Opinion
Case No. 3:13-cv-249
2013-09-24
SHIRLEY L. MAGEE, Debtor-Appellee, v. NICHOLAS L. WELLER, Creditor-Appellant.
Judge Timothy S. Black
ORDER: (1) AFFIRMING THE ORDER OF THE BANKRUPTCY COURT;
(2) CONFIRMING DEBTOR'S CHAPTER 13 PLAN; AND (3) TERMINATING
THIS CASE FROM THE DOCKET OF THE COURT
This civil action is before the Court on an appeal from the United States Bankruptcy Court. Specifically before the Court is Appellant's brief (Doc. 4) and the parties' responsive memoranda (Docs. 6, 7).
I. PROCEDURAL POSTURE
Appellant appeals an Order of the Bankruptcy Court confirming the Debtor's Chapter 13 Plan and an Order denying his motion for reconsideration.
The Creditor/Appellant, Nicholas Weller, contends that the Bankruptcy Court erred when it confirmed the Debtor's Chapter 13 Plan because the Plan proposes to pay him a fraction of the amount due to him and then compel him to surrender his rights in the property. Weller claims this is a clear "taking" of property for the benefit of the Debtor.
The following three issues will be addressed by the Court in deciding this Appeal:
1. Whether the Debtor's Chapter 13 Plan violates and takes, under pretext of law, the constitutional right of the Creditor, Nicholas L. Weller, to possess, use, and control property.
2. Whether the Debtor's Chapter 13 Plan violates the requirements of 11 U.S.C. § 1325(a)(5)(B), requiring payment of the debt to the creditor.
3. Whether the Debtor's Chapter 13 Plan violates the requirements of 11 U.S.C. § 363(c)(2) and (c)(4), limiting the use of the cash collateral (rents).
II. BACKGROUND FACTS
In June 1998, Shirley L. Magee obtained a loan from Nicholas L. Weller in the amount of $85,300.00 for the purchase of a four family apartment building located at 1500 Harvard Blvd., Dayton, Ohio. A promissory note calling for repayment of the loan in monthly installments with interest at the rate of 13 per cent per annum was executed by Magee and delivered to Weller. A mortgage deed to the property was executed and delivered by Magee to Weller to secure payment of the note. Included in the terms of the mortgage was an assignment of the rents from the property as additional security for repayment of the loan.
In August 1998, Magee obtained a loan from Weller in the amount of $43,380.00 for the purchase of a two family dwelling located at 2734-36 Oxford Ave., Dayton, Ohio. A promissory note calling for repayment of the loan in monthly installments with interest at the rate of 13.5 per cent per annum was executed by Magee and delivered to Weller. A mortgage deed to the property was executed and delivered by Magee to Weller to secure repayment of the loan. Included in the terms of the mortgage was an assignment of the rents from the property as additional security for repayment of the loan.
In November 1998, Magee obtained a loan from Weller in the amount of $65,000.00 for the purchase of a four family apartment building located at 518 Delaware Ave., Dayton, Ohio. A promissory note calling for repayment of the loan in monthly installments with interest at the rate of 13.5 per cent per annum was executed by Magee and delivered to Weller. A mortgage deed to the property was executed and delivered by Magee to Weller to secure repayment of the loan. Included in the terms of the mortgage was an assignment of the rents from the property as additional security for repayment of the loan.
Magee made some of the payments on each of the three mortgages, but frequently was delinquent in her payments. She completely omitted numerous payments on each of the mortgages and was often in default. Weller did not pursue mortgage foreclosure proceedings until October 2012 when American Tax Funding, LLC commenced proceedings in Montgomery County, Ohio Common Pleas Court to foreclose a property tax lien on the property at 1500 Harvard Blvd. The tax lien had been purchased from the Montgomery County Treasurer and had not been redeemed. Weller filed a cross complaint in that action for foreclosure of his mortgage on the property. Weller also commenced a separate action in Montgomery County Common Pleas Court for foreclosure of his mortgages on the properties at 2734-36 Oxford Ave. and 518 Delaware Ave.
Thereafter, in November 2013, Magee filed a Chapter 13 proceeding in Bankruptcy Court and filed a Chapter 13 Plan. Appraisals were filed on the properties, in particular $56,000.00 on Harvard, $32,000.00 on Oxford, and $64,650.00 on Delaware. Magee obtained a stay of the foreclosure proceedings in Common Pleas Court and subsequently, over the objection of Weller, obtained an order confirming the Chapter 13 Plan. Said order is the subject of this appeal.
