Source: http://updates.mwbllp.com/2018/05/fyi-11th-cir-vacates-dismissal-of.html
Timestamp: 2019-04-19 22:31:09+00:00

Document:
The U.S. Court of Appeals for the Eleventh Circuit recently vacated a trial court's dismissal of a mortgagee's deficiency claims and remanded to the trial court to determine whether the voluntary dismissal of a bankrupt debtor's Chapter 11 case without a discharge had any effect on the mortgagee's right to pursue its pre-petition deficiency claims.
The debtor, a real estate investor and developer, filed a Chapter 11 bankruptcy case in July of 2009 after he defaulted on a series of real estate loans. The mortgagee filed proofs of claim, asserting that its real estate loans were fully secured. The debtor did not object to any of the proofs of claim.
The debtor filed his Chapter 11 reorganization plan in February of 2010, listing all of the subject loans in Class 19 as secured claims. The plan also provided that the debtor would sign a promissory note to the mortgagee for $150,000, representing post-petition interest, secured by real estate. In return, the mortgagee would agree that debtor was current on the subject loans through August of 2010 and the debtor would resume making payments on the loans in September of 2010.
The plan also created a "Class 45—a single class of all unsecured claims allowed under 11 U.S.C. §502[,]" which provided that "[a]ny secured creditor who has filed a secured claim and claims an entitlement to an unsecured claim must file an amended claim seeking entitlement to an unsecured claim by 30 days after the confirmation hearing…."
The plan was confirmed in 2011. The mortgagee did not amend its proofs of claim within 30 days after confirmation to claim an entitlement to an unsecured claim.
The debtor defaulted in 2013 on both the pre-petition loans and the post-petition promissory note. The mortgagee moved to lift the automatic stay to foreclose on the properties securing the loans, which the bankruptcy court granted.
The mortgagee sold the real estate securing the loans, but the proceeds were insufficient to cover the balance, resulting in the debtor owing a deficiency of more than $1.2 million, of which more than $180,000 was owed for the post-petition promissory note.
In November of 2015, the mortgagee moved to lift the automatic stay in order to pursue its deficiency claim against the debtor, which the debtor did not oppose, so the bankruptcy court granted the motion.
The mortgagee then sued the debtor in January of 2016 in the trial court to collect the deficiency owed on the pre-petition loans and post-petition the promissory note. The debtor moved to dismiss, arguing that the bank "could not seek an unsecured deficiency judgment related to its pre-petition real-estate loan because [the mortgagee] 'did not take the steps delineated in Class 45 [of the Chapter 11 plan] to assert an unsecured deficiency claim.'"
The trial court denied the motion to dismiss as to post-petition promissory note, reasoning that the complaint stated a plausible claim for a deficiency as to the post-petition promissory note because the note was signed post-petition, such that "any deficiency claim arising under the note would not have been included in Class 45 of [debtor's] Chapter 11 plan, which dealt only with prepetition unsecured claims." The trial court, however, granted the motion as to the deficiency owed on the pre-petition loans because they were included in Class 45. As the mortgagee had not alleged that it had complied with Chapter 11 plan's requirement relating to Class 45 deficiency claims, the trial court directed the mortgagee to allege in its amended complaint that it complied with the plan's requirements as to Class 45 deficiency claims.
The mortgagee filed an amended complaint, again seeking to collect both the deficiency owed on the pre-petition loans and the post-petition promissory note, but did not allege that it had complied the plan's Class 45 requirements. Instead, it argued that it did not have to comply because the debtor "did not assert in his bankruptcy case that [the mortgagee's] claims were unsecured." Because it was oversecured when the petition was filed and the Chapter 11 plan brought the debtor current through August of 2010, the mortgagee did not have to file "a contingent unsecured claim in a speculative unknown amount to preserve its right to receive the full payment promised by the Plan, in the event that [debtor] should perhaps default at some later date…."
The trial court once again dismissed the mortgagee's deficiency claims as to the pre-petition loans because the mortgagee did not allege that it complied with the plan's Class 45 requirements, reasoning that the bank's "'theory of recovery … [was] antithetical to the dual purposes underlying the Bankruptcy Code,' which are to give the debtor a fresh start and to promote equality of distribution among creditors."
The mortgagee filed a second amended complaint, but the debtor failed to respond so the clerk entered a default against him. The debtor moved to set aside the default, which the trial court denied.
The mortgagee and debtor then stipulated to the entry of a judgment against him for $180,000 on the post-petition promissory note. After the trial court entered judgment, the mortgagee appealed.
After the appeal was fully briefed, the debtor moved to dismiss his Chapter 11 bankruptcy case, which the bankruptcy court granted. As the bankruptcy case was dismissed, that automatic stay was automatically terminated and none of the debtor's debts were discharged.
The mortgagee moved the appellate court to take judicial notice of the dismissal of the bankruptcy case, which was granted.
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 filed—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."
The Court pointed out that since the Chapter 11 case was dismissed after the appeal was fully briefed, "the effect of that dismissal, as well as the facts and circumstances surrounding it, have not been meaningfully briefed by the parties."
The Court went on to explain that the dismissal without a discharge "is a potentially significant event that may affect the ultimate disposition of this case and on which there has been insufficient briefing." Accordingly, based on that reason, the Court vacated the trial court's dismissal order and remanded for the trial court "to consider this newly raised issue and, if necessary, to develop a fuller factual record."
The Court then provided guidance to the trial court on the issues it needed to consider, pointing out that under 11 U.S.C. § 1141(a), upon confirmation a Chapter 11 plan "is binding on both the debtor and his creditors …[and] cannot be revoked unless, within 180 days after confirmation, it is shown that the plan was procured by fraud." The confirmed plan is a contract between the debtor and his creditors that replaces the creditors' pre-confirmation claims.
The Court further explained that in 2005, "Congress amended § 1141 to provide that, when a debtor is an individual rather than a corporation or other business entity, 'confirmation of the plan does not discharge any debt provided for in the plan until the court grants a discharge on completion of all payments under the plan."
Given that amended § 1141 requires the debtor to comply with the plan before getting a discharge and that "Chapter 13 likewise conditions a discharge on the debtor's fulfillment of his obligations under the confirmed plan, … opinions discussing the dismissal of Chapter 13 cases without a discharge could perhaps become relevant to a determination of whether and how the dismissal of [debtor's] Chapter 11 case without a discharge affects the enforceability of his confirmed Chapter 11 plan."
In addition, the Court noted that under 11 U.S.C. § 349(b), "unless the bankruptcy court, for cause, orders otherwise, the dismissal of a bankruptcy case" returns "the parties, as far as practicable, to the financial positions they occupied before the case was filed."
The Court acknowledged, however, "that § 349(b) does not provide that dismissal of a bankruptcy case without a discharge vacates a previously confirmed Chapter 11 plan or otherwise renders that plan unenforceable by the debtor. … But that silence does not necessarily mean that the confirmed plan can survive dismissal of the bankruptcy case."
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.

References: §502
 § 1141
 § 1141
 § 1141
 § 349
 § 349