Opinion
Case Nos. 04-18008-WCH, 03-20143-WCH.
March 3, 2005
Nina M. Parker, Winchester, MA, for debtor Jan White DePaolo.
John O. Desmond, Framingham, MA, for debtor Domenic G. Ceruti.
Richard T. Mulligan, Newton Highlands, MA, for creditor Mortgage Electronic Registration Systems.
Deirdre M. Keady, Newton Highlands, MA, for creditor Mortgage Electronic Registration Systems.
Gary Donahue, Boston, MA, for the United States Trustee.
MEMORANDUM OF DECISION
I. Introduction
The matters before the Court are Mortgage Electronic Registration Systems ("MERS") objections to confirmation of the Chapter 13 plans in the cases of Jan White DePaolo ("DePaolo") and Domenic G. Ceruti ("Ceruti"). MERS holds a secured claim in each case as the mortgagee of the personal residences of the debtors and is owed significant pre-petition arrears by each debtor. In both the DePaolo and Ceruti plans, the debtors propose to pay the bulk of their plan amount and the majority of MERS arrears in a balloon payment funded by a refinance or sale of their respective residences in the final month of the plan. In its objections to the DePaolo and Ceruti plans, MERS challenged the reasonableness of their cure provisions under 11 U.S.C. § 1322(b)(5), the feasibility of the plans under 11 U.S.C. § 1325(a)(6), and the permissibility of balloon payment plans pursuant to 11 U.S.C. § 1322(d). After separate hearings on MERS objections to the DePaolo and Ceruti plans, I took the matters under advisement and consider them jointly given the common issues they raise. The following constitutes my findings of fact and conclusions of law.
II. Facts
A. In re DePaolo
DePaolo filed for Chapter 13 bankruptcy protection on October 1, 2004. On Schedule A of the petition, DePaolo listed ownership in three parcels of real property: (1) fee simple interest in 30 Hillcrest Circle, Swampscott, MA, (the "Hillcrest property") (2) joint-tenant interest in 355 West Fourth Street, South Boston, MA (the "West Fourth property") and, (3) joint-tenant interest 60 Moutwood Road, Swampscott, MA (the "Moutwood property"). On Schedule D, DePaolo listed the value of the Hillcrest property at $475,000, encumbered by a first mortgage in favor of MERS in the amount of $321,635. In her plan, DePaolo explains she holds a one-third interest in the West Fourth and Moutwood properties and that the total value of the unencumbered properties are $119,361 and $95,667, respectively.
DePaolo's Schedule I reveals her net monthly income from employment is $2,593.89. DePaolo's spouse receives a net income of $2,211.94 a month, for a total combined net monthly income of $4,805.83. DePaolo's expenses are reflected on Schedule J of her petition in the amount of $4,483.94, leaving an excess income of $321.89.
On October 1, 2004, DePaolo filed a Chapter 13 plan which provides she will make 35 monthly payments of $321 and a balloon payment in the amount of $46,179.07 in the 36th month. As part of the plan, DePaolo seeks to pay the pre-petition mortgage arrears in the amount of $32,947, Chapter 13 attorney's fees, and 100% of unsecured claims in the amount of $16,225.66. The plan provides that regular mortgage payments on the Hillcrest property will be paid directly to MERS. As concerns the balloon payment in the 36th month, DePaolo explains in her plan that "if necessary to fund the balance of the balloon payment the Debtor will refinance or liquidate her real estate."
On October 6, 2004, MERS filed a Proof of Claim in the amount of $349,959.13, which includes $34,613.39 in pre-petition arrears. On October 8, 2004, MERS filed an Objection to Confirmation of Plan. I held a hearing on the Objection on November 4, 2004 and took the matter under advisement.
B. In re Ceruti
Ceruti filed a Chapter 7 petition with this Court on May 19, 2003 and received a discharge of his debts on November 21, 2003. On December 11, 2003, Ceruti filed a Chapter 13 petition. Ceruti's Schedule A lists a fee simple interest in 41 Perry Street, Sherborn, Massachussets (the "Perry Street property") with a value of $515,000. The Perry Street Property is encumbered by a first mortgage in favor of MERS in the amount of $336,140.98 and tax liens recorded by the Massachusetts Department of Revenue in the amount of $25,427.91. On January 14, 2004, MERS filed a Proof of Claim in the amount of $360,555.75, including $49,186.24 in pre-petition arrears.
Ceruti's Schedule I indicates that he earns a net income of $4,525, consisting of $4,325 earned as a Landscaper for Proscape Development Corporation and $200 as income from real property. Ceruti's spouse has a net income of $1,208, for a net monthly combined income of $5,733. On Schedule J, Ceruti lists $5,133 in monthly expenses including mortgage payments, property insurance and real estate taxes on the Perry Street property. Accordingly, Ceruti has excess income in the amount of $600.
