Opinion
Case No. 18-14513
08-23-2019
IN RE Terence M. HOLMES, Debtor
Jessica Goldberger, Shawn Robert Ryan, Amourgis and Associates, Cincinnati, OH, for Debtor.
Jessica Goldberger, Shawn Robert Ryan, Amourgis and Associates, Cincinnati, OH, for Debtor.
ORDER SUSTAINING OBJECTIONS TO CONFIRMATION
Jeffrey P. Hopkins, United States Bankruptcy Judge
Before the Court is Terence M. Holmes's (the "Debtor") Second Amended Chapter 13 Plan (Doc. 37) (the "Plan") and three objections thereto brought by Bayview Loan Servicing, LLC ("Bayview"); US Bank, N.A. ("US Bank"); and Margaret A. Burks, the chapter 13 trustee (the "Trustee"). On June 25, 2019, these matters came up for hearing before this Court. At the conclusion of the hearing, the Court took the matter under advisement. For the reasons below, all three objections to confirmation of the Plan are SUSTAINED .
PROCEDURAL HISTORY
On December 14, 2018, the Debtor commenced these proceedings by filing a voluntary petition for bankruptcy relief under chapter 13 of the Bankruptcy Code. On January 19, 2019, the Debtor filed his initial Chapter 13 plan (Doc. 11). Thereafter, Bayview and US Bank each filed objections (Docs. 13 and 14, respectively). On February 19, 2019, the Debtor filed his first amended Chapter 13 plan (Doc. 21). Three days later, on February 22, 2019, the Trustee filed an objection thereto (Doc. 23). The same day, Bayview filed another objection (Doc. 24).
The first amended plan and the various objections were heard by the Court on April 23, 2019. At that time, the Trustee's counsel reported her objection had been satisfied, and counsel for the Debtor, as well as Bayview and US Bank, reported this matter was on the path toward confirmation, specifically that the Debtor and the two creditors had agreed on the amounts of the debts that had to be paid over the life of the plan and that the plan only needed to be amended to incorporate those amounts.
On May 17, 2019, Debtor's counsel was replaced by another associate in the same firm (Doc. 36) and the present Plan was filed the next day. The Plan is a rather radical departure from the prior plan. Specifically, Bayview was moved from section 5.1.1 and split into two other sections of the plan: 5.1.2 and 5.2.1. Additionally, US Bank which was not treated in the prior plan iteration, was inserted into the same two sections. Finally, both Bayview and US Bank were included under the Nonstandard Provisions portion of section 13.
This section is titled "Maintenance of Regular Mortgage Payments." Claims treated under section 5.1 are considered Class 1 claims under the Plan and would be paid first.
This section is titled "Modified Mortgages or Liens Secured by Real Property [‘Cramdown/Real Property’]." The explanatory paragraph states, "The following claims are subject to modification as ... claims for which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the Debtor's principal residence is due before the date on which the final payment under the plan is due. 11 U.S.C. §§ 1322(b)(2), (c)(2)." This section also falls under the category of Class 1 claims.
This section is titled "Secured Claims with No Designated Monthly Payments." Claims treated under section 5.2 are considered Class 2 claims under the Plan and would be paid after all Class 1 claims are paid.
As to the two creditors at issue, section 13 states:
The mortgage arrears owed to Bayview Financial Loan listed in section 5.2.1 shall be paid at an interest rate of 6.5% as the loan was incurred in 1991.
The mortgage arrears owed to US Bank shall be paid at a 0% interest rate as the loan was incurred in 1997.
Section 5.1.2 of the Plan would have the Trustee disburse $130 per month to Bayview, allegedly paying off its mortgage of $21,947.22 (POC 2-1, Line 9) at a proposed Till rate of 6.5%. The same section would have the Trustee disburse nothing to US Bank on a monthly basis, but would nevertheless institute a Till rate of 6.5%. Simultaneously, section 5.2.1 would have the Trustee pay off Bayview's arrearage claim in the amount of $15,192.44 (POC 2-1, Line 9) as a Class 2 claim. Additionally, section 5.2.1 would direct the entirety of US Bank's claim in the amount of $9,604.03 (POC 4-1, Line 7) be paid off, also as a Class 2 claim.
See Till v. SCS Credit Corp. (In re Till) , 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004).
