ERIC L. FRANK, Bankruptcy Judge.
The confirmed chapter 13 plan of Debtor Raymond E. Smith ("the Debtor") provides, inter alia, that the Debtor will procure a "reverse mortgage" on his residential real property and use the proceeds to pay off the existing mortgage on the property held by M & T Bank ("M & T").
Before the court is the Debtor's objection (the "Objection") to M & T's amended proof of claim, which is in the amount of $32,053.58. The Debtor bases his objection primarily on the ground that the claim improperly includes charges assessed after the entry of a pre-petition state court judgment in foreclosure. The Debtor also disputes the calculation of interest and the propriety of various legal expenses included in the claim. He asserts that the allowed claim should be only $24,987.81.
For the reasons set forth below, I conclude that the Objection is largely without merit. I find that M & T's claim should be allowed in the amount of $30,351.55, which includes post-petition interest through the date of confirmation of the Debtor's chapter 13 plan.
The Debtor commenced this chapter 13 bankruptcy case on June 7, 2010. The Debtor's confirmed chapter 13 plan provides, as the "primary option" for treatment of the secured claim on his residence, as follows:
(Debtor's Chapter 13 Plan ¶ 5) (Doc. # 18).
Dovenmuehle Mortgage, Inc. ("Dovenmuehle") filed a secured proof of claim in the amount of $30,758.37. On May 11, 2011, Dovenmuehle's assignee, M & T, filed an amended proof of claim in the
Neither party presented any witnesses at the hearing in this contested matter. Without objection, the Debtor introduced three (3) documents and M & T introduced two (2) documents into evidence. In addition to the documentary evidence, I have considered certain factual representations in the parties' post-hearing memoranda, but only to the extent that it is clear that the facts are not in dispute. I have also taken judicial notice of the court docket in Dovenmuehle Mortgage, Inc. v. Smith, March Term 2009, No. 1503 (C.P. Phila.). See, e.g., In re Soto, 221 B.R. 343, 347 (Bankr.E.D.Pa.1998) (a bankruptcy court may take judicial notice of the matters of record in the state courts within its jurisdiction).
Based on this record, I make the following findings:
(Id. ¶ 1, 6).
principal $11,392.23 interest through 6/7/2010 @ 7.35%4 2,951.955
interest on unpaid principal over 36 month plan term 1,341.50 late charges 404.46 escrow advances 8,402.44 foreclosure legal fees 4,180.00 foreclosure costs 3,031.50 property inspection costs 349.50 __________ Total $32,053.58 6
judgment in the Foreclosure Action $23,573.41 interest to the date of the bankruptcy filing @ 7.35%7 891.748 sheriff's costs 1,500.00 affidavit of service per Pa. R. Civ. P. 3129.1 58.38 service of notice 65.00 bringdown 125.00 skip/trace search 35.00 costs to stay sheriff's sale 200.00 writ 15.00 affidavit of service per Pa. R. Civ. P. 3129.1 17.16 foreclosure fees 1,925.00 escrow advances 1,395.18 __________Total $29,800.87
The Debtor's lead argument is that the Amended Proof of Claim is overstated based on a fundamental flaw in M & T's calculation methodology. The Debtor bases his argument on In re Stendardo, 991 F.2d 1089 (3d Cir. 1993).
In Stendardo, the Third Circuit applied the doctrine of merger under Pennsylvania law and held that after the entry of a foreclosure, the terms of a mortgage are merged into the foreclosure judgment and the mortgage no longer provides a basis for determining the respective rights and obligations of the parties. Because the foreclosure judgment constitutes a "new and higher" obligation, mortgage provisions relating to items such as the interest rate and the borrower's obligation to reimburse the lender for advances for taxes and insurance are superseded by the judgment and are no longer operative. Id. at 1098. The merger doctrine, however, is subject to an exception: a provision of a mortgage may survive the entry of judgment if the mortgage clearly evidences the parties' intent to preserve the effectiveness of that provision even after the entry of judgment. Id. at 1095; see also In re Phillips Group, Inc., 382 B.R. 876, 883 (Bankr.W.D.Pa.2008).
Relying on Stendardo, the Debtor contends that M & T's claim should be calculated
M & T responds with two arguments. First, M & T contends that, regardless of the terms of the Mortgage, the judgment entered in the CP Court permits M & T to recover interest at the contract rate and escrow advances through the date of a sheriff's sale and that the bankruptcy court is bound by that judgment under the Rooker-Feldman doctrine.
