644 B.R. 883
Bankr. D.N.M.2022Background
- Debtor Michael J. Jacobs filed Chapter 11 on November 13, 2019; DLJ Mortgage Capital holds an in rem foreclosure judgment against his primary residence and an allowed secured claim (~$497,457.45).
- This Court granted DLJ in rem stay relief and allowed DLJ’s claim on May 24, 2021; multiple post-judgment and Rule 60(b) efforts and appeals followed and remain pending.
- Debtor filed four proposed plans; his Second Amended Plan (July 11, 2022) classifies DLJ as "unimpaired" but proposes an initial payment plus modest monthly payments that would cure prepetition arrears over many years rather than in full at plan effective date.
- The U.S. Trustee moved to convert or dismiss under 11 U.S.C. § 1112(b), arguing bad faith and failure to file a confirmable plan in a reasonable time; the Court held a multi-day evidentiary hearing.
- The Court concluded Debtor’s plan is unconfirmable because it would impermissibly modify the contractual rights of a creditor holding a claim secured only by the debtor’s principal residence (violating § 1123(b)(5) when read with § 1124(2)), and dismissed the Chapter 11 case as being in the best interests of creditors and the estate.
Issues
| Issue | Plaintiff's Argument (UST) | Defendant's Argument (Debtor) | Held |
|---|---|---|---|
| Whether "cause" exists under § 1112(b) to convert or dismiss | Debtor failed to file an acceptable plan within a reasonable time and filed in bad faith | Debtor has a pending Second Amended Plan and funding sources (rental, photography, litigation, VA loan) | Cause exists: plan unconfirmable under § 1123(b)(5); dismissal appropriate; no unusual circumstances shown |
| Whether § 1123(b)(5) prohibits curing preconfirmation home-mortgage arrearages in installments after confirmation | Anti-modification bars any treatment that alters lender's contractual rights unless arrearages are cured in full by plan effective date | § 1124(2) permits reinstatement/cure in installments; chapter 11 should allow cure like chapter 13 (citing Lennington/LaPorta) | § 1123(b)(5) read with § 1124(2) requires full payment of preconfirmation arrearages (and satisfaction of § 1124 elements) by the plan effective date; post-confirmation installment cures would modify creditor rights and are impermissible |
| Whether precedents permitting post-confirmation installment cures control (e.g., Lennington, LaPorta) | UST: those decisions are unpersuasive and conflict with statutory text and policy differences between Ch. 11 and Ch. 13 | Debtor: relies on cases allowing installment cures and on parity with Chapter 13 practice | Court rejects Lennington/LaPorta reasoning; follows decisions requiring cure in full by effective date (e.g., Schatz) |
| Whether dismissal or conversion is proper remedy | UST preferred dismissal to permit state-court foreclosure appeal to proceed | Debtor favored remaining in Chapter 11 to attempt confirmation | Court exercised discretion and dismissed case as in best interests of creditors and estate; conversion unnecessary given circumstances |
Key Cases Cited
- Nobelman v. American Savings Bank, 508 U.S. 324 (interpretation of "rights" protected by anti-modification provision)
- Frieouf v. United States (In re Frieouf), 938 F.2d 1099 (§ 1112(b) list of examples of cause is non-exhaustive)
- Hall v. Vance, 887 F.2d 1041 (failure to file acceptable plan supports dismissal)
- Preferred Door Co. v. SBA (In re Preferred Door Co., Inc.), 990 F.2d 547 (inability to effectuate a plan is ground for dismissal)
- Vincens v. (In re Vincens), [citation="287 F. App'x 686"] (failure to file acceptable plan after reasonable time warrants dismissal)
- Woodbrook Associates v. Fox, 19 F.3d 312 (dismissal appropriate if unreasonable to expect plan confirmation)
- Lennington v. (In re Lennington), 288 B.R. 802 (held installment cures permissible in Ch.11 — decision the Court declined to follow)
- LaPorta v. (In re LaPorta), 578 B.R. 792 (similar to Lennington; court declined to follow)
- Schatz v. (In re Schatz), 426 B.R. 24 (supporting view that cure must occur prior to or on plan effective date)