CRAIG A. GARGOTTA, Bankruptcy Judge.
Came on to be considered the above-numbered bankruptcy case, and, in particular, the Chapter 13 Trustee's Motion to Deny Discharge and Dismiss Case (ECF No. 48)(the "Motion"), and Debtors' Response thereto (ECF No. 49). The Court has jurisdiction over this proceeding under 28 U.S.C. §§ 157 and 1334. Venue is proper under 28 U.S.C. § 1408(1). This matter is referred to this Court under the District's Standing Order of Reference. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A) in which the Court may enter a final order. The Court notes that the Supreme Court's decision in Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), does not suggest or hold that this Court lacks authority to hear and enter final orders regarding a debtor's discharge. The Court finds that this is a contested matter as defined under Fed. R. Bankr.P. 9014. As such, the Court makes the following findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052. The Court took this matter under advisement and finds that the Chapter 13 Trustee's (the "Trustee") Motion should be GRANTED in part, and DENIED in part.
Debtors Michael and Katherine Heinzle filed Chapter 13 bankruptcy on October 3, 2008 (ECF No. 1). On January 15, 2009, the Court entered an Order Confirming the Debtors' Plan, Awarding a Fee to the Debtors' Attorney, and Related Orders providing that Debtors must make a Plan payment of $560.00 per month for a period of 36 months (ECF No. 22). This payment would make available a base amount of $21,160.00 for distribution to creditors (ECF No. 22). The Order also stated that Debtors were to pay their post-petition mortgage payments directly to their lender, Countrywide Home Loans, and cure the pre-petition mortgage arrears through their Plan with an interest rate of nine percent.
On September 11, 2009, BAC Home Loans Servicing, LP ("BAC") (fka Countrywide Home Loans Servicing, LP) filed its Motion for Relief from Stay Pursuant to 11 U.S.C. § 362(d) (ECF No. 25). The Motion for Relief from Stay states that "Debtors have failed to maintain current the post-petition payments due under the note and are presently in arrears for 6 payments through and including the September 01, 2009 payment." (ECF No. 25, ¶ 5). As a result of Debtors' post-petition delinquency, BAC asked that the Court lift the automatic stay to allow BAC to pursue its state law remedies, including foreclosure, on Debtors' homestead property. Debtors filed a Response in the form of a general denial as to the allegations in BAC's motion. A hearing was held on BAC's Motion for Relief from Stay on October 5, 2009, and the Court entered an Agreed Order Conditioning Automatic Stay as to Debtors (ECF No. 29). The Agreed Order Conditioning Automatic Stay as to Debtors provides, in relevant part, that "Debtors shall have 30 days from the date of the hearing or before
Debtors' case was marked by a number of other events that underscored Debtors' difficulty in maintaining both Plan and direct mortgage payments. Notably, the Chapter 13 Trustee moved to dismiss Debtors' bankruptcy case on April 20, 2010, (ECF No. 34) and BAC filed a Notice of Termination of Automatic Stay Due to Failure to Cure Default on August 9, 2010 (ECF No. 41).
Pursuant to Fed. R. Bankr.P. 3002.1(f), the Trustee filed her Notice of Final Cure Payment ("Notice") (ECF No. 47). The Trustee indicated in her Notice that she had paid both the pre-petition and post-petition arrears to BAC. Further, pursuant to Fed. R. Bankr.P. 3002.1(g), BAC had 21 days to file a supplement to its proof of claim agreeing with the Trustee's Notice that Debtors' were current on all payments to BAC. On September 27, 2013, BAC filed its Statement in Response to Notice of Final Cure Payment indicating that it agreed with the Trustee's Notice that Debtors have paid the full amount required to cure the default on BAC's claim, but disagreeing that Debtors are current with respect to all payments required by § 1322(b)(5).
The Trustee argues that the:
(1) The confirmed plan implies that Debtors are assuming the duties of the Trustee to make direct payments to creditors. As such, the Trustee asserts that direct payments to the mortgage lender constitute payments under the plan.
(2) Debtors' failure to make the payments due under the plan (including mortgage payments) is a default under the plan. As such, Debtors are not entitled to a discharge under § 1328(a).
(3) Because Debtors have made all payments under the plan for a term of 60 months, the plan cannot be modified. § 1329(c). As such, because the plan term is completed and Debtors may not now modify the plan to cure a plan default, the Trustee maintains that dismissal of the case is appropriate.