Although I reject M & T's Rooker-Feldman argument,
The Debtor contends that even if M & T has an ongoing right to interest based on the Note, the rate of interest should drop from 7.375% to 6% after July 1, 2009, the maturity date of the Note. I agree.
Paragraph 1 of the Consent Agreement refers to M & T's right to "per diem" interest. While that term is undefined in the Agreement, it undoubtedly refers to M & T's right to interest as provided in the loan documents; M & T does not contend otherwise. The question then, is what, if anything, do the loan documents provide regarding the post-maturity interest rate?
Paragraph 26 of the Mortgage
At first blush, one might think that the reference in Paragraph 2 of the Note to the payment of 7.375% interest "until" all of the principal interest has been "paid" would extend the contract rate beyond the maturity date of the (unpaid) Note. However, under Pennsylvania law, the phrase "until paid" has an understood meaning in this context and refers to the maturity date of the Note. As one court explained:
In re Dilts, 143 B.R. 644, 646 (Bankr. W.D.Pa.1992) (quoting Wright v. Hanna, 210 Pa. 349, 59 A. 1097 (1904)).
Based on Dilts and the text of the Note, I conclude that after July 1, 2009, the maturity date of the Note, the annual interest rate on the unpaid principal balance of the Note dropped from 7.375% to 6%. Consequently, M & T's calculation of the prepetition interest that accrued on the judgment in the approximate one year period from the maturity of the Note and the filing of this bankruptcy case is overstated by 1.375%.
The next question is whether the 6% interest rate should be assessed against the amount of the foreclosure judgment ($23,573.41) or the unpaid principal balance ($11,392.23).
Ordinarily, interest on a claim reduced to judgment pre-petition is calculated by applying the interest rate against the full amount of the pre-petition judgment. See In re Yorke, 1996 WL 432422, at *1 (Bankr.E.D.Pa. July 30, 1996). However, in all of their filings with the court, Dovenmuehle and M & T have treated their entitlement to "per diem interest," as that term is used in the Consent Agreement, to refer to interest on the unpaid principal balance of the Mortgage, not interest on the CP Judgment. Because that methodology results in a lower per diem, I infer that their actions are consistent with the parties' intentions in entering into the Consent Agreement. See Restatement (Second) of Contracts §§ 202(4), (5) (West 2011). In effect, just as the Debtor waived certain benefits of the merger doctrine in entering into the Consent Agreement, so too did Dovenmuehle.
Pursuant to the Consent Agreement, I conclude that the accrual of post-judgment, pre-petition interest on the CP Judgment should be calculated by applying the appropriate interest rate to the unpaid principal balance of the Note, not to the entire amount of the CP Judgment. Based on this methodology, I calculate the post-foreclosure, pre-petition interest charges to be $701.93. I obtain this figure by adding:
The Debtor further objects to the post-petition interest charge of $1,341.50 included in M & T's Amended Proof of Claim. He contends that interest should not run for 36 months "when the plan proposes to pay the claim in full prior to the expiration of the 36 month ... period." (Debtor's Memorandum of Law at 8). While I do not accept the Debtor's reasoning or any suggestion that no post-petition, pre-confirmation interest is allowable,
If a creditor's secured claim is "oversecured," post-petition, pre-confirmation interest may be allowed as part of a proof of claim. See 11 U.S.C. § 506(b) ("To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim....") (emphasis added); see also In re Nixon, 404 Fed.Appx. 575, 578-79 (3d Cir. Dec. 15, 2010) (nonprecedential).
In this case, it does not appear that the Debtor disputes that the value of the Property exceeds M & T's claim.
In determining the amount of post-petition interest allowable under § 506(b), most courts employ the rate of interest applicable under the parties' contract. See, e.g., Garner, 663 F.3d at 1220; South Canaan Cellular Investments, 427 B.R. at 77-78. As explained in Part IV.B.1, supra, in this case, involving a matured loan note, the proper interest rate is 6%.
Another issue arises however. Just as it was necessary to decide whether the post-judgment, pre-petition interest rate should be applied to the entire amount of the foreclosure judgment or the (lower) unpaid principal balance, the same issue arises with respect to post-petition, pre-confirmation interest allowable under § 506(b).
