EDWARD ELLINGTON, Bankruptcy Judge.
After considering same and the Joint Stipulation of Undisputed Facts and Debtor and Creditor's Positions (Adv. Dkt. #26) (Joint Stipulation) filed by Stephen L. Mason, Sr. and Christiana Trust, A Division of Wilmington Savings Fund Society, FSB, as Trustee for Normandy Mortgage Loan Trust, Series 2013-8, (Rushmore)
"On cross-motions for summary judgment, we review each party's motion independently, viewing the evidence and inferences in the light most favorable to the nonmoving party." Ford Motor Co. v. Tex. Dep't. Of Transp., 264 F.3d 493, 498 (5th Cir. 2001). Upon consideration of both motions for summary judgment and the Joint Stipulation, the Court finds that there are no genuine disputes as to any material facts. The Joint Stipulation states that the following are undisputed facts:
Joint Stipulation of Undisputed Facts and Debtor and Creditor's Positions, Adv. Proceeding No. 1500075EE, Adv. Dkt. #26, unnumbered pages 1-3, Aug. 29, 2016.
This is the second Opinion this Court has written in this case. On October 30, 2014, the Court entered its Memorandum Opinion (Dkt. #69) (Proof of Claim Opinion)
The basic facts of the Proof of Claim Opinion were: Rushmore had timely filed proofs of claim. The Debtor did not object to either of Rushmore's timely filed proof of claims, therefore, Rushmore's claim was deemed allowed under 11 U.S.C. § 502(a)
Thirty-eight months later, the Debtor completed all plan payments. At that time, Rushmore filed a third amended proof of claim (Third Proof of Claim) in which it claimed that the Debtor's pre-petition mortgage arrearage was actually $12,608.52. The Debtor objected to the Third Proof of Claim.
In its Proof of Claim Opinion, the Court sustained the Debtor's objection to the Third Proof of Claim and disallowed the pre-petition mortgage arrearage of $12,608.50 contained in the Third Proof of Claim. The Court further granted James L. Henley, Jr.'s, the Chapter 13 Trustee, (Trustee) Trustee's Motion for an Order Declaring [Rushmore's] 1322(B)(5) Claim Defaults Cured Pursuant to Amended Proof of Claim Filed on January 11, 2011. This order deemed the Debtor current in his mortgage payments to Rushmore at that point in time. Finally, the Court held that "the mortgage arrearage listed in the Proof of Claim (Claim #1-1) and in the amended Proof of Claim (Claim #1-2), namely $439.21, have been satisfied and all defaults have been cured."
Thereafter, the Trustee filed his Trustee's Notice of Completion of Plan Payments (Dkt. #75) on March 11, 2015, and his Chapter 13 Standing Trustee's Final Report and Account (Dkt. #76) (Final) on March 12, 2015. The Final shows that Rushmore was paid $53,731.80 in ongoing mortgage payments and $439.21 on Rushmore's arrearage claim.
On April 14, 2015, the Discharge of Debtor After Completion of Chapter 13 Plan (Dkt. #79) was entered. The Debtor's case was closed on April 21, 2015. (Dkt. #81).
On July 15, 2015, Rushmore filed its Motion to Re-Open Bankruptcy for Purpose of Filing Adversary to Determine Validity, Priority and Extent of Lien (Dkt. #83). An order was entered reopening the bankruptcy case on August 13, 2015. (Dkt. #88).
Rushmore initiated the above-styled adversary proceeding with the filing of its Adversary Complaint to Determine Validity, Priority and Extent of Lien (Adv. Dkt. #1) on October 29, 2015. On October 30, 2015, Rushmore filed its Amended Adversary Complaint to Determine Validity, Priority and Extent of Lien (Adv. Dkt. #4) (Complaint). In the Complaint, Rushmore states that the Debtor has demanded that Rushmore release its lien on his homestead. Rushmore has declined to release its lien because Rushmore alleges that it holds a valid lien against the Debtor's property for the unpaid pre-petition mortgage arrearage the Court deemed was disallowed in its Proof of Claim Opinion, namely $12,608.52. Rushmore requests that the Court find that it holds a valid lien on the Debtor's property for the unpaid pre-petition arrearage.
