Sutton v. Reed et al
Filing
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MEMORANDUM Opinion and Order signed by the Honorable Edmond E. Chang. For the reasons stated in the Opinion, the bankruptcy court is affirmed. Status hearing of 09/23/2014 is vacated. A separate AO-450 judgment shall issue. Civil case terminated. Emailed notice(slb, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
IN RE SHERMAN REED AND
YVETTE REED,
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Debtors.
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_________________________________________ )
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SANDRA SUTTON,
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Appellant-Creditor,
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v.
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SHERMAN REED AND YVETTE REED,
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Appellees-Debtors.
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No. 13 C 05660
Judge Edmond E. Chang
MEMORANDUM OPINION AND ORDER
Creditor Sandra Sutton appeals from the bankruptcy court’s orders denying
Sutton’s motion to lift the automatic stay and confirming Sherman and Yvette
Reed’s Chapter 13 bankruptcy plan. For the reasons discussed below, the
bankruptcy court’s orders are affirmed.1
I. Background
The Reeds filed a Chapter 13 bankruptcy petition in June 2012. R. 1-3,
Chapter 13 Voluntary Petition [Dkt. 1]. One of the reasons for their Chapter 13
filing was a pending foreclosure dispute they had with Sutton over the mortgage on
the Reeds’ six-unit apartment building; Sutton is the Reeds’ mortgage lender for the
1The
Court has subject matter jurisdiction over this bankruptcy appeal under 28
U.S.C. § 158(a)(1). Citations to this Court’s docket, including the Record on Appeal, are
noted as “R. [docket entry number],” followed by a description of the document in that
entry. When appropriate, the Court will also include the bankruptcy court’s docket entry
number (“Dkt. [number]”) from In re Reed, No. 12-22803 (Bankr. N.D. Ill.).
property. See R. 9, Appellees’ Br. at 1-2; see also R. 1-3, Adversary Compl. [Dkt. 23]
at 2; R. 1-3, Mot. Relief from Stay [Dkt. 38] at 1. The Reeds acknowledged that they
owed Sutton $250,000 on the mortgage, but they wanted to modify the mortgage
through Chapter 13 bankruptcy (this is known as a “cram down” in the bankruptcy
world). See Adversary Compl. [Dkt. 23] at 3. The Reeds argued that by 2012, the
property had lost more than half of its value, leaving no equity in the property. See
id.
During the bankruptcy proceedings, the Reeds filed multiple proposed
bankruptcy plans, along with amended schedules listing their income and expenses.
Sutton likewise filed multiple objections to the Reeds’ proposed plans and also a
motion to lift the automatic stay so that she could proceed with her foreclosure
action against the Reeds.2 See Mot. Relief from Stay [Dkt. 38]. Before the
bankruptcy court addressed these proposed plans and objections, it first ordered the
Chapter 13 Trustee to make an adequate-protection payment to Sutton from “all
amounts held by the Trustee on behalf of the Debtors.” R. 1-3, Order Enforcing
Required Adequate Protection Payment [Dkt. 102]; see also R. 1-4, Sixth Am. Plan
[Dkt. 130] at 6 (stating that Sutton received an adequate-protection payment of
$32,836). Then, in a valuation hearing, the bankruptcy court also determined that
the current value of the Reeds’ apartment-building property was $140,000. See
Sixth Am. Plan [Dkt. 130] at 6. In other words, instead of owing Sutton the
2As
necessary, the Court will discuss further details about these proposed plans and
objections in the Analysis section below.
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$250,000 balance on the mortgage, the Reeds would now owe Sutton $140,000 (plus
interest)—the current value of the property.3
Finally, the bankruptcy court confirmed the Reeds’ seventh and final plan—
their “Sixth Amended Plan”—on July 11, 2013, and denied Sutton’s motion to lift
the stay. See R. 1-4, Order Confirming Plan [Dkt. 139]; see also Order Denying Mot.
Relief from Stay, In re Reed, No. 12-22803 (Bankr. N.D. Ill. July 11, 2013), ECF No.
138.4 During the confirmation hearing, the bankruptcy court found that “based on a
lot of history in this courtroom that the Reeds are making a good faith effort to
confirm a Chapter 13 plan that does treat their creditors appropriately.” R. 4,
7/11/13 Tr. [Dkt. 150] at 16. Under the confirmed plan, the Reeds will repay Sutton
$140,000 on the mortgage, $12,121.88 for post-filing real-estate tax payments that
Sutton made on the property, and 5% interest, for a total of $172,224.20. Sixth Am.
