Opinion
Case No. 98-16239-SSM
August 3, 1999
William Stancil, Esquire, Washington, D.C., of Counsel for the debtor
MEMORANDUM OPINION AND ORDER
This matter is before the court on (a) the trustee's objection to confirmation of the debtor's modified plan and (b) the trustee's motion to dismiss the debtor's case. A hearing was initially held on July 6, 1999, and continued to July 20, 1999, to enable the debtor to present additional evidence related to the second deed of trust against her home. The debtor was present in person and was represented by counsel. The chapter 13 trustee was present in person. The court took the matter under advisement to rule on lingering issues in attempt to move this case along in light of the upcoming one-year anniversary of the filing of the bankruptcy petition.
The trustee's objection centers on the plan's proposed treatment of two deeds of trust against the debtor's home. The trustee argues that the plan improperly modifies the rights of Fleet Mortgage Corporation ("Fleet Mortgage") and John and Adrene Rivera ("the Riveras") in violation of § 1322(b)(2), Bankruptcy Code. Furthermore, the trustee objects that the plan fails to satisfy the feasibility requirement of § 1325(a)(6), Bankruptcy Code. Finally, the trustee asks the court to dismiss the case under § 1307(c)(1), Bankruptcy Code, because of the debtor's failure to propose a confirmable plan for over 11 months. For the reasons set forth in the opinion, the court will deny confirmation of the plan and will withhold dismissal only on the condition that the debtor achieve confirmation of a modified plan by a date certain.
The trustee's standing was not challenged at the hearing, but there is no question that the trustee has standing to "appear and be heard at any hearing that concerns . . . confirmation of a plan." § 1302(b), Bankruptcy Code. Thus, the trustee may object to a plan that fails to meet the requirements under the Code. Furthermore, the trustee can raise objections relating to the plan's treatment of secured creditors. See In re Andrews, 49 F.3d 1404, 1407 (9th Cir. BAP 1995) ("[T]he primary purpose of the Chapter 13 trustee is not just to serve the interest of unsecured creditors, but rather, to serve the interests of all creditors.").
Facts
The debtor, Beverly B. Bryant, filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code in this court on August 24, 1998. Her first proposed plan was denied confirmation on April 28, 1999. At issue is the debtor's modified plan filed on May 6, 1999, which provides for the payment to the trustee of $387 per month for 60 months. The plan proposes to pay a dividend of 0% to unsecured creditors. According to the debtor's amended Schedules I and J, her projected net monthly income is $2,784.86 and her monthly expenses are $2,397.
The court's records reflect that the debtor had previously filed two chapter 7 petitions (No. 98-10607-SSM and No. 98-13654-SSM), which were dismissed on February 17, 1998, and July 29, 1998, respectively, for failure to file schedules. In her current petition the debtor listed only the more recent of the two prior filings and inaccurately asserted that that case was dismissed voluntarily.
There are $5,744.66 in filed unsecured claims. In this Circuit, a zero-percent plan is not per se unconfirmable, but the percentage dividend on unsecured claims is a factor that may be considered in determining whether the plan satisfies the "good faith" requirement for confirmation. Deans v. O'Donnell, 692 F.2d 968, 972 (4th Cir. 1982).
The portions of the plan in dispute involve the proposed treatment of two deeds of trust on the debtor's residence located at 14455 Minnieville Road, Woodbridge, Virginia. Fleet Mortgage, the holder of the first deed of trust, filed a timely proof of claim asserting a secured claim in the amount of $159,285.86, including a prepetition arrearage of $21,125.23. As to the treatment of that claim, the plan is not entirely clear. Fleet Mortgage is first mentioned under § B-3 of the plan (entitled "CREDITORS SECURED BY PROPERTY OTHER THAN REAL ESTATE-DEBTOR TO RETAIN COLLATERAL") (emphasis added). Section B-3(a) appears to provide that the entire balance due on the mortgage will be amortized by monthly payments through the trustee for 60 months at an interest rate of 6.9% per annum. Section B-3(b) then oddly requires the debtor to make her regular monthly payments of $1,346 outside of the plan. Finally, § B-3(c) causes further confusion by stating that the arrearage will be cured through the plan, without specifying the monthly amounts, at an interest rate of 6.9% per annum. To make matters worse, Fleet Mortgage is provided for a second time, but under a different section of the plan. Section B-5(a), entitled "Creditors Secured Only by Interest in Debtor's Principal Residence," states that the curing of the arrearage, as well as the regular monthly payments accruing post-petition, will be made through the plan with interest. In sum, the treatment of Fleet Mortgage's claim is inconsistent from one section to another.