In response, Debtors argue that "payments under the plan" is an undefined phrase under the Bankruptcy Code. Rather, Debtors ask the Court to examine the language of § 1328(a), which states:
Debtors argue that, under § 1328(a), the phrase "payments under the plan" means those payments Debtors make directly to the Chapter 13 Trustee as specified in the Plan. Debtors maintain that the phrase "after completion by the debtor of all payments" denotes only those payments the debtor makes to the Trustee. Further, when examining the context of payments "under" the plan, the proper construction is to conclude that "under" only refers to Chapter 13 plan payments, not payments made directly to a mortgagee. Debtors suggest that Colliers on Bankruptcy supports such a conclusion. See 8 Collier on Bankruptcy, ¶ 1328.02 (16th ed. 2013) ("[t]he phrase `completion by the debtor of all payments under the plan' in § 1328(a) clearly refers to payments made by the debtor to the trustee"). Debtors further maintain that payments to the mortgagee are controlled by the mortgage note, and not the Plan.
In addition, Debtors' argue that the Court should adopt their construction of § 1328(a) that a discharge must be granted when plan payments, not post-petition mortgage payments, are made because such a construction harmonizes the language in §§ 1328(a) and 1329(a). Debtors reason that, because § 1329(a) precludes further modification of the plan after all payments are made under the plan, allowing the Trustee to object to Debtors' discharge after all payments are completed under the plan for purposes of receiving a discharge under § 1328(a) would mean that the plan is deemed "completed" for purposes of § 1329(a), but not for purposes of § 1328(a). Debtors posit that such a conclusion places the purpose and intent of §§ 1328(a) and 1329(a) at odds. See In re Ezzell, 438 B.R. 108, 115-16 (Bankr. S.D.Tex.2010) (both provisions should be read harmoniously).
No evidence was taken at the hearing and both parties stipulated as to the operative facts. Specifically, Debtors completed all plan payments, including payment of BAC's pre-petition arrears and those post-petition arrears cured by the Trustee pursuant to the Order Conditioning the Stay. The only "default" under the Plan was Debtors' failure to make their post-petition mortgage payments directly to the mortgagee. Absent this delinquency, Debtors would be entitled to a discharge under § 1328(a).
As an initial matter, the Court notes that the San Antonio Division of the Western District of Texas is not a "conduit"
In non-conduit districts or divisions, a debtors' failure to make post-petition payments to their mortgage lender generally leads to the lender filing a motion for relief from stay with the attendant result being that the parties reach an agreement to allow the debtors to cure the delinquency through the plan or the stay is lifted. In these districts or divisions, there is no independent requirement to pay post-petition mortgage payments to the Chapter 13 Trustee who would in turn make the requisite payments to the mortgage lender.
In addition, like most bankruptcy courts, the San Antonio Division uses a "form" plan. The form plan in this division has language governing the debtor's duties pursuant to the plan, and identifies which creditors will be paid pursuant to the plan and how they will be paid. Both the Trustee and Debtors' counsel argued that particular provisions of the form plan govern this Court's determination as to whether Debtors' mortgage payments constitute payments under the plan. The question of whether a post-petition mortgage payment is a payment under the plan determines whether delinquent mortgage payments are a material default under the plan, thereby precluding a discharge under § 1328(a).
Debtors and Trustee agree that Debtors' post-petition mortgage delinquency is not discharged under §§ 1322(b)(5) and 1328(a)(1). Section 1322(b)(5) allows a debtor to cure a default on a long term secured or unsecured debt in which the last payment is due after the final date on which the final payment is due under the plan. 8 Collier on Bankruptcy ¶ 1322.09[1] (16th ed. 2011). In this case, Debtors proposed to cure their mortgage delinquency pursuant to their plan. It is uncontroverted that Debtors' mortgage obligations continue after plan payments. Section 1328(a)(1) states that a debt provided for under § 1322(b)(5) is not discharged. Nonetheless, Debtors correctly argue that a failure to make post-petition mortgage payments is not a specific basis to deny their Chapter 13 discharge under § 1328(a).
The Court also agrees with Debtors' assertion that a full discharge is not necessary to protect the interest of the mortgage lender. Debtors concede that their mortgage debt survives discharge under § 1328(a)(1). Debtors also acknowledge that the mortgage lender may proceed under its state law remedies, including foreclosure, even after Debtors' receive a discharge. With these acknowledgements, Debtors posit why the Court should consider denying their discharge if the lender and the creditor body appears completely disinterested because no party other than the Trustee is asking the Court to deny Debtors' discharge.
