By Michael B. Joseph
(Printed with permission, NACTT Academy, Considerchapter13.org, July 28, 2024)
Could it be that chapter 13 got it right? How does the recent United States Supreme Court holding in Harrington v Purdue Pharma impact chapter 13 cases? See Harrington v. Purdue Pharma L.P., 219 L. Ed. 2d 721 (Sup. Ct. June 27, 2024). The Court held the bankruptcy code does not authorize a release and injunction as part of a Chapter 11 plan that effectively discharges claims against a nondebtor without the consent of the claimants. In chapter 13 there is a codebtor stay that technically may extend over the 5-year term of a chapter 13 case. Also, chapter 13 plans may be confirmed without the consent of claimants that limit rights against nondebtors. The possible impact of Purdue in chapter 13 is examined below.
Bill Rochelle in ABI’s “Rochelle’s Daily Wire” reviewed 2 recent Chapter 11 cases decided after Purdue: July 18, 2024: Parlement Technologies Inc., 24-10755, 2024 BL 240417, 2024 WL 3417084 (Bankr. D. Del. July 15, 2024) and July 23, 2024 Coast to Coast Leasing LLC v. M&T Equipment Finance Corp. (In re Coast to Coast Leasing LLC), 24-00172 (Bankr. N.D. Ill. July 17, 2024)
In Parlement, Judge Goldblatt considered the debtors motion for a preliminary injunction in view of the recent Purdue decision. The court concluded that the debtor had not met its burden to obtain preliminary injunctive relief. It focused on what is meant by likelihood of success on the merits when applying the traditional, four factor test applicable to request for preliminary injunctions. Judge Goldblatt did not preclude granting such relief in other cases if the court concludes that providing a breathing spell to debtor’s management is required, or if it appears the parties may ultimately negotiate a consensual resolution of claims against the non-debtors. The court stated are examples of success on the merits.
In Coast to Coast Leasing, the debtor filed a Motion for a temporary restraining order to enjoin creditors from continuing actions against the debtor’s principles and its two affiliates. The creditors objected to the motion. The court reviewed the recent decision in Purdue Pharma and found that case before the court was distinguishable from the much broader relief sought in Purdue. The court then went on to analyze the factors needed for the requested relief. (1) when such proceedings would defeat or impair the jurisdiction over the case before it (2) the moving party has establish a likelihood of success on the merits and (3) the court, must consider whether the injunction will harm the public interest. In this case, the court found all three requirements were met to issue a temporary stay.
Of course, chapter 13 is a unique chapter and far different than chapter 11. Although some individual business owners or sole proprietors may file a chapter 13 petition, far more individual consumers seek chapter 13 relief. Also, Purdue Pharma involved releases under a chapter 11 plan resolving thousands of Oxy-Contin damage claims. Chapter 13 claims involve primarily consumer debts. However, as seen in the recent chapter 11 cases discussed above, without the chapter 13 co-debtor stay, extraordinary measures would be required of chapter 13 debtors to obtain codebtor relief.
11 USC Section 1301 provides as follows:
“a) Except as provided in subsections (b) and (c) of this section, after the order for relief under this chapter, a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor, or that secured such debt, unless—
(1) such individual became liable on or secured such debt in the ordinary course of such individual’s business; or
(2) the case is closed, dismissed, or converted to a case under chapter 7 or 11 of this title.
(b) A creditor may present a negotiable instrument, and may give notice of dishonor of such an instrument.
(c)On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided by subsection (a) of this section with respect to a creditor, to the extent that—
1) as between the debtor and the individual protected under subsection (a) of this section, such individual received the consideration for the claim held by such creditor;
(2) the plan filed by the debtor proposes not to pay such claim; or
(3) such creditor’s interest would be irreparably harmed by continuation of such stay
d)Twenty days after the filing of a request under subsection (c)(2) of this section for relief from the stay provided by subsection (a) of this section, such stay is terminated with respect to the party in interest making such request, unless the debtor or any individual that is liable on such debt with the debtor files and serves upon such party in interest a written objection to the taking of the proposed action.”
As stated in Section 1301, the codebtor stay remains in place until the case is closed, dismissed, or converted to chapter 7. Reading this section with 11 USC Section 524(e) is necessary for the effect of a discharge on a codebtor:
“(e) Except as provided in subsection (a)(3) of this section, discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt. (f) Nothing contained in subsection (c) or (d) of this section prevents a debtor from voluntarily repaying any debt.”
So, in effect the codebtor stay acts as a preliminary and not a permanent injunction. Effectively it can remain in place for at least 5 years from the filing of the chapter 13 petition without the consent of the creditor. Although the codebtor may not be released from any remaining deficiency once the debtor is granted a discharge and the case is closed, the time the codebtor enjoyed free from harassment is quite valuable. The relief is extraordinary.
