IN RE: DAVID HARLEY PALFI AND BRITTANY AMBER PALFI (2026)

Ch. 11, Sub V

MEMORANDUM OPINION AND ORDER

This matter came before the Court on the University of Kentucky's Motion for Payment of Administrative Expense, Debtors’ Response, and related pleadings. (Docs. 192, 199, 205, 206). Upon consideration of the pleadings, Stipulation of Facts, and Record, the Court finds that the Motion for Payment for Administrative Expense is due to be DENIED for the reasons below.

JURISDICTION

This Court has jurisdiction to hear these matters pursuant to 28 U.S.C. §§ 1334 and 157, the Order of Reference by the District Court dated June 5, 2012, and General Order 2025-R entered by the Eleventh Circuit Judicial Council on September 2, 2025. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(G). The parties stipulated to this Court's jurisdiction and that this is a core proceeding under 28. U.S.C. § 157(b)(2)(A) &(B).

PROCEDURAL BACKGROUND AND FACTS 1

On or about June 24, 2022, Debtor, Brittany Amber Palfi, entered into a home equity line of credit (“HELOC”) with the University of Kentucky Federal Credit Union (“Credit Union”). The HELOC was secured by a mortgage on 171 General Cleburne Drive, Richmond, KY 40475 (“Property”). The Debtors filed this Chapter 11, Subchapter V Bankruptcy on November 21, 2024. The Debtors’ Bankruptcy Schedules valued the Property at $295,000 with security interests held by Stockton Mortgage Corporation (“Stockton”) in the amount of $237,169.00 and the Credit Union in the amount of $58,767.00. (Doc. 31, at 27). Stockton filed a fully secured proof of claim on January 30, 2025, in the amount of $248,607.45, listing the Property as the collateral for its claim. (ECF Claim No. 21-1). The Credit Union filed a fully secured proof of claim on December 11, 2024, in the amount of $60,936.71, also listing the Property as the collateral for its claim. (ECF Claim No 9-1).

On January 23, 2025, the Credit Union filed a Motion for Relief from Stay under 11 U.S.C. § 362 (d)(1) & (2). (Doc. 48). On February 27, 2025, this Court entered a Consent Order Granting Adequate Protection and Conditionally Denying the Motion for Relief upon the parties’ agreement that the Debtors would remit payments to the Credit Union in the amount of $286.00 per month commencing on March 10, 2025 and continuing until the Debtors’ plan was confirmed. (Doc. 85). On or around July 2025, the Property was damaged by a flooding event, constituting a casualty loss. The casualty event reduced the value of the Property. Although the Debtors had insurance, it did not cover flood damage and the Debtors’ insurance claim was denied.

The Debtors filed their Amended Chapter 11 Small Business Subchapter V Plan on September 22, 2025, stating in part:

4. Class 4: Claim of University of Kentucky Federal Credit Union

(1) Description. Class 4 consists of the claim of University of Kentucky Federal Credit Union (“UKFCU”) in the asserted amount of $60,936.71 which represents the amount set forth in Claim #9, and which the Class 4 Creditor asserts is secured by a lien on the General Cleburne Property. The Debtors reserve the right to file a motion to value the collateral which may result in a lower secured claim on behalf of UKFCU.

(2) Collateral. The collateral for this claim is, and shall be solely limited to, the following property: Property located at 171 General Cleburne Drive, Richmond, KY 40475 (the “General Cleburne Property”).

(3) Treatment. The Debtors shall surrender the General Cleburne Property to Stockton Mortgage, the Class 3 Creditor, subject to the lien (the Class 4 Claim) of UKFCU. The treatment set forth herein shall be in full satisfaction of the Class 4 Claim.

(4) Retention of Liens. Except to the extent that UKFCU agrees to a different treatment, UKFCU shall retain its Lien on the General Cleburne Property to the extent of its Allowed Secured Claim, as set forth above, which Collateral shall be the sole collateral for UKFCU's Allowed Secured Claim. This Lien shall secure UKFCU's Allowed Secured Claim as of the Effective Date and shall remain attached to the Calhoun Avenue Property following its surrender to the Class 3 Creditor unless altered or removed by a subsequent valid judicial proceeding or agreement.

(5) Impairment and Voting. Class 4 is Impaired. UKFCU shall be entitled to vote its Secured Claim to accept or reject the Plan.

(Doc. 148 11,12).

10. Class 10: General Unsecured Claims  2

(1) Description. Class 10 consists of Claims of General Unsecured Creditors.

(2) Treatment of General Unsecured Claims. The Class 4 Unsecured Creditors Class shall receive payments as set forth in Article VII(B)(4) with funding provided as described in Article XI below. No Class 10 Unsecured Claim shall be allowed to the extent that it is for interest or other similar charges other than as otherwise specifically and expressly provided for herein.

