Opinion
Case No. 09-35899-dof
11-01-2013
IN RE: ORVILLE PICKARD and DAWN PICKARD, Debtors.
Chapter 13 Proceeding
Hon. Daniel S. Opperman
OPINION REGARDING DEBTORS' MOTION TO COMPEL
Procedural Background and Facts
On November 3, 2009, Orville and Dawn Pickard ("Debtors") filed a Chapter 7 bankruptcy petition. At the time of filing, the Debtors owned a residence located at 10048 Fox Run Drive, Davison, Michigan (the "Property"). Previously, on July 20, 2005, the Debtors executed a note in the amount of $171,000.00 and executed a mortgage in favor of Independent Bank ("Creditor") granting the Creditor a security interest in the Property. Pursuant to the terms of the Mortgage, the Debtors paid their homeowner's insurance, private mortgage insurance, and property taxes through an escrow account.
Prior to the petition date, the Debtors were current on their mortgage payments. On the petition date, the Debtors filed a Statement of Intent indicating that they intended to retain the Property and reaffirm the debt thereon. Despite indicating that they wanted to reaffirm the mortgage debt on their Statement of Intent, the Debtors claim that, at the time of filing, they initially intended to surrender the Property. The Debtors ceased making mortgage payments on the Property after the petition date, and, as a result, their account became delinquent. On December 14, 2009, the Creditor filed a Motion for Relief from the Automatic Stay. The Court entered an Order Granting the Creditor's Motion for Relief from Stay on February 16, 2010.
On February 10, 2010, the United States Trustee filed a Motion to Dismiss the Debtors' Chapter 7 Case pursuant to 11 U.S.C. § 707(b). As a result of that motion, the Debtors converted their Chapter 7 case to a Chapter 13 case on July 14, 2010. As a result of the conversion of their case to Chapter 13, the Debtors decided to attempt to strip the second mortgage on the Property and pay the arrearages owed to the Creditor through their Chapter 13 plan.
On July 21, 2010, the Creditor sent a letter to the Debtors stating, in part:
The above referenced loan is in default for non-payment. This letter is to notify you Independent Bank . . . will no longer pay any further insurance advance from the escrow account. As of the date of this letter, it will be your responsibility to insure the property and pay insurance premiums. Independent Bank may purchase insurance on your behalf. This type of policy is known as force placed insurance; it provides less coverage. The primary purpose of a force placed policy is to protect the mortgage holder, not the property owner. Force placed insurance will be paid from your escrow account with Independent Bank.Shortly thereafter, the Debtors obtained a homeowner's insurance policy and submitted it to the Creditor. The Debtors paid the premiums for the policy on their own. On August 19, 2010, the Creditor sent a letter to the Debtors acknowledging the receipt of the insurance policy and indicating that it was an acceptable policy.
On December 3, 2010, the Debtors filed a Motion to Reinstate the Automatic Stay as to the Creditor. The Court entered an Order Reinstating the Automatic Stay as to the Creditor on January 4, 2011. On January 13, 2011, the Debtor's Chapter 13 plan was confirmed. Shortly after the Debtor's plan was confirmed, on February 7, 2011, the Chapter 13 Trustee made a lump sum payment to the Creditor in the amount of $9,305.95. The Creditor applied those funds toward the principal, interest, and to the escrow account for the missed payments dating back to October 2009.
The Creditor had not filed a proof of claim prior to confirmation of the Debtors' Chapter 13 Plan. The Debtors placed an approximation of the arrearage owed to the Creditor in their Plan and relied on the Chapter 13 Trustee for disbursement.
After reviewing the Debtors' file, the Creditor noticed that the homeowner's insurance policy was due for renewal, and on July 5, 2011, the Creditor sent a letter to the Debtors stating:
During a recent review of your loan, it was discovered that your homeowner's insurance is up for renewal. As a condition of your mortgage the bank is required to maintain a copy of your most recent homeowner's insurance policy.
Please provide a copy of your current policy in the postage paid envelope provided. If you would refer you may fax the information to 616.527.5819, Attention: Insurance Representative.
As of July 20, 2011, the Creditor was notified that the Debtors' homeowner's insurance policy had been cancelled for non-payment of premiums. On September 16, 2011, the Creditor sent a letter to the Debtors notifying them that it had not received adequate proof of insurance on the Property and stating:
According to the terms of your mortgage contract, it is necessary to provide evidence that your property is insured at all times. If we do not receive a policy showing adequate proof of insurance within the next ten (10) days, it will be necessary to place coverage for you under our force-placed insurance policy. Force-placed coverage is limited and may not match the coverage of your previous policy.The Creditor sent a second notice to the Debtors on October 4, 2011, and sent a third notice to the Debtors on October 20, 2011.
