3 IN RE: 4 CASE NO. 06-03221 BKT
5 ISMAEL MALDONADO TORRES Chapter 13
8 XXX-XX-2295
9 XXX-XX-7241
FILED & ENTERED ON 04/09/2008 10 Debtors 11
12 OPINION AND ORDER 13 This case is before the Court on the following motions: Debtors’ motion requesting 14 reconsideration of dismissal (Dkt. No. 64), the opposition filed by Eurobank (Dkt. No. 65), the 15 debtors’ reply to the opposition by Eurobank (Dkt. No.66), the Joint Motion for Entry of Order by 16 17 Consent, filed between the debtors and Eurobank (Dkt. No. 67), the trustee’s opposition to the joint 18 motion (Dkt. No. 68), the debtors’ reply to the trustee’s opposition (Dkt. No. 72), the trustee’s sur- 19 reply (Dkt. No. 76), and the debtor’s response to the trustee’s sur-reply (Dkt. No. 78). 20 Based upon a review of the motions, the arguments presented, and a review of the entire official 21 file, the Court hereby finds as follows: 22 I. Findings of Facts 23 On September 7, 2006, Ismael Maldonado Torres and Adaliz Solis Figueroa (hereinafter “the 24 Debtors”), filed this bankruptcy petition. On said petition debtors listed four (4) properties with 25 different liens on each one. The main residence had a value of $530,000.00 listed in Schedules A and D, and the professional office had a market value of $150,000.00 with a lien in favor of Eurobank for 2 debtors’ failure to comply with their duties as set forth in 11 U.S.C.A §521 (debtors’ failure to 3 provide evidence of income during the sixty (60) days prior to the petition, failure to provide tax 4 5 returns, and failure to file a plan within the first fifteen (15) days from the filing of the petition). The 6 case was dismissed on December 28, 2006 (Dkt. No. 19). 7 On December 29, 2006, debtors filed the chapter 13 plan, the statement of current monthly 8 income and a reconsideration of the dismissal order. Creditor Eurobank filed an opposition to the 9 reconsideration for undue delay that is prejudicial to creditors. After reviewing the motions, the 10 Court granted the reconsideration on January 18, 2007. The plan contemplated the sale of the 11 debtors’ main residence and the professional office. 12 Consequently, on February 8, 2007, debtors filed an application to sell property, as stated in their 13 chapter 13 plan. The application informed the Court that the debtors entered into an option contract 14 15 to sell their main residence for $772,800.00, which is $242,800.00 more than listed in the schedules. 16 Meanwhile, on August 23, 2007, Creditor Eurobank filed an objection to plan and request for 17 dismissal (Dkt. No. 52), for failure to prosecute, achieve plan confirmation, and failure to pay 18 Eurobank’s mortgage payments encumbering the professional office. 19 Debtors failed to answer the motion and the case was dismissed for a second time on October 24, 20 2007 (Dkt. No. 61). 21 On November 5, 2007, debtors once again filed a motion requesting reconsideration of the 22 dismissal order (Dkt. No. 64). Debtors stated in their motion that the main residence at El Monte 23 Development, had been sold and the remaining balance (after payments of liens), had been deposited 24 with the Chapter 13 Trustee.1 Debtors prayed in their motion that the funds deposited with the 25 Trustee be returned to them in order to pay the pre and post-petition arrears to creditor Eurobank. On November 16, 2007, Eurobank opposed the reconsideration (Dkt. No. 65), and debtors filed 2 On November 28, 2007, debtors and Eurobank filed a joint motion requesting entry of order by 3 consent (Dkt. No. 67). This motion informed the court that debtors and Eurobank agreed that the 4 5 monies deposited by “error” with the trustee would be used to pay the pre and post-petition arrears of 6 Eurobank. 