At the time of filing and based on Proof of Claims filed in this case, the Debtor owed the following: Harvard: $7,906.61 to American Tax Funding (purchases of Tax lien from
Montgomery County Treasurer)
$5,867.88 to American Tax Funding Creditor's claim
$5,280.40 to American Tax Funding
$4,681.83 to American Tax Funding
$2,262.50 to American Tax Funding
$56,000.00 to Weller Mortgage (of which $28,226.96 is secured, balance of
$27,773.04 unsecured)
Oxford: $1,239.77 to Montgomery County Treasurer
$3,487.70 to Montgomery County Treasurer
$32,000.00 to Weller Mortgage (of which $27,272.53 is secured and
$4,727.47 is unsecured)
For all three properties, the values provided in Schedule D were less than the amount owed to the lienholders, including Weller. (Bankruptcy, Doc. 1). The proposed Chapter 13 plan provided for full payment of "allowed" secured claims and 10% of the amounts owed on "allowed" unsecured claims. (Bankruptcy, Doc. 2).
Section 18(E) of the Confirmation Plan states that valuation of real estate would be set at confirmation and "[i]f no objection to valuation is timely filed, the value as set forth in the Chapter 13 Plan and/or filed Appraisal will be binding upon confirmation of the Chapter 13 Plan." (Bankruptcy, Doc. 2 at § 18(E)). The Plan specifies the appraised values of the Harvard Blvd. and Oxford Ave. properties are subject to Weller's security interest and provides that Weller would only be required to release his lien upon completion of the case. (Id. at § 19(A)). The values of the properties as described in the Plan match the appraisals that the Debtor attached to the Plan and the values that the Debtor listed in her Schedule D. (Bankruptcy, Doc. 1). The Debtor did not attach an appraisal of the Delaware Ave. property, but the Plan clearly states that the Debtor intended to surrender the Delaware Ave. property to Weller and the holder of a tax lien and that no payment would be made on the claims of those creditors unless a deficiency claim was filed. (Bankruptcy, Doc. 2 at § 19(B)).
Weller filed an objection to the proposed Plan. Weller's motion was heard and considered at the confirmation hearing. Weller's motion for relief from the automatic stay was ultimately denied because: (1) Weller failed to properly serve the tax lienholder; and (2) adequate protection was provided through the proposed Chapter 13 Plan. During the hearing the court reviewed Weller's mortgages and more specifically the assignment of rents provisions and determined that Weller did not have an absolute assignment, but instead, an assignment of rents as security for payment of the loans. The court explained that because the assignment of rents was not absolute, but was instead intended as security or additional collateral, the Debtor could use this cash collateral to fund the plan so long as adequate protection was provided. The court concluded that adequate protection was provided through the Debtor's Plan that proposed to pay the full value of Weller's allowed secured claim, with interest, over the life of the Plan.
Furthermore, the Harvard and Oxford properties are not the Debtor's principle residence, and therefore are subject to "cram down" which limits Weller's allowed secured claim to the value of the collateral with deductions for higher priority liens (such as real estate taxes). Consequently, the court held that Weller's secured claims were treated appropriately by the Plan provisions proposing to pay Weller up to the appraised value of the real properties with interest, subject to reductions for amounts owed for tax liens.
After hearing on February 21, 2013, the Court overruled the Creditor's objections and confirmed the Plan. The Creditor then filed a motion for reconsideration of the Confirmation Order. The motion was denied by the Bankruptcy Court. The instant appeal of the Confirmation Order was then filed.
III. STANDARD OF REVIEW
A federal district court has jurisdiction to hear appeals from "final judgments, orders, and decrees, and, with leave of the court, from interlocutory orders and decrees, of bankruptcy judges." 28 U.S.C. § 158(a). In determining appeals from the Bankruptcy Court, this Court sits as an appellate court and reviews the Bankruptcy Court's conclusions of law de novo. In re Lowenbraun, 453 F.3d 314, 319 (6th Cir. 2006).
IV. ANALYSIS
A. Whether the Debtor's Chapter 13 Plan is Unconstitutional
The Creditor claims that under the Fifth Amendment, a secured creditor's rights in specific property cannot be taken in bankruptcy proceedings for the benefit of the Debtor. The Creditor relies on Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555 (1935), for the proposition that the Frazier-Lemke Act was declared unconstitutional because it permitted a bankruptcy court to force a secured creditor to give up its lien without payment. However, the Louisville Joint Stock Land Bank case only survived as viable law for two years. Congress amended the Frazier-Lemke Act and in 1937 the Supreme Court found that the deficiencies in the Act were corrected and that the rights of the debtor in a bankruptcy case do not amount to an unconstitutional taking of property under the Fifth Amendment. Wright v. Venton Branch of the Mountain Trust Bank of Ronnoke, 300 U.S. 440 (1937).