The Debtor filed his Answer and Counter-Complaint (Adv. Dkt. #7) (Answer or Counter Claim) on November 11, 2015. In its Answer, the Debtor states that the Court has previously ruled that the Debtor had brought his mortgage current by the end of his bankruptcy plan. The Debtor also states that he has subsequently paid the last payment due Rushmore under the promissory note. Consequently, the Debtor states that the Court should deny Rushmore's request to find that it holds a valid lien on the Debtor's property for the unpaid pre-petition mortgage arrearage and require Rushmore to release its lien. In his Counter Claim, the Debtor alleges Rushmore has reported to the credit bureaus that he is delinquent in his mortgage payments and that Rushmore is attempting to collect a debt this Court has ordered he did not owe. The Debtor seeks attorney fees and damages for Rushmore's violation of the discharge order.
Rushmore filed a Motion for Summary Judgment (Adv. Dkt. #11) (Rushmore's Motion) on April 14, 2016, in which Rushmore alleges there is no dispute to any material fact and that it is entitled to a judgment against the Debtor as a matter of law. The Debtor filed his Response to Plaintiff's Motion for Summary Judgment (Adv. Dkt. #14) (Debtor's Answer) on April 20, 2016, in which the Debtor denies Rushmore is entitled to a judgment as a matter of law. Rushmore filed Adversary Plaintiff's Amended Reply to Defendant's Response to Plaintiff's Motion for Summary Judgment (Adv. Dkt. #17).
On April 20, 2016, the Debtor filed his Defendant's Motion for Summary Judgment, Motion for Sanctions, and Motion for Hearing on issue of damages [sic] (Adv. Dkt. #12) (Debtor's Motion). In the Debtor's Motion, the Debtor alleges that there is no dispute to any material fact and that he is entitled to a judgment against Rushmore as a matter of law. Included in the Debtor's Motion is a Motion for Sanctions against Rushmore pursuant to Federal Rule of Civil Procedure 11(b). Rushmore filed Adversary Plaintiff's Response to Defendant's Motion for Summary Judgment (Adv. Dkt. #18) (Rushmore's Answer) on May 11, 2016, in which Rushmore alleges that the Debtor is not entitled to a judgment as a matter of law. Included in Rushmore's Answer is a motion to dismiss the Debtor's Motion and the Debtor's Motion for Sanctions.
On June 10, 2016, the Court entered an Order Bifurcating Issues (Adv. Dkt. #19) (Bifurcating Order). In the Bifurcating Order, the Court ordered that it would bifurcate the matters and decide the threshold issue of the validity, priority and extent of any lien by Rushmore. Once there was a final adjudication as to the validity, priority and extent of any lien of Rushmore, the Court would then address the question of sanctions, attorney fees and damages.
The Court heard the motion to strike on July 20, 2016, and ruled that the motion to dismiss the Debtor's Motion should be denied. The Court further found that the Debtor's Motion for Sanctions should be denied. On September 13, 2016, the Court signed an Order (Adv. Dkt. #28) denying Rushmore's motion to dismiss the Debtor's Motion and denying the Debtor's Motion for Sanctions. After the parties informed the Court that they would not be filing amended briefs, the Court took the matter under advisement on November 10, 2016.
This Court has jurisdiction of the subject matter and of the parties to this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(1), (2)(K).
Rule 56 of the Federal Rules of Civil Procedure,
Under the Bankruptcy Code, two sections define how a mortgage lender will be paid in a Chapter 13 case. Section 1322(b)(2) is known as the anti-modification provision and provides that a Chapter 13 plan may "modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims." 11 U.S.C. § 1322(b)(2). The anti-modification provision grants special rights to mortgage lenders, and by prohibiting modification of the mortgage lender's contractual rights, incorporates the pre-petition mortgage contract into a Chapter 13 plan.
To balance the rights granted to mortgage lenders, § 1322(b)(5) gives debtors the right to cure any pre-petition arrearage on their mortgage and to remain current on their mortgage. Section 1322(b)(5) provides that a Chapter 13 plan may:
11 U.S.C. § 1322(b)(5).
In other words, under § 1322(b)(5), a debtor can maintain current mortgage payments and cure any pre-petition mortgage arrearage through a Chapter 13 plan. "Essentially, § 1322(b)(5) does not allow modification of a creditor's substantive right to payments, but does modify how a mortgage lender can exercise these substantive rights."