On December 12, 2004, Ceruti filed his Second Amended Plan which provides he will make 59 monthly payments of $600 and a balloon payment of $111,060 in the 60th month. Through the payments to the Trustee, Ceruti proposes to pay the: (1) MERS secured claim for pre-petition mortgage arrears, (2) priority tax claims of the Internal Revenue Service and the Massachusetts Department of Revenue in the aggregate amount of $78,611.96, and (3) $4,015.80 or 10.01% of unsecured claims aggregating $40,098.12. Ceruti proposes to pay his monthly mortgage payments to MERS and $25,427.91 in recorded tax liens of the Massachusetts Department of Revenue outside the plan. As to the balloon payment in the 60th month, Ceruti's plan provides "[d]ebtor will refinance his residence before the end of the plan in order to complete the payments under the plan." If Ceruti is unable to refinance the Perry Street property, the plan provides Ceruti will sell the residence to fund the balloon payment.
As to cause pursuant to 11 U.S.C. § 1322(d), to permit extension of Ceruti's plan past 36 months, Ceruti submitted a Statement of Cause asserting that business losses caused Ceruti incur mortgage arrears which now make him unable to cure such arrears in addition to his other secured, priority and unsecured claims in 36 months. Ceruti states that he is currently working and as such will be "able to cure the arrearages on his mortgage in 60 months."
The Plan also lists an Internal Revenue Service tax lien for $8,439.53 against the Perry Street Property. Ceruti's personal liability on these liens was discharged in his previous Chapter 7 case, but the lien remains on the property in rem.
On December 7, 2004, MERS filed an Objection to Debtor's Second Amended Chapter 13 Plan. I held a hearing on the objection on January 6, 2005, and took the matter under advisement on a consolidated basis with the DePaolo case.
III. Discussion as to Confirmation of the DePaolo and Ceruti Chapter 13 Plans
In order for a Chapter 13 plan to be confirmed, the plan must meet the six requirements of 11 U.S.C. § 1325(a). For confirmation under § 1325(a)(1), I must conclude that the plan complies with the provisions of Chapter 13, and "[t]hus, `in order for a plan to be confirmable under § 1325(a)(1), it must comply with § 1322 relative to the contents of the plan.'" U.S. v. Easley, 216 B.R. 543, 545 (W.D. Va. 1997) (citing In re Bowles, 48 B.R. 502, 505 (Bankr. E.D. Va. 1985)).
11 U.S.C. § 1325(a) provides:
Except as provided in subsection (b), the court shall confirm a plan if —
(1) the plan complies with the provisions of this chapter and with the other applicable provisions of this title;
(2) any fee, charge, or amount required under chapter 123 of title 28, or by the plan, to be paid before confirmation, has been paic;
(3) the plan has been proposed in good faith and not by any means forbidden by law;
(4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date;
(5) with respect to each allowed secured claim provided for by the plan —
(A) the holder of such claim has accepted the plan;
(B) (i) the plan provides that the holder of such claim retain the lien securing such claim; and
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or
(C) the debtor surrenders the property securing such claim to such holder; and
(6) the debtor will be able to make all payments under the plan and to comply with the plan.
In its objections to confirmation, MERS contends that the Ceruti and DePaolo balloon payment plans do not comply with 11 U.S.C. § 1322(b)(5) in that they fail to cure the pre-petition arrears within a reasonable time. § 1322(b) provides
Subject to subsections (a) and (c) of this section, the plan may . . .
(5) notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured or secured claim on which the last payment is due after the date on which the final payment under the plan is due . . .
Id. The parties do not dispute that § 1322(b)(5) is applicable to the cure of DePaolo and Ceruti's pre-petition mortgage arrears.
What constitutes a "reasonable time" to cure arrears under § 1322(b)(5) is a flexible concept to be determined upon the facts presented by each case. Cent. Fed. Sav. and Loan Ass'n v. King (In re King), 23 B.R. 779, 781 (B.A.P. 9th Cir. 1982). This is subject to a caveat, however, that in no circumstance may the proposed cure of arrears exceed the maximum statutory term of Chapter 13 plans pursuant to 11 U.S.C. § 1322(d). U.S. v. Easley, 216 B.R. at 546-7 (citing Sapos v. Provident Inst. of Sav., 967 F.2d 918, 928 (3rd Cir. 1992)). While several bankruptcy courts have adopted multi-factor tests to determine reasonableness, in consideration of the cases before me, I am ultimately guided by the principle that "a reasonable time as used in § 1322(b)(5) is simply the most expeditious time, consistent with true rehabilitation, within which the debtor can cure defaults." In re Pollasky, 7 B.R. 770, 771 (Bankr. D. Colo. 1980).
