By Thomas G. Wolfe, J.D.
While the U.S. Supreme Court recently addressed a procedural issue in a Chapter 13 bankruptcy case, Bullard v. Blue Hills Bank, there are some interesting sub-issues lurking in the background for banks that have filed claims in bankruptcy proceedings to recover their mortgage debt, only to find that the debtor has proposed to “split” that claim into secured and unsecured claims as part of the debtor’s overall repayment plan.
Turning to the Supreme Court’s May 4, 2015, decision in Bullard v. Blue Hills Bank (Docket No. 14-116), the Court unanimously ruled that a bankruptcy court’s order denying confirmation of a debtor’s proposed repayment plan—impacting a mortgage lending bank and other creditors—did not constitute a final, appealable order. As a result, in keeping with the bankruptcy court’s decision declining to confirm the debtor’s proposed repayment plan to, among other things, split his approximately $346,000 mortgage debt owed to the bank into a $245,000 secured claim and a $101,000 unsecured claim, the debtor’s proposed “hybrid” treatment of the mortgage debt was not allowed.
By way of background, Louis Bullard filed a petition for Chapter 13 bankruptcy in federal court in Massachusetts in December 2010. In keeping with bankruptcy procedure, Bullard filed a proposed repayment plan “listing the various claims he anticipated creditors would file and the monthly amounts he planned to pay on each claim over the five-year life of his plan.”
Bullard’s chief debt was the roughly $346,000 he owed to Blue Hills Bank in connection with the mortgage the bank held on Bullard’s multifamily house. Notably, the mortgage was significantly “underwater;” Bullard’s house was worth substantially less than the $346,000 amount that Bullard owed Blue Hills Bank.
Under his repayment plan, Bullard proposed a “hybrid treatment” of the mortgage debt owed to the bank. Essentially, the debtor proposed “splitting the debt into a secured claim in the amount of the house’s then-current value (which he estimated at $245,000), and an unsecured claim for the remainder (roughly $101,000).” Under this proposal, Bullard would continue making his regular mortgage payments to Blue Hills Bank on the secured claim, “which he would eventually repay in full, long after the conclusion of his bankruptcy case.” However, Bullard planned on treating the unsecured claim “the same as any other unsecured debt, paying only as much on it as his income would allow over the course of his five-year plan.” Along these lines, Bullard’s plan called for him to pay “only about $5,000 of the $101,000 unsecured claim” by the end of the five-year plan, and any remaining balance on the unsecured portion of the loan would be discharged.
After Blue Hills Bank objected to Bullard’s proposed repayment plan and a hearing was held, the bankruptcy court declined to confirm it. Although the bankruptcy court acknowledged that some other bankruptcy courts within the First Circuit had allowed split-claim arrangements, the court concluded that “Chapter 13 did not allow Bullard to split the Bank’s claim as he proposed unless he paid the secured portion in full during the plan period.” Consequently, the bankruptcy court ordered the debtor to submit a new plan for approval.
However, instead of submitting a new repayment plan, Bullard appealed to the Bankruptcy Appellate Panel (BAP) of the First Circuit. In turn, the BAP determined that the bankruptcy court’s order denying confirmation of the proposed repayment plan was not final because Bullard was “free to propose an alternate plan.” Still, the BAP decided to exercise its discretion to hear an interlocutory appeal and considered the merits of the Bullard’s appeal. In upholding the bankruptcy court’s decision, the BAP agreed that Bullard’s proposed “hybrid treatment” of the bank’s claim was not permitted.
Bullard then appealed the BAP’s ruling to the First Circuit. The First Circuit adopted the majority view among the federal circuits that a court’s order denying confirmation of a proposed repayment plan “is not final so long as the debtor remains free to propose another plan.” Ultimately, the Supreme Court agreed with the First Circuit’s decision. The practical effect of the Court’s decision on the procedural issue was to keep intact the bankruptcy court’s refusal to recognize Bullard’s “split claim” theory, concerning the mortgage debt owed to the bank, as part of the proposed repayment plan.
Still, a few queries about the debtor’s “split claim” theory linger. For example, if Bullard—or any other bankruptcy debtor for that matter—had proposed to pay all of the secured portion of the underlying mortgage debt to the bank during the repayment plan period, would that have passed muster? In other words, under the right conditions, is a bankruptcy debtor’s “split claim” theory still a sustainable one? Apart from the procedural issues addressed in the Bullard decision, would the federal circuits view the viability of a bankruptcy debtor’s “split claim” theory for mortgage debt the same way in the bankruptcy context?
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