Should an acceptable insurance policy be received that provides coverage as of 07/20/2011, this action will not be necessary. Please contact your agent or insurance company to assist you in providing us with proof of coverage in the form of a policy, reinstatement or declaration sheet. We will send you written confirmation upon receipt of proof of insurance.
On November 3, 2011, the Creditor sent a letter to the Debtors stating:
We have not received adequate proof of insurance on the [Property] as required by your mortgage contract. It has been necessary to place your property on our force-placed insurance program effective 07/20/2011. This program does not provide personal property coverage or owner's liability to protect your interest.
Your premium is $1,809.36 and will be deducted from your escrow account.
New payment coupons have been ordered which you should receive in approximately two weeks. When you receive the new coupons, you must use them to make your payment. We cannot accept the old payment amount. Once you provide us with acceptable proof of insurance we will send you written confirmation and remove this charge from your mortgage payment amount.
On January 18, 2012, the Debtors, through their counsel, submitted a quote for homeowner's insurance (dated January 18, 2012) to the Creditor. The Debtors claim that their counsel and Creditor's counsel had numerous discussions and that the Creditor's counsel told their counsel to obtain and submit an insurance quote. Because no policy had been submitted (and all that had been submitted was a quote to provide coverage rather than a verification that coverage had been obtained), the Creditor continued the force-placed insurance on the Property.
On July 25, 2012, the Creditor sent a letter to the Debtor stating:
This letter is a reminder that a force-placed insurance policy is still in place for your [Property]. Force-placed insurance is usually more expensive and does not provide the same level of coverage as a standard homeowner's policy.
According to the terms of your mortgage contract it is necessary to keep your property insured at all times. If we do not receive a replacement policy from you within the next thirty days, we will automatically renew your force-placed coverage at a premium of $1,781.76 to be charged to your escrow account.
On October 2, 2012, the Debtors filed a Motion for Accounting as to Creditor, for Reinstatement of Homeowner's Insurance Pursuant to Escrow, and Costs. They filed a Corrected Motion for Accounting as to Creditor, for Reinstatement of Homeowner's Insurance Pursuant to Escrow, and Costs on November 20, 2012. In that Motion, the Debtors requested that the Court enter an order (1) requiring the Creditor to file a proof of claim; (2) requiring the Creditor to provide an accounting of the escrow account; (3) requiring the Creditor to credit the Debtor's escrow account for the amounts expended for the force-placed insurance policy; and (4) requiring the Creditor to resume the payment of Debtors' homeowner's insurance premiums pursuant to the escrow agreement. The Creditor filed its Response to the Debtors' Motion on December 5, 2012.
The Court held a preliminary hearing on the Debtors' Motion on January 15, 2013, and an evidentiary hearing on May 1, 2013, and June 3, 2013. The Debtor, Orville Pickard was the only witness. Creditor's Exhibits A - H were admitted by agreement of the parties. The parties agreed that the accounting of the Debtor's escrow account provided by the Creditor prior to the hearing was satisfactory.
On June 17, 2013, the Court entered an Order Following Hearing as to Debtors' Motion for Account as to Independent Bank, for Reinstatement of Homeowner's Insurance Pursuant to Escrow, and Costs, in which the Court ordered that (1) the Creditor will file a proof of claim with the bankruptcy court within 42 days; (2) the Chapter 13 plan payment to the Chapter 13 Trustee shall be reduced by $500.00 for the June 22, 2013, payment only (and that those funds are to be used by the debtor to obtain homeowner's insurance and that proof thereof shall be provided to the Creditor's counsel; (3) the review of the force-placed insurance would be reserved; and (4) the hearing would be continued to July 24, 2013, as a telephone status conference. The Creditor filed a proof of claim on June 28, 2013. The Court held the telephone status conference on July 24, 2013, and, on July 29, 2013, the Court entered an Order Establishing Briefing Deadlines should the parties choose to file supplemental briefs.
No supplemental briefs have been filed and the matter is now ripe for decision.
Discussion
Neither party has provided any specific statute or case law applicable to this determination. Accordingly, the Court relies on 11 U.S.C. § 105(a), which provides: "The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title."
After the homeowner's insurance policy the Debtors obtained in 2010 was up for renewal in July 2011, the Debtors did not want to make the homeowner's insurance payments because they thought that the Creditor should make the payments out of the escrow account, and the Creditor did not think there was enough money in the escrow account to begin making the homeowner's insurance payments again, so it placed force-placed insurance on the Property from July of 2011 until the Court issued the June 17, 2013, Order.