Notwithstanding Debtors' arguments concerning what constitutes payments under and outside the plan, courts in this circuit and elsewhere have concluded that payments made directly to a mortgagee are plan payments. The Fifth Circuit held in In re Foster, 670 F.2d 478 (5th Cir.1982), that mortgage payments made by the debtors directly to their lender constitute plan payments despite the debtors' characterization that the payments were being made outside the Chapter 13 plan. In Foster, the bankruptcy court denied confirmation of the debtors' Chapter 13 plan because the debtors proposed to make their post-petition mortgage payments directly to their mortgage lender. Id. at 482. The bankruptcy court concluded that Chapter 13 policy requires that all payments must be made to the trustee and through the plan. Id.
In Foster, the Fifth Circuit began its analysis by discussing the basic components of Chapter 13 plans and analyzing the treatment of secured claims under §§ 1322 and 1325. The court then focused its analysis on the ambiguity of the term "outside the plan." The Fifth Circuit noted the historical context regarding the term "payments outside the plan" began with the Bankruptcy Act of 1898. The court stated:
Foster, 670 F.2d at 485 (quoting In re Blevins, 1 B.R. 442, 443 (Bankr.S.D.Ohio 1979)).
The Fifth Circuit then agreed with the debtors in finding that they could act as disbursing agents under their plan for purposes of paying their mortgage lender directly subject to meeting the feasibility test of § 1325(a)(6). Foster, 670 F.2d at 486. Moreover, the court agreed with the debtors that Congress left open, in § 1326(b)
In addition, the Fifth Circuit also analyzed the terminology of "outside the Plan" as it related to treatment of fully secured mortgage claims. The court first made the distinction between unsecured, partially secured, and fully secured claims as to their treatment outside the plan; noting that the issue of unfair discrimination (preferential payment of some claims outside the Chapter 13 plan) is not implicated by paying fully secured claims outside the plan. Id. at 488. The Fifth Circuit found that there is no issue as to unfair treatment of fully secured claims because those claims must be separately treated under § 1325(a)(5). Id. The court then found that:
Id. at 488.
The court also addressed the issue of whether the direct payment of post-petition mortgage payments would be impermissible because direct payments would not include a Chapter 13 trustee commission. The court found the question of a trustee commission subsumed into the discretion of the bankruptcy court in terms of how a fee may be affected by direct mortgage payments. Id.; see also In re Reid 179 B.R. 504, 507-08 (E.D.Tex.1995) (decision as to whether the debtor may act a disbursing agent left to sound discretion of the bankruptcy judge), aff'd, 77 F.3d 473 (5th Cir.1995); Cohen v. Lopez (In re Lopez), 550 F.3d 1202 (9th Cir.2008) (Code does not require that payments to a mortgagee be made through the trustee). More importantly, the Fifth Circuit recognized that the primary reason that the debtors wanted to pay their post-petition mortgage payment directly to the lender was to avoid the inclusion of a trustee commission which allowed their plan to be more feasible. Foster, 670 F.2d at 491-92. As such, the court held that payments made directly to a mortgage lender was part of the overall flexibility of the Chapter 13 plan process and that a bankruptcy court could factor into its discretion whether the direct payments to a mortgagee were permissible under the facts and circumstances
Foster, 670 F.2d at 492-93.
The Fifth Circuit's analysis in Foster supports the Trustee's contention that payments made directly to a mortgage lender are payments made under the plan.
In re Perez, 339 B.R. 385, 390 n. 4 (Bankr. S.D.Tex.2006) (internal citations omitted) (emphasis added), aff'd, 373 B.R. 468 (S.D.Tex.2007); see also Giesbrecht v. Fitzgerald, 429 B.R. 682, 690-91 (9th Cir. BAP 2010) ("Bankruptcy courts may require that payments be made through the plan based on specific factors or reasons such as administrative efficiency, tracking of payments, fairness and treatment of creditors, and the determination that there is a reduction of plan failure when all payments are made through the plan") (citations omitted); In re Padilla, 365 B.R. 492, 502 (Bankr.E.D.Pa.2007) ("[I]t is a misstatement to refer to a debtor's post-petition contractual payments as being `outside the plan'.... [Rather,] [i]t follows that a debtor's contractual postpetition payments are made pursuant to the plan, not outside the plan.") (emphasis in original).
