Opinion
Bankruptcy Case No. 10-36018-HRT
08-14-2013
In re: TIMOTHY P. HARAN and SHEILA M. HARAN, Debtors.
Honorable Howard R. Tallman
Chapter 13
ORDER
THE MATTER before the Court involves an objection to a creditor's amended proof of claim. The creditor, Green Tree Servicing, LLC ("Green Tree"), held a junior lien which was partially secured by the Debtors' residence. Following confirmation and subsequent modification of their Chapter 13 plan, the Debtors surrendered their residence to the senior lien holder and their home was auctioned off at a foreclosure sale. Green Tree received proceeds from the sale which partially satisfied its lien. To account for the remaining deficiency, Green Tree amended its timely filed secured claim to an unsecured claim in the amount of the deficiency. The Debtors object to Green Tree's amended claim on two grounds: first, that Green Tree's amended claim is time-barred by FED.R.BANKR.P. 3002(c)(3); and second, that Green Tree's amended claim is improper and untimely because it asserts an entirely new and separate claim from Green Tree's prior and timely secured claim. For the reasons stated herein, the Court allows Green Tree's amended claim (Claim 3.2) and overrules the Debtors' Objection to Proof of Claim Filed by Green Tree Servicing, LLC (Docket No. 63).
I. FACTS
The following facts are not in dispute.
On October 13, 2010, the Debtors, Timothy and Sheila Haran, filed for bankruptcy and submitted their Chapter 13 plan. In their plan, the Debtors proposed to make payments on the senior and junior liens which encumbered their residence. Green Tree Servicing LLC ("Green Tree") held the junior lien against the Debtors' residence and filed a timely secured proof of claim evidencing such interest. The Court confirmed the Debtors' plan on December 10, 2010.
Almost one year after the Court confirmed the Debtors' plan, the Debtors' economic circumstances changed. In response to these changed circumstances, the Debtors' filed a Motion to Modify their plan. Under the modified plan, the Debtors proposed to surrender their residence. In particular, the Debtors' modified plan provided:
Relief from the automatic stay to permit enforcement of the liens encumbering surrendered property shall be deemed granted by the Court at the time of confirmation of this Plan. With respect to property surrendered, no distribution on the creditor's claim
shall be made unless that creditor files a proof of claim or an amended proof of claim to take into account the surrender of the property.
The Court granted the Debtors' Motion to Modify on October 28, 2011. Approximately nine months later, on July 27, 2012, the holder of the senior lien against the Debtors' surrendered residence, initiated a foreclosure action in Colorado state court under Rule 120 of the Colorado Rules of Civil Procedure.
"Rule 120 governs the very specialized civil proceeding in which an interested [party] may file a verified motion in court seeking the order authorizing sale under the power of sale contained in the recorded instrument." Plymouth Capital Company, Inc. v. District Court of Elbert County, 955 P.2d 1014, 1015 (Colo. 1998).
Following the Rule 120 hearing, the Debtors' residence was sold at a foreclosure auction on October 24, 2012. The senior lien holder was paid in full and Green Tree received a distribution which partially satisfied its secured claim. On December 17, Green Tree amended its proof of claim to account for the partial payment and the outstanding, unsecured deficiency, totaling $97,666.73, which remained following the foreclosure sale.
On January 17, 2013, in response to Green Tree's amended proof of claim, the Debtors moved to modify their plan again and objected to Green Tree's amended claim. In support of their objection, the Debtors argue first, that Green Tree's amended claim is time-barred by FED.R.BANKR.P. 3002(c)(3), which governs when a creditor may file a claim which arises from a judgment, and second, in the alternative, that Green Tree's amended claim asserts a new unsecured claim which does not relate back to Green Tree's original secured claim and is therefore, not allowable under FED.R.BANKR.P. 7015.
II. STATEMENT OF ISSUES
Based on the facts of the case and the arguments advanced by the Debtor, the Court must decide the following issues:
(1) Whether Green Tree's amended claim is time-barred by FED.R.BANKR.P. 3002(c)(3), and
(2) Whether Green Tree's amended claim relates-back to its previously filed secured claim
For the reasons set forth herein, the Court finds: (1) Green Tree's amended claim is not time-barred by FED.R.BANKR.P. 3002(c)(3); and (2) Green Tree's amended claim does not assert a new claim and does relate-back to its original secured claim.
III. DISCUSSION
A. Green Tree's Amended Claim Is Not Time-Barred by FED.R.BANKR.P. 3002(C)(3)
The Debtors argue that Green Tree's amended claim is time-barred by FED.R.BANKR.P. 3002(c)(3), which governs when a creditor may file a claim which arises from a judgment. Under FED.R.BANKR.P. 3002(c)(3),
[a]n unsecured claim which arises in favor of an entity or becomes allowable as a result of a judgment may be filed within 30 days after the judgment becomes final if the judgment is for the recovery of money or property from that entity or denies or avoids the entity's interest in property. If the judgment imposes a liability which is not satisfied, or a duty which is not performed within such period or such further time as the court may permit, the claim shall not be allowed.