The debtor assigned a value of $140,000 to the real property.
What is certain is that the plan understates the amounts asserted by Fleet Mortgage in its proof of claim. The debtor asserts that the balance due is $138,421 with an arrearage of $20,475.
The Riveras hold the second deed of trust on the debtor's real property. They were not originally listed as creditors in the schedules. On September 30, 1998, the schedules were amended, but the Riveras' claim was listed as an unsecured nonpriority claim in the amount of $82,650. To date, the Riveras have not yet filed a proof of claim. On its face, the plan contains no provisions specifically addressing their claim, but the debtor's counsel at the hearing informed the court that the plan treated the Riveras' claim as unsecured. As to the Riveras' security interest, debtor's counsel stated that the plan does not propose to strip, void or modify their lien. In effect, counsel represents the Riveras would receive no distributions during the term of the plan, but their lien would pass through bankruptcy unaffected.
The debtor initially took the position that the Riveras's claim was unsecured because no deed of trust had been recorded. It is now conceded, however, that a deed of trust dated May 19, 1995, was recorded on April 9, 1996, at Deed Book 2327, Page 1640, among the land records of Prince William County, Virginia, securing a $75,000.00 promissory note made by Ronnie L. Bryant and Beverly B. Bryant, repayable with interest at the rate of 8.25% per annum in monthly installments of $725.00.
Nothing in the record reflects that the Riveras were ever given notice of the amendment adding them as a creditor, or that they were ever served with a copy of the plan.
Conclusions of Law and Discussion I.
Confirmation of an individual debtor's chapter 13 plan of repayment is governed by § 1325, Bankruptcy Code, which requires that the court "shall" confirm a plan if certain enumerated requirements are met. Chapter 13 allows a debtor considerable flexibility in adjusting his or her debts, but the proposed plan must comply with § 1322, Bankruptcy Code, which sets forth additional elements of a confirmable plan. As is frequently the case, the primary purpose of this chapter 13 filing is to save the debtor's residence from foreclosure. In this connection, § 1322(b)(2), Bankruptcy Code, provides that the 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[.]" (Emphasis added.) Yet, § 1322(b)(2) is subject to the exception under § 1322(b)(5), Bankruptcy Code, which reads as follows:
notwithstanding paragraph (2) of this subsection, [the plan may] provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due[.]
(Emphasis added.) Therefore, § 1322(b)(5) empowers debtors to save their homes, where long-term mortgages are in default, by allowing them to cure any defaults within a reasonable period of time. In effect, the debtor's mortgage would be reinstated as long as the plan complies with § 1322(b)(5). See In re Clark, 133 B.R. 123, 125 (Bankr. N.D. Ill+. 1991); In re Cole, 122 B.R. 943, 948-951 (Bankr. E.D. Pa. 1991).
A.
The stated basis of the trustee's objection to the plan's treatment of Fleet Mortgage's claim relies on § 1322(b)(2), but at oral argument it became clear that the actual basis of his objection is § 1322(b)(5). The plan, the trustee contends, fails to cure the arrearage asserted by Fleet Mortgage. As discussed, the debtor has the right under § 1322(b)(5) to reinstate a mortgage in default, but only upon the condition that any arrearage be paid in full within a "reasonable time." In Clark, the chapter 13 plan attempted to bifurcate an arrearage claim, asserted by the mortgage company, in the amount of $6,725.05. The debtor proposed to pay $274.13 as a secured claim, and pay only 10% of the remaining arrearage as an unsecured claim. The court denied confirmation and noted, "The plain meaning of `cure' as used in section 1322(b)(5) is to remedy or rectify the default and restore matters to the status quo ante. Only a payment of arrearage in fall would do that." Clark, 133 B.R. at 125 (citation omitted).
The court agrees with the trustee that the plan, as currently proposed, violates § 1322(b)(5), because it does not pay the fall amount of Fleet Mortgage's filed arrearage claim within the plan term. The filed arrearage claim is $21,125.23, while the plan provides only for payment of $20,475.00. But even putting aside that minor difference, which could easily be accommodated if the plan funding were otherwise sufficient, the dollars into the plan are simply insufficient to pay either amount. The monthly payment required to amortize a $21,125.23 arrearage claim over 60 months with interest at 6.9% — which is what the plan proposes — is $417.31. That is even before consideration of the trustee's 10% commission and the IRS priority claim listed in the plan. The plan, however, provides for payments by the debtor of only $387.00 per month. Even if — as well may be the case — there is in actuality no IRS priority claim to be paid, the minimum monthly payment required to pay the filed Fleet Mortgage arrearage claim and the trustee's commission is $459.04.
