Opinion
22-31447
01-05-2024
In re: LAWRENCE LEE ADAMS, Debtor.
Brian D. Flick (Special Counsel for the Debtor) Paul T. Saba (Counsel for Cincinnati Capital Holdings, LLC) Scott G. Stout, (Counsel for the Chapter 13 Trustee)
Chapter 13
Brian D. Flick (Special Counsel for the Debtor)
Paul T. Saba (Counsel for Cincinnati Capital Holdings, LLC)
Scott G. Stout, (Counsel for the Chapter 13 Trustee)
ORDER SUSTAININING IN PART DEBTOR'S OBJECTION TO AMENDED PROOF OF CLAIM 10-2 OF CINCINNATI CAPITAL HOLDINGS, LLC (DOCS. 56 & 57) AND ORDERING OTHER MATTERS
GUY R. HUMPHREY, UNITED STATES BANKRUPTCY JUDGE
Procedural and Factual Background
On October 14, 2022 the Debtor, Lawrence Lee Adams ("Adams"), filed a petition for relief under Chapter 13 of the Bankruptcy Code. Doc. 1. On December 19, 2022 Cincinnati Capital Holdings, LLC ("Cincinnati Capital") filed a proof of claim [10-1] in the amount of $215,175.10. Cl. 10-1. The claim is based upon a February 26, 2010 promissory note executed by the Debtor and his non-filing spouse, Amy Adams (collectively, the "Borrowers") in favor of Bramble Savings Bank (the "Note"). Cl. 10-1, Ex. A. The claim is filed as secured by a February 26, 2010 mortgage the Borrowers granted on their residence at 3908 Everett Drive, Loveland, Ohio (the "Mortgage"). Cl. 10-1, Ex. C.
On April 4, 2011, Foundation Bank, which was the successor to Bramble Savings Bank by merger, assigned the Note and Mortgage to Cincinnati Capital. Cl. 10-1, Ex. D. On November 15, 2013 the Borrowers and Cincinnati Capital executed a certain Note and Mortgage Loan Modification Agreement (the "Loan Modification") that included past-due interest within a new principal balance. Cl. 10-1 Ex. E. The key provision of the Loan Modification stated that the "[l]oan will amortize over 25 years and will have a 2 year balloon. If borrowers remain in good standing [Cincinnati Capital] may extend the loan for another 23 years." Id.
Cincinnati Capital's proof of claim [10-1] asserts a claim of $215,175.10, which included a principal balance of $190,350.68, accrued interest of $15,285.26, late fees of $3,157.92, escrow fees of $1,076.83, and legal fees of $5,304.41. Cl. 10-1. It describes the total amount of $215,175.10 as the prepetition arrearage owed on the loan. Id. On December 27, 2022 the Chapter 13 Trustee, John Jansing (the "Trustee"), objected to that proof of claim, asserting that the Borrowers' obligation did not mature until April 1, 2040 and that the proposed Chapter 13 plan (Doc. 6) provided for the pre-petition arrearage on the loan to be cured and the loan reinstated with continuing monthly payments. Doc. 33. The Trustee also filed the only plan objection for reasons unrelated to the treatment of Cincinnati Capital's claim, but later withdrew that objection. Docs. 27, 35. The proposed plan was confirmed on January 17, 2023. Doc. 38.
Also on January 17, 2023 Cincinnati Capital responded to the Trustee's claim objection and filed an amended proof of claim. Doc. 39; Cl. 10-2. The response and the amended proof of claim asserted that the loan was in default as early as January 31, 2014, the loan matured on November 15, 2015, and the balloon payment was due. Following this response and amended proof of claim, the Trustee withdrew his claim objection. Doc. 41.
Adams filed an objection to Cincinnati Capital's amended proof of claim on February 12, 2023. Doc. 43. Adams argued in that objection that Cincinnati Capital is improperly attempting to accelerate the loan under the Loan Modification. Similar to the Trustee's prior objection, Adams notes that the loan did not mature until April 1, 2040 and the confirmed Chapter 13 plan provides for the curing of the arrearage and the reinstatement of the loan to a current status. The objection further argues that Cincinnati Capital waived any right to accelerate the loan by accepting payments after the two-year balloon period expired. Adams, without specificity, also asserts that improper attorney fees and expenses were added to the balance. Cincinnati Capital filed a response, again indicating that the Borrowers were not in "good standing" under the terms of the Loan Modification and that the Borrowers were in default of the Note and Mortgage by not paying the balloon payment. Doc. 51.