7 On December 11, 2007, the trustee filed his opposition to the joint motion for entry of order by 8 consent (Dkt. No. 68). The motion argued that the joint proposal to withdraw the monies deposited 9 with the trustee to pay Eurobank’s arrears outside the plan is tantamount to a “cross- 10 collateralization” in favor of Eurobank and in detriment of other allowed unsecured creditors. 11 On January 2, 2008, debtors filed a reply to Trustee’s opposition to the Joint Motion for Entry of 12 Order by Consent (Dkt. No. 72). In said motion, debtors alleged that the trustee has no rights under 13 the law or otherwise to attempt to control funds which belong to debtors and arose from the sale of 14 15 their residence. Section 1306(b) of the Bankruptcy Code is clear in specifying that, except as 16 provided in a confirmed plan or order confirming a plan, the debtor shall remain in possession of all 17 property of the estate. Furthermore, debtors argued that a debtor in a Chapter 13 case is similar to a 18 debtor in possession in a Chapter 11 case. Consequently, the Chapter 13 Trustee is not to receive or 19 be accountable for property of the estate. According to debtors, these functions correspond to them. 20 On January 30, 2008, the trustee filed a response to debtors’ reply to opposition to joint motion 21 for entry of order (Dkt. No. 78). In this motion, the trustee points out the discrepancies in the monies 22 deposited and the alleged price that the property was sold. Also, the trustee referred to the Chapter 13 23 plan, which was never amended, and to the provisions that established that debtors would sell both 24 properties (the main residence and the primary office), to fund the plan. Finally, the trustee argues 25 that Eurobank had no lien attached to debtors’ former residence and that this creditor is entitled to the cure of the pre and post-petition arrears through the Chapter 13 plan and not through a joint 2 1. Cross-collateralization 3 Trustee’s motion argued that debtors’ joint motion for consent is in the nature of a cross- 4 5 collateralization. Generally speaking, cross-collateralization occurs to a limited extent in almost 6 every case. 7 Under the Bankruptcy Code §363(e) any creditor whose collateral, including cash collateral, is 8 used by the debtor is entitled to a replacement lien on other assets as adequate protection for any 9 diminution in the value of the creditor's interest in such property caused by the debtor's use. For 10 example, if proceeds of prepetition collateral (i.e. cash collateral) are used by the debtor, the creditor 11 with an interest in such collateral is entitled to a replacement lien on the debtor's other assets, 12 including its postpetition assets, to adequately protect the creditor's interest in such cash collateral. 13 The act of providing the creditor with the replacement lien on postpetition assets to protect the 14 15 creditor's interest in such collateral is a form of cross-collateralization of the creditor's prepetition 16 claim. A portion of the debtor's prepetition debt is now secured by the replacement lien on 17 postpetition assets. William L. Norton, Norton Bankruptcy Law and Practice, § 94:34 (3d ed. 2008). 18 In the case Matter of Saybrook Mfg. Co., Inc., 963 F.2d 1490 (11th Cir. 1992), the Eleventh 19 Circuit described the term of “cross-collateralization” as a method of securing prepetition debt with 20 prepetition and postpetition collateral as part of postpetition financing arrangement. The trustee used 21 this case to support his allegation that debtors’ joint order by consent is in the nature of a cross- 22 collateralization. We do not agree with trustee’s interpretation. 23 As stated by Norton, supra, the act of providing the creditor with the replacement lien on 24 postpetition assets to protect the creditor's interest in such collateral is a form of cross- 25 collateralization of the creditor's prepetition claim. In this case creditor’s claim is secured by a prepetition lien in another property of the debtors.