On the present state of the record, it is uncertain what claims the Internal Revenue Service is asserting in this case. Claim No. 5 asserts a secured claim in the amount of $7,546.23 for 1985 and 1986 Federal income taxes. Claim No. 8, which states that it amends Claim No. 5, asserts a general unsecured claim in the amount of $570.10 for unpaid 1992 Federal income taxes. Whether Claim No. 8 was meant only to supplement Claim No. 5, or instead to supercede it, is far from clear, but for the purpose of the present ruling, the court assumes that by filing Claim No. 8, the IRS is abandoning its claims with respect to 1985 and 1986 income taxes.
If inadequate funding were the only problem with the plan, the court might simply condition confirmation on the debtor's agreement to increase her payment to the trustee by the amount required to make the plan work. As will be discussed, however, there is a more serious obstacle to confirmation.
The first payment required under the initial plan filed by the debtor would have been due October 8, 1998. Assuming the debtor has made all required payments to date, only 50 months remain of the maximum possible 60-month plan term. Thus, the required monthly payment amount would have to be greater than $459.04 in order to make up for the shortfall created during the first ten months of the plan term. The debtor's schedules of income and expenses cast serious doubt on her ability to fund such a modified plan, but that issue is better addressed at the hearing on confirmation of a modified plan, should one be filed.
B.
The trustee contends that the debtor's proposal to preserve the lien held by the Riveras, but treat their claim as unsecured under the plan, is in direct violation of § 1322(b)(2). The debtor disagrees, arguing that the Riveras's second deed of trust would remain fully intact even after the bankruptcy case. Just as neither party was unable to cite to any case authority, the court similarly failed to discover any cases that involve a closely similar set of facts. Nevertheless, the court believes that the Supreme Court's decision in Nobelman v. American Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), is dispositive. There, the debtor sought to bifurcate the claim of a creditor which was secured by a mortgage against the debtor's principal residence into secured and unsecured claims. The Supreme Court held that to permit bifurcation of an undersecured creditor's claim under § 506(a), Bankruptcy Code, in a chapter 13 plan would modify the creditor's rights by changing the contractual rights contained within the underlying note. Id. at 331, 113 S.Ct. at 2111. The Court held that such modification is prohibited under § 1322(b)(2) when the creditor is secured solely by the debtor's principal residence. Id.
As a preliminary matter, the court is concerned that the debtor has not provided proper notice to the Riveras of this bankruptcy case or of the intended treatment of their claim. As noted, the Riveras were first listed as a creditor in the amended schedules filed on September 30, 1999. However, the file does not reflect that the debtor has complied with F.R.Bankr.P. 1009 and Local Bankruptcy Rule 1009-1. Specifically, the debtor did not file an amendment cover sheet with the clerk's office, and as a result the Riveras are not listed in the "Creditor Matrix Register" for this case. Furthermore, the "Notice of Chapter 13 Plan and Related Motions" mailed to all creditors is not in compliance with Local Bankruptcy Rule 5005-1(C)(8) ("[The] declaration [of proof of service] shall include the . . . exact address at which service was made."). (Emphasis added.) In the event the debtor decides to file another modified plan, the court will require strict compliance with all applicable rules, and especially those requiring notice to, and proof of service on, the Riveras.
Mindful that Nobleman is not directly on point, the court nevertheless concludes that, like bifurcation, the debtor's plan effectively modifies the Riveras' rights under the second deed of trust by imposing a 5-year moratorium on payments. Although the plan does not expressly so state, the practical effect in a zero-percent plan of treating a claim as unsecured — even if the claim survives discharge — is to impose a complete payment moratorium during the plan term. Such a moratorium is clearly a "modification" of the noteholder's rights to receive monthly installment payments, and, when the claim is secured solely by the debtor's principal residence, is a violation of § 1322(b)(2). Therefore, the confirmation of the debtor's plan must be denied for its treatment of the Riveras' claim.
This is not to say that the debtor would necessarily be unable to have a plan confirmed that provided for no current payments on account of the Riveras' claim. First, Mr. and Mrs. Riveras could affirmatively consent to such treatment. Indeed, given the minimal (if any) equity that currently exists above the first deed of trust, the Riveras might well be motivated to agree to a payment moratorium in order to avoid having their second trust position possibly wiped out in a foreclosure by the first deed of trust holder. However, any such agreement on their part must be express and may not be inferred simply from a failure to object to confirmation. Second, assuming that the property value of $140,000 shown in the schedules is correct, the debtor might be able to avoid the second deed of trust under §§ 506(a) and (d), Bankruptcy Code. Flowers v. FirstPlus Financial, Inc. (In re Flowers), 1999 WL 118022 (Bankr. E.D. Va. 1999); Wright v. Comm'l Credit Corp. (In re Wright), 178 B.R. 703 (E.D. Va. 1995), appeal dismissed, 77 F.3d 472 (4th Cir. 1996). However, unless and until the Riveras affirmatively consent to a modification of their mortgage rights or this court, after proper notice and hearing, enters an order avoiding their deed of trust, a plan cannot be confirmed that provides for no current payments on the Riveras's deed of trust.
