HONORABLE RICHARD D. TAYLOR, UNITED STATES BANKRUPTCY JUDGE.
Before the court is a Motion to Determine Extent and Validity of Lien or in the Alternative Motion to Declare Mortgage Satisfied ("Complaint") filed by Timikia Leann Smith ("debtor") on June 20, 2016. Nationstar Mortgage, LLC ("Nationstar") filed an Answer/Response to Motion to Determine Extent and Validity of Lien or in the Alternative Motion to Declare Mortgage Satisfied ("Answer") on June 28, 2016.
Also before the court is an Objection to Claim ("Objection") filed by the debtor on July 17, 2015, requesting that BAC's claim be denied. Nationstar filed a response on August 14, 2015. The court heard the matters on August 9, 2017.
This court has jurisdiction over this matter under 28 U.S.C. §§ 1334 and 157. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B), (K), and (L). The following opinion constitutes findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
The debtor's confirmed and completed Chapter 13 plan provided for payment of the principal balance of her mortgage inside the plan. At the conclusion of her plan and at the time of discharge, the debtor believed her mortgage would be paid in full and Creditor's lien on the property released. In opposition, Creditor argues that it has no obligation to release its mortgage as its filed proof of claim controls regardless of the plan.
This is the debtor's second bankruptcy. Her treatment of Countrywide Home Lending ("Countrywide"), yet another predecessor in interest to Creditor, in her first case set the stage for the controversy in her current case. Specifically, in her first case (1:04-bk-78313), the Chapter 13 trustee distributed monthly mortgage payments of $439.73 to Countrywide based on a plan confirmed on June 3, 2005. (Ex. 1, at 1.) Countrywide received $24,950.27 over the life of the plan on a listed debt of $34,788.89. (Ex. 1, at 1.) Presumably, and by reference to the proof of claim filed in the debtor's current case, the $34,788.89 represented principal; unfortunately, the proof of claim filed in the first case was not introduced into evidence. The court dismissed the debtor's first bankruptcy case on October 20, 2009, because she fell behind on her payments. (Ex. 13, at 2.) Regardless, she made a considerable number of payments to Countrywide in her first bankruptcy over the course of her confirmed, but uncompleted, plan.
The debtor promptly filed her second, and current, Chapter 13 proceeding on November 5, 2009. (Ex. 2, at 1.) When she refiled, her then lawyer, Travis Starr, explained that she could subtract what she had paid in her previous bankruptcy from what she originally borrowed to determine the amount she needed to pay through her new plan. Apparently, her lawyer based his calculations on a claims report from the debtor's 2004 bankruptcy generated by the Chapter 13 trustee's office. The total amount paid through the debtor's first case, $24,950.27, deducted from the total amount of the mortgage claim, $34,788.89,
The debtor's ill-founded calculation is reflected in her schedules. On her Schedule A, the debtor listed a fifty-percent interest with her husband in a "3BR/1BA Brick home & city lot @ 401 W. Long" valued at $15,000 with a secured claim of $9,838.62, the resulting balance of her lawyer's calculation.
The debtor's Chapter 13 Narrative Statement of Plan, however, incongruously categorized Countrywide's debt as a long-term debt with regular payments of $439.73 and an arrearage of $9,839.00 (presumably rounding off the $9,838.62 figure) to be paid at a rate of $12.00 per month. (Stip. Facts at ¶ 2; Ex. 3, at 2.) A principal amount was not referenced. Neither party proffered or elicited any testimony explaining why this initial plan treated the purported principal debt of $9,838.62 as an "arrearage" to be paid at $12.00 a month associated with an unspecified "long-term debt" addressed by monthly payments of $439.73.
