Trustee
lacked the power to sell or dispose of property of the estate, or to liquidate any property of the estate.
The court noted that “the Code assures that unsecured creditors will receive at least as much as they
would receive if the case were liquidated under Chapter 7. Thus, if a Chapter 13 debtor elects to
retain property subject to an avoided and preserved lien now held by the Trustee, the debtor must pay
into the plan the value of the lien.”18 The concept articulated by the bankruptcy court is known as

16Because there has been a default, the Court anticipates that the Trustee/Plaintiff will file a Motion for Default
Judgment pursuant to Fed. Rule Bankr. P. 7055, which applies Rule 55 of the Federal Rules of Civil Procedure to
adversary proceedings. See Rule 55(b)(2) (outlining the procedure to use when party against whom a default judgment
is sought has appeared by a representative).

17356 B.R. 217 (Bankr. D. Kan. 2006).

18Id. at 227.


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the “best interest of the creditors test” (hereafter “best interests test”) and is applicable in all Chapter
13 cases pursuant to § 1325(a)(4).

But the facts in this case differ from Ramsey. First, unlike in Ramsey, it is Debtors who are
proposing the plan, not the Trustee. 19 The Trustee correctly argues that Debtors’ proposed plan
language does not constitute an impermissible “sale” by the Trustee of the lien, as was the case in
Ramsey, but is instead Debtors’ attempt to meet the best interests test. The Trustee acknowledges
that the proposed plan must meet this test, and suggests that evidence may be needed to determine
how much Debtors must pay to satisfy this requirement.

D. Amount Debtors must pay to satisfy best interests test
It appears to the Court, after carefully reviewing all of the briefs, that all the parties
essentially agree that the real issue here is whether or not Debtors’ modified plan complies with the
best interests test. The parties’ real disagreement concerns the amount that Debtors must pay
through their Chapter 13 plan in order to satisfy that test.

First Horizon claims that the “value” of the lien that must be paid is capped by (1) the amount
of the debt on the petition date (here $133,798.10), (2) the entire fair market value of the property,
or (3) the amount necessary to pay all unsecured creditors in full, whichever is less. In support of
this position, First Horizon relies upon In re Ramsey and In re Haberman.20

The Court disagrees with First Horizon’s position. In Haberman, a Chapter 7 proceeding,
the debtors owned a vehicle valued at $2,000 at the time the bankruptcy was filed; they owed over

19In Ramsey, the debtors objected to the Trustee’s attempt to sell the lien for $4,000, which required Debtors
to pay the entire unrecorded mortgage to the otherwise unsecured creditor—its mortgage holder.

20347 B.R. 411 (10th Cir. BAP 2006), aff’d, 516 F.3d 1207 (10th Cir. 2008).


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$3,000 on that same vehicle on the date of filing. The trustee successfully avoided the lien on the
vehicle because it was not properly perfected, and the lien was preserved for the benefit of the estate.

During the pendency of the case and before the avoidance action was fully resolved, the
debtors paid the debt in full to the bank, and the trustee then sought turnover of the full amount paid
to the bank. On appeal, the court affirmed the bankruptcy court’s holding that the Chapter 7 trustee
was entitled to recover the value of the creditor’s claim as of the date of bankruptcy, or the value of
the collateral on that day, whichever was less.21

Although Haberman is instructive on the issue of the value a Chapter 7 trustee is entitled to
receive following the avoidance of a lien, that is not the ultimate issue that must be decided here.
In order to satisfy the best interests test in a Chapter 13 proceeding, debtors are required to pay into
the plan an amount equal to, or greater than, the amount the creditors would receive if their assets
were liquidated under a Chapter 7 proceeding.22 In other words, creditors must receive at least as
much money from a Chapter 13 plan as they would receive in a Chapter 7.

In performing a hypothetical liquidation analysis, the starting point is obviously the value of
the property the Chapter 7 Trustee would be entitled to liquidate, as explained in Haberman. That
is only the starting point, however. From that amount, one must deduct the costs the Chapter 7
trustee will likely incur in completing the liquidation, as well as the trustee fees and any other
expenses that would be incurred in an actual Chapter 7 liquidation of the property.23

21Id. at 413.