In both Flowers and Wright, the debtors proceeded by way of adversary proceeding. Recently, the standard form of chapter 13 plan used in this district was modified so as to incorporate within the plan document any motions under § 506(a), Bankruptcy Code, to value a secured creditor's collateral. Additionally, the local bankruptcy rules require that creditors be provided with a standard form of notice, which, among other things, advises affected creditors of any motions to value collateral and of the procedure for contesting the valuation placed by the debtor on the collateral. These changes to the standard form of chapter 13 plan were made in order to satisfy the due process concerns expressed by the Fourth Circuit in Piedmont Trust Bank v. Linkous (In re Linkous), 990 F.2d 160 (4th Cir. 1993) and Cen-Pen Corp. v. Hanson, 58 F.3d 89 (4th Cir. 1995). Assuming that proper use of the new form of plan and notice would eliminate the necessity of a separate adversary proceeding, see In re Thomas, 222 B.R. 524 (Bankr. E.D. Va. 1998) (Tice, J.), it is nevertheless essential that creditors whose liens are to be avoided or whose collateral is be valued be individually served with the plan and notice, and that such service comply with the requirements of F.R.Bankr.P. 7004 for service of a summons and complaint. See F.R.Bankr.P. 9014. In the present case, as previously noted, there is no evidence in the record that the Riveras were given any notice, let alone individualized notice, of the plan and its intended treatment of their claim.
II.
The final matter to be addressed by the court is the trustee's motion to dismiss the case. The Bankruptcy Code provides that the court may convert or dismiss a case "for cause-including unreasonable delay by the debtor that is prejudicial to creditors[.]" § 1307(c)(1). It is the trustee's position that the debtor has no excuse for failing to present a confirmable plan within a reasonable time.
As stated by a leading commentator, "unreasonable delay in the filing of necessary modification of a plan" is an example of a delay that warrants dismissal under § 1307(c)(1). 8 Collier on Bankruptcy ¶ 1307.04[2], at 1307-11 (Lawrence P. King ed., 15th ed. rev. 1999). The case at hand is a vivid example of just such a situation. This case has been before the court on numerous occasions without showing any significant progress towards confirmation. Chapter 13 is not intended to be a way of life for debtors. A delay in confirmation substantially prejudices creditors with allowed claims because the trustee cannot make any distributions in accordance with the plan until confirmation. § 1326(a)(2), Bankruptcy Code; Fed.R.Bank.P. 3021. In this case, the extent of the prejudice is blatant considering the few claims involved. As compared to other chapter 13 cases that have come before the court, the facts of this case are relatively simple. The court sees no reason why confirmation could not have been obtained months ago. The delay is even more troubling because of the debtor's history as a serial filer. The court is sympathetic with the debtor's desire to save her residence, but this case must come to an end. The court will give the debtor one last chance to propose a confirmable plan consistent with the above discussion, but the court agrees with the trustee that the creditors should not be held hostage indefinitely to the debtor's struggle to obtain confirmation in what is essentially a straight-forward and uncomplicated case. Therefore, although the court will not dismiss the case at this time, the court will require that the debtor obtain confirmation of a plan by September 30, 1999.
ORDER
For the foregoing reasons, it is
ORDERED:
1. The objection to confirmation is sustained. The debtor shall have ten (10) days from the entry of this order in which to file a modified plan. If the debtor fails within such ten day period to file a modified plan, a notice of appeal of this order, or a motion to alter or amend this order, the clerk is directed to dismiss this case.
2. The motion to dismiss is denied, conditioned, however, upon the debtor obtaining confirmation of a plan not later than September 30.1999. If a plans not confirmed by such date, the trustee may serve on the debtor and her counsel, and submit to the court, a proposed form of order reciting such failure and dismissing the case for unreasonable delay. The court, in its discretion, may enter such order without further notice or hearing.
3. The clerk will mail a copy of this memorandum opinion and order to the debtor, counsel for the debtor, the chapter 13 trustee, and John and Adrene Rivera.