Plan [Dkt. 130] at 6. Unsecured creditors will then receive, at a minimum, 2.59% of
their claims. See R. 1-4, Order Modifying Plan [Dkt. 140].
Sutton filed her notice of appeal on July 22, 2013. R. 1, Notice of Appeal [Dkt.
143].
II. Standard of Review
A federal district court has jurisdiction, under 28 U.S.C. § 158(a), to hear
appeals from the rulings of a bankruptcy court. On appeal, the district court reviews
3To
be more precise, the portion of the mortgage that is now “secured” debt is
$140,000, and the balance (in this case, $110,000) is “unsecured” debt. See 11 U.S.C.
§ 506(a) (“[A]n allowed claim of a creditor secured by a lien on property in which the estate
has an interest . . . is an unsecured claim to the extent that the value of such creditor’s
interest . . . is less than the amount of such allowed claim.”).
4Although Sutton also appeals from this order, she did not include it in the Record
on Appeal. See R. 1, Designation of Record & Issues on Appeal [Dkt. 147] at 1.
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the bankruptcy court’s legal findings de novo and its factual findings for clear error.
In re Miss. Valley Livestock, Inc., 745 F.3d 299, 302 (7th Cir. 2014). A bankruptcy
court’s finding that a debtor’s plan was proposed in good faith is a finding of fact
that this Court evaluates for clear error only. In re Smith, 848 F.2d 813, 816 n.2
(7th Cir. 1988). Under that standard, an appellate court will not reverse simply
because it would have decided the case differently; instead, a reviewing court must
ask whether, considering all of the evidence, “it is left with the definite and firm
conviction that a mistake has been committed.” Easley v. Cromartie, 532 U.S. 234,
242 (2001) (internal quotation marks and citation omitted).
Additionally, decisions left to the discretion of the bankruptcy court are
reviewed “only for an abuse of discretion.” Wiese v. Cmty. Bank of Cent. Wis., 552
F.3d 584, 588 (7th Cir. 2009). This is a difficult standard to meet: “a court abuses its
discretion when its decision is premised on an incorrect legal principle or a clearly
erroneous factual finding, or when the record contains no evidence on which the
court rationally could have relied.” Corporate Assets, Inc. v. Paloian, 368 F.3d 761,
767 (7th Cir. 2004). Appellate courts review a bankruptcy court’s ruling on whether
to lift the automatic stay for abuse of discretion and its underlying factual findings
for clear error. In re Alexander, 435 F. App’x 563, 564 (7th Cir. 2011) (citing Colon v.
Option One Mortg. Corp., 319 F.3d 912, 916 (7th Cir. 2003)).
III. Analysis
On appeal, Sutton contends that the bankruptcy court erred in two ways:
(1) by confirming the Reeds’ Chapter 13 plan, and (2) by denying Sutton’s motion to
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lift the stay. Although the analysis of these two issues overlaps, the Court addresses
each issue in turn below.
A. Confirmation of Plan
Sutton argues that the bankruptcy court was wrong to confirm the Reeds’
Sixth Amended Plan because the Reeds proposed the plan in bad faith. R. 8,
Appellant’s Br. at 11-17. The obligation of good faith is imposed on the debtor at two
stages of a Chapter 13 proceeding. First, the debtor must file a Chapter 13 petition
in good faith, and next, the debtor must file a Chapter 13 plan in good faith. In re
Smith, 286 F.3d 461, 465 (7th Cir. 2002); see also 11 U.S.C. § 1325(a)(3), (7). When
reviewing whether a debtor filed a plan in good faith, the court asks of the debtor:
“Is he really trying to pay the creditors to the reasonable limit of his ability or is he
trying to thwart them?” In re Smith, 286 F.3d at 466. This is a question of fact that
the court considers “based on the totality of the circumstances surrounding the
proposed plan.” Id. The Seventh Circuit has articulated a non-exclusive list of
factors that courts should consider in analyzing the totality of the circumstances:
“(1) whether the plan states the secured and unsecured debts of the debtor
accurately; (2) whether the plan states the expenses of the debtor accurately;
(3) whether the percentage of repayment of unsecured debts is correct; (4) whether
inaccuracies in the plan amount to an attempt to mislead the bankruptcy court; and
(5) whether the proposed payments indicate a fundamental fairness in dealing with
creditors.” Id. at 466 n.3 (citing In re Rimgale, 669 F.2d 426, 432-33 (7th Cir. 1982)).