Creditor's Exhibit E, the Annual Escrow Account Disclosure Statement, indicates that the actual balance in the Debtor's escrow account as of July 2011 was $964.45. Creditor's Exhibit F, an accounting of how the Creditor applied the payments made by the Chapter 13 Trustee to the Debtor's account, indicates that the balance in the Debtor's escrow account was $3,396.33 after making the principal mortgage insurance and summer tax payments. However, that escrow account balance does not provide an accurate, real-time escrow balance because the Creditor did not receive the July 1, 2011, payment from the Chapter 13 Trustee until February 3, 2012. Therefore, although it appears that there is an inconsistency between Exhibit E and F, that inconsistency appears to be explained by the fact that Exhibit F was created to show how the payments made to the Creditor by the Chapter 13 Trustee were applied and that exhibit does not provide a real-time analysis of the escrow account balance. For the purpose of determining the actual escrow account balance in July 2011, the Court will rely on the figure provided for the actual escrow balance in Exhibit E.
Exhibit E, the Annual Escrow Account Disclosure Statement, is a source of some confusion. That document provides both projected (those projections being provided in the Disclosure Statement from the previous year and being included to show the difference between the projected amounts and actual amounts) and actual numbers for payments made to the escrow account, payments from the escrow account, and the escrow balance. The Court will use the actual escrow balance.
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It is clear that although there was enough money in the escrow account by July of 2011 for the Creditor to make payments on a homeowner's insurance policy, there would not be enough money in the escrow account to make the $1,658.63 winter 2011 tax payment that would have been due shortly thereafter. Accordingly, the Creditor sent the July 5, 2011, letter to the Debtors explaining that their homeowner's insurance policy was up for renewal and they would need to submit a current policy to it. On September 16, 2011, after receiving notice that the Debtors' homeowner's insurance policy had been cancelled for non-payment of premiums, the Creditor sent a letter to the Debtors explaining that, unless it received adequate proof of insurance on the Property within ten days, it would place force-placed insurance the Property. The Creditor sent a second notice to the Debtors on October 4, 2011, and sent a third notice to the Debtors on October 20, 2011. On November 3, 2011, the Creditor sent a letter to the Debtors informing them that, because it had not received adequate proof of insurance, the Property had been placed on their force-placed insurance program at a cost of $1,809.36 per year, which would be deducted from the escrow account.
Starting in January 2012, the Debtors, through counsel, attempted to negotiate a method to break their disagreement with the creditor. These efforts failed, but it was not until November 20, 2012, when the Debtors filed their corrected Motion, that a request was made to this Court.
While the Motion was pending and while the hearings were ongoing, the Debtors did not obtain a homeowner's insurance policy in an effort to eliminate the need for the force-placed insurance policy. As noted, on June 17, 2013, the Court entered an Order stating, in part, that the Chapter 13 plan payment to the Chapter 13 Trustee shall be reduced by $500.00 for the June 22, 2013, payment only (and that those funds are to be used by the debtor to obtain homeowner's insurance and that proof thereof shall be provided to the Creditor's counsel). Therefore, the force-placed insurance issue has been resolved going forward - a new homeowner's insurance policy is (or should be) in effect and the Creditor will pay the premiums through the escrow account.
With regard to whether the Debtors are entitled to a credit for the amounts expended by the Creditor for the force-placed insurance policy, the Court concludes that they are not. After reviewing the pleadings, the exhibits, and the testimony given by Mr. Pickard at the evidentiary hearing, the Court concludes that the Creditor did everything in its power to notify the Debtors of the need to renew their homeowner's insurance policy or obtain a new one in July 2011, to explain how the Debtors would be effected by their failure to do so, and to convince them that it was in their best interest to avoid the need for force-placed insurance. Although the result in this case is unfortunate in that the Debtors were paying for force-placed insurance to the tune of approximately $1,800.00 per year versus the approximately $450.00 - $500.00 per year they would have paid otherwise, because this is the Debtors' Motion and the burden of proof is accordingly on them, the Court must conclude that the Debtors have not met their burden of proving that they are entitled to a credit for the amounts expended by the Creditor for the force-placed insurance policy.
Conclusion
For the reasons set for in this Opinion, the Debtors are not entitled to a credit for the amounts expended by the Creditor for the force-placed insurance policy. Counsel for the creditor is directed to prepare and submit an order consistent with this Opinion and consistent with the procedural rules of this Court. Not for publication.
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Daniel S. Opperman
United States Bankruptcy Judge