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Creditor Insurance Company Fails to Object To Discharge of Interest; Ch. 13 Plan Upheld

Wednesday, April 17, 2013
By Stephanie M. Acree

A Chapter 13 plan confirmation order discharging post-petition interest on a judgment involving the debtor's negligent operation of a motor vehicle was found to be binding on the creditor insurance company March 19 by the U.S. Bankruptcy Court for the Eastern District of Wisconsin (American Family Mutual Insurance Co. v. Reichartz (In re Reichartz), Bankr. E.D. Wis., No. 2:12-ap-02697 (SVK), 3/19/13).

Judge Susan V. Kelley found that because the creditor had failed to object to the plan, the order must be enforced even though the provision discharging the post-petition interest would likely not have been confirmed if the creditor had objected. 

Judgment Plus Interest

Debtor Martin L. Reichartz filed for Chapter 13 protection on Oct. 13, 2004. Prior to the filing, Reichartz was involved in the negligent operation of a motor vehicle while intoxicated, which resulted in American Family Mutual Insurance Co. paying certain medical expenses pursuant to Reichartz's insurance policy.

American Family obtained a judgment against Reichartz on June 25, 2003, and filed a general unsecured proof of claim in Reichartz's bankruptcy case. The claim stated that the amount due as of the date of the petition was “$22,612 plus judgment interest.” Pursuant to Wisconsin state law, American Family's judgment would accrue 12 percent interest per year. 

Interest Shall Cease

The debtor's Chapter 13 plan provided that the debtor would pay American Family's claim in full, but that “[i]nterest, penalties, and garnishment [would] cease.” American Family did not object to the plan confirmation, and the bankruptcy court confirmed the plan on Nov. 29. 2004, with the order specifically containing the provision that interest would cease. American Family recieved $22,612 worth of payments under the plan. The plan was completed in 2007 and the bankruptcy court entered an order discharging the debtor.

However, in 2012, both American Family and the debtor moved to reopen the case and both parties instituted adversary proceedings. The debtor alleged that American Family was attempting to collect a discharged debt because it had wrongfully applied the Chapter 13 plan payments to interests, costs, and other charges and now claimed to be owed more money after discharge. American Family claimed that it recalculated the debt, applying all of the plan payments to the principal amount of the judgment, and sought in its complaint a determination that $6,460 it calculated in post-petition interest was nondischargeable.

Both parties filed motions for summary judgment. 

Espinosa Controls

In deciding the case, the bankruptcy court relied on the U.S. Supreme Court's decision in United Student Aid Funds Inc. v. Espinosa, 559 U.S. 260 (2010)(22 BBLR 399, 3/25/10). In Espinosa, the Chapter 13 debtor's plan provided that it would pay the principal on a nondischargeable student loan, but that the interest would be discharged. The creditor failed to object and the bankruptcy court confirmed the plan. The creditor eventually attempted to collect the post-petition interest and moved to declare the confirmation order void pursuant to Rule 9024 of the Federal Rules of Bankruptcy Procedure, arguing that the order violated the Bankruptcy Code because student loans are nondischargeable without an adversary proceeding finding of due hardship.

The Supreme Court concluded that the provision discharging the interest should have been considered invalid and the bankruptcy court should not have confirmed the plan, but that once it had been confirmed the order must be enforced. 

Failure to Object

The bankruptcy court concluded that the decision in Espinosa was controlling. The court said that because the plan “unambiguously provided for discharge of American Family's post-petition interest,” and because American Family had failed to object to the provision, it was now binding. The court acknowledged that had American Family objected to the provision, the plan likely would not have been confirmed.

Accordingly, the bankruptcy court granted Reichartz's motion for summary judgment and dismissed American Family's complaint.

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