In Re Donnadio
By: Dean A. Langdon
The key focus in a Chapter 13 bankruptcy is the plan, because it determines how creditors will be treated during the case. Historically, each bankruptcy district had its own version of a plan, and provisions for treatment of creditors varied from district to district. After the Supreme Court held that creditors are bound by a confirmed plan even if it doesn’t follow the Bankruptcy Code, creditors pushed for a uniform national plan to try and avoid hidden surprises in a plan. As a result, a national plan form (Official Form 113) became effective on December 1, 2017.
Secured Claims in National Plan
The national plan form includes one section dedicated to the treatment of secured claims. It offers six options: i) continue direct payments to a creditor and use plan payments to cure any default; ii) modify a secured claim based on the value of the collateral (a “cramdown”); iii) pay secured claims through the plan where the collateral is not subject to valuation (“910 car claims”); iv) avoid a lien due to its status as a judicial or non-purchase money lien; v) surrender the collateral; or vi) a catchall provision for creditors who file allowed secured claims not treated elsewhere. A recurring issue in Chapter 13 practice is what happens to a creditor’s lien if their claim is paid through the plan, whether they are paid the value of the collateral or the full amount of their claim.
Case Law – Donnadio v Santander
Section 1325(a)(5) of the Bankruptcy Code provides the answer with three options for treatment of a secured claim: i) the claim holder accepts the plan; ii) the debtor surrenders the collateral; or iii) the creditor keeps its lien until the earlier of payment in full of its claim or the debtors’ discharge. The Sixth Circuit Bankruptcy Appellate Panel recently decided a case where a creditor with a 910 car claim (Santander Consumer USA, Inc.) objected to a debtor’s (Donnadio) plan because although it provided to pay the claim in full, it didn’t specify that the creditor would keep its lien until the claim was paid or the debtor was discharged. The bankruptcy court overruled the objection and confirmed the plan, holding that the Bankruptcy Code provided for this result even if the plan did not.
The BAP reversed and remanded the case, directing the debtor to include a special provision in the plan to specifically provide that the creditor would retain its lien until the claim was paid in full or the debtor received a discharge. Santander Consumer USA, Inc. v. Donnadio (In re Donnadio), B.R. 19-8004 , 2019 WL 6270946. The BAP relied on a prior Sixth Circuit case which held that a court had no discretion to confirm a plan which did not meet the requirements of Section 1325(a). Shaw v. Aurgroup Fin. Credit Union, 552 F.3d 447, 462 (6th Cir. 2009).
So, has the Sixth Circuit BAP unearthed a flaw in the national Chapter 13 plan form? Will this decision be appealed further, and if so, what will the full Sixth Circuit decide? Will we see a spate of creditor objections to confirmation based on this apparent omission from the national form? Should debtors’ counsel now routinely include the language of Section 1325(a)(5) in the “special provisions” section for all 910 car claims? We’ll just have to wait and see, but a simpler fix would be to revise the national Chapter 13 plan form to include the required language for treatment of such claims.
 United Student Aid Funds, Inc. v. Espinosa, 130 S.Ct. 1367 (2010).
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