Tajima BAP: Courts, Explain Yourselves

Bankruptcy Appellate Panel praises court for confirming Chapter 13, but wants reasons why

In re Tajima is a recent Chapter 13 bankruptcy in L.A. which was confirmed over a creditor’s objection, and then appealed. The Bankruptcy Appellate Panel (BAP) reviewed the Los Angeles bankruptcy court’s decision, and reversed because the court didn’t explain its reasoning.

I’m a local Santa Clarita bankruptcy attorney with a focus on Chapter 13 bankruptcy  and a track record of hundreds of successful cases. Recently, as chair of the cdcbaa Chapter 13 committee, I wrote an article for our newsletter that summarized the recent Tajima appellate case for the hundreds of bankruptcy lawyers in our group. Here is the summary I wrote.

Sahni v. Tajima (In re Tajima)

2022 WL 3354006 (9th Cir. BAP Aug 15, 2022)(unpublished) S.Klein J

ISSUE

Did the bankruptcy court err in confirming the Chapter 13 plan?

RULING

Yes.

FACTS

This case involves the tension of litigation in bankruptcy causing delay, and the need to get a Chapter 13 plan confirmed quickly.  Here, there was a dispute between debtors and one of their Chapter 13 bankruptcy creditors, a hard-money lender with a claim secured by debtors’ residence. The loan was for $300,000 at 10% interest, which debtors were unable to pay, so the junior lienholder foreclosed, leading to the bankruptcy. Creditor filed a claim stating that more that the original loan amount was arrearages. Debtors objected to claim, asserting TILA and RESPA failures, usurious interest, requesting rescission, and stating the loan was now unsecured in a greatly reduced amount. Debtors also filed an adversary proceeding on the same theories.

Debtors’ initial plan paid nothing to creditor, to which both creditor and the trustee objected. Debtors’ amended plan placed creditor in class two with a reduced interest rate, and an arrearages amount that would not be paid in full during the bankruptcy, and not in equal monthly payments as required by Section 1325(a). To try to fix this, the amended plan had a non-standard provision that, among other things, allowed for final calculations of the creditor claim after the A.P. and claim objection issues were resolved. Creditor objected to confirmation, saying that his claim would not be paid in full, let alone the amount of arrearages in it. It also cited feasibility, the reduction of the interest rate, and bad faith. Trustee proposed and debtors agreed to modify the amended plan to provide for a massive balloon payment in month 24. Creditor objected.

The court confirmed the plan anyway, as modified, over creditor’s objection. It observed that debtors had plenty of equity in the home, and they could refinance to make the plan work. The court made no findings about how the confirmed plan met 1325, other than its feasibility finding. There was nothing in the record describing the TILA and RESPA issues, nor any effort to consider these issues before confirmation, and this the BAP found “perplexing.” Creditor then appealed to the BAP.

RULING

Given that complex background, the BAP considered the issue as to whether the confirmed plan properly treated creditor’s claim such that confirmation was appropriate.  The panel’s ruling was “no.”

The Panel reviewed whether the confirmed plan met the Bankruptcy Code’s requirements in about a half-dozen aspects. First, citing Section 502(c), the BAP found the bankruptcy court did not estimate the creditor’s claim for purposes of confirmation, despite debtors’ assertion that it did. Nothing on the record indicates that the court used estimation, and besides, it would only be appropriate for contingent and unliquidated claims, not present here. Second, even if the court did use estimation for the claim amount, that would make it allowed. If allowed, the plan must pay it in accordance with Section 1325(a)(5)(B), which the BAP found that the plan does not.

Third, sticking with 1325(a)(5)(B), the BAP then ruled that the claim was a secured interest-bearing debt, and must be paid as one, per the claim. Debtors proposed to pay creditor in a manner that would not satisfy the claim, or even its own plan amount, even after changing the interest rate.

Fourth, the claim was not to be paid in equal monthly payments, also per 1325(a)(5)(B). The BAP dismissed debtors’ assertion that the claim objection makes this provision inapplicable. While tipping its hat to the Chapter 13 Trustee for trying to broker a plan with a balloon payment to get creditor support, absent that consent, the plan should not be confirmed.

Fifth, the plan should not have been confirmed because it did not comply with Section 1322. This section prevents modifying the rights of holders of a claim secured by the debtor’s principal residence. The claim here was oversecured, so the creditor has the right to postpetition interest under the contract. As debtors tried to reduce the debt’s interest rate, 1322 was not followed.

Sixth, there was no feasibility established to comply with Section 1325(a)(6). While the Court did find that a refi or sale could allow the proposed balloon payment, the confirmed plan did not require either. Further, the BAP was troubled that the confirmed plan has no meaningful provision for payment of the claim if creditor prevailed in defending his claim. It was implied debtors would do something, but the plan lacked any timing requirement, and does not adhere to 1325(a)(5)(B). Lastly, the BAP looked at a Ninth Circuit ruling that the impact of pending litigation must be evaluated when determining feasibility of a Chapter 11 plan. In re Harbin, 486 F.3d 510, 519 (9th Cir, 2007). It then extended the rationale of Harbin to Chapter 13 cases. In doing so, the BAP focused on the following Harbin language: “we cannot conclude, without the benefit of the bankruptcy court’s analysis of the issue, whether the plan was in fact feasible when confirmed.” In Harbin, it required consideration of the impact of a successful appeal. As there is no demonstrated ability to pay creditor’s claim if it is successful in the present case, the BAP further found feasibility under 1325(a)(6) lacking.

In looking at these areas, the BAP struggled because there were no findings of fact or conclusions of law by the bankruptcy court. The BAP could not discern on what basis or theory the court confirmed the plan, particularly given that there was an objection to confirmation, at which point Rules 9014 and 7052 require it.

In the big picture, the BAP notes that the court was trying to be practical in confirming a placeholder plan, observing that creditor would be paid in full if debtors got a refi. Despite that, the BAP ruled that 1325(a) must be met for a plan to be confirmed, and that was lacking here. Even if litigation causes unreasonable delay under 1307(c)(1), the remedy isn’t confirmation, but dismissal or conversion. There was no discussion that dismissal while litigation was addressed would in this instance subject debtors to resumption of the foreclosure process which led to the filing of the instant case.

CONCURRENCE

Judge Lafferty in his concurrence notes that the bankruptcy court was weighing the interests of trying to be practical and confirming plans as soon as possible against the uncertainty of pending litigation, especially when that conflict can impact feasibility. He notes that while Chapter 13 doesn’t set a deadline for confirmation, it only works if it works quickly and plans get confirmed as fast as practicable. He then says this is thwarted when there is complex litigation in debtors’ case.

To address these scenarios, the Code doesn’t give a lot of guidance, and allows courts to delay confirmation, provide some alternative treatments based on litigation outcomes, or “confirm around” the problem. Judge Lafferty notes that any of these would have been supportable with a fair application of confirmation standards and reasoning that is fairly and plainly articulated.

Hale Andrew Antico is a two-term Past President of the cdcbaa and has practiced bankruptcy law in Santa Clarita & Palmdale, California in the CDCA for about 20 years.