Hybrid Plans Rejected by First Circuit BAP

The BAP for the First Circuit rejected confirmation of so-called “hybrid” plans in chapter 13. Bullard v. Hyde Park Savings Bank, No. 12-54 (May 24, 2013). The debtor proposed a plan under which his mortgage (including both residential and non-residential elements) was to be divided into secured and unsecured portions under section 1322(b)(2) with the unsecured portion paid for cents on the dollar through the plan. The secured portion would be paid outside the plan and beyond the completion of the plan period as contemplated by the cure and maintain provision in section 1322(b)(5). The bankruptcy court found that sections 1322(b)(2) and 1322(b)(5) are mutually exclusive and therefore the plan could not be confirmed as proposed. In re Bullard, 475 B.R. 304 (Bankr. D. Mass. 2012). The BAP for the First Circuit accepted the interlocutory appeal.

The BAP began its analysis with the observation that the bankruptcy courts in Massachusetts are divided on the legitimacy of hybrid plans. See, e.g., In re McGregor, 172 B.R. 718 (Bankr. D. Mass. 1994) (so long as plan provides for payments in accordance with underlying mortgage agreement—i.e. no change to interest rate—hybrid plans confirmable); In re Fortin, 482 B.R. 35 (Bankr. D. Mass. 2012) (modification under section 1322(b)(2) and “cure and maintain” under section 1322(b)(5) mutually exclusive).

The BAP affirmed the bankruptcy decision, albeit for different reasons, finding that “combining §§ 1322(b)(2) and (5) results in a plan that cannot comport with the requirements of § 1325(a)(5)(B)(i)(I), and is, therefore, unconfirmable.” Section 1325(a)(5)(B)(i)(I) offers two alternatives for confirmation of a plan over the objection of the creditor. A plan may be confirmed if the creditor retains the lien until either: (aa) the underlying debt as “determined under nonbankruptcy law” is paid, or (bb) the debtor is discharged under 1328. The court found that the phrase “payment of the underlying debt determined under nonbankruptcy law” as found in subparagraph (aa) refers to the underlying mortgage document and that the underlying debt is the entire debt covered by that agreement rather than the debt as modified under bankruptcy law. It further found that (bb) affords no relief because section 1328 excepts from discharge debts provided for under section 1322(b)(5). The court concluded: “In effect, § 1328(a)(1) establishes that as long as a plan employs § 1322(b)(5), it can only be confirmed over the creditor’s objection via § 1325(a)(5)(B)(i)(I)(aa). And, since that section states the debt, as determined by nonbankruptcy law, must be paid, a debtor may not use it and bifurcate the applicable claim via § 506(a). To do so would render §1325(a)(5)(B)(i)(I)  ineffective.”

The flaw in this reasoning is that when it dismissed the possibility of confirmation pursuant to section 1325(a)(5)(B)(i)(I)(bb), the panel read the discharge requirement of that subparagraph too expansively. The fact that section 1328(a)(1) precludes discharge of a debt provided for under section 1322(b)(5) is irrelevant to the issue of whether a hybrid plan can be confirmed under (bb). Confirmation does not depend upon the creditor retaining the lien until that specific debt is discharged but rather, confirmation under (bb) is contingent upon the creditor retaining the lien until the debtor completes the plan and the discharge order is entered. Retention of a lien is a separate question from discharge of a debt as discharge only releases the debtor from in personam liability and does not, in and of itself, affect the status of a lien.

NCBRC filed an amicus brief on behalf of the NACBA membership in this case.

Bullard opinion