If a debtor maintains the ongoing mortgage payments over the life of the plan and has cured all pre-petition mortgage arrearage, the plan is fully performed. The effect is that the debtor is now current on his mortgage obligations.
The Court will note at the onset that neither the Debtor nor Rushmore provided the Court with much legal authority to support their respective positions. Rushmore relies mainly on two cases to support its position that its lien for the unpaid pre-petition mortgage arrearage was not extinguished: In re Thompson, Case No. 95-11159-MAM-13, (Bankr. S.D. Ala. May 20, 1998) and In re Stovall, 256 B.R. 490 (Bankr. N.D. Ill. 1999). The Court will discuss each case separately.
In Thompson, the debtor was behind eleven (11) mortgage payments when he filed a Chapter 13 bankruptcy. When the mortgage company filed its proof of claim, it failed to list the pre-petition arrearage, therefore, the Chapter 13 trustee did not pay any mortgage arrearage through the plan. The debtor received his discharge after twenty-five (25) months of payments.
Subsequently, the debtor moved to reopen his bankruptcy case to determine whether a pre-discharge mortgage arrearage existed. In denying the motion to reopen the bankruptcy case, the court found that the debtor had pre-petition mortgage arrearage that was not paid during his bankruptcy case. Therefore, the unpaid pre-petition mortgage arrearage survived the debtor's discharge.
Rushmore is attempting to claim that the mortgage arrearage which this Court disallowed in its Proof of Claim Opinion is in the same posture as the pre-petition mortgage arrearage in Thompson. It is not. Unlike the creditor in Thompson, Rushmore filed two proofs of claim for a pre-petition mortgage arrearage in the amount of $439.21, which was deemed allowed when no objection was filed to either proof of claim. The Debtor paid the allowed pre-petition mortgage arrearage in full, again, unlike the debtor in Thompson.
After Rushmore filed its Third Proof of Claim, the Court disallowed the claim and deemed the Debtor current in his mortgage payments. Thompson did not involve a situation where a claim for a pre-petition mortgage arrearage was disallowed by the court-to the contrary, there was no adjudication in Thompson as the debtor's pre-petition mortgage arrearage. By virtue of the pre-petition mortgage arrearage in the Third Proof of Claim being disallowed by the Court, the Debtor did not owe a pre-petition mortgage arrearage at the time his case was discharged and closed. Consequently, the court finds Thompson inapplicable to the case at bar.
Rushmore also relies on the Stovall case to support its position. While the facts of Stovall can be distinguished from the case at bar, the court's reasoning in Stovall in reaching its decision is applicable to the case at bar.
In Stovall, the debtor filed a motion to reopen his bankruptcy case to enforce the discharge injunction. The debtor alleged that over the life of his plan that he had paid his mortgage in full. The creditor alleged that its claim was not paid in full, and therefore, its lien survived the bankruptcy case.
The debtor's plan in Stovall proposed to pay the entire balance owed on his mortgage. The creditor filed a proof of claim, which was allowed, and the debtor completed his plan payments and received his discharge. After the case was reopened, it was discovered that the Chapter 13 trustee had misread the creditor's proof of claim and failed to accurately calculate the correct amount needed to pay the mortgage in full.
In reaching its decision, the court quoted extensively from Matter of Penrod, 50 F.3d 459 (7
The Stovall court found that the debt to the creditor was provided for in the plan to be paid in full, "and if that had been done the lien would have been extinguished." Id. But, due to the trustee's misreading of the proof of claim, the debtor did not pay the creditor claim in full because the debtor still owed the creditor over $12,000.00 at the time he completed his plan payments. Consequently, the court held that the creditor's lien was not extinguished.
In the case at bar, Rushmore filed two proofs of claim for pre-petition mortgage arrearage, and therefore, participated in the reorganization. Rushmore's claim for $439.21 in pre-petition mortgage arrearage was provided for in the Debtor's plan, and unlike the debtor in Stovall, the Debtor paid this amount in full. Therefore, any lien for a pre-petition mortgage arrearage was extinguished upon payment in full of the $439.21. Consequently, Stovall can be distinguished from the case at bar.
While the facts can be distinguished, the Court finds persuasive the case of In re Kleibrink.
The debtor then filed another bankruptcy case. The debtor alleged that the creditor's claim was disallowed in his prior bankruptcy case and any interest the creditor held in his property was discharged in his prior bankruptcy case. The creditor, of course, alleged that the claims objection order did not disallow its secured claim and that its lien was not extinguished in the bankruptcy.
