By Hunter Gould, Esq.

SouthLaw, P.C.*

USFN Member (IA, KS, MO, NE)

On April 1, 2025, the Bankruptcy Court for the District of Kansas Chief Bankruptcy Judge Dale L. Somers reaffirmed most creditor counsel’s understanding of Bankruptcy Rule 3002.1 in In re McGruder, 2025 Bankr. LEXIS 771 (Bankr. D. KS April 1, 2025), finding that Rule 3002.1 does not apply to secured creditor’s in a Chapter 13 case if the debtor’s plan fails to provide for contractual installment payments.

The opinion is of note because the debtor’s counsel argued that Bankruptcy Rule 3002.1 should be applicable because a portion of the equal monthly amount paid to the creditor pursuant to the Chapter 13 Plan included a monthly payment toward principal and interest identical to the amount in the note.

In this case, the basis of creditor’s claim was a note in the principal amount of $100,000.00 to be paid in monthly principal and interest payments in the amount of $599.55 at 6% interest and a final balloon payment to be paid upon the note’s maturity, which was originally August 15, 2017, and then extended to December 15, 2017.

Debtor’s Chapter 13 Plan filed contemporaneously with the case filing sought to pay in full the creditor’s lien against the debtor’s principal residence. The Chapter 13 Plan was confirmed providing for payments to the creditor in equal monthly amounts of $988.00 for the entirety of the Chapter 13 Plan, and a unique plan provision stated that the remainder of the lien would be paid in full through a refinance of the indebtedness upon plan completion.

Debtor’s original Chapter 13 Plan was then confirmed without objection.

Later, the creditor filed a Motion for Relief based upon the debtor’s failure to pay the post-petition taxes and assessments against the property. Creditor and debtor resolved the basis for the Motion for Relief in an Agreed Order. The Order provided for an increase in the monthly amount paid to creditor, increasing from $988.00 to $1,300.00 per month. The $1,300.00 monthly amount consisted of: $599.55 paid toward principal and interest, $303.00 paid toward ongoing property taxes, and $397.45 toward the post-petition escrow deficiency with the funds later being applied toward principal and interest after the post-petition escrow deficiency was cured.

Creditor’s Motion for Relief was subsequently denied three days after the entry of the Agreed Order.

Two years later the debtor obtained a pay-off quote from creditor during an attempt to refinance the property.  The pay-off quote from the creditor included post-petition creditor attorney’s fees of over $20,000.00.

Debtor then filed a Motion for Determination of Post-Petition Mortgage Fees, Expenses, and Charges pursuant to 3002.1 seeking to disallow the post-petition attorney’s fees included in the creditor’s payoff as Bankruptcy Rule 3002.1 Notices of Post-petition Fees, Expenses and Charges had not been filed in the case and a majority of the fees were incurred over 180 days prior. The debtor also argued that the total amount of the creditor’s attorney fees was unreasonable.

In debtor’s brief in support of the Motion, debtor’s counsel argued that Bankruptcy Rule 3002.1 should apply based upon the fact that the Agreed Order Confirming the debtor’s Amended Chapter 13 Plan provided that a portion of the monthly amount paid to creditor explicitly included a $599.55 payment toward principal and interest. As the $599.55 in the Order was identical to the ongoing principal and interest payment in the original note, the debtor asserted that the payment was in fact a contractual installment payment as referenced in Bankruptcy Rule 3002.1.

The Order, designated as an Opinion due to the novel argument, includes a robust analysis of Bankruptcy Rule 3002.1 and the term contractual installment payments. As neither the Bankruptcy Code nor Bankruptcy Rule 3002.1 defines contractual installment payments, the court turned to the Advisory Committee Notes from the 2016 amendment to Bankruptcy Rule 3002.1 which provide:

 " If… a secured creditor's claim is otherwise modified by the confirmed plan, the secured creditor is said to have lost the ‘benefit of its original contract negotiated with the debtor’ as the confirmed plan, pursuant to § 1327(a), becomes the modified contract between the debtor and creditor, and the plan payments to the creditor are not contractual installment payments as the original contract is no longer adhered to.”

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The court determined that the Chapter 13 Plan created “a separate and distinct payment arrangement than the one contemplated by the underlying contract,” even though the $1,300.00 monthly amount to be paid to creditor did include $599.55 toward principal and interest identical to the principal and interest amount included in the original note.  Consequently, Bankruptcy Rule 3002.1 did not apply.

Although, the conclusion of the court may not be a surprise to USFN readers familiar with Bankruptcy Rule 3002.1, it reinforces the court’s reading of the term “contractual installment payments” in spite of debtor’s counsel’s attempted argument.

The court declined to address the reasonableness of creditor’s attorney fees and set the matter for a future status hearing.

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USFNews - May 21, 2025

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