Opinion
Case No. 15-13069
08-03-2018
In Re FRED A. NORMAN LYDIA NORMAN Debtors
Chapter 13
ORDER OVERRULING THE DEBTORS' OBJECTION TO CLAIM
THIS MATTER involves a long-running dispute between the Debtors Fred A. and Lydia Norman (the "Debtors" or the "Normans") and Cinco Credit Union (hereinafter "Cinco"). Cinco holds the mortgage on the Debtors' residence. The Debtors filed a joint petition seeking relief from creditors on August 6, 2015 (Doc 1). The Debtors are serial filers; this is their fourth bankruptcy petition filed within the past fifteen years.
As noted in previous orders, the Normans list on LBR Form 1015-2 only one joint Chapter 13 case filed on April 16, 2001. See Docs 4, 15. That case was dismissed without a discharge on May 28, 2002 (Case No. 01-12611, Doc 26). However, the Debtors have filed three other bankruptcies, including an individual Chapter 13 case Mr. Norman filed on October 16, 1995, that was dismissed without receiving a discharge on February 10, 1997 (Case No. 95-14199, Doc 18), an individual Chapter 7 case Mr. Norman filed on September 4, 1997, that he received a discharge in on April 15, 1998 (Case No. 97-15413, Doc 24), and relevant to these proceedings, a joint Chapter 13 petition filed on November 10, 2004, that the Debtors completed and received a discharge in on September 17, 2007 (Case Number 04-19054, Doc 31).
Before the Court is the Debtors' Objection to Claim (Doc. 61) and Cinco's response thereto. (Doc. 71). On October 2, 2017, this Court issued an Order Overruling the Debtors' Objection to Claim No.8 (the "Order"). Ostensibly, the Court held that the 2004 confirmation order, entered on February 23, 2005, established the validity and amount of Cinco's claim totaling $40,876.75. (Doc. 100).
In response to the Order, the Debtors filed a Motion to Alter, Amend, or Vacate the Order Overruling the Objection to Claim (the "Motion") (Doc. 102). This Court granted the Motion, in part, so that the Debtors could present evidence in support of their contention that the "amount owed to [Cinco] subsequent to Debtors 2004 confirmed plan" as stated in Proof of Claim No. 8 was incorrect based upon events occurring after that case concluded. (Doc 115). After appealing the Order, the Sixth Circuit Bankruptcy Appellate Panel (the "BAP") denied the Debtors' request for interlocutory review. In so doing, the BAP determined that "Debtors have not established a substantial ground for any difference of opinion regarding the correctness of the bankruptcy court's ruling on the application of res judicata. Indeed, a raft of statutory and decisional authority supports the bankruptcy court's decision." (Doc 125, p.3).
This matter is back before the Court for a final determination of the Debtors' Objection to Cinco's proof of claim. Under the law, the Court must decide whether the Debtors have met the initial burden, through credible evidence, of establishing a "colorable challenge" to Cinco's properly filed proof of claim (Proof of Claim No. 8) so as to overcome the prima facie validity and amount of the claim afforded by Rule 3001(f). In making this determination the Court is reminded that once a debtor has met that burden, "the burden of going forward shifts back to the creditor, and the creditor bears the ultimate burden of persuasion." In re Morton, 298 B.R. 301, 307 (6th Cir. B.A.P. 2003). However, the Court is likewise mindful of the rule which holds that the objecting party cannot effectively negate the claim proponent's initial prima facie case merely by making a "bald objection" to the claim, In re Miceli, 556 B.R. 655, 658 (Bankr. M.D. Pa. 2016); rather, a debtor must offer evidence that, if believed, would negate at least one of the averments necessary to the claim's legal sufficiency. In re Henry, 546 B.R. 633, 635 (Bankr. M.D. Pa. 2016)(citing In re Allegheny Int'l, Inc., 954 F.2d 167, 173-74 (3d Cir. 1992).