The Honorable Barbara J. Houser discusses in depth what is required in order for a debtor to extinguish a lien in a Chapter 13 bankruptcy case. Judge Houser found that:
In re Kleibrink, 346 B.R. at 747-49, 751, 752.
Judge Houser ultimately held that the creditor's lien survived the first bankruptcy case. Even though the debtor had filed objections to the creditor's proof of claim, the court found that the multiple objections were so confusing that the creditor had not received sufficient notice to satisfy due process because the creditor was not clearly notified that the debtor was seeking to extinguish its lien. Rather, the objection to the claim "`did not seek to `disallow' [the creditor's] claim, but rather, it sought to allow the claim at a zero amount.'"
In the case at bar, Rushmore's pre-petition mortgage arrearage claim of $439.21 was deemed allowed, and the Debtor paid the claim in full. It was not until the Debtor had completed his plan payments that Rushmore filed its Third Proof of Claim claiming that the Debtor owed a much larger pre-petition mortgage arrearage. The Debtor objected to Rushmore's Third Proof of Claim, and thereby complied with the minimum requirements of Simmons and Howard to extinguish a lien under § 506(d). Further, unlike the confusing objections in Kleibrink, the Debtor's objection to Rushmore's Third Proof of Claim clearly stated that "the Debtor Objects to the Proof of Claim filed by [Rushmore] on May 23, 2014, and said claim should be disallowed."
Unlike the debtor in Kleibrink, Rushmore was clearly put on notice that the Debtor was seeking to disallow its Third Proof of Claim for pre-petition mortgage arrearage. And unlike the creditor in Kleibrink, Rushmore fully participated in the proceedings on the objection to its Third Proof of Claim process: Rushmore received notice of the objections; filed responses; participated in hearings; and entered into a joint stipulation of facts with the Debtor. After full participation by Rushmore, the Court then entered its Proof of Claim Opinion disallowing Rushmore's proof of claim for pre-petition mortgage arrearage and deeming the Debtor current in his mortgage payments.
The matter before the Court is a complaint to determine the validity, priority and extent of Rushmore's lien. Therefore, the Court finds that it need not answer the question raised in Kleibrink of whether the objection to Rushmore's Third Proof of Claim substituted for an adversary proceeding and satisfied the requirements of due process so that Rushmore's lien was extinguished. The issue of the validity, priority and extent of Rushmore's lien is squarely before the Court and all parties' due process rights have been protected. The Court will now determine whether its ruling which disallowed Rushmore's Third Proof of Claim extinguished Rushmore's lien for the pre-petition mortgage arrearage.
In a bankruptcy case, a proof of claim is evidence of the validity and amount of a creditor's claim. A party who objects to a proof of claim is objecting to the validity and/or amount of the creditor's claim. When Rushmore filed its original proofs of claim and then the Third Proof of Claim, its claims were essentially bifurcated: one part was for the ongoing mortgage payments and the other part was for mortgage arrearage. The Debtor did not object to Rushmore's claim regarding his ongoing mortgage payments. Instead, the Debtor only objected to Rushmore's claim for pre-petition mortgage arrearage contained in the Third Proof of Claim. In its Proof of Claim Opinion, the Court disallowed the pre-petition mortgage arrearage claim in Rushmore's Third Proof of Claim. The Court did not, however, disallow Rushmore's claim for the ongoing monthly mortgage payments.
As stated previously, under § 506(d), "[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless—(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title."
H.R. Rep. No. 95-595, p. 357 (1977), U.S. Code Cong. & Admin. News 1978, pp. 5787, 6313.
In its Proof of Claim Opinion, Rushmore's claim for pre-petition mortgage arrearage in the Third Proof of Claim was not disallow under either § 502(b)(5) or § 502(e).
Further, the Order Confirming the Debtor's Plan, Awarding a Fee to the Debtor's Attorney and Related Orders (Dkt. #15) (Confirmation Order) states on page one of the Amended Chapter 13 Plan: "SECURED CLAIMS: Creditors that have filed claims that are not disallowed are to retain lien(s) under 11 U.S.C. § 1325(a)(5)(B)(i) until plan is completed. . . ." Ignoring the fact that the Debtor had already completed his plan, once the Court disallowed Rushmore's claim for pre-petition mortgage arrearage contained in the Third Proof of Claim, the Confirmation Order clearly states that Rushmore's lien was not retained under § 1325(a)(5)(B)(i).