It is useful to review how two courts approached the codebtor stay prior to Purdue:
In re Deen 260 BR 577 (Bankr SD GA 2000) the debtors filed a chapter 13 petition and listed Southeastern Bank (the “creditor”) as a creditor. The debtors’ father was listed as a cosignor on the creditor’s claim. The creditor filed a request for relief from the codebtor stay. The debtors proposed a plan to pay the creditors claim in full with interest and at the same time as other secured creditors. The chapter 13 trustee objected but stipulated the plan would be recommended for confirmation if the debtors removed the payment of post-petition interest, but otherwise the claim would be paid in full including any pre-petition interest. The court stated that the codebtor stay of Section 1301 protects the debtors from the indirect pressure exerted by creditors through collection actions, Typically in these cases the codebtors are relatives or friends.
The court denied granting codebtor stay relief, finding the Deen’s plan as modified was confirmable with the elimination of post-petition interest. The court also allowed the classification of the creditor’s claim as not unfair discrimination to other claimants. The result of this case was that over the objection of a claimant, the debtors and the codebtor would have at least 5 years without creditor harassment and collection activities.
However, post discharge may be another result. In the case of In re Faulkner 2013 WL 2154790 (Bankr C.D. Ill 2013) after receiving a chapter 13 discharge the debtor alleged that the credit union violated the discharge injunction by not releasing title to a 2002 Chevrolet trailblazer. The debtor had completed her payments under the plan and received her chapter 13 discharge. The credit union responded that although the plan was completed, there remained an unsecured balance that was still due and owing by the nonfiling cosigner. As such it was not obligated to release the lien. The court agreed. Although section 1301 protected the codebtor from collection actions during the chapter 13 case, after discharge the vehicle lien remained in place and could be enforced against the cosigner’s interest. Citing In re: Brooks 340 BR 648 (Bankr ME 2006) the court seems to indicate that the creditors lien rights against the cosignor may be modified if the plan conspicuously places the creditor on notice with the release language. Possibly creditors could present a timely argument, that Purdue requires consent to plan release language releasing liens against a nonfiling cosignor.
Chapter 13 is a unique and powerful tool providing relief for honest and well-intentioned debtors. The codebtor stay is an extraordinary and remarkable part of the relief included in a chapter 13 filing. Purdue may provide guidance on how far codebtor releases could extend during and after a chapter 13 case, but essentially the immediate relief of the codebtor stay remains.
1521 Concord Pike
Purdue Pharma and Chapter 13 Codebtor Stays
By Michael B. Joseph
(Printed with permission, NACTT Academy, Considerchapter13.org, July 28, 2024)
Could it be that chapter 13 got it right? How does the recent United States Supreme Court holding in Harrington v Purdue Pharma impact chapter 13 cases? See Harrington v. Purdue Pharma L.P., 219 L. Ed. 2d 721 (Sup. Ct. June 27, 2024). The Court held the bankruptcy code does not authorize a release and injunction as part of a Chapter 11 plan that effectively discharges claims against a nondebtor without the consent of the claimants. In chapter 13 there is a codebtor stay that technically may extend over the 5-year term of a chapter 13 case. Also, chapter 13 plans may be confirmed without the consent of claimants that limit rights against nondebtors. The possible impact of Purdue in chapter 13 is examined below.
Bill Rochelle in ABI’s “Rochelle’s Daily Wire” reviewed 2 recent Chapter 11 cases decided after Purdue: July 18, 2024: Parlement Technologies Inc., 24-10755, 2024 BL 240417, 2024 WL 3417084 (Bankr. D. Del. July 15, 2024) and July 23, 2024 Coast to Coast Leasing LLC v. M&T Equipment Finance Corp. (In re Coast to Coast Leasing LLC), 24-00172 (Bankr. N.D. Ill. July 17, 2024)
In Parlement, Judge Goldblatt considered the debtors motion for a preliminary injunction in view of the recent Purdue decision. The court concluded that the debtor had not met its burden to obtain preliminary injunctive relief. It focused on what is meant by likelihood of success on the merits when applying the traditional, four factor test applicable to request for preliminary injunctions. Judge Goldblatt did not preclude granting such relief in other cases if the court concludes that providing a breathing spell to debtor’s management is required, or if it appears the parties may ultimately negotiate a consensual resolution of claims against the non-debtors. The court stated are examples of success on the merits.
In Coast to Coast Leasing, the debtor filed a Motion for a temporary restraining order to enjoin creditors from continuing actions against the debtor’s principles and its two affiliates. The creditors objected to the motion. The court reviewed the recent decision in Purdue Pharma and found that case before the court was distinguishable from the much broader relief sought in Purdue. The court then went on to analyze the factors needed for the requested relief. (1) when such proceedings would defeat or impair the jurisdiction over the case before it (2) the moving party has establish a likelihood of success on the merits and (3) the court, must consider whether the injunction will harm the public interest. In this case, the court found all three requirements were met to issue a temporary stay.