According to the Debtors, FED.R.BANKR.P. 3002(c)(3) applies in this case because Green Tree's claim arose from a judgment of the state court, which, at the conclusion of the Rule 120 proceeding, approved the foreclosure sale of the Debtors' residence. The Debtors further allege that when their residence was purchased at the foreclosure sale on October 24, 2012, the judgment of the state court became final and Green Tree had only 30 days thereafter to file its deficiency claim. After considering the Debtors' argument, the Court finds that the argument is not supported by the plain language of FED.R.BANKR.P. 3002(c)(3).
A plain reading of the rule reveals that the 30 day limit imposed by FED.R.BANKR.P. 3002(c)(3) is conditioned upon: (1) an unsecured claim arising in favor of an entity; (2) which becomes allowable because of a judgment; and (3) the judgment must seek from the same entity which holds the unsecured claim the recovery of money or property, i.e. a preference, or deny or avoid that entity's interest in property. Here, the facts of this case fail to satisfy the third prong of FED.R.BANKR.P. 3002(c)(3) because the Rule 120 proceeding neither resulted in the recovery of money or property from Green Tree, nor did it result in the avoidance or denial of Green Tree's interest in property. Rather, at the conclusion of the Rule 120 proceeding, the state court merely approved the foreclosure sale of the Debtors' residence. In doing so, the state court did not require Green Tree to pay money to the Debtors nor did the state court avoid Green Tree's security interest in the Debtor's residence; rather, the state court recognized the legitimacy of Green Tree's interest in the Debtors' residence and allowed Green Tree to collect proceeds from the sale of that residence. Based on a plain reading of the rule, such facts do not invoke FED.R.BANKR.P. 3002(c)(3) or its 30 day deadline for filing claims.
Id (emphasis added).
While the Court also doubts that the Debtors' argument satisfies the second prong of FED.R.BANKR.P. 3002(c)(3), which requires the unsecured claim to arise from a judgment, the Court declines to make a determination on whether Rule 120 proceedings result in "judgments" because such a determination is not dispositive of the Court's decision. See Plymouth Capital Co., Inc., 955 P.2d at 1014 ("The hearing contemplated by Rule 120 operates as an integral part of [Colorado's] streamlined, non-judicial foreclosure system."). emphasis added.
See footnote 1 supra.
In making their case for the application of FED.R.BANKR.P. 3002(c)(3), the Debtors rely on two cases, In re Tapp and In re Little In Tapp, a case decided by the U.S. District Court for the Western District of Kentucky, and cited within the Advisory Committee Notes to FED.R.BANKR.P. 3002(c)(3), the entity's unsecured claim was time-barred by FED.R.BANKR.P. 3002(c)(3) because the claim arose from a judgment which allowed the Trustee to recoup for the estate a preference payment made to the entity. Similarly, in Little, the entity's unsecured claim was also time-barred by FED.R.BANKR.P. 3002(c)(3) because the claim arose from a judgment which avoided the entity's security interest in the debtor's property.
In re Tapp, 61 F.Supp. 594 (W.D.Ky. 1945); In re Little, 74 B.R. 625 (Bankr.N.D.Ny. 1987).
FED.R.BANKR.P. 3002, Advisory Committee Note (1983).
In re Tapp, 61 F.Supp. at 595.
In re Little, 74 B.R. at 627.
What differentiates both Tapp and Little from the case at bar is that the judgment in Tapp, sought the recovery of money from the creditor, i.e. a preference payment, and the judgment in Little, avoided the creditor's interest in the debtor's property. Conversely, in the case at bar, the state court's approval of the foreclosure sale neither required Green Tree to pay money to the Trustee nor did it serve to avoid Green Tree's interest in the Debtors' residence. While Tapp and Little contain facts which fall squarely within the ambit of FED.R.BANKR.P. 3002(c)(3), the present case contains facts which fall well outside of that ambit. Therefore, the Court finds that Green Tree's amended claim for a deficiency is not time-barred by FED.R.BANKR.P. 3002(c)(3).
See In re Brotman Medical Center, Inc., 2008 WL 8444797 (9th Cir.B.A.P. Aug. 15, 2008)(citing In re Int'l Diamond Exch. Jewelers, Inc., 188 B.R. 386, 391 (Bankr.S.D.Ohio 1995))("Rule 3002(c)(3) applies only to creditors whose claims arise as a result of a recovery by the bankruptcy trustee."); FED.R.BANKR.P. 3002, Advisory Committee Note (1983)(indicating that the intent of Rule 3002(c)(3) is to allow a creditor whose security interest is avoided to file an unsecured proof of claim); see also 9 Collier on Bankruptcy ¶ 3002.03[4] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.).