In response to this treatment, on February 12, 2010, BAC, as the mortgage lien holder, filed its Objection to Plan Prior to Confirmation ("Objection to Confirmation") objecting to the plan treatment proposed for Countrywide. (Ex. 4.) BAC alleged that its prepared, but apparently unfiled, proof of claim reflected pre-petition arrears of $1,588.81 rather than the $9,839.00 amount provided for in the debtor's proposed plan. (Stip. Facts at ¶ 3; Ex. 4, at 1.) BAC objected to the plan because the monthly payment of $12.00 to cure the pre-petition arrearage was inadequate to completely cure the arrears over the course of the proposed plan. (Stip. Facts at ¶ 3; Ex. 4.) The objection stated that "[t]he Debtor should be required to amend her Plan to cure those pre-petition arrears cited in BAC Home Loans Servicing, LP's Secured Proof of Claim ($1,588.81) within sixty (60) months of confirmation of the subject Plan by — accordingly — increasing the maintenance payment to the Chapter 13 Trustee." (Ex. 4, at 2.)
The debtor filed a plan modification on February 18, 2010, with a notice of opportunity to object.
(Stip. Facts ¶ 4; Ex. 5, at 2-3.) Significantly, Countrywide's treatment (1) changed categories from a "long term debt" to a "short-term claim"; (2) reflected the $9,839.00 figure as principal instead of as an "arrearage," a treatment consistent with the debtor's schedules but not the original plan; (3) introduced a slight and unexplained adjustment of the $9,839 figure to $9,878; and (4) incorporated the $1,588.81 arrearage figure set forth in the Objection to Confirmation. (Ex. 5.) Again, the parties did not produce or elicit any comprehensive explanation for these changes other than the Objection to Confirmation. In addition, the plan required Countrywide to file a proof of claim reflecting the "principal amount of indebtedness and the pre-petition arrearage." (Ex. 5, at 2-3.) The Chapter 13 trustees in this jurisdiction will not make payments on a claim unless a proof of claim is filed in the case. Countrywide nor BAC filed a proof of claim before confirmation.
The court set BAC's Objection to Confirmation for hearing on April 20, 2010; thereafter, the parties requested two continuances.
Although the confirmed plan outlined specific figures and treatment for Creditor, BAC subsequently filed a secured proof of claim for a greater amount. (Rushmore Ex. 10.) BAC's claim set out a total indebtedness of $32,603.44, an arrearage of $1,588.81, a total monthly payment of $439.73, and an interest rate of 8.00%.
In support of its argument that the subsequently filed proof of claim controls over the plan, Creditor emphasizes three facts. First, Creditor focuses on the last sentence of the plan modification, which provides that the "[c]reditor shall file a proof of claim showing the principal amount of indebtedness and the pre-petition arrearage," to support its argument that the proof of claim is controlling. (Ex. 5, at 3.) Creditor's representative, Mike Aiken, testified that, in normal practice, this language requires a creditor to file a proof of claim reflecting the accurate amount of the underlying debt, and the agreed arrearage amount will be treated in the plan.
Second, Creditor points to the last sentence in the confirmation order entered on August 23, 2010:
(Ex. 7.)
Third, Creditor notes the "Other Provisions" section of the original plan that provides "[i]n the event a secured claim is allowed which is not provided for in the plan, then the trustee shall pay such creditor in full after this plan has in all other respects been completed." (Stip. Facts ¶ 9.) Creditor did not expound on the significance of this provision. However, if and to the extent Creditor seeks to differentiate its claim from that of Countrywide, the evidence of claim transfers and testimony confirm that Countrywide was indeed the predecessor in interest to Creditor. Thus, Creditor's successor claim was "provided for in the plan." Matthew Black, a staff attorney for the Chapter 13 trustee, testified that the debtor made every payment required under her confirmed plan.
In her Complaint, the debtor sought declaratory relief — a finding that her mortgage was satisfied — because she made all of the payments to Creditor required by her plan based on an "agreed" principal balance amount and arrearage figure. (Complaint, June 20, 2016, ECF No. 1, at ¶ 5.) The debtor's Objection expanded on her argument, alleging that the confirmed Chapter 13 plan is "binding" pursuant to 11 U.S.C. § 1327 and that BAC's proof of claim was contrary to an agreement reached between the parties and memorialized in the confirmed plan. (Ex. 4.) Creditor generally denied that the plan proposed to pay an agreed principal balance and asserted that the lien remains on the residence even after the debtor receives a discharge.
