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An Evidentiary Hearing is Required for any Disputed Fact; a Creditor who Didn’t File a Proof of Claim Does Not Have Standing to Object to Debtor’s Disposable Income Projection

By Alexander Beeby posted 09-26-2021 14:30

Contributing Editor: Karl J. Johnson, Taft

In Citizens State Bank Norwood Young America v Schiller (In re Schiller), 629 B.R. 54 (B.A.P. 8th Cir. July 15, 2021), the BAP held that (1) the bankruptcy court erred by not holding an evidentiary hearing to determine the bank’s allowed secured claim, (2) the bank’s objection to a motion under § 364 to obtain secured credit did not qualify as an informal proof of claim, (3) whether the chapter 12 plan provides for payment of the amount of an allowed secured claim cannot be evaluated before the collateral is valued, and (4) the bank lacked standing to object to the debtor’s disposable income projection. For these reasons, the BAP vacated the order confirming the plan and remanded for further proceedings.

The bankruptcy court granted the debtor’s motion to obtain secured credit over the bank’s objection that the debtor failed to recognize a lien the bank asserted in post-petition crops (presumably because § 552 provides that prepetition security agreements do not apply to post-petition assets). Although the bank never filed a proof of claim, it still objected to plan confirmation based on theories that the plan failed to provide payments for the full amount of the bank’s allowed secured claim and that the plan failed to provide any distribution on the bank’s unsecured claim. The bankruptcy court overruled the bank’s objections, and the bank appealed.

First, the BAP cited precedent for the proposition that a court cannot make a finding regarding a disputed fact without holding an evidentiary hearing, including a dispute about an allowed secured claim.

Next, the BAP rejected the bank’s argument that a chapter 12 debtor’s schedules qualify as a deemed proof of claim under § 1111 because § 1111 applies only in chapter 11. Furthermore, the BAP rejected the bank’s argument that its objection to the 364 motion qualified as an informal proof of claim for an unsecured claim because the objection specifically argued that the bank was oversecured with no deficiency. Third, the BAP rejected the bank’s argument that the order confirming the chapter 12 plan should somehow qualify under Rule 3002 as a judgment for the recovery of money from the bank that would set a new deadline to file a proof of claim.

The BAP agreed with the bank that the bankruptcy court’s failure to hold an evidentiary hearing on the value of the bank’s collateral made it impossible for the court to determine whether the plan provided that the bank would be paid the value of its allowed secured claim as required by § 1225(a)(5)(B).  

Finally, the BAP rejected the bank’s argument that a creditor who failed to file a proof of claim could have an allowed unsecured claim for standing to object that the plan provides that “Debtor’s disposable income will be applied to make payments,” as required by § 1225(b)(1)(B).

Co-Editors in Chief
Alexander J. BeebyLarkin Hoffman
Kesha Tanabe, Tanabe Law