(3) Impairment and Voting. Class 10 is Impaired. Class 10 creditors with Allowed

Claims shall be entitled to vote their Allowed Class 10 Claims to accept or reject the Plan.

(Id. at 15).

The Credit Union obtained an Order Granting Relief from the Automatic Stay on October 29, 2025 (doc. 169) and did not object to confirmation of the Debtors’ Plan.³ The Debtors obtained non-consensual confirmation at the hearing held on October 31, 2025, and the Confirmation Order was entered on November 5, 2025. (Doc. 183).

On or about January 2, 2026, the Credit Union amended its Proof of Claim, changing it from fully secured to unsecured and then amended it again asserting an administrative priority claim under 11 U.S.C. § 507(b). (See ECF Claim Nos. 9-1, 9-2, 9-3). A dispute arose as to whether any part of the Credit Union's claim was intended to be included in the Class 10 Unsecured Creditors’ Class. On January 8, 2026, the Debtors filed a Motion to Amend Plan to Correct Scrivener's Error asserting that the reference to “Class 4” in paragraph 2 of the Class 10 treatment was a typographical error and should be corrected to read “Class 10”. (Doc. 207). The Court granted the Debtors’ Motion to Correct Scrivener's Error by Order dated May 28, 2026. The remaining issue is whether the Credit Union's post confirmation amended claim is entitled to administrative priority treatment.

ANALYSIS

Confirmation of a chapter 11 plan binds the debtor, creditor, and equity holders and has preclusive effect on all claims or issues which were raised or could have been raised in the confirmation proceedings. 11 U.S.C.§ 1141(a); In re Justice Oaks II, Ltd, 898 F.2d 1544 (11th Cir.1990), cert. denied, 498 U.S. 959, 111 S.Ct. 387, 112 L.Ed.2d 398 (1990); Trulis v. Barton, 107 F.3d 685, 691 (9th Cir. 1995); In re Laing, 31 F.3d 1050 (10th Cir.1994) (stipulation of nondischargeability of debt made in a confirmed Chapter 11 plan could not be relitigated); In re Chattanooga Wholesale Antiques, Inc., 930 F.2d 458, 463 (6th Cir.1991)(noting all parties are bound by the terms of a confirmed plan of reorganization.); In re Howe, 913 F.2d 1138 (5th Cir.1990) (debtors could have brought lender liability claims in a previous bankruptcy case which concluded in a confirmed plan, so res judicata applied to bar claims after confirmation); In re Varat Enterprises, Inc., 81 F.3d 1310, 1315 (4th Cir.1996)( bankruptcy court's order of confirmation is treated as a final judgment with res judicata effect); In re Martin 150 B.R. 43 (Bankr.S.D.Cal.1993) (IRS bound by debt collection procedures of plan even though debt was nondischargeable); In re Moussa, 95 B.R. 449 (Bankr.N.D.Tex.1989) (provisions of plan preempts time limits of Fed.R.Bankr.P. 4004(a)); NCL Corp. v. Lone Star Bldg. Centers (Eastern) Inc., 144 B.R. 170 (S.D.Fla.1992)( an order confirming a plan of reorganization possesses all the requisite elements of common law res judicata); In re Wayne H. Coloney Co., Inc., 89 B.R. 924 (Bankr.N.D.Fla.1988) (although debtor cannot normally sever and assume part of a contract and reject the remainder, if the confirmed plan so provides, res judicata precludes challenge); In re St. Louis Freight Lines, Inc.,45 B.R. 546 (Bankr.E.D.Mich.1984) (plan is binding on creditors receiving less under the plan than legally entitled to). The binding effect of a confirmed plan is such that res judicata applies even when the plan contains provisions which are arguably contrary to applicable law. See In re Bowen, 174 B.R. 840, 847–48 (Bankr. S.D. Ga. 1994)(creditors wishing to attack provisions of the plan as contrary to applicable law should object to the plan at confirmation). Consequently, challenges to a confirmed plan of reorganization which allege that the plan is contrary to applicable law, either bankruptcy or otherwise, are bound to be unsuccessful. Id.