B. Green Tree's Amended Claim Does Not Assert a New Claim and Does Relate-Back to Its Original Secured Claim
In the event FED.R.BANKR.P. 3002(c)(3) does not bar Green Tree's claim, the Debtors argue that Bankruptcy Rule 7015 should because Green Tree's amended claim asserts a distinctly new right to payment from that asserted by Green Tree's original and timely secured claim.
While neither the Bankruptcy Code nor Rules specifically address the amendment of a proof of claim, courts have generally allowed post-bar date amendments so long as the amendment does not assert a new claim against the estate. In the Tenth Circuit, courts follow this general approach, under which "amendment of a proof of claim is freely permitted so long as the claim initially provided adequate notice of the existence, nature, and amount of the claim as well as the creditor's intent to hold the estate liable." Further, a creditor's "[l]ate-filed amendments to proofs of claim should be treated with liberality" where the debtor fails to demonstrate actual prejudice.
See 9 Collier on Bankruptcy ¶ 3001.04[1] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.).
Tanaka Bros. Farms, Inc. v. Berger, 36 F.3d 996, 998 (10th Cir. 1994)(quoting Unioil v. Elledge (In re Unioil, Inc.), 962 F.2d 988, 992 (10th Cir. 1992)).
Id.
In Tanaka Bros. Farms, Inc. v. Berger ("Tanaka"), the Tenth Circuit Court of Appeals applied the general standard in determining whether the Internal Revenue Service (IRS) was permitted to amend its timely filed original claim after the claims bar date. In Tanaka, the IRS filed a timely proof of claim for an estimated amount of unpaid taxes. The IRS based its estimated claim upon the information it had prior to the claims bar date. After the claims bar date, the IRS was able to calculate its claim with certainty and realized that its estimated proof of claim was too low. In response, the IRS filed an amended proof of claim to account for the increased amount.
See Tanaka Bros. Farms, Inc., 36 F.3d 996 (10th Cir. 1994).
In allowing the IRS to amend its claim, the Tenth Circuit Court of Appeals evaluated the following equitable factors in an effort to determine whether the estate had adequate notice of the claim and whether the estate would suffer unfair surprise and prejudice. Such factors, which are relevant to the present case, include:
(1) Whether the parties or creditors relied on the initial claim, or whether they had reason to know subsequent proofs of claim would follow;The Court will consider each of these factors in turn.
(2) Whether other creditors would receive a windfall to which they are not entitled on the merits by the court not allowing the amendment to the proof of claim;
(3) Whether the creditor intentionally or negligently delayed in filing its amended claim;
(4) The justification, if any, for the failure to request the timely extension of the bar date; and
(5) Any other general equitable considerations.
Tanaka Bros. Farms Inc., 36 F.3d at 998-99.
1. Whether the parties or creditors relied on the initial claim, or whether they had reason to know subsequent proofs of claim would follow
Here, Green Tree filed a secured claim prior to the claims bar date. This secured claim arose from and was based upon a promissory note signed by the Debtors and secured by a junior lien on the Debtors' residence. In their initial confirmed Plan, the Debtors elected to retain their residence and pay Green Tree the full value of its secured claim. Thus, there is no doubt that the Debtors had adequate and complete notice of Green Tree's secured claim and the legal basis for that secured claim.
Next, once the Debtors elected to surrender their residence to the senior lien holder, they moved to modify their plan. In their modified plan, the Debtors included the following language:
Relief from the automatic stay to permit enforcement of the liens encumbering surrendered property shall be deemed granted by the Court at the time of confirmation of this Plan. With respect to property surrendered, no distribution on the creditor's claim shall be made unless that creditor files a proof of claim or an amended proof of claim to take into account the surrender of the property. (emphasis added)
Based on the language of their own modified plan, it is clear that the Debtors not only anticipated a deficiency claim from Green Tree, the Debtors also expressly and unconditionally permitted the filing of such amended claims for resulting deficiencies and imposed no deadline for Green Tree to do so. Thus, the Debtors recognized the connection between Green Tree's original secured claim and a potential unsecured deficiency claim. Such a connection between the original secured claim and a future deficiency is undeniable and has been recognized by many courts faced with the same decision of whether to allow a creditor to amend a prior secured claim to account for a deficiency.
In re Breaux, 410 B.R. 236, 239 (Bankr.W.D.La. 2009)("[Bank's] right to a deficiency claim is grounded on the same facts and transactions reflected in the original proof of claim - namely the [n]ote and [the bank's] rights under the [n]ote and Louisiana law."); In re Tessier, 333 B.R. 174, 177 (Bankr.D.Conn. 2005); In re Delmonte, 237 B.R. 132 (Bankr.E.D.Tx. 1999); In re King, 2008 WL 2856688, *1 (Bankr.D.Dist.Col. July 20, 2008).