22In re Ramsey, 356 B.R. at 227 (citing 11 U.S.C. § 1325(a)(4)).

23See 8 Collier on Bankruptcy, ¶ 1325.05[2][d], at 1325-21 (noting that the “statute’s language looks to the
amount that would be paid if there was a chapter 7 liquidation”). (Emphasis in original).


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First Horizon argues that, in order to satisfy the best interests test, Debtors must pay into the
Chapter 13 plan the full amount of First Horizon’s claim, the full value of the house, or the amount
necessary to pay all creditors in full, whichever is less. In making such a claim, however, First
Horizon has failed to account for the fees and expenses that must be considered when performing
a hypothetical liquidation analysis.24 In order to satisfy the best interests test, Debtors are not
required to pay into their Chapter 13 plan the full amount a Chapter 7 Trustee could potentially
recover or the full value of an asset that could be liquidated, but instead they are required to pay into
their Chapter 13 plan an amount that is at least equal to the amount that the creditors would receive
following a Chapter 7 liquidation. When factoring in expenses such as Chapter 7 Trustee’s fees and
costs of sale,25 the amount creditors are due to receive will almost always be considerably lower than
the full value of the property acquired by the Chapter 7 trustee. What that amount is, however, will
have to be determined following an evidentiary hearing.

Second, Ramsey does not directly support First Horizon’s position. In Ramsey, the court
specifically noted that

“[i]f the Debtor cannot pay the lien’s value up to an amount to pay unsecured creditors as

much as they would have realized under Chapter 7, the remedy is either (1) conversion (at

which point the Chapter 7 liquidating trustee may sell the lien for the highest offer); or (2)

dismissal (at which point the unperfected lien will revert back to [the creditor]).”26

24Id. at ¶ 1325.05[2][d], at 1325-20 (“The determination regarding what property creditors would receive in a
liquidation should also take into account the administrative expenses that would be incurred in a chapter 7 case. These
expenses may include, in addition to costs of sale, costs such as capital gains taxes incurred by the trustee who disposes
of property.”)

25See In re Delbrugge, 347 B.R. 536 (Bankr. N.D.W. Va. 2006) (holding that best interests test must take into
account costs of sale, trustee’s fees and other amounts that would be deducted in chapter 7 liquidation of property) and
In re Dixon, 140 B.R. 945 (Bankr. W.D.N.Y. 1992) (allowing a 10% deduction from estimated sales price to account
for costs of sale in chapter 7 based on court’s experience).

26Ramsey, 356 B.R. at 228 (emphasis added).


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The court recognized that the best interests test is satisfied by determining the amount that creditors
would receive in a Chapter 7 liquidation, not the amount the Trustee could likely recover before the
costs of liquidation.27

The Court also must address Debtors’ argument that because the subject real property is their
exempt homestead, and First Horizon and AIG have no security interest in it, there is no available
value to the bankruptcy estate because a Chapter 7 Trustee could not sell the exempt property. In
making that argument, however, Debtors seem to confuse the relative value of First Horizon’s
general unsecured claim, and the value of the mortgage to the Trustee, who holds the mortgage for
the benefit of the estate. The avoidance of the lien by the Trustee does not extinguish the mortgage;
instead, it merely transfers the mortgage rights to the bankruptcy estate. In other words, the real
property remains subject to the lien pursuant to§ 522(c)(2), despite the claim of exemption regarding
the property. 28 There is still a valid mortgage against Debtors’ property; it is just no longer held by
First Horizon. That lien has value, as explained in In re Haberman,29 and Debtors must account for
that value in formulating their Chapter 13 plan.

The Court finds that the proposed modifications to the Chapter 13 plan can be sustained, but
only if Debtors demonstrate that they have met the best interests test by a preponderance of the

27The Court notes that Ramsey contains some language that could be misinterpreted on the issue of what is
required to meet the best interests test. However, the facts of Ramsey were such that the test was not met under any
interpretation, which likely led to any potentially ambiguous language on this subject.