Brief History of the Court's Res Judicata Rulings
As noted, the Debtors' 2004 plan was confirmed on February 23, 2005. (Case No. 04-19054, Doc. 17). The Order Granting in Part and Denying in Part Debtors' Motion to Alter, Amend or Vacate Order specifically reiterated that the principal amount due as of February 23, 2005 was $40,876.75 based on principles of res judicata. (Doc. 115). The principal amount arrived at in the Order, $40,876.75, incorporates an ongoing interest rate on the mortgage of 8.5% up to and through the 2004 confirmation order, until the plan payments were completed on September 17, 2007.
Based upon representations made by the Debtors and Debtors' counsel at previous hearings, the Court fully expected them to present evidence creating a "colorable challenge" to Cinco's proof of claim at the hearing which might demonstrate that Cinco misapplied the Debtors' mortgage payments, did not properly credit those payments, or breached some other banking norm or protocol. At a minimum, the Court quite expected the Debtors to come forward with some evidence to show that Cinco's claim amount was incorrect based upon events occurring between the time that the plan payments under the 2004 confirmation order were completed, on September 17, 2007, and the filing of the current case on August 6, 2015 - a span of approximately eight years.
It is noteworthy that the 2004 plan and confirmation order were entered prior to enactment of Rule 3002.1(f)-(h) of the Federal Rules of Bankruptcy Procedure. Rule 3002(f)-(h) put in place a procedure for determining if a debtor is fully current on his/her mortgage at the end of a chapter 13 case. Here, too, the 2004 confirmation order indicated that the Debtors were to have made their mortgage payments "outside of the plan" (and not through the Chapter 13 trustee's office). Thus, there was no way of officially tracking whether the Debtors were still current on their mortgage payments after September 17, 2007 (when the plan subject to the 2004 confirmation order was completed) and beyond.
The Hearing on the Objection to Cinco's Claim
On April 17 and 18, 2018, the Court held an evidentiary hearing for the exclusive and explicit purpose of allowing the Debtors to "litigat[e] the amount owed to [Cinco] subsequent to Debtors' 2004 confirmed plan." (Doc. 115, ¶ 1). Based on the Motion, it was this Court's understanding that the Debtors would "prosecute their claim objection as to the calculations of the proper claim balance [. . .] starting from the amount as would be established by the 2004 case under the res judicata ruling. . . ." (Doc. 102, p. 2).
However, during oral argument and prior to the presentation of any evidence at the April hearing, counsel for the Debtors stated unequivocally that, "The major issue before the Court is what interest rate governs this payment stream." (April 17, 2018 Hearing Transcript: Time stamp 10:15 am-10:16 am). (Emphasis added.). The Debtors, however, failed to present any evidence of an agreement made between them and Cinco after the 2004 confirmation order which would have affected a change to the interest rate from 8.5% to a variable interest rate (or any other specified rate for that matter). Thus, the 8.5% interest rate which had been established in this Court's 2004 confirmation order necessarily continued for all years subsequent to February 23, 2005, when that order was entered. (Case No. 04-19054, Doc. 17).
Importantly, also, the Debtors failed to present evidence that any payments that were made after the 2004 confirmation order had been misapplied by Cinco or that Cinco had somehow miscalculated the amount of the debt stated in its proof of claim. To the contrary, the Debtors and Cinco stipulated to the payments that the Normans made and how those payments had been applied. In sum, the Debtors presented no evidence that calculations Cinco used in order to formulate its proof of claim were in error. Instead of proffering new evidence demonstrating miscalculations or misapplied payments on Cinco's part, the Debtors continued their reliance upon the singular argument that their mortgage was subject to a variable interest rate despite never having raised this issue prior to the 2004 confirmation order when it would have been appropriate.
