Kendall Lloyd Ward and Carra Michelle Ward

MEMORANDUM OF DECISION - 1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF IDAHO
IN RE 	)
)
WARD, KENDALL LLOYD and 	) 	Case No. 04-02669-TLM
WARD, CARRA MICHELLE, 	)
)
Debtors. 	) 	MEMORANDUM OF DECISION
)
________________________________ )
INTRODUCTION
Sometimes relatively “small” cases raise relatively “big” issues. In such
cases, given the amounts in controversy, litigants often negotiate mutually
agreeable resolutions. No such settlement occurred here, leaving the Court to
evaluate and resolve the parties’ distinctly different views on a chapter 13 debtor’s
ability to modify a confirmed plan. This Memorandum of Decision constitutes the
Court’s findings of fact and conclusions of law on the contested matter. Fed. R.
Bankr. P. 7052, 9014.
BACKGROUND AND FACTS
It is relatively easy to summarize the situation.
Kendall and Carra Ward (“Debtors”) filed a voluntary petition for chapter
13 relief on July 28, 2004. Doc. No. 1. They owned, at filing, a 1987 Chevrolet
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1 The secured creditor is actually Y2K, Inc, a financing entity for vehicles purchased
through Vista Auto Sales. No issue is raised in the present case concerning the naming of or
notice to the Creditor in the plan or the later appearance of Y2K, Inc. through counsel, and the
Court will simply refer to “Creditor” in this Decision.
2 Why Debtors’ plan proposed to pay Creditor less than the scheduled value of the
vehicle is unexplained.
3 See Claim No. 6, filed September 10, 2004, asserting a $5,567.54 secured claim.
MEMORANDUM OF DECISION - 2
Suburban. They purchased this three-quarter ton, diesel powered vehicle in
January, 2004. Debtors valued the vehicle at $3,250.00, and they claimed a
$3,000.00 exemption in it. Id. at schedule B, schedule C.
Debtors chapter 13 plan proposed to pay Vista Auto Sales (“Creditor”)1
$3,000.00 for the vehicle at an interest rate of 9%, pursuant to § 1325(a)(5)(B).
See Doc. No. 3. 2 Creditor raised no objection to confirmation, and the plan was
confirmed on November 8, 2004. See Doc. No. 22. Given Creditor’s proof of
claim,3 some $2,500.00 of Creditor’s claim was rendered unsecured by Debtors’
“cram down” on the debt.
According to Debtors, the Suburban had electrical problems and difficulties
prior to confirmation. Debtors believe it would cost between $800.00 and
$1,600.00 to repair these problems and that, without the repairs, the vehicle is
unsafe as well as unreliable. In addition, although Debtors were aware prior to
confirmation that the vehicle had exceedingly poor gas mileage, they argue that
post-confirmation increases in fuel prices make the vehicle overly expensive to
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MEMORANDUM OF DECISION - 3
drive.
On February 25, 2005, Debtors proposed a modification of their confirmed
chapter 13 plan. See Doc. No. 37. They proposed to “surrender” the Suburban to
Creditor in satisfaction of Creditor’s secured claim, to reduce their plan payments
to the Trustee by the amount previously dedicated to Creditor’s claim under
§ 1325(a)(5)(B), and to use tax refunds to make a down payment on a replacement
vehicle. Creditor objects, contending that § 1329 does not allow Debtors to
modify their plan in the manner suggested, relying primarily on the decision of
this Court in In re Holt, 136 B.R. 260, 92 I.B.C.R. 13 (Bankr. D. Idaho 1992). See
Doc. No. 41.
Pursuant to notice, a hearing was held on April 5, 2005. The matter was
taken under advisement upon the conclusion of post-hearing briefing by Debtors
and Creditor.
DISCUSSION AND DISPOSITION
A. 	Does the law allow the suggested surrender of collateral
through modification of a confirmed plan?
On its face, the issue presented is straightforward. May chapter 13 debtors,
after confirming a plan treating a creditor as partially secured under
§ 1325(a)(5)(B), later modify that plan to surrender the collateral to the creditor in
satisfaction of the allowed secured claim and treat any deficiency as unsecured.
Despite the seeming simplicity, a review of the case law indicates that a great
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4 It was incumbent upon Debtors, in making their motion, to acknowledge the existence
of Holt and to explain why it should not be followed. DeBoer 99.3 I.B.C.R. at 103. Debtors’
Motion, Doc. No. 37, did not do so. Debtors did not address Holt, which foreclosed their
suggested modification, until after Creditor raised the objection and cited to it. In addition to
violating DeBoer, this failure raises potential issues under Fed. R. Bankr. P. 9011(b)(2).