Of course, chapter 13 is a unique chapter and far different than chapter 11. Although some individual business owners or sole proprietors may file a chapter 13 petition, far more individual consumers seek chapter 13 relief. Also, Purdue Pharma involved releases under a chapter 11 plan resolving thousands of Oxy-Contin damage claims. Chapter 13 claims involve primarily consumer debts. However, as seen in the recent chapter 11 cases discussed above, without the chapter 13 co-debtor stay, extraordinary measures would be required of chapter 13 debtors to obtain codebtor relief.
11 USC Section 1301 provides as follows:
“a) Except as provided in subsections (b) and (c) of this section, after the order for relief under this chapter, a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor, or that secured such debt, unless—
(1) such individual became liable on or secured such debt in the ordinary course of such individual’s business; or
(2) the case is closed, dismissed, or converted to a case under chapter 7 or 11 of this title.
(b) A creditor may present a negotiable instrument, and may give notice of dishonor of such an instrument.
(c)On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided by subsection (a) of this section with respect to a creditor, to the extent that—
1) as between the debtor and the individual protected under subsection (a) of this section, such individual received the consideration for the claim held by such creditor;
(2) the plan filed by the debtor proposes not to pay such claim; or
(3) such creditor’s interest would be irreparably harmed by continuation of such stay
d)Twenty days after the filing of a request under subsection (c)(2) of this section for relief from the stay provided by subsection (a) of this section, such stay is terminated with respect to the party in interest making such request, unless the debtor or any individual that is liable on such debt with the debtor files and serves upon such party in interest a written objection to the taking of the proposed action.”
As stated in Section 1301, the codebtor stay remains in place until the case is closed, dismissed, or converted to chapter 7. Reading this section with 11 USC Section 524(e) is necessary for the effect of a discharge on a codebtor:
“(e) Except as provided in subsection (a)(3) of this section, discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt. (f) Nothing contained in subsection (c) or (d) of this section prevents a debtor from voluntarily repaying any debt.”
So, in effect the codebtor stay acts as a preliminary and not a permanent injunction. Effectively it can remain in place for at least 5 years from the filing of the chapter 13 petition without the consent of the creditor. Although the codebtor may not be released from any remaining deficiency once the debtor is granted a discharge and the case is closed, the time the codebtor enjoyed free from harassment is quite valuable. The relief is extraordinary.
It is useful to review how two courts approached the codebtor stay prior to Purdue:
In re Deen 260 BR 577 (Bankr SD GA 2000) the debtors filed a chapter 13 petition and listed Southeastern Bank (the “creditor”) as a creditor. The debtors’ father was listed as a cosignor on the creditor’s claim. The creditor filed a request for relief from the codebtor stay. The debtors proposed a plan to pay the creditors claim in full with interest and at the same time as other secured creditors. The chapter 13 trustee objected but stipulated the plan would be recommended for confirmation if the debtors removed the payment of post-petition interest, but otherwise the claim would be paid in full including any pre-petition interest. The court stated that the codebtor stay of Section 1301 protects the debtors from the indirect pressure exerted by creditors through collection actions, Typically in these cases the codebtors are relatives or friends.
The court denied granting codebtor stay relief, finding the Deen’s plan as modified was confirmable with the elimination of post-petition interest. The court also allowed the classification of the creditor’s claim as not unfair discrimination to other claimants. The result of this case was that over the objection of a claimant, the debtors and the codebtor would have at least 5 years without creditor harassment and collection activities.
However, post discharge may be another result. In the case of In re Faulkner 2013 WL 2154790 (Bankr C.D. Ill 2013) after receiving a chapter 13 discharge the debtor alleged that the credit union violated the discharge injunction by not releasing title to a 2002 Chevrolet trailblazer. The debtor had completed her payments under the plan and received her chapter 13 discharge. The credit union responded that although the plan was completed, there remained an unsecured balance that was still due and owing by the nonfiling cosigner. As such it was not obligated to release the lien. The court agreed. Although section 1301 protected the codebtor from collection actions during the chapter 13 case, after discharge the vehicle lien remained in place and could be enforced against the cosigner’s interest. Citing In re: Brooks 340 BR 648 (Bankr ME 2006) the court seems to indicate that the creditors lien rights against the cosignor may be modified if the plan conspicuously places the creditor on notice with the release language. Possibly creditors could present a timely argument, that Purdue requires consent to plan release language releasing liens against a nonfiling cosignor.
Chapter 13 is a unique and powerful tool providing relief for honest and well-intentioned debtors. The codebtor stay is an extraordinary and remarkable part of the relief included in a chapter 13 filing. Purdue may provide guidance on how far codebtor releases could extend during and after a chapter 13 case, but essentially the immediate relief of the codebtor stay remains.