The parties specifically agreed as follows: "The parties would agree that for the purposes of today's hearing only the issue currently before the Court and arguments to the Court, applying a fixed rate of interest of 8.5% the principal balance as of July 20, 2013 [the date on which the last payment was tendered by the Debtors to Cinco] is $31,893.49. The calculation is premised upon the Court's finding in its order (Doc. 115) principal balance of $40,876.75 as of February 23, 2005. The parties would further agree that for the purpose of today's hearing only for the issue currently before the Court and arguments to the Court, applying an interest methodology and the interest rate changes as set forth on Debtors Exhibit 2, the principal balance as of July 20, 2013, is $19,808.95. This calculation is premised upon the Court's finding in its order (Doc. 115) principal balance of $40,876.75 as of February 23, 2005." (April 18, 2018 Hearing transcript: Time stamp 2:36 pm-2:39 pm).
These stipulations were confirmed in the parties posthearing briefs. See Doc. 142, at p. 12; see also Doc. 149, p. 4. These stipulations necessarily include agreement that the Debtors' payments were correctly applied by Cinco because the only variable at issue between the parties' two numbers is the interest rate.
Indeed, the Debtors' attorney failed to present a single piece of evidence challenging the debt amounts contained in Cinco's proof of claim (other than the escrow deficiency discussed below). Moreover, the parties agreed to the following amounts: $1,069.95 in late charges, $200 for property inspections, and $1,128 in court costs. See Doc. 142, p. 2.
The Debtors actually claim an agreement to a higher number of $1,205.95 in court costs, but Cinco notes it has agreed to the lesser amount. (Doc. 149, p. 1 n. 2).
Richard Keck's Testimony is Inadmissable
This Court allowed the Debtors' witness, Richard Keck, to testify over Cinco's Objection to Witness (Doc. 134) and held in abeyance the decision whether to admit his testimony. After the hearing, both the Debtors and Cinco submitted briefs to the Court regarding the underlying objection to claim and admissibility of Mr. Keck's testimony. (Docs. 142 and 149).
To be admissible as expert testimony, "the testimony must be relevant, meaning that it 'will assist the trier of fact to understand the evidence or to determine a fact in issue.'" Superior Production P'ship v. Gordon Auto Body Parts Co., Ltd., 784 F.3d 311, 323 (6th Cir. 2015)(quoting Fed. R. Evid. 702(a)) (emphasis added). The party seeking to introduce expert witness testimony has the burden of establishing its admissibility. Pride v. BIC Corp., 218 F.3d 566, 578 (6th Cir. 2000). Having failed to present any issues of fact that need to be decided, the Debtors have failed to establish that Mr. Keck's testimony is at all relevant to these proceedings; his testimony is thus stricken and will not be considered by the Court.
At the hearing, and memorialized in post-trial briefing, the parties stipulated to an agreed principal balance of $31,893.49 as of July 20, 2013, assuming a fixed rate of 8.5%. (Doc. 149, p. 4). However, this Court's prior order determining that res judicata applies to the balance owed as of February 23, 2005 also, by necessity, determines that a fixed interest rate of 8.5% applies thereafter (see below), and absent any evidence of a change in that interest rate subsequent to the 2004 confirmation order such a finding is the law of the case. This Court's Order Granting in Part and Denying in Part Debtors' Motion to Alter, Amend or Vacate Order explicitly rejected any attempt by the Debtors to reopen issues settled by res judicata. (Doc. 115, ¶ 2). Pairing this prior finding with the parties' stipulation as to the amount owed as of July 20, 2013, this Court finds that there are no undecided issues of fact. The 8.5% interest rate has been in effect and continues in effect through these proceedings, notwithstanding Mr. Keck's attempts at testifying that Ohio or federal truth and lending laws had not been followed precisely prior to the 2004 confirmation order, which as noted fixed the mortgage interest rate at 8.5%.
"Under the doctrine of the law of the case, a decision on an issue made by a court at one stage of a case should be given effect in successive stages of the same litigation." U.S. v. Todd, 920 F.2d 399, 403 (6th Cir. 1990).