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3 IN RE: 4 CASE NO. 06-03221 BKT
5 ISMAEL MALDONADO TORRES Chapter 13
8 XXX-XX-2295
9 XXX-XX-7241
FILED & ENTERED ON 04/09/2008 10 Debtors 11
12 OPINION AND ORDER 13 This case is before the Court on the following motions: Debtors’ motion requesting 14 reconsideration of dismissal (Dkt. No. 64), the opposition filed by Eurobank (Dkt. No. 65), the 15 debtors’ reply to the opposition by Eurobank (Dkt. No.66), the Joint Motion for Entry of Order by 16 17 Consent, filed between the debtors and Eurobank (Dkt. No. 67), the trustee’s opposition to the joint 18 motion (Dkt. No. 68), the debtors’ reply to the trustee’s opposition (Dkt. No. 72), the trustee’s sur- 19 reply (Dkt. No. 76), and the debtor’s response to the trustee’s sur-reply (Dkt. No. 78). 20 Based upon a review of the motions, the arguments presented, and a review of the entire official 21 file, the Court hereby finds as follows: 22 I. Findings of Facts 23 On September 7, 2006, Ismael Maldonado Torres and Adaliz Solis Figueroa (hereinafter “the 24 Debtors”), filed this bankruptcy petition. On said petition debtors listed four (4) properties with 25 different liens on each one. The main residence had a value of $530,000.00 listed in Schedules A and D, and the professional office had a market value of $150,000.00 with a lien in favor of Eurobank for 2 debtors’ failure to comply with their duties as set forth in 11 U.S.C.A §521 (debtors’ failure to 3 provide evidence of income during the sixty (60) days prior to the petition, failure to provide tax 4 5 returns, and failure to file a plan within the first fifteen (15) days from the filing of the petition). The 6 case was dismissed on December 28, 2006 (Dkt. No. 19). 7 On December 29, 2006, debtors filed the chapter 13 plan, the statement of current monthly 8 income and a reconsideration of the dismissal order. Creditor Eurobank filed an opposition to the 9 reconsideration for undue delay that is prejudicial to creditors. After reviewing the motions, the 10 Court granted the reconsideration on January 18, 2007. The plan contemplated the sale of the 11 debtors’ main residence and the professional office. 12 Consequently, on February 8, 2007, debtors filed an application to sell property, as stated in their 13 chapter 13 plan. The application informed the Court that the debtors entered into an option contract 14 15 to sell their main residence for $772,800.00, which is $242,800.00 more than listed in the schedules. 16 Meanwhile, on August 23, 2007, Creditor Eurobank filed an objection to plan and request for 17 dismissal (Dkt. No. 52), for failure to prosecute, achieve plan confirmation, and failure to pay 18 Eurobank’s mortgage payments encumbering the professional office. 19 Debtors failed to answer the motion and the case was dismissed for a second time on October 24, 20 2007 (Dkt. No. 61). 21 On November 5, 2007, debtors once again filed a motion requesting reconsideration of the 22 dismissal order (Dkt. No. 64). Debtors stated in their motion that the main residence at El Monte 23 Development, had been sold and the remaining balance (after payments of liens), had been deposited 24 with the Chapter 13 Trustee.1 Debtors prayed in their motion that the funds deposited with the 25 Trustee be returned to them in order to pay the pre and post-petition arrears to creditor Eurobank. On November 16, 2007, Eurobank opposed the reconsideration (Dkt. No. 65), and debtors filed 2 On November 28, 2007, debtors and Eurobank filed a joint motion requesting entry of order by 3 consent (Dkt. No. 67). This motion informed the court that debtors and Eurobank agreed that the 4 5 monies deposited by “error” with the trustee would be used to pay the pre and post-petition arrears of 6 Eurobank. 7 On December 11, 2007, the trustee filed his opposition to the joint motion for entry of order by 8 consent (Dkt. No. 68). The motion argued that the joint proposal to withdraw the monies deposited 9 with the trustee to pay Eurobank’s arrears outside the plan is tantamount to a “cross- 10 collateralization” in favor of Eurobank and in detriment of other allowed unsecured creditors. 