2. Whether other creditors would receive a windfall to which they are not entitled on the merits by the Court not allowing the amendment to the proof of claim
In their modified plan, the Debtors disclosed $57,883 in disposable income and scheduled $54,966 in unsecured debt. Their plan proposes to pay all unsecured claims in full. The modified plan does not account for Green Tree's amended unsecured claim, which totals $97,666.73. The Debtors' do not dispute the amount of Green Tree's amended unsecured claim nor do they dispute Green Tree's right to assert a deficiency claim under Colorado law.
The Court notes that Colorado, unlike other states, has not enacted an anti-deficiency statute which prohibits creditors from pursuing debtors for deficiencies which remain following a foreclosure sale of the creditor's collateral. Therefore, in Colorado, the holder of a deed of trust on property may pursue a debtor for a deficiency following a foreclosure sale to the extent the debt exceeds the fair market value of the property. See Franks v. Colorado Nat. Bank-Arapahoe, 855 P.2d 455, 457 (Colo.App. 1993)(citing Bailey v. Merritt, 90 Colo. 338, 9 P.2d 485 (1932)).
If the Debtors' modified plan included Green Tree's amended unsecured claim, then the Debtors' unsecured debt would total $152,632.73. Therefore, given their disclosed $57,883 in disposable income, the Debtors' would likely be able to pay and the unsecured creditors would likely receive only 38 percent on their claims. In other words, unsecured creditors would receive, at Green Tree's expense, about 200 percent more on their claims if the Court disallows Green Tree's amended unsecured claim. Such a return could be fairly classified as a windfall and would come at the expense of a claim Green Tree has a state law right to assert. Such treatment would significantly prejudice Green Tree and result in a significant forfeiture.
$54,966.00 + $97,666.73 = $152,632.73.
$57,883.00 / $152,632.73 = 0.38.
See footnote 16, supra.
The Debtors urge the Court to find the reverse - that allowance of Green Tree's claim would result in prejudice to other unsecured creditors in the form of a significantly reduced dividend. While the Debtors are correct that unsecured creditors would receive substantially less if Green Tree's amended claim is allowed, this is not the prejudice with which courts are concerned. For purposes of allowing an amended claim, an amendment is prejudicial if the amendment would impose a cost by misleading someone and not that the error, if corrected, would cause someone to receive less money. The Court finds that unsecured creditors were not misled and, therefore, not prejudiced because, based on the terms of the Debtors' modified plan specified above, unsecured creditors were on notice that Green Tree could file an unsecured deficiency claim.
Matter of Stoecker, 5 F.3d 1022, 1028 (7th Cir. 1993); McAbee v. Isom, 116 F.2d 1001, 1003 (5th Cir. 1940).
--------
3. Whether the creditor intentionally or negligently delayed in filing its amended claim
The Debtors' residence was sold at foreclosure on October 24, 2012. The Public Trustee issued a check for Green Tree's share of the proceeds from the foreclosure sale on November 30, 2012. Green Tree received this check in the mail on December 8, 2012. On December 17, 2012, Green Tree filed its amended proof of claim. Based on this timeline, the Court finds that Green Tree acted quickly and did not delay in filing its amended claim.
4. The justification, if any, for the failure to request the timely extension of the bar date
Green Tree relied on the terms of the original plan as proposed by the Debtors. Under the terms of the original plan, Green Tree's secured claim was to be paid in full. Green Tree had no reason to believe its claim would become unsecured, through no action of its own. Therefore, Green Tree was justified in not seeking an extension of the claims bar date.
5. Other equitable considerations
The Court sees no other factors which would serve to outweigh the factors discussed above which weigh in favor of allowing Green Tree's amended claim.
In short, Green Tree's amended claim for a deficiency is not new. It arises from the same obligation owed by the Debtors which served as the basis for Green Tree's original secured claim. And, such deficiency claim was anticipated and specifically allowed under the terms of the Debtors' modified plan. The amended claim will not cause the prejudice prohibited by Tenth Circuit precedent, nor do any other equitable circumstances mandate denial of Green Tree's amended claim.
IV. CONCLUSION AND ORDER
IT IS THEREFORE ORDERED that Green Tree's amended claim (Claim 3.2) is ALLOWED.
IT IS FURTHER ORDERED that the Debtors' Objection to Proof of Claim Filed by Green Tree Servicing, LLC (Docket No. 63), is OVERRULED.
BY THE COURT:
____________
Howard R. Tallman, Chief Judge
United States Bankruptcy Court