The Court is aware that US Bank has indicated the appropriate Till rate should be 7.5% rather than the proffered 6.5% (Doc. 45, p. 2). However, that issue has not been briefed and is not appropriately before the Court at present. Moreover, counsel for US Bank indicated at the June 25 hearing that his client was not particularly concerned about the interest rate. It just wants to make sure its principal is paid. Therefore, this Order does not address the propriety of the Debtor's asserted Till rate as to either of the claims.
On May 21, 2019, three days after the Plan was filed, the Court held a hearing at which time the parties indicated the issues to be resolved were "academic" in nature and related to a very small amount of money. Specifically, interest would accrue on both creditors' claims at the Till rate of 6.5% over the course of the Plan except for $137.63 of US Bank's claim. The parties all agreed that both Bayview's and US Bank's claims were oversecured by their interest in the Debtor's residence. Moreover, the creditors, joined by the Trustee, expressed concern over the hybrid nature of their treatment under the Plan, given they were to each be treated as both Class 1 and Class 2 claims with differing and inconsistent payment designations. The Trustee specifically highlighted the difficulty of administering these claims on the proposed bifurcated terms, particularly where the difference centered on the amortization of approximately $138 over the course of five years.
The de minimus nature of the present conflict in front of the Court is readily apparent. As discussed below, the Debtor concedes that Bayview's entire claim is owed interest regardless of how it is treated under the Plan. The vast majority of US Bank's claim also would be owed interest, excepting only $137.63. In the event this amount is subject to interest, its payment would be amortized over the course of the Plan. Thus, as Debtor's counsel agreed during the hearing on this matter, the ultimate determination here will not affect the Debtor's payments much at all.
Given these issues, the parties seemed to be on the brink of an agreement and the Debtor's counsel reported that she would be filing a new amended plan in order to address the creditors' and the Trustee's concerns. As a precaution, in case an agreement was not reached, the Court directed the parties to file briefs on the underlying disputes related to the various objections to the Plan. The Court's Order Setting Briefing Schedule (Doc. 39) ordered the Debtor's counsel to file her brief and the proposed new amended plan by June 4, 2019, and instructed the creditors' counsels and the Trustee to file their reply briefs by June 11, 2019.
On June 3, 2019, the Debtor's brief (Doc. 43) was filed but no amended plan was ever filed. On June 4, Bayview filed their reply brief (Doc. 44); on June 7, US Bank filed their reply brief (Doc. 45); and on June 11, the Trustee filed her reply brief (Doc. 48). No agreement having been reached, this matter came back up on the docket on June 25, 2019, and this Court took it under advisement.
SUMMARY OF THE ARGUMENTS
The Debtor has characterized the Plan's treatment of the creditors' claims as a bifurcation. Specifically, "The proposed [P]lan instead treats the arrears identified by the proofs of claim under section 5.2.1 – curing the arrears on a pro-rata basis – and pays any remaining unpaid principal balance under 5.1.2." (Doc. 43, pp. 1-2). Such bifurcation, so the argument goes, is authorized by 11 U.S.C. § 1322(c). The Debtor notes that § 1322(c)(1) allows a default on a loan secured by an interest in his residence to be cured subject to § 1322(b)(3). Additionally, § 1322(c)(2) authorizes a debtor to modify a debt secured by an interest in his residence pursuant to 11 U.S.C. § 1325(a)(5). The Debtor reads these options disjunctively, effectively cleaving the creditors' individual claims into two parts to be treated under each provision separately, section 5.1.2 applying § 1322(c)(2) and section 5.2.1 applying § 1322(c)(1).
It also allows curing subject to § 1322(b)(5), but as both loans at issue in this case will mature prior to the conclusion of the Plan, § 1322(b)(5) is inapplicable.
"Thus, with respect to the two loans at issue, Debtor may choose to cure the default under 1322(b)(3); he may provide for the payment of the claim to be modified pursuant to 1325(a)(5); or he may do both." (Doc. 43, p. 2).
Having done so, the Debtor then turns to how to pay the two claims. As to Bayview, the Debtor acknowledges that the claim predates the enactment of 11 U.S.C. § 1322(e), so under § 1322(c), Bayview's entire claim must be paid with interest. See generally Rake v. Wade , 508 U.S. 464, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993) (overruled by the enactment of § 1322(e) ). The Debtor's primary reason for wanting to split Bayview's claim, then, is to avoid the "equal monthly amounts" requirement of 11 U.S.C. § 1325(a)(5)(B)(iii)(I). Bayview asserts this provision applies to its entire claim since the debt matures during the life of the Plan and its entire claim should be treated solely under section 5.1.2. The Debtor responds that since the Plan proposes to treat the arrearage under § 1322(c)(1), § 1325(a)(5) is inapplicable because only § 1322(c)(2) explicitly incorporates it. Under this theory, the $130 monthly Plan payments under section 5.1.2 would only go to paying the principal balance, excluding the arrearage until the mortgage matures during the life of the Plan. The present arrearage, then, is treated separately under section 5.2.1.