Interpretation of the 1998 Loan Extension Agreement
This should be the end of the story on the interest rate. However, the Debtors continue to try to argue that the interest rate on their mortgage is variable. At bottom, the Debtors are seeking to unring the proverbial bell.
It is undisputed that the parties entered into a Loan Extension Agreement on December 29, 1998. Two sections of the Loan Extension Agreement are at the core of the present dispute. The top of the Loan Extension Agreement reads in part:
If this extension is approved I hereby agree to pay the balance remaining due on this note at the rate of $331.28 each month starting February 1, 1999 including interest at the same rate as provided in the original note, all other provisions of the original note except those changed by this agreement to
remain in full force and effect.(Loan Extension Agreement, Doc. 40, Exhibit. 3)(emphasis added.). The Loan Extension Agreement also provides a Truth in Lending Disclosure which states the Annual Percentage Rate as 8.5%. Id. When read together, these two provisions of the Loan Extension Agreement appear facially inconsistent, and have given rise to the assertion by the Debtors that they should owe less on their mortgage than the Cinco proof of claim now purports.
However, this Court specifically discussed the issue of the appropriateness of the applied interest rate of 8.5% in the Order Overruling the Debtors' Objection to Claim No.8. To reiterate, the Court held that "the discovery by Mrs. Norman of these alleged overcharges in 2008, well after the discharge in the 2004 Chapter 13 case, harms rather than helps the Debtors['] case for purposes of res judicata." (Doc. 100, at 9). This Court does not have the authority to reach back into the 2004 confirmation order and undo what has already been decided.
The 2004 confirmation order, and more importantly for our purposes, the interest rate of 8.5% which was determined to apply to Cinco's mortgage, remains enforceable and binding upon the Debtors. The Debtors had notice of Cinco's proof of claim filed in the 2004 Chapter 13 case and failed to object or timely appeal the 2004 confirmation order. See Bullard v. Blue Hills Bank , 135 S. Ct. 1686, 1692, 191 L. Ed. 2d 621, 627 (2015) ("When the bankruptcy court confirms a plan, its terms become binding on debtor and creditor alike. 11 U. S. C. §1327(a). Confirmation has preclusive effect, foreclosing relitigation of 'any issue actually litigated by the parties and any issue necessarily determined by the confirmation order.' 8 Collier ¶1327.02[1][c], at 1327-6; see also United Student Aid Funds, Inc. v. Espinosa, 559 U. S. 260 , 275 (2010) (finding a confirmation order 'enforceable and binding' on a creditor notwithstanding legal error when the creditor 'had notice of the error and failed to object or timely appeal')"). The same principles that bind the creditors in the 2004 confirmation order also bind the Debtors. To hold otherwise, this Court would need to ignore well established Supreme Court precedent articulated in Espinosa and Bullard, which it is bound to follow.
The Escrow Deficiency
The only other issue that the Debtors have raised relates to an alleged miscalculation of the escrow deficiency. In their Objection to Proof of Claim, the Debtors allege, that Cinco "at various times [after December 29, 1998] increased the monthly principle [sic] and interest payment as well as escrow items." (Doc. 61, p. 3). However, there is no articulation of what those increases were nor whether they were allegedly improper.
In addition, during the Debtors' case-in-chief at the April 17 hearing, they presented no evidence whatsoever to negate the validity or amount of the escrow claim. The Debtors' attempt to raise the issue on cross-examination during Cinco's case-in-chief was improper, given that no foundation had been laid and the Debtors' attorney sought to elicit testimony that exceeded the scope of the witness's direct testimony. The Court is not persuaded that the Debtors have made a colorable challenge sufficient to shift the burden of going forward back to Cinco. See Morton, 298 B.R. at 307 supra.
Over Cinco's objection, the only time that the Debtors' counsel sought to challenge the escrow amount stated in Cinco's proof of claim was during the cross-examination of Cinco's witness after the Debtors had rested their case. This exchange took place at the hearing on April 18.