The Wright decision interpreting the Frazier-Leinke Act is comparable to 11 U.S.C. Section 1325 because it required the Debtor to make payments overtime (currently 11 U.S.C. § 1325(a)(6)), authorized the court to order sale if the debtor failed, and authorized the court to terminate the stay if, at any time, there appeared to be no reasonable likelihood of financial rehabilitation (currently 11 U.S.C. § 362). The court further found that the power of the debtor to retain possession rather than have a receiver or trustee take possession did not amount to a Fifth Amendment taking. Wright, 300 U.S. at 470.
Weller remains focused on the perceived unfairness of the modification and cramdown of his secured claims thought the Debtor's confirmed Chapter 13 Plan. However, the Bankruptcy Code allows a Chapter 13 plan to modify a secure creditor's state law rights in certain ways unless the secured creditor's collateral is the debtor's residence. 11 U.S.C. § 1322(b)(2). The constitutionality of the Bankruptcy Code's cramdown provisions have been reviewed and found not to violate the Fifth Amendment. In re Trenton Ridge Investors, LLC, 461 B.R. 440, 463 n.4 (S.D. Ohio 2011) (a cramdown alters a secured creditor's property rights but does not result in complete destruction of those rights and "therefore, does not implicate the Takings Clause of the Fifth Amendment").
See also Assocs. Comm. Corp. v. Rash, 520 U.S. 953, 964 (1997) (noting that the Chapter 13 cramdown provision allowing Chapter 13 debtors to retain and use collateral over a secured creditor's objection is one of the ways that the Bankruptcy Code reshapes debtor and creditor rights in a "marked departure from state law").
See also In the Matter of Briscoe Enter., 994 F.2d 1160, 1165 (5th Cir. 1993) ("The [Bankruptcy] Code, however, has been the primary source of the creditors' protections not the Fifth Amendment. Congress provides protections for creditors, and in many instances it allows debtors to impinge on creditor's state law rights. Bankruptcy frequently rewrites the secured creditor's state law bargain.").
Accordingly, the Debtor's Chapter 13 Plan is constitutional.
B. Whether Debtor's Chapter 13 Plan violates 11 U.S.C. § 1325(a)(5)(B)
The Creditor argues that the Debtor is improperly taking the rents associated with the three properties. 11 U.S.C. § 541(a)(6) clearly states that rents from property of the estate are also property of the estate. The Plan as confirmed does not reinvest property back into the Debtor until dismissal, discharge, or conversion. Until the Delaware property is removed from the bankruptcy estate, the rents are property of the estate. Once the Delaware property is removed by the stay order, the Creditor is entitled to the rents. The rents associated with the two retained properties on Harvard and Oxford remain property of the bankruptcy estate under Section 541(a)(6). The Code broadly defines property of the estate as including all legal or equitable interests of the debtor in property as of the commencement of the case, wherever they are located and by whomever they are held by virtue of section 541(a)(1).
11 U.S.C. Section 541(a)(6) states that the bankruptcy estate is comprised of "[p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case."
A debtor's plan is confirmable with respect to an allowed secured claim if one of the following is satisfied pursuant to 11 U.S.C. Section 1325(a)(5): (1) the secured creditor accepts the plan; (2) the debtor surrenders the property securing the claim; or (3) the debtor invokes the "cram down" option. Rash, 520 U.S. at 956-57. Under the cramdown option, the debtor is permitted to keep and use property that is collateral over a secured creditor's objection to conformation if the creditor retains its lien securing the claim until discharge and the creditor is paid the present value of the "allowed secured claim." 11 U.S.C. § 1325(a)(5)(B)(i) and (ii). See also Rash, 520 U.S. at 957. In this case, the Debtor's plan complies with Section 1325(a) by: (1) surrendering the Delaware Ave. property to the lienholders; and (2) including provisions for Weller to be paid the present value of the "allowed secured claims" on the Oxford Ave. and Harvard Blvd. properties and for Weller to retain the liens on those properties until discharge. Payment of the "allowed secured claims" does not entitle Weller to payment in full of the amount due under the contracts. Pursuant to 11 U.S.C. Section 506(a) and its bifurcation provisions, an "allowed secured claim" is limited to the present value of the collateral and is subject to further reduction for higher priority lien holders. Rash, 520 U.S. at 956-57 (under Section 506(a), a secured creditor's claim for the balance owed on a truck is secured to the value of the truck and its claim over and above the value of the truck is unsecured).