Neither party suggested that the current controversy is the result of a mistake, either mutual or unilateral. The record is devoid of any allegations of fraud by the parties or on the court. Thus, the issue is whether, in the absence of any subsequent or collateral attack on the validity of a confirmation order, the clear and specific terms of a confirmed plan and commensurate confirmation order govern over a subsequently filed and inconsistent proof of claim. In this instance and based upon the
Section 1327 of Title 11 sets forth the effect of Chapter 13 plan confirmation, including the binding nature of the plan: "The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan." 11 U.S.C. § 1327(a) (2017). Therefore, once final, the plan essentially has a res judicata effect, and it "represents a binding determination of the rights and liabilities of the parties as ordained by the plan." 8 COLLIER ON BANKRUPTCY ¶ 1327.01 (Alan N. Resnick & Henry J. Sommers eds., 16th ed. 2014) (citations omitted).
In United Student Aid Funds, Inc. v. Espinosa, the United States Supreme Court emphasized the final and binding nature of confirmation orders, even when a plan contravenes the bankruptcy code. 559 U.S. 260, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010). The debtor in Espinosa filed a Chapter 13 plan that proposed to discharge accrued interest on a student loan debt. Id. at 264, 130 S.Ct. 1367. The student loan creditor received notice of the proposed plan but did not object to the treatment of its debt or the proposed discharge of a portion of the debt without an undue hardship determination. Id. at 265, 130 S.Ct. 1367. Instead, the creditor filed a proof of claim evidencing the total amount of its debt, "both the principal and the accrued interest," and the plan was confirmed. Id. Over the life of the plan, the debtor paid his principal student loan debt in full, and the court discharged the remaining interest. Id. at 265-66, 130 S.Ct. 1367.
Three years later, the United States Department of Education tried to collect the unpaid interest. Id. at 266, 130 S.Ct. 1367. Eventually, United filed a motion pursuant to "Federal Rule of Civil Procedure 60(b)(4) seeking to set aside as void the Bankruptcy Court's 1993 order confirming Espinosa's plan." Id. The Court found that the confirmation order was a final judgment. Id. at 269, 130 S.Ct. 1367 (citation omitted). The Court additionally held that Rule 60(b)(4) relief was inappropriate in this case, where the creditor received notice of the plan and did not object.
Id. at 275-76 (internal citation omitted). Despite the inclusion of an improper provision, the Court noted the significance of finality when a party has been "notified of a plan's contents and fails to object to confirmation of the plan before the time for appeal expires, that party has been afforded a full and fair opportunity to litigate, and that party's failure to avail itself of that opportunity will not justify Rule 60(b)(4) relief." Id. at 276, 130 S.Ct. 1367.
Since Espinosa, courts have tried to reconcile the decision with the realities of the Chapter 13 plan confirmation process.
Other courts have come to the same, or similar, general conclusion. In In re Franklin, a "mortgage creditor sought relief from the claim bar date" after belatedly filing a proof of claim in the debtor's case post-confirmation. 448 B.R. 744, 746 (Bankr. M.D. La. 2011). The untimely filed proof of claim provided a pre-bankruptcy arrearage amount that differed from the amount provided by the debtor in the confirmed plan. Id. The court found that Espinosa required a new analysis — "the confirmed chapter 13 plan binds [the creditor] because it had notice of the case well before confirmation and plainly in time to file a proof of claim and take other steps to protect its interest." Id. at 748.
The Franklin decision has been cited by other courts acknowledging the importance of debtors being able to "deal" with secured creditors through the plan process when the creditor has adequate notice:
In re Kitzerow, 573 B.R. 766, 770-71 (Bankr. W.D. Wis. 2017) (citing Susan V. Kelley, Ginsberg & Martin on Bankruptcy § 15.03[G]; Shelton v. Citimortgage, Inc.