The party alleging bad faith or seeking reconsideration of a good-faith finding has
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the burden of showing that the bankruptcy court erred. See Hower v. Molding Sys.
Eng’g Corp., 445 F.3d 935, 939 (7th Cir. 2006); see also In re Love, 957 F.2d 1350,
1355 (7th Cir. 1992).
Most of Sutton’s objections to the Sixth Amended Plan stem from alleged
discrepancies between the Reeds’ plan and their 2012 federal income tax return.
First, pointing to a discrepancy between the Reeds’ claimed monthly expenses in
their amended Bankruptcy Schedule J and those same expenses as listed in their
2012 tax return, Sutton argues that the Reeds inflated their property expenses in
the Sixth Amended Plan. See Appellant’s Br. at 14. But the Reeds’ attorney
adequately explained this alleged discrepancy at the confirmation hearing: the
Reeds listed their “actual current numbers” in Schedule J (filed in July 2013), while
the tax return represented their expenses from 2012. 7/11/13 Tr. [Dkt. 150] at 3; see
also R. 1-4, Am. Schedule J [Dkt. 129] (filed 7/2/13). Again relying on an alleged
discrepancy between the plan and the Reeds’ 2012 tax return, Sutton also argues
that the Reeds underreported their Social Security income.5 See Appellant’s Br. at
14. But again, as explained at the confirmation hearing, this discrepancy is also a
product of comparing the 2012 tax return (which lists their gross Social Security
amount) with the Sixth Amended Plan (which represents the Social Security check
5Sutton
also argues that the bankruptcy court ignored the months that the Reeds
failed to report their rental income. See Appellant’s Br. at 16. But the bankruptcy court did
consider this possible discrepancy. As the Reeds’ attorney explained in response to the
bankruptcy court’s question on precisely this issue, the Reeds gave Sutton their current
rent-roll, which is what their amended Schedule I was based on. See 7/11/13 Tr. [Dkt. 150]
at 4.
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that the Reeds actually receive after Medicare expenses are deducted). See 7/11/13
Tr. [Dkt. 150] at 3.
Sutton next argues that in addition to allegedly inflating their expenses
listed in Schedule J, the Reeds also omitted “numerous” expenses. See Appellant’s
Br. at 14-15. Sutton, however, only provides two specific examples. Their 2012 tax
return showed that the Reeds had paid for an adult child’s college tuition and had
also paid the real-estate taxes on their mother’s residence, neither of which
appeared on their Schedule J list of expenses. See id. at 14. Again, these
discrepancies stem from Sutton’s relying on the 2012 tax return. The Reeds paid
their child’s college tuition in 2012, but then could not afford to continue paying it
after they filed for bankruptcy. See 7/11/13 Tr. [Dkt. 150] at 13-14. Likewise, the
Reeds no longer pay their mother’s real-estate taxes. See id. at 14 (“[W]e have listed
their current expenses.”). In other words, both expenses were no longer bankruptcy
expenses that they needed to list in Schedule J.
Moving on from Schedule J, Sutton argues that the 2.59% minimum return to
unsecured creditors under the Sixth Amended Plan is further evidence of bad faith.
See Appellant’s Br. at 15, 17. The bankruptcy court, too, was troubled by this “very
low percentage.” 7/11/13 Tr. [Dkt. 150] at 4. But the Reeds’ attorney explained to
the court that this low percentage resulted from the Reeds’ maintaining a reserve in
case a tenant, for example, stopped paying rent (the Reeds’ primary source of
income) or if they had to make repairs on the rental property. See id. at 5; see also
Am. Schedule J [Dkt. 129] ¶ 17. The Reeds had even considered holding a larger
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reserve, but ultimately reduced it to the amount in the amended Schedule J so that
their payments to creditors could be larger. See 7/11/13 Tr. [Dkt. 150] at 5. The
Reeds’ lawyer importantly noted that even at this low percentage, it guarantees
that the Reeds’ unsecured creditors will receive at least as much as they would if
the Reeds had liquidated their debt in a Chapter 7 proceeding. See id.; see also 11
U.S.C. § 1325(a)(4) (requiring courts to confirm a plan if the amount recovered by
unsecured creditors “is not less than the amount that would be paid on such
claim[s] if the estate of the debtor were liquidated under chapter 7”).