In following the Fifth Circuit's analysis in Foster that semantics do not alter the fact that mortgage payments are payments made pursuant to the plan, Debtors arguments to the contrary fail. Debtors maintain that § 1328(a) requires that they receive their discharge once they complete their plan payments, exclusive of any mortgage delinquency. Second, Debtors argue that "payments under the plan" are only those payments "guided by" or "controlled by" their Plan (ECF No. 55, p. 6). Further, Debtors argue that payments made directly to the mortgage lender are not payments "guided by" or "controlled by" the plan.
The fact remains, however, that Debtors did not make all their payments under their Chapter 13 plan. Debtors are entitled to receive a discharge only when they meet all the requirements of Chapter 13, including payments under the plan and the "maintain and cure" provisions of § 1322(b)(5). Debtors do not receive a discharge if they are unable to make both plan and post-petition mortgage payments. Plans are contracts between Debtors and their creditors; the Court sees little reason to excuse non-payment of a mortgage simply because no one other than the Trustee objects. Further, at the time of confirmation, Debtors represented in their Plan that they could make both their Chapter 13 plan payments and direct payments to their mortgage lender. That representation was inaccurate.
Based on the legal conclusion that post-petition mortgage payments are plan payments, Debtors' arguments fail because Debtors have not made all of their payments pursuant to the plan. Moreover, Debtors' assertions fail because case law demonstrates that mortgage payments are payments that are guided by or controlled by the plan. The fact that there is a contractual relationship between Debtors and their mortgage lender does not alter the conclusion that Debtors' mortgage payments are made pursuant to the plan. The Fifth Circuit in Foster found that direct post-petition mortgage payments were part of the overall flexibility of Chapter 13 plan formulation, but that direct payments to mortgage lenders were still part of the plan treatment process. Foster, 670 F.2d at 492-93.
The San Antonio Form Chapter 13 Plan, (ECF No. 2, pg. 3), has the following language that the Trustee relies upon in support of her arguments:
The Trustee argues that, pursuant to the above-referenced plan provision, Debtors are making payments to the mortgagee as a disbursing agent of the Trustee which is the functional equivalent of Debtors making payments through the Trustee as if the payments were pursuant to a "conduit" plan. Further, the Trustee asserts that because Debtors failed to make post-petition mortgage payments as required in the plan and order confirming plan, Debtors are in material default of the plan.
Debtors instead point to language in the form plan itself that they maintain supports a discharge being entered after all payments to the Trustee have been made:
(ECF No. 2, p. 1).
Debtors cite this language in the form plan in support of their contention that the plan itself determines that a plan is completed when all payments to the Trustee have been made. Debtors contend that the terms of the plan control and bind all parties. Meza v. Truman, 467 F.3d 874, 877 (5th Cir.2006). Debtors also argue that completion of the plan is not predicated on status of the mortgage being either current or delinquent in payments.
Debtors also believe that the following language in the plan regarding "payments outside the plan" to mortgage lenders is a clear indication that mortgage payments were not intended to be paid under the plan:
(ECF No. 2, pp. 3 & 6).
The Court recognizes that there are portions of the form plan that arguably support both the Trustee's and Debtors' positions. Notwithstanding the ambiguity in the form plan, the Court finds that § 1322(b)(5) requires that Debtors cure and maintain payments for long term debt. That is, Debtors may cure a pre-petition mortgage delinquency through the plan, but they must do so by also staying current on their mortgage. Additionally, the Court finds that Foster dictates that regardless how a plan is written, post-petition mortgage payments are payments made pursuant to the plan and the failure to maintain such payments will result in dismissal, conversion, or denial of discharge.
Debtors argue that when the Trustee served her notice under Rule 3002.1, the Trustee is estopped from taking the position that Debtors have not made all their payments under the plan. Bankruptcy Rule 3002.1(f) states that:
Debtors cite the language in Rule 3002.1(f) — "after the debtor completes all payments under the plan" — as an admission
The Trustee responds by noting that the Notice of Final Cure Payment only requires the Trustee to certify that the debtor has made all payments to cure a default on a claim; that is payments the Trustee makes to the mortgage lender to cure an arrearage. The Trustee notes that the Trustee provides no information to the mortgagee regarding post-petition mortgage payments because Debtors make the post-petition mortgage payments directly to the lender and act as the disbursing agent for the Trustee. Moreover, if the debtor is current on post-petition mortgage payments, the debtor has met the requirements of § 1322(b)(5), which requires a debtor to cure and maintain mortgage payments.