After retaining special counsel (Docs. 45, 52), Adams filed an amended objection arguing that attorney fees were not recoverable pursuant to 11 U.S.C. § 1332(e). Doc. 56. As to the acceleration issue, Adams argues Cincinnati Capital is misinterpreting the Loan Modification and, as a factual matter, has not accounted for various payments made by the Borrowers through April 18, 2022. Further, Adams notes the state court foreclosure filed by Cincinnati Capital did not proceed to judgment and, therefore, these issues remained unresolved. See Am. Obj. to Am. Proof of Cl., Ex. 1 (Complaint For Foreclosure). In response, Cincinnati Capital repeats that the balance of the loan is due under the terms of the Loan Modification and that, as a contractual matter, it was entitled to recoup its attorney fees. Doc. 57.
The court provided the parties with an optional August 22, 2023 date by which they could brief any issue "deem[ed] pertinent," but specifically requested that any additional briefing they wished to provide be related to the issues of whether the legal fees were allowable as part of Cincinnati Capital's amended proof of claim and whether the Borrowers' obligation matured under the terms of the Loan Modification. Doc. 65. The parties did not file any stipulations of fact. However, both Cincinnati Capital and Adams filed supplemental briefing (Docs. 67, 68) which did not raise any new arguments. Adams has taken the position that an evidentiary hearing is required to determine the status of the loan.
Analysis
A proof of claim is deemed allowed unless an objection is filed. 11 U.S.C. § 502(b). A properly filed proof of claim is prima facie evidence of the amount and validity of the claim. Fed.R.Bankr.P. 3001(f). Once a proof of claim is filed, the burden of production shifts to the objecting party to produce evidence to overcome the validity of the claim. In re Tudor, 342 B.R. 540, 550 (Bankr. S.D. Ohio 2005). The ultimate burden of persuasion rests with the claimant. Id. Once an objection to a proof of claim is filed, the matter becomes a contested matter under Federal Rule of Bankruptcy Procedure 9014. Lundell v. Anchor Constr. Specialists, Inc., 223 F.3d 1035, 1039 (9th Cir. 2000); Kelly v. Mace (In re Mace), 573 F. App'x. 490, 496 (6th Cir. 2014).
The 7000 series of the Federal Rules of Bankruptcy Procedure, which largely incorporates the Federal Rules of Civil Procedure, generally apply to contested matters. Fed.R.Bankr.P. 9014(c). Specifically, Federal Rule of Civil Procedure 56 governs motions for summary judgment and that rule applies (with one exception not relevant here) to adversary proceedings. Fed.R.Bankr.P. 7056. In turn, Rule 9014(c) applies Rule 7056 to contested matters unless "the courts direct otherwise." Accordingly, the court is applying the rubric of Rule 56 to this contested matter.
A court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). A factual disagreement is genuine if "a rational trier of fact could find in favor of either party on the issue." SPC Plastics Corp. v. Griffith (In re Structurlite Plastics Corp.), 224 B.R. 27, 30 (B.A.P. 6th Cir. 1998) (citing Schaffer v. A.O. Smith Harverstone Prods., Inc., 74 F.3d 722, 727 (6th Cir. 1996)). A fact is material if it might affect the outcome of the suit under substantive law. Niecko v. Emro Mktg. Co., 973 F.2d 1296, 1304 (6th Cir. 1992) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). When reviewing a motion for summary judgment, a court views all evidence and draws all inferences in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
Cincinnati Capital argues that it had the discretion to decide whether to fully amortize the loan another twenty-three years. The language of the Loan Modification does state Cincinnati Capital "may" extend the loan. The argument continues that the Borrowers have missed payments and are not currently in "good standing" as called for by the Loan Modification. Further, Cincinnati Capital insists it did not extend the loan in November 2015 and, therefore, the loan ballooned and is fully due.