"Notwithstanding subsection (b)(2) of this section and sections 506(b) and 1325(a)(5) of this title, if it is proposed in a plan to cure a default, the amount necessary to cure the default, shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law."
The $130 per month proposed to be paid to Bayview under section 5.1.2 would add up to $7,800 assuming this below-median case went for the maximum of 60 months. As such, the remainder of Bayview's total claim of $21,947.22 would be paid under the arrearage provision of section 5.2.1. The math roughly adds up as Bayview's arrearage claim of $15,192.44 is $6,754.78 less than the total claim, well under $7,800. However, this division highlights the administrative difficulties the Trustee would face in trying to administer this claim under two separate provisions.
As to US Bank, however, the Debtor argues "there is absolutely no evidence that [ ] interest is provided for under the terms of the original agreement." (Doc. 43, p. 4). US Bank's proof of claim shows the interest rate on its claim as "0.000%" (POC 4-1, Line 9). The attached itemization, further, shows interest due of "$0.00" and fees and costs due of "$137.63." Id. , p. 4. Thus, the Debtor asserts US Bank's claim can also be bifurcated between §§ 1322(c)(1) and (2), curing the default under section 5.1.2 and paying the arrearage under section 5.2.1. However, the Debtor posits that since the debt has matured the entire claim is an arrearage. So, while listing the debt under section 5.1.2, it will actually be paid under section 5.2.1. This would functionally allow the Debtor to avoid the equal payment provision on the entirety of US Bank's claim. US Bank responds that its claim is not an arrearage. It is "a total debt claim" because the underlying mortgage matured on October 6, 2012, more than six years prior to this case being filed (Doc. 45, p. 2). According to US Bank, relying on the expressed language of § 1322(c)(2) which addresses debts which mature prior to the final payment under a plan and incorporates § 1325(a)(5), this means that, like Bayview's claim, US Bank's entire claim should be paid in equal monthly installments pursuant to § 1325(a)(5)(B)(iii)(I) under section 5.1.2.
Though never stated specifically, this Court infers that the $137.63 the parties had been arguing over is this number. However, from the quoted language, it seems the Debtor may be trying to shift his argument to say no interest is owed at all on any part of US Bank's claim. To the extent the Debtor's briefing and the Plan are at odds with each other, this Court will defer to the Plan which concedes a 6.5% interest rate on all but the "mortgage arrears owed to US Bank." (Doc. 37, Sec. 13).
This explanation, though, does nothing to clarify the inclusion of a 6.5% interest rate in section 5.1.2.
The Trustee's view is that both debts should be treated entirely in section 5.1.2 of the Plan in order to ensure full payment and compliance with § 1325(a)(5), not to mention to ease her administration of the estate.
THE LAW
A. The Debtor's View of § 1322(c) is Unsupported in the Law
The Code provisions at issue here are interwoven, referring to each other and various other Code provisions which in turn refer to other Code provisions. However, at their core, §§ 1322(c)(1) and (2) were designed to achieve two specific purposes, neither of which supports the Debtor's construction.
1. A Brief History of § 1322(c)
Section 1322(c) was created as part of the Bankruptcy Reform Act of 1994 to overturn two decisions rendered by the Third Circuit Court of Appeals. The provision reads in its entirety:
(c) Notwithstanding subsection [1322](b)(2) and applicable nonbankruptcy law—
(1) a default with respect to, or that gave rise to, a lien on the debtor's principal residence may be cured under paragraph (3) or (5) of subsection (b) until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law; and
(2) in a case in which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor's principal residence is due before the date on which the final payment under the plan is due, the plan may provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title.
Section 1322(c)(1) addressed the decision in In re Roach , 824 F.2d 1370 (3d Cir. 1987). Roach declared, specifically regarding a foreclosure in New Jersey, that "the right to cure a default on a home mortgage under § 1322(b) does not extend beyond the entry of a foreclosure judgment." Id. at 1379. Congress found this decision to be "in conflict with the fundamental bankruptcy principle of allowing the debtor a fresh start through bankruptcy." 140 Cong. Rec. H10, 769 (daily ed. Oct. 4, 1994).