11 On January 2, 2008, debtors filed a reply to Trustee’s opposition to the Joint Motion for Entry of 12 Order by Consent (Dkt. No. 72). In said motion, debtors alleged that the trustee has no rights under 13 the law or otherwise to attempt to control funds which belong to debtors and arose from the sale of 14 15 their residence. Section 1306(b) of the Bankruptcy Code is clear in specifying that, except as 16 provided in a confirmed plan or order confirming a plan, the debtor shall remain in possession of all 17 property of the estate. Furthermore, debtors argued that a debtor in a Chapter 13 case is similar to a 18 debtor in possession in a Chapter 11 case. Consequently, the Chapter 13 Trustee is not to receive or 19 be accountable for property of the estate. According to debtors, these functions correspond to them. 20 On January 30, 2008, the trustee filed a response to debtors’ reply to opposition to joint motion 21 for entry of order (Dkt. No. 78). In this motion, the trustee points out the discrepancies in the monies 22 deposited and the alleged price that the property was sold. Also, the trustee referred to the Chapter 13 23 plan, which was never amended, and to the provisions that established that debtors would sell both 24 properties (the main residence and the primary office), to fund the plan. Finally, the trustee argues 25 that Eurobank had no lien attached to debtors’ former residence and that this creditor is entitled to the cure of the pre and post-petition arrears through the Chapter 13 plan and not through a joint 2 1. Cross-collateralization 3 Trustee’s motion argued that debtors’ joint motion for consent is in the nature of a cross- 4 5 collateralization. Generally speaking, cross-collateralization occurs to a limited extent in almost 6 every case. 7 Under the Bankruptcy Code §363(e) any creditor whose collateral, including cash collateral, is 8 used by the debtor is entitled to a replacement lien on other assets as adequate protection for any 9 diminution in the value of the creditor's interest in such property caused by the debtor's use. For 10 example, if proceeds of prepetition collateral (i.e. cash collateral) are used by the debtor, the creditor 11 with an interest in such collateral is entitled to a replacement lien on the debtor's other assets, 12 including its postpetition assets, to adequately protect the creditor's interest in such cash collateral. 13 The act of providing the creditor with the replacement lien on postpetition assets to protect the 14 15 creditor's interest in such collateral is a form of cross-collateralization of the creditor's prepetition 16 claim. A portion of the debtor's prepetition debt is now secured by the replacement lien on 17 postpetition assets. William L. Norton, Norton Bankruptcy Law and Practice, § 94:34 (3d ed. 2008). 18 In the case Matter of Saybrook Mfg. Co., Inc., 963 F.2d 1490 (11th Cir. 1992), the Eleventh 19 Circuit described the term of “cross-collateralization” as a method of securing prepetition debt with 20 prepetition and postpetition collateral as part of postpetition financing arrangement. The trustee used 21 this case to support his allegation that debtors’ joint order by consent is in the nature of a cross- 22 collateralization. We do not agree with trustee’s interpretation. 23 As stated by Norton, supra, the act of providing the creditor with the replacement lien on 24 postpetition assets to protect the creditor's interest in such collateral is a form of cross- 25 collateralization of the creditor's prepetition claim. In this case creditor’s claim is secured by a prepetition lien in another property of the debtors. The property encumbered by Eurobank’s 2 secured by debtors’ prepetition collateral, which is worth more than the amount claimed. 3 For the reasons stated in the abovementioned jurisprudence, we differ with trustee’s legal 4 5 argument that the joint motion for entry of order by consent is in the nature of a cross- 6 collateralization agreement. Nevertheless, we concur with trustee’s reasoning that it is his 7 prerogative to distribute the surplus gained by debtors’ sale of their main residence. 8 2. Chapter 13 Trustee’s power to distribute proceeds following the 9 liquidation of property of the estate. 10 The commencement of a case under the bankruptcy code creates an estate. 11 U.S.C.A. §541. 11 Such estate is compromised of all the following property: 12