However, there is no indication that Creditor raised Rule 9011 issues in compliance with the
several requirements of that Rule. Further, the parties were given an opportunity to address the
authorities after the April 5 hearing and did so. The Court concludes that admonishing Debtors
for their inappropriate conduct in not proactively addressing Holt is sufficient remedy under all
the circumstances of this case.
MEMORANDUM OF DECISION - 4
many issues may be implicated. These issues have created a distinct split in the
decisional law.
In Holt, this Court took a stand on the issue, the Honorable Alfred C.
Hagan stating:
I 	conclude 	the 	return 	of 	the 	vehicle 	is 	not 	an 	allowed
modification under Section 1329 under the theory of [In re] Sharpe
[122 B.R. 708 (E.D. Tenn. 1991)]. Further, it does not appear to be fair
and equitable to allow a debtor the continued ability to elect to retain
or return secured property during the full term of the plan.
It is doubtful Congress intended to afford the debtor the options
available under 11 U.S.C. § 1325(a)(5)(B) and (C) throughout the life
of the plan. 11 U.S.C. § 1329(a)(1) ought to be limited to adjustments
in amounts of payments under the plan as opposed to material changes
in the treatment of secured creditors.
136 B.R. at 260-61.
This Court respects its prior decisions and departs from them only for
compelling reasons. In re Cent. Idaho Forest Prods., 04.4 I.B.C.R. 159, 162 n.10
(Bankr. D. Idaho 2004) (citing In re DeBoer, 99.3 I.B.C.R. 101, 103 (Bankr. D.
Idaho 1999).4 DeBoer indicates that changes or developments in relevant case law
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MEMORANDUM OF DECISION - 5
may constitute compelling reason to depart from this Court’s prior decisional law.
Here, the precise issue presented in Holt has gained a great deal of attention in the
years following Holt’s publication in 1992.
Certain courts adhere to the conclusion reached in Holt, though upon much
more detailed analysis and, in some cases, for other reasons. Principal among
these decisions is the only Court of Appeals’ resolution, that of the Sixth Circuit in
Chrysler Financial Corp. v. Nolan (In re Nolan), 232 F.3d 528 (6th Cir. 2000).
That court’s conclusion was perhaps presaged by the manner in which it cast the
issue:
There has been a debate over whether section 1329 allows a
debtor to modify a confirmed plan to surrender collateral for a secured
claim (the value of which typically will have been significantly
reduced) and then reclassify any deficiency as an allowed, unsecured
claim to be paid back at the general pennies-on-the-dollar rate set forth
in the plan for unsecured debts.
232 F.3d at 531. Nolan concluded that a debtor could not modify a plan in such a
manner under § 1329, laying out at least five reasons for its decision. Id. at 532-
35.
The Sixth Circuit’s decision is not universally embraced. After discussing
Nolan and other cases with similar holdings, the authors of a respected bankruptcy
treatise note that “[o]ther courts have held to the contrary, based on a more careful
and complete reading of the Code.” 8 Collier on Bankruptcy ¶ 1329.04 [1], 1329-
8 (Alan N. Resnick & Henry J. Sommer, eds., rev. 15th ed. 2004).
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5 This Court has previously recognized that § 1325 requirements are applicable when a
modification is proposed. See In re Flaming, 03.4 I.B.C.R. 240 (Bankr. D. Idaho 2003); In re
DeFrehn, 03.3 I.B.C.R. 175 (Bankr. D. Idaho 2003).
MEMORANDUM OF DECISION - 6
The Court has carefully reviewed Nolan, the cases it cites, and the decisions
discussed in Collier. Additionally, the Court has analyzed the litigants’ briefs and
the decisions cited therein, and it has conducted its own research. Much has been
written on the subject, and it would be unnecessary and inefficient to recite all of
the arguments and contentions advanced in this debate. A relatively brief
summary will suffice, and the Court directs the parties to the authorities noted for
a more complete and detailed explanation of the issues and their resolution.
The Court concludes that several more recent decisions disagreeing with
Nolan – and with Holt – are persuasive. One such cogent, thoughtful analysis of
the issue can be found in Bank One NA v. Leuellen, 322 B.R. 648 (S.D. Ind. 2005).
The Leuellen court concluded that the language of § 1329 allows for such a
modification so long as the statutory requirements of § 1325, incorporated by
§ 1329, are met. 322 B.R. at 652-55. 5 Leuellen continues with a detailed analysis
of the arguments advanced in Nolan and an explanation of why a careful reading
of the Code negates those arguments. Id. at 655-62. Chief among that court’s
several reasons for discounting the concerns of Nolan is the fact that modifications
are subject to the good faith requirements of § 1325(a)(3), which enables a court to
protect against abusive manipulation of the Code or abusive treatment of creditors.