Notice to the creditor is an imperative part of this analysis. The Ramey court acknowledged that if notice to the creditor is "so insufficient that it violates due process of law," then the principles of res judicata should not apply. 301 B.R. at 545 (citations omitted). "Due process requires notice `reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." Espinosa, 559 U.S. at 272, 130 S.Ct. 1367 (citing Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 S.Ct. 865 (1950); Jones v. Flowers, 547 U.S. 220, 225, 126 S.Ct. 1708, 164 L.Ed.2d 415 (2006)). In Espinosa, the Court acknowledged that "Rule 60(b)(4) does not provide a license for litigants to sleep on their rights." Id. at 275, 130 S.Ct. 1367. The creditor had "actual notice" of the debtor's "plan, its contents, and the [court's] subsequent confirmation of the plan." Id. The creditor also filed a proof of claim in the case, "thereby submitting itself to the Bankruptcy Court's jurisdiction with respect to that claim." Id. (citation omitted). When a "confirmed plan treats [a] creditor, and if the creditor received proper notice of the plan and its proposed confirmation, the creditor's only potential remedy for a plan it doesn't like is to appeal the order of confirmation." Simpson, 240 B.R. at 562.
When the plan's treatment of a creditor is ambiguous or lacks specificity, an issue relating to notice can arise. In United States v. Monahan (In re Monahan), the creditor "[did] not dispute that it received notice of the filing of the Amended Plan. However, unlike Espinosa, the confirmed plan in this case did not provide for the discharge of the priority tax claim upon completion of the plan." 497 B.R. 642, 651 (1st Cir. BAP 2013). In Monahan, the debtor's plan proposed to pay a priority tax claim in full but did not clearly state that the claim, or any accrued postpetition interest, would be discharged upon plan completion. Id. at 644-45. In the court's perspective, these facts distinguished Monahan from Espinosa. The court noted that "in the context of plan confirmation," the due process requirements for notice mean a "clear, open, and explicit statement of a secured creditor's treatment in a chapter 13 plan before the creditor's failure to object will be deemed implied acceptance" in the First Circuit. Id. at 652 (citing Flynn v. Bankowski (In re Flynn), 402 B.R. 437, 444 (1st Cir. BAP 2009); In re Rheaume, 296 B.R. 313, 321 (Bankr. D. Vt. 2003)).
In the case at hand, Creditor or its predecessor had an opportunity to object to the original plan and the modified plan. The creditor objected to the original plan. That objection was set for a hearing post-modification, which provided an adequate vehicle to contest the plan as modified. Of equal significance, the creditor chose to withdraw its objection and allowed a modified plan to be confirmed that was very specific as to the principal, arrearages,
As in Espinosa, this case presents a confirmed Chapter 13 plan that treats a creditor's claim in an impermissible manner. A Chapter 13 plan may modify the rights of secured creditors except to the extent the creditor's claim is secured "only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)(2) (2017). Consonant with this provision, a plan may also "provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any ... secured claim on which the last payment is due after the date on which the final payment under the plan is due[.]" 11 U.S.C. § 1322(b)(5) (2017). An exception comes into play when the last mortgage payment is due before the last plan payment is to be made.
11 U.S.C. § 1322(c)(2) (2017).
In this case, the section 1322(c) exception is simply inapplicable. The Note matures September 1, 2032, a significant period of time after completion of the debtor's proposed sixty-month plan. (Rushmore Ex. 10, at 4.) Therefore, the modification of Creditor's rights, as a secured creditor with a claim secured only by the debtor's principal residence, did not meet the statutory requirements for confirmation. 11 U.S.C. § 1325(a)(1).
Although the treatment is improper, it is difficult to ascertain how the result in this case is significantly different than that in Espinosa. The Creditor's treatment does not spontaneously render the confirmed plan unenforceable. The confirmation order is a final judgment, which Creditor did not appeal and has not attacked since it was entered on August 23, 2010. (Ex. 7.) The confirmed plan explicitly outlines the modified terms — "[t]he remaining principal debt of $9,878 shall be paid in full at 0% interest in monthly installments of $197.56. The arrearage claim of $1,588.81 shall be paid in full by monthly installments of $32.00." (Ex. 5, at 3.) Pursuant to 11 U.S.C. § 1327 and relevant case law, if Creditor was afforded notice of the modification and failed to object, or, as here, objected but withdrew its objection and waived a hearing on the plan as modified, the terms of the confirmed plan "bind" both the debtor and Creditor despite the improper treatment.