The issue in Morton was that the trial court ruled on the debtor's objection to claim "without giving the parties the opportunity to present evidence." Id. at 308. Here, the parties were undoubtedly given the opportunity to present evidence and the Debtors had free rein during their case-in-chief to present evidence on the alleged miscalculation of the escrow deficiency. They chose not to do so. The Debtors' counsel stated on the record, prior to any evidence on the escrow deficiency being presented, "My case under Morton in my attempt to shift the burden of proof over to [Cinco] is concluded." (April 18, 2018 Hearing transcript: Time stamp 9:50 am-9:52 am).
However, even if the Court assumes the Debtors met their burden under Morton, Cinco carried its burden of proving the validity and amount of its claim by a preponderance of the evidence through the testimony of James Zahneis and the introduction of Exhibit U (the Hamilton County Historical Payment Reports) and Exhibit S (the Mortgage Discharge Letter dated November 12, 2014). Mr. Zahneis's uncontroverted testimony clearly demonstrated that Cinco had made all of the escrow payments reported on Exhibit U to Hamilton County, including those that occurred after the last mortgage payment from the Debtors in July 2013. Additionally, Mr. Zahneis's uncontroverted testimony established that the escrow deficiency of $3,508.51 shown on Exhibit S was accurate as of November 12, 2014. Taking that number and adding the escrow expenditures shown on Exhibit U for January 2015 and June 2015 (both pre-petition) results in an escrow deficiency of $4,460.76 as of the petition date in this case.
Based on the evidence of record, the Court finds that the Objection to Claim is not well taken; Claim No. 8 was filed in accordance with Rule 3001, and under Rule 3001(f), the claim constitutes prima facie evidence of its validity and amount, including the escrow deficiency of $4,460.76 as of the petition date.
By contrast, the Debtors offered no evidence other than that which the record already contained: The 2004 confirmation order fixed the Debtors' mortgage interest rate at 8.5% and all payments made by the Normans have been properly credited by Cinco. There is no evidence of record to refute any allegation essential to Cinco's claim. Under the circumstances, "if the objecting party fails to offer sufficient evidence to overcome the evidentiary effect of a properly filed proof of claim, the objection will be denied and the claim will be allowed as filed." In re Britt, 199 B.R. 1000, 1008 (Bankr. N.D. of Ala. 1996).
Conclusion
The 2004 confirmation order established the validity and amount of Cinco's mortgage claim on the Debtors' principal residence. By necessity, it also established the applicable interest rate of 8.5%. Cinco's proof claim filed in this case is predicated upon findings made in the 2004 confirmation order. Cinco's properly filed proof of claim constitutes prima facie evidence of the validity and amount of the claim. Absent evidence that after the 2004 confirmation order the Debtors and Cinco agreed to a change in the interest rate or that the Debtors' payments to Cinco were misapplied or miscalculated, there is no basis for sustaining the Debtors' objection to Cinco's proof of claim. Further, the Court finds unavailing the Debtors' assertion that the escrow deficiency was wrongly determined by Cinco. Based on the evidence of record, this Court finds the debt owed by the Debtors to Cinco is $44,625.93.
$31,893.49 (principal and interest) + $5,873.73 (accrued and unpaid interest at 8.5%) + $1,069.95 (late charges) + $4,460.76 (escrow deficiency) + $1,128 (court costs) + $200 (property inspections) = $44,625.93 --------
Accordingly, the Debtors' Objection to Claim (Doc. 61) is hereby OVERRULED.
It is further ORDERED, that the debt owed by the Debtors to Cinco as of the petition date is $44,625.93. An amended Proof of Claim conforming to these findings is to be filed by Cinco within fourteen (14) days of entry of this order.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Jeffery P. Hopkins
United States Bankruptcy Judge Dated: August 3, 2018 Copies to: Default List plus additional parties William B. Fecher
wbfecher@statmenharris.com