Section 1322(c)(1) "altered the equation, providing a supplemental, federal, right that enhances state law rights." In re Ausburn , 524 B.R. 816, 821 (Bankr. E.D. Ark. 2015) (quoting In re Stephens , 221 B.R. 290, 293 (Bankr. D. Me. 1998) ). "The statute now grants debtors the opportunity to cure home mortgage defaults up to the foreclosure sale in a civil foreclosure action, whether or not state law principles would have extinguished the debtor's real property rights in the period preceding bankruptcy." Stephens , 221 B.R. at 293.
Section 1322(c)(2) was designed to overturn the ruling in First Nat'l Fidelity Corp. v. Perry , 945 F.2d 61 (3d Cir. 1991). Perry held that "since § 1322(b)(2) prohibits a plan that works a modification of the rights of a home mortgage lender," a plan's conformity with the requirements of § 1325(a)(5)(B)(ii) "is simply not relevant." Id. at 66. In direct contrast to the holding in Perry , § 1322(c)(2) explicitly provides recourse to § 1325(a)(5) in the event a debtor seeks to modify a mortgage secured by an interest in a debtor's residence which matures before the final payment under the plan.
This provision directs, "the court shall confirm a plan if ... (5) with respect to each allowed secured claim provided for by the plan ... (B)(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...."
Though each section was designed to overrule a different decision, there is no indication they are intended to be used disparately to cleave a single debt and have it treated in two different ways. Indeed, the two provisions are connected by "and."
In fact, at least one court has strongly suggested that "section 1322(c)(1), by its reference to section 1322(b)(3) and (5), usually applies to situations where the last payment of the secured claim on the original payment schedule is due after the date on which the final payment under a debtor's plan is due, i.e., long term debt. " In re Mendez , 600 B.R. 321, 328 (Bankr. D.N.J. 2019) (emphasis in original). By contrast, "section 1322(c)(2) expressly applies to secured claims on which the last payment comes due prior to the last payment under a chapter 13 plan . In looking to cure a default on a fully matured debt over a period of time, absent the consent of the creditor, a debtor does not have a choice, a debtor can only address a default under section 1322(b)(3) through section 1322(c)(2)." Id. at 329 (emphasis in original).
2. The Word "And" is Conjunctive
The controversy here appears to stem from Debtor's counsel's misapprehension of the word "and" connecting §§ 1322(c)(1) and (2). The most robust discussion of the purpose of "and" in § 1322(c) comes from Judge Schaaf in the case In re Parker , 563 B.R. 650 (Bankr. E.D. Ky. 2017).
In Parker , Judge Schaaf was confronted with a plan which proposed to cure a default after the foreclosure sale had been conducted but before the Kentucky state court had confirmed the sale. Section 1322(c)(1) contains a cutoff provision, consistent with Congress's intention to overturn Roach , which states a defaulted mortgage on a residence can be cured under §§ 1322(b)(3) and (5) "until such residence is sold at a foreclosure sale...." As Judge Schaaf acknowledged, a foreclosure sale is not final under Kentucky law until it is confirmed by the state court. Id. at 651.
However, relying upon the Sixth Circuit's opinion in Cain v. Wells Fargo Bank, N.A. (In re Cain) , 423 F.3d 617, 620 (6th Cir. 2005), Judge Schaaf stated, "A debtor's right to cure a home mortgage default under § 1322(c)(1) terminates when the residence is sold at a foreclosure sale. Cain makes it clear that the foreclosure sale occurs when the gavel comes down on the last bid...." Parker , 563 B.R. at 653 (internal citations and quotation marks omitted).
There is no question the foreclosure process is not complete under Kentucky law because the state court might not enter the sale confirmation order for any number of reasons (e.g., notice problems, auction defects)....
But the issue is whether the Debtor has a federal statutory right to cure, not when a sale is final under state law. Ultimately, it does not matter that lower courts or the Debtor might disagree because the Sixth Circuit opted for a bright line test that avoids the need to analyze the transaction in terms of state property law.
Id. at 653-54 (internal citations and quotation marks omitted).
The issue before this Court does not involve a foreclosure sale as Parker did. However, this background is necessary because the debtor in Parker suggested, as an alternative to invoking § 1322(c)(1), she could cure under § 1322(c)(2) which does not contain the foreclosure sale time limit. This attempted use of the two subsections of § 1322(c) as alternatives mirrors the Debtor's construction. See supra, n. 9.