At one point in his motion for reconsideration, Weller argues that Section 1325(a)(5)(B)(i)(I) requires full payment of his debt as determined by non-bankruptcy law. (Bankruptcy, Doc. 66 at 3). Weller misconstrues this section of the statute. Section 1325(a)(5)(B)(i)(I) requires that a plan provide for a secured creditor to retain his lien securing the claim until the earlier of: (a) payment of the underlying debt as determined by non-bankruptcy law; or (b) the debtor's discharge. 11 U.S.C. § 1325(a)(5)(B)(i)(I)(aa) and (bb). In this case, the Debtor's plan provides for Weller to retain his liens until the case is completed. (Bankruptcy, Doc. 2 at § 19).
See also In re Curry, 347 B.R. 596, 606-07 (6th Cir. 2006).
The provisions of the Plan clearly state that a determination of the value of Weller's collateral would occur at the confirmation hearing and that the Debtor intended to value Weller's collateral based on the appraisals attached to the Plan. (Bankruptcy, Doc. 2 at ¶ 18(E), 19). See also Bennett v. Springleaf Fin. Serv., 466 B.R. 422 (Bankr. S.D. Ohio 2012) (holding that valuation of collateral may be established through the confirmation process if proper notice is given to creditors). While Weller raised various arguments in his written objection to the Debtor's plan, he failed to raise the issue of valuation. Therefore, the terms of the Debtor's plan regarding the value of Weller's collateral became binding upon confirmation via 11 U.S.C. Section 1327(a).
Weller offered auditor records as evidence of higher valuation at the confirmation hearing. However, the court rejected this attempt to bring valuation into issue because it was not raised in the written objection and the Debtor had no prior notice that valuation was in dispute. Consequently, the valuations in the appraisals attached to the Debtor's Chapter 13 plan became binding pursuant to Sections 18 and 19 of the plan.
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In summary, the cramdown of Weller's "allowed secured claims" to the value of the collateral minus payment to higher priority lienholders is in accordance with well-established bankruptcy law and the binding terms of the confirmed plan.
C. Whether Debtor's Chapter 13 Plan violates the requirements of 11 U.S.C. Section 363(c)(2) and (c)(4)
Finally, the creditor claims that he has not consented to the use of the rents by the Trustee and insists that the rents be paid in satisfaction of his mortgages.
A mortgage of real property does not per se operate as a specific pledge of the rents and profits therefrom. To have that effect the mortgage must expressly include them. But even though a mortgage contains a pledge of rents and profits, and even though the condition is broken, the mortgagor is entitled to them so long as he retains possession. To be entitled to the rents and profits specifically pledged, the mortgagee must have taken possession of the premises or must have taken some action, such as the appointment of a receiver to reduce the rents and profits to possession. Where, however, a mortgagee is prevented from taking possession because the estate of the mortgagor has passed into the jurisdiction of the court,...the mortgagee will, nevertheless, be entitled to the pledged rents and profits collected by the officer of the court, when necessary to fully pay the obligation secured by the mortgage.In the Matter of Pfleiderer, 123 Bankr. 768, 769 (Bankr. N.D. Ohio 1987).
The automatic stay provision, 11 U.S.C. Section 362(a), prohibits a mortgagee from obtaining either possession of the mortgaged property or the appointment of a receiver to collect the rents therefrom without first requesting the bankruptcy court to grant relief from stay under 11 U.S.C. Section 362(d). An automatic stay takes effect upon the filing of a petition in bankruptcy and precludes certain actions against a debtor such as all collection efforts and foreclosure actions. In the Matter of Colonial Realty Co., 122 Bankr. 1 (Bankr. D. Conn. 1990). "[T]he enforcement of a secured creditor's interest in the rents by declaring the mortgagee to be entitled to the rents collected after a certain date when the mortgagee would have been able to enforce that interest in state court but for the automatic stay is a proper exercise of bankruptcy jurisdiction." In re Park at Dash Point, L.P., 121 Bankr. 850, 860 (W.D. Wash. 1990).
By virtue of the mortgage agreements, the Creditor had the right to the rental income from the mortgaged properties in the event of default. However, the Creditor was prevented from either taking possession of the mortgaged properties or having a receiver appointed to collect the rental income because those properties had passed into the exclusive jurisdiction of the bankruptcy court. In the Matter of Pfleiderer, 123 Bankr. 768.
V. CONCLUSION
Accordingly:
1. The Order of the Bankruptcy Court is AFFIRMED;
2. Debtor's Chapter 13 Plan is CONFIRMED; and
3. The Clerk shall enter judgment against Nicholas L. Weller, whereupon this civil action is TERMINATED on the docket of this Court.
IT IS SO ORDERED.
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Timothy S. Black
United States District Judge