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6 Arencibia notes that another respected bankruptcy treatise, Bankruptcy Judge Keith
Lundin’s book, Chapter 13 Bankruptcy (3d. Ed. 2000), includes a comprehensive review of the
decisions and a “well reasoned analysis” of the Code, and that it concludes § 1329 permits such
modifications. See 2003 WL 21004969 at *2. See also Leuellen, 322 B.R. at 661 n.5 (citing both
Lundin and Collier); Knappen, 281 B.R. at 719-720 (discussing William L. Norton, Jr., Norton
Bankruptcy Law and Practice 2d, § 124:3 (2001) and Lundin).
MEMORANDUM OF DECISION - 7
Additionally, a creditor’s concern over receiving a substantially depreciated asset
through a post-confirmation surrender can be safeguarded by a creditor’s ability to
object to confirmation unless the timing and amount of payments under
§ 1325(a)(5)(B) in the original plan are at least equal to the rate of depreciation.
Id. at 659 (citing, inter alia, In re Townley, 256 B.R. 697, 699-700 (Bankr. D.N.J.
2000)).
Leuellen does not stand alone. Reaching similar conclusions, again on
extended analysis, are In re Knappen, 281 B.R. 714 (Bankr. D.N.M. 2002), and In
re Arencibia, Doc. No. 01-40647, 2003 WL 21004969 (Bankr. S.D. Fla. April 1,
2003).6
The parties have not cited, and the Court has not located in its research, any
controlling Ninth Circuit Court of Appeals’ decision on the issue or any direct
Bankruptcy Appellate Panel authority. However, within our Circuit, other
bankruptcy courts have validated a debtor’s ability to make such a modification.
See In re Zieder, 263 B.R. 114 (Bankr. D. Ariz. 2001); see also In re Mason, 315
B.R. 759 (Bankr. N.D. Cal. 2004) (quoting at length and following Zieder).
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MEMORANDUM OF DECISION - 8
Zeider, like Leuellen, is a detailed and persuasive rebuttal to Nolan and similar
cases.
Under the weight and persuasiveness of the developing case law and
treatise analysis, this Court concludes there is no per se prohibition on the
suggested modification. This Court thus respectfully disagrees with the
conclusion announced in Holt and concludes that sufficiently compelling reasons
justify departing from it. In re DeBoer, 99.3 I.B.C.R. at 103.
B. Can Debtors’ proposed modification be approved in this case?
Creditor argues that even if this type of modification is allowable, Debtors’
concerns regarding the Suburban existed prior to confirmation and do not now
present good cause to modify. In many ways, Creditor appears to be arguing that
there must be a “material” and “unanticipated” change in circumstances to support
a modification under § 1329. To the extent that earlier decisional law discussed or
implied such a condition, it is clear that it is not a prerequisite to modification. See
Flaming, 03.4 I.B.C.R. at 241 n.8; DeFrehn, 03.3 I.B.C.R. at 176. It is therefore
not an absolute impediment to modification that the fuel inefficiency of the
Suburban was a known problem at confirmation and that the vehicle’s mechanical
unreliability was at least in part known prior to confirmation.
A modified plan must meet the confirmation standards of § 1325(a),
including the good faith requirement of § 1325(a)(3). In re Flaming, 03.4 I.B.C.R.
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7 The Court notes that Creditor’s post-hearing brief presented an “alternate defense” in
the nature of a compromise, under which it would release its lien upon receipt of an amount equal
to the balance of the $3,000.00 cram down figure less the payments actually made through the
(continued...)
MEMORANDUM OF DECISION - 9
at 242. The several cases discussed above note the importance of this requirement
in the context of the proposed surrender of collateral through post-confirmation
modification. See, e.g., Leuellen, 322 B.R. at 660-61 (noting that the good faith
requirement and the requirement of court approval of a modification upon notice
and hearing “provide important checks against debtors indulging their internal
‘whims’ or engaging in the ‘subterfuges’ feared by the Nolan Court.”). In the
Ninth Circuit, good faith requires an analysis of the totality of circumstances and
an inquiry into whether debtors have misrepresented facts, unfairly manipulated
the Code, or otherwise made their proposals in an inequitable manner. See Goeb
v. Heid (In re Goeb), 675 F.2d 1386, 1390 (9th Cir. 1982).