Indeed, because a "reasonable time" analysis is so intricately woven with the facts of each particular case, a review of the case law yields similar Chapter 13 plan cure durations being found to fall on opposite sides of the line of reasonableness. Compare First Nat'l Bank of Damariscotta v. Sidelinger (In re Sidelinger), 175 B.R. 115 (Bankr. D. Me. 1994) (36 months reasonable); In re Masterson, 147 B.R. 295 (Bankr. D.N.H. 1992) (56 months reasonable); In re Herrera, 1991 Bankr. Lexis 71 (Bankr. D.P.R. 1991) (24 months reasonable); In re King, 7 B.R. 110 (Bankr. S.D. Cal. 1980) (30 months reasonable) with In re Schenk, 67 B.R. 137 (Bankr. D. Mont. 1986) (60 months unreasonable); In re Pollasky, 7 B.R. 770 (Bankr. D. Colo. 1980) (24 months unreasonable); In re Coleman, 2 B.R. 348 (Bankr. W.D. Ky. 1980) (36 months unreasonable).
11 U.S.C. § 1322(d) provides that "[t]he plan may not provide for payments over a period that is longer than three years, unless the court for cause approves a longer period, but the court may not approve a period that is longer than five years."
See In re Lessman, 159 B.R. 135 (Bankr. S.D.N.Y. 1993) (8 factor test); In re Newton, 161 B.R. 207 (Bankr. D. Minn. 1993) (14 factor test); In re Herrera, 1991 Bankr. Lexis 71 (Bankr. D.P.R. 1991) (5 factor test); In re King, 7 B.R. 110 (Bankr. S.D. Cal. 1980) (same).
In In re Pollasky, Chapter 13 debtors sought to cure pre-petition mortgage arrears over the first 24 months of a 26 month plan. Id. at 770. Upon the mortgagee's objection to confirmation of the debtors' plan, Judge Keller denied confirmation of the plan holding that 24 months was not a reasonable time in which to cure arrears pursuant to § 1322(b)(5). Id. at 771. In reaching this conclusion, Judge Keller noted that the debtors' plan "emphasis is to stretch out the cure period as long as possible and not to shorten it to a maximum degree." Id. The DePaolo and Ceruti plans before me are of the same ilk.
In DePaolo's plan, a mere $11,235 of plan payments for the aggregate of the first 35 months of the plan is proposed. Of the $11,235 in plan payments over the first 35 months, unsecured claims in the amount of $16,225.66, administrative fees for $2,500, Trustee's fees and the MERS arrears will all claim a portion of the payments. Even if one-hundred percent of the those first 35 payments were to be paid to MERS, up until the final ballon payment in the 36th month the Debtor will have only paid approximately one-third of the arrears.
Ceruti's plan also postpones payment on the bulk of MERS pre-petition arrears to the balloon payment in the 60th month of the proposed plan. The balloon payment of $111,060 represents more than three quarters of the total of $146,460 to paid under Ceruti's plan to administrative fees, tax liens, unsecured creditors and MERS arrears.
There is no clear indication from the plans or from either DePaolo's or Ceruti's briefs why 36 and 60 months, respectively, are needed to cure the arrears. Indeed, the fact that the cure of the MERS arrears in both cases are dependent upon a refinance or sale of DePaolo's Hillcrest property or Ceruti's Perry Street Property in the final month of the plans, betrays that 36 and 60 months are indeed unreasonable times in which to cure arrears. Both DePaolo and Ceruti's property have significant equity at the present, and to refinance or sell in the nearer future while said equity is guaranteed would be the most consistent with true rehabilitation. For DePaolo and Ceruti to speculate as to increased equity in their homes over the terms of their plans whether through payments on their mortgages or increases in property value is effectively a gamble with MERS collateral and claims. Neither DePaolo nor Ceruti has argued that sale or refinance of their properties is currently impossible, could not take place any sooner or that factual circumstances make a sale or refinance more reasonable in the absolute final month of their plans.
I do not proclaim a strict time line for reasonableness of cure in cases where a refinance or sale of a debtor's residence to fund a Chapter 13 plan takes place. Where as here, however, both DePaolo and Ceruti have significant equity in their respective properties (and in DePaolo's case significant equity in other, unencumbered real estate), I cannot find that to make relatively insignificant payments on the arrears to MERS for all but the final month of the plans and delay a refinance or sale of the properties until that time is a cure in a reasonable time. As such, I conclude that the terms of the proposed cures of MERS arrears in both the DePaolo and Ceruti plans are not within a "reasonable time" pursuant to § 1322(b)(5). As the contents of both plans fail to comply with § 1322(b)(5), § 1325(a)(1) has not been satisfied. Given the foregoing, I need not address either the feasibility of each plan or whether balloon payment plans are prohibited by § 1322(d).
IV. Conclusion
Based upon the foregoing, I conclude that neither DePaolo nor Ceruti's plan can be confirmed for failure to comply with § 1325(a)(1). I will enter separate orders sustaining the MERS objections to confirmation of the DePaolo and Ceruti plans.