Finally, Sutton argues that the long delay in confirming the Reeds’ final plan
and all of the many changes that the Reeds made to their proposed plans and
schedules demonstrate that they acted in bad faith. See Appellant’s Br. at 14-17. It
is true that the Reeds’ bankruptcy case was pending for thirteen months before the
bankruptcy court finally confirmed their plan. But Sutton points to nothing in the
record suggesting that the Reeds caused these continuances and delays in bad faith.
Instead, amending bankruptcy schedules is permitted “as a matter of course at any
time before the case is closed.” Fed. R. Bankr. P. 1009. And as the bankruptcy court
recognized in the confirmation hearing, these kinds of changes are common for
small-business owners: “[t]he Chapter 13 plans, the budgets, the schedules typically
move. The small businesses typically vary constantly. I do find that the debtors are
making a good faith effort here to confirm a plan.” 7/11/13 Tr. [Dkt. 150] at 15-16.
Satisfied with these explanations, the bankruptcy court confirmed the Reeds’
Sixth Amended Plan. Id. at 6, 16; Order Confirming Plan [Dkt. 139]. It is true that
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the bankruptcy court did not recite, point by point, all of the reasons for confirming
the plan. But that does not mean that the court committed clear error. The
discrepancies were all explained at the confirmation hearing. The bankruptcy court
could rely, for example, on the explanation about the time gap between the 2012 tax
return and the amended Schedule J. The omitted expenses were also explained
because they were not part of the plan. Moreover, the reports in the schedules, all
which were sworn, were sufficient for the bankruptcy court to rely on without
committing clear error. Cf. Anderson v. City of Bessemer City, N.C., 470 U.S. 564,
574 (1985) (explaining that appellate courts must still give deference to a trial
court’s factual findings even when they “do not rest on credibility determinations,
but are based instead on . . . documentary evidence or inferences from other facts”).
Although the bankruptcy court could have asked for more proof, it did not need to.
It was therefore not clear error for the bankruptcy court to find that the Reeds acted
in good faith and to confirm the Sixth Amended Plan.
B. Denial of Motion to Lift the Stay
During the bankruptcy proceedings, Sutton also filed a motion to lift the stay,
arguing that the Reeds failed to make adequate-protection payments and to pay the
property’s post-petition taxes. See Appellant’s Br. at 17; see also Mot. Relief from
Stay [Dkt. 38] at 3. Now on appeal, Sutton also argues the plan was not feasible
because of the value of the property and that the delay in confirming a plan also
supports her argument that the bankruptcy court should have lifted the stay. See
Appellant’s Br. at 17. None of these arguments has merit.
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First, Sutton did receive adequate-protection payments, as the bankruptcy
court ordered. Order Enforcing Required Adequate Protection Payment [Dkt. 102];
see also Sixth Am. Plan [Dkt. 130] at 6. And although Sutton did pay the Reeds’
property taxes to prevent a tax foreclosure on the property, the Reeds included that
debt in the plan. See 7/11/13 Tr. [Dkt. 150] at 15; Sixth Am. Plan [Dkt. 130] at 6.
Next, Sutton’s argument about the value of the property impacting the feasibility of
the plan was resolved when the bankruptcy court held a valuation hearing and
determined that the property “was worth at best $140,000.” See 7/11/13 Tr. [Dkt.
150] at 15. The Sixth Amended Plan listed that revised amount and also included
5% interest, which the bankruptcy court held was appropriate. See id. And finally,
as discussed above, the bankruptcy court reasonably found that the delay in
confirming the plan was not caused by the Reeds acting in bad faith. In short, just
as above, the bankruptcy court did not commit clear error in any of its factual
findings, and it did not abuse its discretion in denying Sutton’s motion to lift the
stay.
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IV. Conclusion
For the reasons stated above, the Court holds that the bankruptcy court’s
finding that the Reeds proposed their Sixth Amended Plan in good faith was not
clear error. The Court therefore affirms the bankruptcy court’s orders denying
Sutton’s motion to lift the stay and confirming the Reed’s Chapter 13 plan.
ENTERED:
s/Edmond E. Chang
Honorable Edmond E. Chang
United States District Judge
DATE: August 20, 2014
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