Creditor is therefore correct that the extent of Debtors’ pre-confirmation
knowledge is a relevant fact. But other relevant facts include the post-
confirmation increase in mechanical difficulties experienced with the Suburban
and the impact of quickly rising gas prices. Nothing in the record before the Court
indicates Debtors have abused the vehicle. Similarly, nothing in the record
indicates that there has been excessive depreciation over and above the amounts
Creditor received under the plan’s § 1325(a)(5)(B) provisions, leaving Creditor
unfairly exposed due to Debtors’ decision to surrender through modification.7
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7(...continued)
plan. See Doc. No. 45 at 2. Though the offer was not accepted, it provides some indication that
the timing and amount of plan payments were at least equal to the rate of depreciation from and
after the effective date of the § 506(a) valuation of the vehicle. See, e.g., Leuellen, 322 B.R. at
659 (discussing Townley 256 B.R. at 699-700).
MEMORANDUM OF DECISION - 10
To be sure, Debtors’ epiphany occurred not all that long after their plan was
confirmed. Given their pre-confirmation knowledge, Debtors perhaps should have
surrendered the vehicle in the plan under § 1325(a)(5)(C). Were other facts
presented, in addition to timing, suggesting Debtors intended to improperly
manipulate the Code or gain some advantage through confirming and then quickly
modifying their plan, the propriety of the modification would certainly be open to
question under the good faith requirement of § 1325(a)(3), incorporated by § 1329.
But no such additional facts were proven.
For all the foregoing reasons, the Court concludes that Creditor’s objection
is not well taken and the same will be overruled. Nevertheless, the Court also
concludes that the proposed modification cannot be granted at this time. Perhaps
due to their focus on the significant legal issue debated with Creditor, Debtors
have overlooked some important details.
Debtors’ motion proposes to acquire a replacement vehicle. Testimony at
hearing indicated that Debtors have not yet located a replacement vehicle nor
determined precisely the amount of any needed down payment or what the
monthly impact on their budget will be. Under all the circumstances, the Trustee
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MEMORANDUM OF DECISION - 11
and creditors are entitled to fact rather than assumption.
Moreover, Debtors propose to use tax refunds as a way of making a down
payment. However, the plan provides that tax refunds shall be turned over to the
Trustee for the initial 36 months of the plan. Doc. No. 3 at 2. The Trustee
appropriately withholds his consent to the use of the tax refunds until need is
established. In addition, the record is not clear that Debtors have provided copies
of their income tax returns to the Trustee for his analysis. That certainly must
occur before modification is ordered.
Finally, Debtors’ motion, Doc. No. 37, indicates Debtors amended their
exemption schedules to claim a certain portion of their tax refunds, representing an
earned income credit, as exempt. Id. at 1-2. While the docket contains an entry
indicating that Debtors amended schedules B, C, I, and J, see Doc. No. 36, a
review of that entry reveals no amended schedule C. The Trustee’s post-hearing
comments concerning the absence of a claim of exemption appear to be well
taken. See Doc. No. 46.
Once Debtors have identified a replacement vehicle and determined how
much is needed for a down payment and what the monthly debt service would be,
it would appear simple enough for the issues addressed above to be clarified. The
Court will therefore deny the motion to modify at the present time, without
prejudice to renewal when the details of the proposal can be more clearly
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8 Of course, should Debtors’ renewed motion to modify impact creditors in excess of
what was earlier anticipated under the original motion, Doc. No. 37, additional notice to all
creditors would be required.
MEMORANDUM OF DECISION - 12
presented. Given the lack of opposition to the earlier motion to modify by
creditors generally, the Court will allow Debtors to bring on a renewed motion to
modify on notice solely to the Trustee and Creditor.8
The Court presumes, from the tenor of the arguments advanced, that
Debtors’ proposed modification to surrender the Suburban to Creditor is
inextricably linked to their proposed modification to use the tax refunds that
otherwise would go to the Trustee and their request to reduce their monthly plan
payments. That is to say, the Court does not believe Debtors wish to modify and
surrender the Suburban to Creditor if their additional modification requests are
denied or deferred. So, until such time as the entirety of the modification request
is clarified under § 1329, Debtors shall be obligated to perform their confirmed
plan including payments to Creditor. As discussed above, these ongoing
payments protect Creditor against depreciation in the vehicle pending any such
modification.
CONCLUSION
Creditor’s objection, Doc. No. 41, arguing that Debtors are prohibited from
modifying their confirmed plan to surrender collateral previously crammed down
under § 1325(a)(5)(B), will be overruled. In addition, Debtors’ motion to modify,
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MEMORANDUM OF DECISION - 13
Doc. No. 37, will be denied without prejudice to renewal once the details
regarding the budget adjustments, use of tax refunds, and related matters have
been clarified. An appropriate order will be issued.
DATED: May 31, 2005
TERRY L. MYERS
CHIEF U. S. BANKRUPTCY JUDGE
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