Judge Schaaf's conclusion, then, is applicable here:
[T]he [d]ebtor's argument improperly relies solely on § 1322(c)(2) and ignores § 1322(c)(1). Subsections (c)(1) and (c)(2) are separated by the conjunctive "and," not the disjunctive "or." "When encountered in a statute, ‘and’ is typically construed in its ordinary conjunctive sense."
Rogan v. U.S. Bank, N.A. (In re Partin) , 517 B.R. 770, 773-774 (Bankr. E.D. Ky. 2014) (citing OfficeMax Inc. v. U.S. , 428 F.3d 583, 588-90 (6th Cir. 2005) and Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 116-25 (West 2012) (explaining the "Conjunctive/Disjunctive Canon")). "Deviation from this rule (i.e. , changing ‘and’ to ‘or’), only occurs when required ‘to effectuate the obvious intention of the Legislature and to accomplish the purpose or object of the statute.’ " Id. (citing Duncan v. Wiseman Baking Co. , 357 S.W.2d 694, 698 (Ky. 1961) ).
Nothing in the statute or case law suggests "and" must mean "or" in § 1322(c). Therefore, the [d]ebtor is required to satisfy both subsection (c)(1) and (c)(2).
Parker , 563 B.R. at 655.
B. The Debtor's Treatment of Debts Under § 1322(c) Must Satisfy Both Subsections
Judge Schaaf's reading makes sense of the "and" between the subsections and clarifies that any treatment of a single debt under § 1322(c) must satisfy both subsections . Given their mutual reliance on each other, §§ 1322(c)(1) and (2) work in concert rather than providing alternatives to each other. As such, the creditors' claims must each be treated singularly, not artificially split. This means the equal monthly payments to secured creditors provision of § 1325(a)(5), as incorporated by § 1322(c)(2), must apply to the entire amount of each claim.
This is different than a "cramdown" where a debtor seeks to limit and bifurcate the security interest of a secured creditor against real estate which is not the debtor's residence. In that circumstance, the secured party must be undersecured. Here, all parties agree the creditors are oversecured. Additionally, § 1322(b)(2) limits cramdown relief only to properties which are not the debtor's residence. Here, the secured property is the Debtor's residence.
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This conclusion is further buttressed by § 1322(c)(1)'s incorporation of § 1322(b)(3) :
As with § 1322(c)(2), cures proposed under § 1322(b)(3) for debts which have matured pre-petition must pay off the debt in installments during the life of the plan.... [A]ny cure proposed under § 1322(b) must fully comply with the other requirements of §§ 1322 and 1325, including § 1325(a)(5)(B)(iii)(I)'s equal payment provision.
In re Henning , 420 B.R. 773, 790 (Bankr. W.D. Tenn. 2009) (internal quotation marks and citations omitted). The distinction the Debtor tries to draw between the two subsections of § 1322(c) is one that ultimately makes no difference. By invoking § 1322(b)(3), § 1322(c)(1) also incorporates § 1325(a) just as forcefully as § 1322(c)(2).
Thus, even if this Court were to read § 1322(c)(1) as an alternative to § 1322(c)(2), and allow the bifurcation that the Debtor suggests, the equal payment provision of § 1325(a)(5) would still apply rendering the split moot and creating needless administrative headaches for the Trustee. Treating any portion of either Bayview's claim or US Bank's claim as a Class 2 claim under section 5.2.1 violates the equal payment provision and cannot be allowed.
Therefore, since § 1322(c) does not authorize bifurcated treatment of debts and the entirety of the amounts owed to Bayview and US Bank are subject to the equal payments provision of § 1325(a)(5)(B)(iii)(I), the Debtor's disparate and confounding treatment of the two creditors secured claims under sections 5.1.2, 5.2.1, and 13 of the Plan and his miscasting of § 1322(c) are not justified under the law. Both Bayview and US Bank must have their claims treated in their entireties under section 5.1.2 of the Plan.
CONCLUSION
Based on the foregoing and FOR GOOD CAUSE SHOWN , Bayview's objection is SUSTAINED , US Bank's objection is SUSTAINED , and the Trustee's objection is SUSTAINED . Confirmation of the Plan is DENIED .
The Debtor shall have twenty-one (21) days from the entry of this Order to file an amended plan or the case may be dismissed or converted to one under Chapter 7.
IT IS SO ORDERED .