Benson v. Empire State Bank

In Benson v. Empire State Bank, 516 N.W.2d 550 (Minn. App. 1994), the Minnesota Court of Appeals concluded that a bank's secured claim reverted back to its original terms after the debtors defaulted on a confirmed chapter 12 plan, and the bankruptcy was converted to chapter 7. The debtors executed a promissory note and real estate mortgage in favor of the bank. The debtors subsequently filed a chapter 12 bankruptcy, and a reorganization plan was confirmed which modified the debt owed to the bank. The debtors operated their farm under this plan for a few years but were unable to make the 1990 and 1991 annual payments. Because they were unable to comply with the plan, they chose to liquidate assets under chapter 7. When the bank was allowed to foreclose on the mortgage, it claimed an amount due based on the original loan amount plus interest, with credit given for payments made during the bankruptcy. The bank reasoned that it was no longer bound by the chapter 12 plan because of the debtors' default. The court agreed with the bank and concluded that the bankruptcy code did not bind a creditor to the terms of a chapter 12 reorganization plan after the creditor has defaulted and converted the bankruptcy to chapter 7. In making its decision, the court stated that "the effect of the plan is 'subject to defeasance if the debtor fails to obtain a discharge. If discharge is denied, claims against the debtor will be discharged only to the extent of payments actually received by the creditor.'" Id. at 554.