The Court also finds persuasive the case of In re McDonald, 336 B.R. 380 (Bankr. N.D. Ill. 2006). In McDonald, the debtor proposed to pay his ongoing mortgage payment and cure the mortgage arrearage in his plan. The debtor paid all post-petition mortgage payments and all pre-petition mortgage arrearage provided for in his plan. The debtor then received his discharge. Subsequently, the bank attempted to foreclose on the debtor's property. The court found that the confirmed plan "acts like a court-approved contract or consent decree that binds the debtor and all of the creditors."
Similarly, when the Court granted the Trustee's Motion for an Order Declaring [Rushmore's] 1322(B)(5) Claim Defaults Cured Pursuant to Amended Proof of Claim Filed January 11, 2011 (Dkt. #70) the Debtor was deemed current as to all mortgage payments as of that date and all defaults were cured. Consequently, like the debtor in McDonald, the Debtor's mortgage loan should have been reinstated as of that date.
The Court thereby finds that when the Court disallowed Rushmore's Third Proof of Claim for a pre-petition mortgage arrearage of $12,608.52, Rushmore's lien for this pre-petition arrearage became void pursuant to § 506(d). At the time the Debtor received his discharge, the Debtor was deemed fully current on his mortgage. Assuming the Debtor has otherwise paid the indebtedness in full, the Debtor is entitle to have the lien on his property released.
The first step in determining whether a motion for summary judgment should be granted or denied is for the court to determine whether a dispute exists as to "a genuine issue of material fact as to each element of the cause of action."
In order to receive distributions under a confirmed Chapter 13 plan, a creditor must file a proof of claim. Without objection by a party, the proof of claim is deemed allowed and "shall constitute prima facie evidence of the validity and amount of the claim." Fed. R. Bank. P. 3001(f). Rushmore filed two proofs of claim stating that it was owed $439.21 for a pre-petition mortgage arrearage. Since no objection was filed to either proof of claim, the claims were deemed allowed. The Debtor paid the $439.21 in pre-petition mortgage arrearage in full.
Rushmore then filed its Third Proof of Claim for a pre-petition mortgage arrearage in the amount of $12,608.52, and the Debtor objected to this claim. In its Proof of Claim Opinion, the Court found that allowing Rushmore to amend its proof of claim, in such a large dollar amount, after the Debtor had completed all of his plan payments would be unfairly prejudicial to the Debtor. The Debtor paid Rushmore's claim exactly as Rushmore requested. The fact that Rushmore waited until the Debtor had completed his plan payments to claim that it was owed an additional $12,608.52 was sufficient for the Court to deny Rushmore relief. "The fault for [this] problem lies squarely with [Rushmore]"
Since the Debtor objected to Rushmore's Third Proof of Claim and requested that the claim be disallowed, the Debtor met the minimum requirements for voiding Rushmore's lien. The Complaint currently before the Court "complies with the procedural safeguards set forth in Part VII of the Federal Rules of Bankruptcy Procedure"
To the extent the Court has not addressed any of the parties' other arguments or positions, it has considered them and determined that they would not alter the result.
A separate judgment consistent with this Opinion will be entered in accordance with Rule 7054 and Rule 9021 of the Federal Rules of Bankruptcy Procedure.
On August 10, 2016, Rushmore Loan Services, LLC as servicing agent for Christiana Trust, A Division of Wilmington Savings Fund Society, FSB, as Trustee for Normandy Mortgage Loan Trust, Series 2013-8 filed a Transfer of Claim Other than for Security (Dkt. #93). The Transfer of Claim Other than for Security (Dkt. #93) states that Rushmore Loan Management Services, LLC as servicing agent for Christiana Trust, A Division of Wilmington Savings Fund Society, FSB, as Trustee for Normandy Mortgage Loan Trust, Series 2013-8 had transferred its claim to Rushmore Loan Management Services LLC as servicing agent for Wilmington Savings Funds Society FSB, d/b/a Christina Trust, as trustee for Normandy Mortgage Loan Trust, Series 2016-1. For purposes of this Opinion, the creditor will be referred to as Rushmore.
