The debtor executed a promissory note (the “note”) secured by a deed of trust tax lien (the “tax lien”) on her property. The creditor became the holder of the note and tax lien. The debtor filed for Chapter 13 bankruptcy and filed her original Chapter 13 plan (the “plan”), and the creditor filed its first objection to the plan. The debtor then filed an amended plan, and the creditor filed its amended objection to the amended plan, arguing against confirmation for various reasons. The bankruptcy court held a hearing and overruled the creditor’s objections to the amended plan and later confirmed the amended plan at a confirmation hearing. The confirmation order provided in relevant part that any creditor had to “file an application for post-petition fees, costs or charges” pursuant to Bankruptcy Code section 506(b) and Federal Rule of Bankruptcy Procedure 2016. The creditor filed its appeal, and the court narrowed the issues on appeal to two after addressing numerous deficiencies in the creditor’s opening brief on appeal. The court addressed (1) whether the bankruptcy court erred in applying section 506(b) rather than 505 of the Bankruptcy Code, and therefore requiring the creditor to file an application and get approval from the bankruptcy court to obtain post-petition attorney fees and costs; and (2) whether the bankruptcy court erred in its ruling that the creditor’s tax lien could be extinguished by the amended plan if the debtor paid the amount of the note plus interest (i.e. the amount stated on in the creditor’s proof of claim) in full even though post-petition attorney fees and costs due to the creditor would not be fully paid when the lien was extinguished.
In Ovation Servs. LLC v. Perez, No. SA-23-CV-00361-JKP, 2024 WL 556683, 2024 U.S. Dist. LEXIS 23899 (W.D. Tex. Feb. 12, 2024) (unpublished opinion), the district court held (1) section 506(b) was correctly applied by the bankruptcy court; and (2) the lien may be extinguished upon payment of the proof of claim amount under the plan. Addressing the first issue on appeal, the district court held that the bankruptcy court correctly applied section 506(b) of the Bankruptcy Code rather than section 505. The creditor argued that because it was a tax lien holder, section 505 was the only applicable provision regarding its post-petition attorney fees and costs. The bankruptcy court had held no cases suggested that only section 505 applied to oversecured creditors or creditors with tax liens and the district court agreed with this on appeal. Additionally, the district court noted the longstanding interpretations of section 506(b) and bankruptcy rule 2016” required oversecured creditors to file applications for payment of post-petition attorney fees and costs in similar cases. Next, the court held that the bankruptcy court did not err in providing that the tax lien could be extinguished if the debtor “paid in full” the debt according to the amended plan. The creditor argued that the debt owed to it included its attorney fees and costs because the note provided for them, and therefore the plan could not extinguish the tax lien because only the proof of claim amount will be paid and not the full debt. Therefore, the creditor argued, the tax lien should pass through bankruptcy until the full debt (proof of claim amount plus attorney fees and costs) was paid. The district court found no basis for this definition of debt under the Bankruptcy Code. The district court further explained that a lien on property exists to secure a specific debt (here, the amount due on the note) and that the lien may be extinguished by a debtor paying in full any underlying debt under a confirmed plan. Once the debt is satisfied by a debtor’s payment, the bankruptcy court must discharge the debt and there is no longer anything for the lien to secure. Therefore, liens do not survive a bankruptcy case when the debt is provided for and paid in full under a plan.
By Kristin Meurer, [email protected]
Edited By Hayden Mariott, [email protected]