In addition, pursuant to Rule 3002.1(g) — Response to Notice of Final Cure Payment — it is the mortgage lender, not the Trustee, who has both the information and duty to report if Debtors have failed to make their mortgage payments post-petition. The Trustee notes that Debtors have the ability under Rule 3002.1(h) to file a motion to determine that the debtor has cured the default and paid all post-petition amounts.
The Trustee argues that the failure to make direct mortgage payments post-petition
The First Circuit Bankruptcy Appeals Panel held in Roberts v. Boyajian, 279 B.R. 396, 399-400 (1st Cir. BAP 2000), aff'd 279 F.3d 91 (1st Cir.2002), that the debtors' failure to pay an allowed tax claim under § 1305(a) was a material default under the plan because the tax claim had been provided for in the plan. The court concluded that the debtors were bound by the terms of their plan, including payments on the IRS's post-petition tax claim. The court found the non-payment of taxes a material default under the plan. Id. (citations omitted). This Court finds that the failure to make direct payments to a mortgage creditor is no different. See Foster, 670 F.2d at 492-93 ("[W]e find no warrant in the Bankruptcy Code for labelling [sic] part of the treatment of a claim `outside the plan' and part of it `under the plan' where the entire treatment is that which has been made available to the debtor through the provisions of Chapter 13."); accord In re Land, 82 B.R. 572, 578 (Bankr.D.Colo.1988) ("[I]f the creditor's claim is somehow modified (e.g. by curing the arrearages pursuant to § 1322(b)(5)), then all payments, whether direct or through the trustee, are considered to be `under the plan'."), aff'd, 96 B.R. 310 (D.Colo.1988); In re Perez, 339 B.R. 385, 390 n. 4 (Bankr.S.D.Tex.2006) (Under the plan refers to any payment made pursuant to the plan, whether the payment is made through the trustee or directly to a creditor.); In re Russell, 458 B.R. 731, 739 (Bankr.E.D.Va.2010) ("[I]f the plan defines the payment terms, ... then the payments are being made `under' the plan regardless of whether the debtor pays the creditor directly or pays through the trustee.").
Debtors argue that they did not default on any of the terms of the Plan and that the Trustee has failed to establish "cause" under § 1307. Debtors also maintain that the Trustee has not shown that dismissal is in the best interests of the creditors and the bankruptcy estate. Debtors further contend that, if a default occurred as to post-petition delinquent mortgage payments, it was not "material." Debtors suggest that if the Court finds that delinquent post-petition mortgage payments
Debtors' arguments are unavailing. They complain of the Trustee's actions as if they had no responsibility for their own failure to make post-petition mortgage payments. Debtors suggest that the Trustee is misusing the Bankruptcy Code and Rules. The Trustee is not. The Court has examined the applicable case law and concludes that Congressional intent, as formulated in the Bankruptcy Act of 1898, and subsequently analyzed in case law, holds that Chapter 13 debtors are afforded flexibility in proposing their plans, including making post-petition mortgage payments directly to their mortgage lender. In doing so, Debtors are then required to make their post-petition mortgage payments as well as their plan payments to the Trustee, all as payments pursuant to the plan.
As such, the Court finds that Debtors' assertion that the failure to make mortgage payments in the amount of $33,467.32 was not a material default under the plan is without merit. Therefore, the Court must determine what remedy is warranted under the circumstances. A denial of discharge places Debtors in the difficult position of potentially seeking further bankruptcy relief and would require creditors to determine the legal effect of a denial of discharge on future bankruptcy filings. The Court believes a more just result is to allow Debtors fourteen (14) days from entry of this Memorandum Opinion and Order to convert their case to Chapter 7 or the case shall be dismissed.
IT IS THEREFORE ORDERED that the Trustee's Motion to deny the Debtors' discharge is DENIED and the Trustee's Motion to Dismiss Case is GRANTED, subject to Debtors exercising their right to convert this case to Chapter 7 within fourteen (14) days of entry of this Memorandum Opinion and Order.
All other relief is DENIED.