13 (i) All legal or equitable interests of the debtor in property as of the 14 commencement of the case. 15 (ii) Any interest in property that the trustee recovers under the provisions of the 16 Bankruptcy Code. 17 (iii) Property acquired by the estate after the commencement of the case, and 18 property that is proceeds, product, offspring, rent or profit from property of 19 the estate. 20 21 (iv) …. 22 In addition to the property specified in §541, the Chapter 13 estate includes all such property that 23 the debtor acquired after the commencement of the case but before the case is closed, dismissed, or 24 converted, whichever occurs first. 11 U.S.C.A. §1306. 25 Debtors allege that the trustee has no rights under the law or otherwise to attempt to control funds which belongs to debtors and arose from the sale of their residence. In addition, debtors assert that section 1306(b) of the Bankruptcy Code is clear in specifying that except as provided in a confirmed 2 Conversely, the trustee alleges that the prerogative to disburse funds under a Chapter 13 plan is 3 vested in him. 4 5 The Court of Appeals for the First Circuit addresses this apparent conflict between Sections 541 6 and 1306(b) in the case of Barbosa v. Soloman, 235 F.3d 31 (1st Cir. 2000). In Barbosa, a Chapter 7 13 Trustee moved to modify debtor's confirmed plan to compel them to increase distribution to 8 unsecured creditors following the sale of investment property at a price significantly in excess of 9 value placed on it in the bankruptcy case. 10 The Bankruptcy Court held that the funds received by debtor from the postpetition sale of a 11 property should be used to make payments under a modified plan. Furthermore, any modification of 12 debtor's plan, in order to permit debtor to reduce time for payment while retaining sales proceeds 13 attributable to appreciation of their property would not satisfy "best interests" or "liquidation value" 14 15 test. The Court, as it would be in our case, permitted the trustee to modify the plan to include the 16 excess surplus obtained from the sale of a property in order to disburse more money to unsecured 17 creditors. Id. (emphasis added). 18 This line of reasoning has been used before in; In re Witkowski, 16 F.3d 739, (7th Cir.1994) 19 (finding that "Section 1329 does not require any threshold requirement for a creditor, debtor or 20 trustee to seek modification of an approved bankruptcy plan" and allowing modification in order to 21 increase distribution to unsecured creditors when fewer than expected claims were filed); Ledford v. 22 Brown, 219 B.R. 191, 195 (6th Cir. BAP 1998) (finding that Bankruptcy Court abused its discretion 23 in requiring Trustee to prove threshold changes in circumstances before allowing a modification); 24 and the case of Powers v. Savage 202 B.R. 618, 622 (9th Cir. BAP 1996) (adopting approach of 25 Witkowski and finding that “[t]he plain language of §1329 simply does not support a change in circumstances as a prerequisite to modification”). 1
5 the trustee has the authority to keep and disburse the funds obtained from the sale of debtors’
3 residence at a significant higher value that the one listed in the schedules. The monies deposited wit
4 the trustee will stay in his control in order to disburse them as mandated in the case of Barbosa. /d| 5 || See, e.g., In re Shepard, 328 B.R. 601, 605 (1st Cir.BAP (Mass.) Jun 02, 2005); In re Wetzel, 381 6 || B.R. 247, 254 (Bkrtcy. E.D. Wis., 2008) (“This Court concludes that the approach adopted by th 7 |! courts in Harchar, Nott and Barbosa is the most logical reconciliation of 8§ 1306(a) and 1327(b)”)| 8 I. Conclusion 7 For the reasons stated above, the trustee’s motion in opposition of joint entry of order (Dkt. No, 78) is granted in part and denied in part. In addition, the joint motion requesting entry of order b consent (Dkt. No. 67), filed by debtors and Eurobank’s objection to reconsideration (Dkt. No. 65) ar
13 hereby denied.
14 Debtors are ordered to file a new Chapter 13 plan within fifteen (15) days from the entry of this
15 || order, to include the profits received from the sale of the main residence to fund the new plan. 16 || Furthermore, debtors are ordered to include the pre and post-petition arrears of secured credito 17 || Eurobank in the plan. Debtors’ modified plan must, among other things, be proposed in “good faith,’ 18 || and must satisfy the “best interests of creditors”. 11 U.S.C.A. §1325(a) and §1329. 19 Once the new Chapter 13 plan is filed, the motion for reconsideration of dismissal (Dkt. No. 66) 20 will be granted and a confirmation hearing will be scheduled. Finally, the trustee is ordered to file recommendation of debtor’s new amended plan within fifteen (15) days from the filing of the ne plan. 23 5A IT ISSO ORDERED.
25 San Juan, Puerto Rico, this 9 day of April, 2008. Za
U. S. Bankruptcy Judge C: ALL CREDITORS