The Eleventh Circuit Dismissal of Mortgagee’s Deficiency Claims Following Debtor’s Bankruptcy
In First National Bank of Oneida v. Brandt, an Eleventh Circuit Court of Appeals remanded to the district court on one important issue: what’s the impact on a confirmed individual Chapter 11 plan of a § 349 dismissal of the bankruptcy case without a discharge? In other words, does a dismissal of the bankruptcy case vacate a prior confirmed plan in an individual case? The Court left it up to the trial court to decide.
The debtor, a real estate investor and developer, filed a Chapter 11 bankruptcy case in July 2009 after he defaulted on a series of real estate loans. The mortgagee filed multiple proofs of claim, asserting that its real estate loans were fully secured. The debtor did not object to any of the proofs of claim.
In the debtor's reorganization plan, he classified all of the mortgagee's real estate loans in a single class to the extent that they were allowed as secured claims under § 506. He also signed a post-petition note for $150,000 to cover post-petition interest. And he had a separate deficiency class requiring secured claimants to assert their entitlement, if any, to an unsecured deficiency claim within 30 days after the confirmation hearing. The mortgagee never made that assertion.
The debtor defaulted under the plan a year or so later. The mortgagee obtained relief from stay and sold the collateral, applied the $150,000 in proceeds to the debt, and sought a deficiency judgment of over $1 million. After a few rounds, the district court dismissed the deficiency suit for the pre-petition amounts on the basis that the mortgagee, having failed to assert its entitlement to a deficiency claim in compliance with the plan, had no deficiency claim on those amounts and was limited to enforcing the post-petition note.
The mortgagee appealed to the Eleventh Circuit. However, after the appeal had been fully briefed, but before the Court could rule, the debtor threw a curveball and voluntarily dismissed his bankruptcy case, all without a discharge of his debts. Recognizing that the dismissal might materially impact the issues on appeal, the Court remanded the matter to the district court to determine the impact of the case dismissal on the confirmed plan.
A confirmed plan is binding on the debtor and his creditors under § 1141 in much the same way that a contract is binding. It recognized that a plan typically subsumes a pre-petition debt and creates a new contract between the parties–but see below. Whereas a confirmed plan in a corporate case results in an immediate discharge of pre-petition debt, an individual discharge must, after the 2005 changes to § 1141, await completion of plan payments.
However, the debtor in this case dismissed his Chapter 11 case before completing his plan payments or receiving a discharge.
On appeal, the Eleventh Circuit reasoned that the case presented two issues: first, “whether a secured creditor whose prepetition debt is oversecured at the time of the Chapter 11 filing—and who therefore fails to identify any part of the debt as unsecured—is precluded from later seeking a deficiency judgment after the debtor has failed to comply with the terms of the plan and the collateral no longer fully secures the debt. The second question … is whether, by dismissing his Chapter 11 case without a discharge, [the debtor] is now foreclosed from arguing that [the bank] cannot seek a deficiency judgment related to its pre-petition real-estate loans based on [the bank’s] failure originally to identify any portion of these loans as being undersecured.”
Although individuals don’t get discharges until they complete their plan payments, it is unlikely (although not yet decided) a dismissal order would vacate a prior confirmation order, particularly given that such result is not spelled out in § 349. The Court analogized to Chapter 13 cases, the dismissal of which cases appears to undo the Chapter 13 plan.
Accordingly, the Court concluded that it would be up to the trial court to determine how the debtor’s dismissal of his Chapter 11 case without a discharge affected the merits of the mortgagee’s claim.
Lets see how the district court handles these issues, and exactly how this case will playout!