28See In re Early, 2008 WL 2073917, 3 (Bankr. D. Colo. 2008), noting that “[u]nder 11 U.S.C. § 522(c)(2),
if the lien on the Property is avoided and, as a consequence, automatically preserved for the benefit of the estate under
11 U.S.C. § 551, the Property will remain subject to the lien pursuant to 11 U.S.C. § 522(c)(2), despite the claim of
exemption regarding the Property.”

29In re Haberman, 347 B.R. at 416-17.


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evidence.30 That test will only be met upon a showing that the amount they propose to pay into the

Chapter 13 plan ($1,170.58 x 60 = $70,234.80)31 meets or exceeds the amount that creditors would

receive if this case were liquidated under a hypothetical Chapter 7 liquidation. The amount that

would be recognized in a hypothetical liquidation must take into account not only the value of the

property and what it is likely to bring in a sale by a Chapter 7 trustee, but also expenses such as costs

of sale and Chapter 7 trustee’s fees. Obviously, those costs and expenses reduce the net available

for payment to creditors under a liquidation analysis.

Because the Court has not received anyevidence of the liquidation value of this property, and

the parties have not stipulated to that fact, the Court will set this matter for evidentiary hearing on

its June 16-17, 2009 stacked evidentiary docket.32 If Debtors can show that the amount they propose

to pay into the Chapter 13 plan meets the best interests test, the Court will grant the motion to

modify the plan.

30The proponent of a Chapter 13 plan has the burden to show that all of the tests under § 1325(a) have been met.
In re Alexander, 363 B.R. 917, 921-22 (10th Cir. BAP 2007). See also In re Hutchinson, 354 B.R. 523, 531 (Bankr.

D. Kan. 2006) (holding that Debtors bear the burden of proving that they have met all of the requirements of § 1325,
including the best interest of the creditors test under § 1325(a)(4). Judge Nugent’s In re Dick decision, 2008 WL 294583
(Bankr. D. Kan. 2008) is also instructive on several issues in this case (“In order for the Court to confirm the Dicks'
chapter 13 plan, the debtors must show by a preponderance of the evidence that the plan meets the requirements of §
1325(a). With regard to unsecured creditors, the plan must return to the unsecured creditors not less than they would
receive were the Dicks' assets to be liquidated in a chapter 7 case. The Court must therefore determine what these parts
might bring in a chapter 7 liquidation, keeping in mind that a chapter 7 trustee would incur administrative expense in
liquidating this property. The Court must make two mathematical calculations: (1) the Court must estimate what would
be distributed to creditors in a chapter 7 case; and (2) the Court must determine what the present value of the stream of
payments to be made to unsecured creditors under the plan is. Both determinations are made as of the ‘effective date
of the plan,’ which most courts construe to mean the petition date.”).
31If this modified plan is ultimately confirmed, Debtors may actually have to pay more than $1,170.58 per month
just to pay the liquidation value over the remaining life of the plan because a significant number of the 60 months allowed
will have elapsed by the time the evidence is presented, and a decision entered. Their budget will obviously need to show
it is feasible for them to make such payments.

32This setting allows the parties 10 weeks to obtain necessary evidence (appraisal and potentially expert
testimony) regarding the value of the property as of the effective date of the modified plan, as well as evidence regarding
liquidation costs.


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The Court finds that neither AIG nor First Horizon currently has standing to object to
Debtors’ motion to modify their Chapter 13 plan. Based upon First Horizon’s representation that
it is in the process of reacquiring its rights in the property, the Court will allow First Horizon until
June 1, 2009 to complete that transfer and file the appropriate documentation with the Court. In the
event First Horizon has not shown that it has standing by that date, the Court will strike its objection
and that of AIG to the motion to modify the plan language.

The Court sets this matter for evidentiary hearing on its June 16-17, 2009 stacked evidentiary
docket to determine whether Debtors’ proposal to pay $70,234.80 to the Chapter 13 Trustee satisfies
the best interests test. If Debtors can show that the total of these payments will provide their
creditors with at least as much as those creditors would receive under a hypothetical liquidation
analysis, then the plan can be confirmed with the amended language.

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