Based on the parties' agreement—the Consent Agreement, which I consider to be the parties' "contract" for purposes of § 506(b)—I resolve M & T's entitlement to post-petition, pre-confirmation interest in the same manner as its entitlement to post-judgment, pre-petition interest. M & T is entitled to § 506(b) interest by applying the interest rate to the unpaid principal balance, not the entire judgment. Further, there is authority suggesting that the court may have some discretion in determining the appropriate amount of interest to be added to a claim under § 506(b). See In re Milham, 141 F.3d 420, 423-24 (2d Cir.1998). To the extent that I have discretion, I exercise it by applying the legal rate of interest (6%) against the unpaid principal balance component of the claim, rather than the entire claim, consistent with the methodology of the Consent Agreement. See generally Nixon, 404 Fed.Appx. at 578-79 (affirming
Therefore, M & T is entitled to $740.49 in post-petition, pre-confirmation interest for the thirteen (13) months between the petition date and confirmation of the Debtor's chapter 13 plan ($11,392.23 x 6% x 13 months/12).
The Consent Agreement also provides that the Debtor is responsible for all costs recoverable under the Mortgage. There is no dispute that the Debtor is responsible for reasonable legal fees and costs that M & T incurred in the Foreclosure Action. However, the Debtor disputes that most of the legal fees and costs itemized by M & T are an allowable component of its claim. See Finding of Fact No. 26. The Debtor agrees that M & T is entitled to reimbursement of $1,565.00: $1,500.00 for sheriff's deposit and $65.00 for the notice of sale, both of these expenses being fees paid to the sheriff's office in connection with the execution on the foreclosure judgment. The Debtor disputes the balance of claimed legal expenses, asserting that M & T has not met its burden of proof.
I find that all of the claimed expenses are allowable.
In the Consent Agreement, the Debtor confirmed his obligation to pay "any additional recoverable costs per the Mortgage." (Ex. M & T-1, Consent Agreement ¶ 1). The Mortgage secures the Note, which provides that "the Note Holder will have the right to be paid back ... for all of its costs and expenses in enforcing this Note to the extent not prohibited by applicable law. These expenses, include, for example, reasonable attorney's fees."
The Debtor presented no evidence in support of his challenge to the claimed legal expenses. Thus, the outcome of the dispute depends upon which party has the burden of proof.
As recently summarized in In re Wells, 2011 WL 6938355, at *4 (Bankr.E.D.Pa. Dec. 28, 2011) (footnotes omitted):
In Sacko, I considered how the general principles described above should be applied in considering an objection to a proof of claim based on a residential mortgage. I concluded that:
Sacko, 394 B.R. at 100.
In Sacko, I also elaborated on the "elastic" approach in determining whether the objecting party has met its burden of production:
Sacko, 394 B.R. at 100-01 (quotation marks and citations omitted; underline added, italics in original).
Applying the foregoing principles in this contested matter, I conclude that M & T's has established a prima facie case for the allowance of its legal expenses. The writings upon which the claimed expenses are based (the Consent Agreement, the Mortgage and the Note) were all attached to the Proof of Claim or offered into evidence at the hearing. Further, all of the specific charges at issue fall within the categories of allowable expenses set forth in the Consent Agreement, the Mortgage and the Note. Consequently, the Debtor bore the burden of producing some evidence to refute the validity of the claimed expenses.
The Debtor failed to meet his burden of production because he neither offered any contradictory evidence regarding the claimed legal expenses nor demonstrated that M & T failed to respond to formal or informal requests for information to verify the validity of the claimed legal expenses. The Debtor merely argued that M & T failed to produce receipts or offer testimony. Under 11 U.S.C. § 502(a), Rule 3001 and Allegheny Int'l, such an argument is insufficient and M & T's legal expenses will be allowed.
Based upon the analysis above, I find that M & T's Proof of Claim should be allowed, including interest through July 12, 2011, the date of confirmation of the Confirmed Plan, in the amount of $30,351.55.
The calculation of the Allowed Claim is set out below:
judgment in the Foreclosure Action $23,573.41 interest to the date of the bankruptcy filing 701.9321 post-petition interest (June 2010 to July 2011) @ 6% 740.4922 sheriff's costs 1,500.00 affidavit of service per Pa. R. Civ. P. 3129.1 58.38 service of notice 65.00 bringdown 125.00 skip/trace search 35.00 costs to stay sheriff's sale 200.00 writ 15.00 affidavit of service per Pa. R. Civ. P. 3129.1 17.16 foreclosure fees 1,925.00 escrow advances 1,395.18 __________Total $30,351.55
For the reasons set forth above, the Debtor's objection to M & T's Amended Proof of Claim will be sustained in part and overruled in part. An order consistent with this Memorandum will be entered.
It is hereby
1. The Objection is
2. Claim No. 1-2 is
As explained above in the text that follows this footnote, the Debtor's statement that post-petition interest is never part of an allowed secured claim is overly broad.