Here, the Credit Union asserts that its claim is entitled to priority treatment.⁴ The statute upon which the Credit Union relies states in part:

If the trustee, under section 362, 363, or 364 of this title, provides adequate protection of the interest of a holder of a claim secured by a lien on property of the debtor and if, notwithstanding such protection, such creditor has a claim allowable under subsection (a)(2) of this section arising from the stay of action against such property under section 362 of this title, from the use, sale, or lease of such property under section 363 of this title, or from the granting of a lien under section 364(d) of this title, then such creditor's claim under such subsection shall have priority over every other claim allowable under such subsection

11 U.S.C § 507(b).

Although there are instances in which the failure of adequate protection may warrant a priority claim under 11 U.S.C.§ 507(b), such is not the case here. In support of its position, the Credit Union cites the In re Carpet Ctr. Leasing Co., Inc. decision, allowing an administrative expense priority under § 507(b) based on “diminution in value of collateral that occurred because of Debtor's continued use of trucks pursuant to the automatic stay ․” 991 F.2d 682 (11th Cir.), opinion amended on denial of reh'g, 4 F.3d 940 (11th Cir. 1993). However, the facts of Carpet Ctr. are materially distinguishable from this case. Notably, the Palfi's Confirmed Plan provided for surrender in full satisfaction of the Credit Union's Claim. The Credit Union's assertion that the surrender in full satisfaction language does not apply to its remaining debt, is not supported by the Plan provisions or the Record. The Debtors’ Plan did not delineate or otherwise bifurcate the Credit Union's Claim into secured and unsecured portions. The plan language plainly states that “․ Class 4 consists of the claim of University of Kentucky Federal Credit Union (“UKFCU”) in the asserted amount of $60,936.71 ․ [and] ․the treatment set forth herein shall be in full satisfaction of the Class 4 Claim.” (Doc. 148). This Court finds that such language reflects the Debtors’ intent to surrender of the collateral in full satisfaction of the Credit Union's entire claim.⁵ Although the Plan reserved the Debtors’ right to seek valuation of the collateral, had they chosen to do so, no such motion was brought before the Court. Further, there is no evidence of bad faith or concealment by the Debtors. The record reflects that the Credit Union had knowledge of the casualty loss well in advance of confirmation. (Docs. 133, 192, para. 12). The Confirmation Order was entered after the flood loss, with proper notice thereof, and opportunity to object. The Credit Union did not object to the surrender in full satisfaction language, the Debtors’ Plan was confirmed, the Confirmation Order was entered, and the appeal time expired. Thus, consistent with the line of cases recognizing the binding effect of the confirmation order, this Court finds that the doctrine of res judicata precludes the Credit Union from seeking re-classification of its claim or priority treatment at this juncture.

Even if the Confirmation Order had not provided for surrender in full satisfaction of the Credit Union's Claim, priority treatment would still not have been appropriate for a myriad of other reasons. See Joint Industry Board v. United States, 391 U.S. 224, 228, 88 S.Ct. 1491, 1493, 20 L.Ed.2d 546 (1968)(statutory provisions governing priorities are construed narrowly and such determinations are fact sensitive); Matter of Jartran, Inc., 732 F.2d 584, 586 (7th Cir.1984)(giving priority to a claimant not clearly entitled thereto, is inconsistent with the policy of equality of distribution); In re Second Timmon Hotel, 91 B.R. 985, 988(Bankr.M.D.Fla.1988) ( creditor must show that the loss was caused solely by the imposition of the automatic stay); In re Mendez, 259 B.R. 754 (Bankr. M. D Ala.2001)(“[N]ot every decline in value must be recompensed, only those which, but for the stay, could ․ be prevented or mitigated.”); In re Five Star Partners, L.P., 193 B.R. 603, 613 (Bankr. N.D. Ga. 1996)( allowance of an administrative priority claim under § 507(b) require that: (1) creditor must have an allowable claim under section 507(a)(1); (2) the court must expressly award adequate protection to the creditor, and (3) the claim must arise from the use, sale or lease of property due to the stay of action under § 362). The casualty loss, due to flooding, was simply an Act of God, not attributable to any nefarious or derelict act of the Debtors. The loss was also not occasioned by the Debtors’ use, sale or lease of the Property and granting relief from the automatic stay earlier would not have prevented it. Thus, even if the Confirmation Order had not precluded the Credit Union's requested relief, priority treatment under § 507(b) would still not be warranted.

CONCLUSION

Based on the above, it is hereby ORDERED, ADJUDGED, and DECREED that the Motion of the University of Kentucky Credit Union's Motion for Administrative Claim is due to be and is hereby DENIED.

FOOTNOTES

2.   For ease of reference, this entire section is hereinafter also referred to as “Paragraph 10”.

3.   The automatic stay lifted as a result of the Debtors’ failure to cure a payment default under the terms of a Conditional Denial Order on a Motion for Relief. (Docs. 85,166,169). The Order granting the Credit Union relief from the automatic stay stated in part that “[T]his Order is entered for the sole purpose of allowing Movant to obtain an in rem judgment against the collateral described above. Movant shall not seek an in personam judgment against Debtor(s).” (Doc. 169 at 2).

4.   The Creditor's Motion and amended claim seeking priority treatment were both filed post-confirmation.

5.   This provision was consistent with the Credit Union's proof of claim on record at the time of confirmation, averring their debt was fully secured.

JERRY C. OLDSHUE, JR. U.S. BANKRUPTCY JUDGE