The central problem with Cincinnati Capital's argument is that its actions raise a factual issue as to whether it did in fact extend the loan. See Am. Mun. Power, Inc. v. Voith Hydro, Inc., 636 F.Supp.3d 838, 865-66 (S.D. Ohio 2022) (noting that course of conduct evidence is permissible and whether a contract provision is waived is a question of fact); Vocke v. Third Nat'l Bank & Trust Co., 267 N.E.2d 606, 617 (M.C. 1971) (Rice, J.) ("Whether or not there has been a waiver of all or certain terms of a prior written agreement is a question of fact . . ."); First-Citizens Bank & Trust Co. v. Parker Med. Holding Co. (In re Parker Med. Holding Co.), 2023 Bankr. LEXIS 850, at *39-40, 2023 WL 2749715, at *11 (Bankr. N.D.Ga. Mar. 31, 2023) (granting the borrower time to conduct discovery on the parties' course of conduct which may have modified the terms of the contract including as to the terms for extension of the maturity of the loan); Wright v. Basinger, 2003 WL 21054727, at *5, 2003 Ohio App. LEXIS 2207, at *39 (Ohio Ct. App. May 9, 2003) (finding that "a party may relinquish a right by either express words or by conduct which seems to dispense with performance at the designated time"). It is correct, at least as far as the current record, that there is no letter or other correspondence from Cincinnati Capital extending the loan, but there is also nothing in writing from 2015 demanding the balloon payment. In addition, Cincinnati Capital continued to accept monthly payments for many years after 2015. Moreover, it also did not raise the failure to make the balloon payment as an event of default in the state foreclosure action. Am. Obj., Ex. 1. Instead, Cincinnati Capital simply argued that the Borrowers failed to make monthly payments on the loan.
Of course, if the loan extends through 2040, Chapter 13 allows Adams to maintain the current monthly payment and cure the pre-petition arrears within a reasonable time. 11 U.S.C. § 1322(b)(5). Indeed, the confirmed plan provides this exact treatment. However, Cincinnati Capital does not address the impact of the confirmed Chapter 13 plan, and Adams merely glosses over the issue. Doc. 43 ¶ 5.
The remaining issue is whether Cincinnati Capital is entitled to add the $3,563 in legal fees to its amended proof of claim [10-2]. These fees appear to relate to legal services performed during the pre-petition state court foreclosure. Section 1322(e) provides that "[n]otwithstanding 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." 11 U.S.C. § 1322(e)(5). Section 1322(e) applies to attorney fees. In re Landrum, 267 B.R. 577, 581 (Bankr. S.D. Ohio 2001). The parties do not appear to dispute that the mortgage loan documents provide for attorney fees. But attorney fees related to a foreclosure are not available under Ohio law in these circumstances. Long-standing Ohio law provides generally that attorney fees are not recoverable "upon a default in payment of a debt." Tudor, 342 B.R. at 558 (quoting Miller v. Kyle, 97 N.E. 372, paragraph one of the syllabus (Ohio 1911)). This rule applies to mortgage loans. Tudor, 342 B.R. at 558 (citing cases that "bankruptcy courts applying Ohio law have consistently held . . . attorney fees are not a proper component of a mortgagee's arrearage claim."). None of the recognized exceptions apply here. Consumer mortgage loans do not constitute a "free and understanding negotiation" in which attorney fees can be recovered. Id. (quoting Worth v. Aetna Cas. & Surety Co., 515 B.R. 253, 257-58 (Bankr. E.D. N.C. 1987)). See also Nottingdale Homeowners' Ass'n v. Darby, 514 N.E.2d 702, 705 (Ohio 1987) (allowing attorney fees in a contract dispute between condominium owners and a condominium owner's association based on the equal bargaining power of the parties). Further, the cure and reinstate provided by the confirmed plan and § 1322(b)(5) of the Bankruptcy Code does not meet the contractual reinstatement exception of a mortgage loan. In re Joslin, 544 B.R. 877, 879-82 (Bankr. S.D. Ohio 2016) (determining that the exception for a mortgage reinstatement provided in Wilburn v. Bank One Corp., 906 N.E.2d 396 (Ohio 2009) and other decisions does not apply to the cure and reinstatement of a mortgage loan in a Chapter 13 plan).
Conclusion
Adams' objection to the attorney fees added to Cincinnati Capital's amended proof of claim (10-2) is sustained. However, the court finds that factual issues prevent the court from determining the issue of whether the loan ballooned and is due in full under the terms of the Loan Modification. The court will schedule a hearing to determine that issue through a separate scheduling order.
IT IS SO ORDERED.