Creditor asserts that the language in the modified plan entitled Creditor to file a proof of claim, which it did, reflecting a higher and contradictory principal balance. Creditor argues that its proof of claim is controlling despite the specific treatment provided in the confirmed plan. This argument fails for two complimentary reasons. First, Creditor had yet to file a proof of claim, and, as noted by this court, Chapter 13 trustees in this jurisdiction will not distribute plan payments to a creditor unless a claim is filed. The referenced plan provision merely implements that procedure. Second, if this was true, it seems there would be no reason to outline with such specificity a "remaining principal debt" figure, $9,878, or an arrearage claim amount, $1,588.81, in the plan provision with a proposed treatment of both. (Ex. 5.)
If Creditor thought its treatment in the plan was patently incorrect or ambiguous, it had an opportunity to litigate and attempt to rectify its treatment prior to confirmation. The debtor reads the relevant plan provision to say that Creditor was required to file a proof of claim mirroring the amounts provided for in the plan, so as to permit distribution, while Creditor argues that the language required it to file a proof of claim reflecting accurate figures. Although the plan does not specifically state that the lien will be released or that any remaining debt will be discharged, it more significantly provides that the full debt — principal, interest, and arrearages — will be paid over the life of the plan. Therefore, when the debtor completed the plan payments, her mortgage should be satisfied.
Regarding notice, the facts as presented confirm that Creditor's predecessor in interest, BAC, had notice of the plan modification when it was filed. BAC objected to the original plan. Although the plan modification did not reference BAC nor was BAC listed on the creditors matrix attached to the modified plan or the notice of opportunity to object, BAC objected to the plan's treatment of Countrywide, its predecessor in interest, agreed to continuances of the confirmation hearing, and withdrew its objection to the original plan after the modification was filed. (Ex. 5.) Considering that a lawyer objected to the plan, eventually withdrew that objection, and filed a claim on its behalf, BAC not only participated in the case but had actual notice of the plan modification and its specific treatment therein. Creditor's predecessor in interest had a fair and full chance to litigate this issue prior to confirmation.
Creditor also argues that a provision in the confirmation order provides that a creditor's proof of claim establishes any debt regardless of the plan. Specifically, confirmation orders in this jurisdiction contain a sentence — emphasized by Creditor — which states: "[t]he total amount of an allowed claim shall be the amount stated on a proof of claim properly filed by or on behalf of such creditor, unless the Court determines a different amount following the filing of an objection to such claim." (Stip. Facts ¶ 10.) This argument fails in two respects. First, the plan confirmation process provides an adequate and suitable alternative to the claims objection process particularly when as here, the affected party's claim is treated with exactness and that party fully participates in the confirmation process.
KEITH M. LUNDIN & WILLIAM H. BROWN, CHAPTER 13 BANKRUPTCY § 233.1 (4th ed. 2004) (footnotes omitted).
Second, the confirmation order provision must be read in context. The entire applicable provision provides:
(Ex. 7.) Read in that context, the Creditor's argument fails. Chapter 13 plans frequently refer to many claims in a generic and unspecified manner. Examples are a reference to "all unsecured claims" or treatment of a debt merely as long-term with a reference solely to payment of arrearages. In that context, proofs of claim should establish the amount of the debt unless objected to in a typical claims objection manner. However, in this instance, the debtor alternatively used the plan confirmation process to outline a specific and exact treatment of this Creditor's claim.
When the confirmation order provision is read in its entirety, it refers to those claims treated generally in the plan rather than those for which a specific treatment is proposed. The debtor's plan terms were not ambiguous as to how Creditor's claim would be treated. Creditor is bound by the confirmed Chapter 13 plan and the inevitable consequences that follow absent a successful appeal or attack on the confirmation order itself.
The debtor complied with the terms of the confirmed plan in this case, and her requested relief is granted. The Creditor is directed to take such steps as are necessary to effectuate the release of its lien.
IT IS SO ORDERED.
