On Dec. 6, 2018, the U.S. Court of Appeals for the Eleventh Circuit held that a Chapter 13 plan stating that a secured debt will be paid directly to the creditor does not constitute the debt being “provided for” by the plan, and thereby precluding a discharge of that debt. In Dukes v. Suncoast Credit Union, Case No. 16-16513, in the U.S. Court of Appeals for the Eleventh Circuit, the ruling by the Eleventh Circuit will not only have a profound impact upon consumers who file for Chapter 13 bankruptcy protection, but also on secured lenders who may wish to collect deficiency balances against debtors, but have otherwise been reticent to do so thus far.

Factual History

In early 2009, Mildred M. Dukes filed for Chapter 13 bankruptcy protection, seeking to reorganize and repay her debts according to certain stated conditions. Included in her schedules were two mortgages with Suncoast Credit Union, each secured by Dukes' principal residence, totaling approximately $150,000, and not due to mature until 2022.

Dukes submitted her plan of reorganization, and included both Suncoast mortgages in the portion of the plan titled “Paid directly to the Creditor.” Significantly, Dukes did not include the Suncoast mortgages in the section addressing claims secured by real property which she intended to retain and mortgage payments paid through the plan. Additionally, while the plan included Dukes' calculation of her debt burden and plan payment schedule, the Suncoast mortgages were not included in either. Suncoast did not file any objection to Dukes' plan.

In May 2010, the Bankruptcy Court for the Middle District of Florida confirmed Duke's plan of reorganization, under which Suncoast would not receive any payment or distribution from the Chapter 13 Trustee. Dukes timely completed all payment obligations under the plan, and, in March 2012, was granted a discharge of “all debts provided for by the plan” under Section 1328(a) of the Bankruptcy Code.

During this time, Dukes continued to make some payments directly to Suncoast, but by 2011, the payments had ceased. With the mortgages in default, in 2013, Suncoast foreclosed on the home under the second mortgage, and pursued a personal judgment against Dukes on the first. Suncoast then reopened Dukes' bankruptcy case and initiated an adversary proceeding seeking a determination that Dukes remained personally liable for the first mortgage—i.e., that the debt on the first mortgage had not been discharged.

Lower Courts

The Bankruptcy Court for the Middle District of Florida ruled in Suncoast's favor, finding that the mortgage debt had not been discharged because it was to be paid outside the plan, and thus remained unaffected by the plan itself. In other words, the Bankruptcy Court found that the mortgage had not been “provided for” by the plan as required for a discharge under Section 1328(a). Additionally, the Bankruptcy Court held that, even if the mortgage had been “provided for” by the plan, the antimodification provision of Section 1322(b)(2) prohibited the discharge. The District Court for the Middle District of Florida affirmed on all grounds, and Dukes appealed.

Eleventh Circuit

Relying upon the U.S. Supreme Court's opinion in Rake v. Wade, 508 U.S. 464 (1993), the Eleventh Circuit, upheld the decisions of the District and Bankruptcy Courts, reasoning, primarily, that for a debt to be “provided for” in a plan, the plan must “make a provision for” or “stipulate to” the debt—i.e., set forth a payment schedule or modify the terms of the instrument. In Dukes' case, however, the plan did neither of these things. Instead, because Dukes' plan merely stated that Suncoast's mortgage would be paid outside the plan, the Eleventh Circuit determined that Suncoast's rights and Duke's liability under the mortgage were governed solely by the original loan documents.

In so holding, the Eleventh Circuit expressly rejected Duke's argument that merely mentioning or referring to the debt was sufficient for the debt to be “provided for” by the plan. Specifically, the court found that, aside from stating it would be paid directly, Suncoast was not addressed in the plan, and thus received no notice that its rights would be modified. To allow otherwise would permit a debtor to unilaterally deprive a secured creditor of its rights in contravention of Section 1325(a)(5)'s express requirements. Finally, to avoid any doubt, the Eleventh Circuit concluded that, even if “provided for” by the plan, the mortgage debt still would not be discharged due to Section 1332(b)(2)'s antimodification provision. As a result, the Eleventh Circuit found that Dukes remained personally liable.

Conclusion

The opinion by the Eleventh Circuit is a cautionary tale for any consumer-debtor in a Chapter 13 case. At the same time, it provides some salvation for secured lenders, such as mortgagees and automobile finance companies, who were otherwise hesitant to pursue debtors for deficiency balances at the risk of violating the discharge injunction.

Christina Paradowski is director with Tripp Scott and focuses her practice in the areas of creditors' rights, commercial litigation, and general civil litigation.