AMENDED MEMORANDUM DECISION ON OBJECTION TO CONFIRMATION OF PLAN
The debtors filed a chapter 13 petition and plan on March 1, 2011. American
This is a core proceeding under 28 U.S.C. § 157(b)(2)(L), and the Court has jurisdiction under 28 U.S.C. § 1334. This decision constitutes the Court’s findings of facts and conclusions of law pursuant to Fed. R. Bankr.P. 7052. For the reasons stated, the objection to confirmation is sustained.
BACKGROUND
The material facts are not in dispute. During all relevant times, the debtors’ primary residence was a house on approximately 20 acres owned by Ms. Anderson in Wautoma, Wisconsin. The debtors filed a previous chapter 13 case in 2002. In an effort to pay off a maturing mortgage on their homestead with a different lender, and to successfully complete that plan, they sought financing through two gentlemen by the names of Christopher Proulx and Shawn Wahle. The debtors have designated the resulting transaction a “foreclosure rescue scam” with predictably convoluted transactions. At the closing, Ms. Anderson sold her home to Mr. Proulx for $119,250, the latter having financed the purchase through a $95,400.00 mortgage with New Century Mortgage Corporation (WB-11 Residential Offer to Purchase dated October 20, 2005; U.S. HUD Settlement Statement dated December 27, 2005). The original Residential Offer to Purchase included both the homestead and an adjacent parcel Although the offer was later amended to remove the extra acres from the purchase, they were included in the deed and mortgage. At the same closing, Mr. Proulx gave Ms. Anderson a “seller carryback” 1 promissory note and mortgage on the property in the amount of $17,887.50, which the county refused to record because the mortgage document was not legible. (Promissory Note dated December 7, 2005; Mortgage dated December 27, 2005; Letter from Nations Title Agency of Minnesota, Inc., dated August 24, 2006). Mr. Proulx also signed a note to the Andersons for $23,860.00. (Note dated December 7, 2005). The debt- or’s first mortgage of $39,915.83 and delinquent real estate taxes of $7,152.96 were paid in full, and after rather exorbitant closing costs and settlement charges were assessed, Ms. Anderson received proceeds of $43,091.45. (U.S. HUD Settlement Statement dated December 27, 2005). A portion of the proceeds was used to pay off the chapter 13 plan and the debtors received a discharge on February 10, 2006. Another portion of the proceeds was split with Messrs. Proulx and Wahle for their assistance.
On March 13, 2007, Mr. Proulx refinanced his New Century mortgage for a $116,000.00 loan with American Brokers Conduit. The note provided for payments of interest only at 7.25% for 120 months and a maturity date of April 1, 2037. In August 2007, he sold off the land that was
On February 27, 2008, American Home Mortgage Servicing, Inc., the holder 2 of the note and assignee of the mortgage, commenced a foreclosure action 3 against Mr. Proulx, naming the debtors as “Unknown Tenants.” The debtors answered the complaint alleging, inter alia, that their interest in the property was paramount to American Home’s.
Ms. Anderson subsequently settled her dispute with Mr. Proulx. On October 19, 2009, Ms. Anderson released her alleged claims against Mr. Proulx in exchange for a quit claim deed to the property not owned by Mr. Scimeca. The Andersons, as unnamed tenants, and American Home stipulated to entry of a judgment of foreclosure on July 1, 2010, and on July 7, 2010, the state court entered a judgment. (Waushara County Circuit Court Case No. 08 CV 60, Findings of Fact, Conclusions of Law and Summary Judgment, dated July 7, 2010). As of the date of the state court proceedings, $149,725.19 was due on the mortgage.
The debtors filed a chapter 13 petition and plan on March 1, 2011, proposing to pay American Home Mortgage Servicing, Inc., $316.32 monthly for 36 months and then approximately $34,200.43 in a balloon payment at the end of the 36 month period, for a total payment of $40,000.00 amortized over 15 years at 5% interest per year. This provision is in essence a cram-down to the value of the property retained by the debtors. American Home, as servicing agent for Federal National Mortgage Association, opposed confirmation on the grounds, inter alia, the plan violated 11 U.S.C. § 1325(a)(5)(B) and sought to modify the terms of the mortgage secured by the debtors’ principal residence in violation of 11 U.S.C. § 1322(b)(2). While arguing in support of their plan, the debtors also reserved an objection to American Home’s standing to oppose confirmation. Both parties submitted briefs in support of their respective positions.
ARGUMENTS
According to the debtors, 11 U.S.C. § 1322(c)(2) does not prohibit them from modifying what they describe as a predatory interest-only mortgage. Although they took back the real estate subject to the security interest of American Home, they were never a party to the note, and they did not have standing to challenge the terms of the note in the state court foreclosure proceedings. While they agree they are subject to the mortgage, they are not
Additionally, American Home may not enforce the security agreement until it verifies that it is servicing the mortgage on behalf of Fannie Mae.
4
The debtors further contend that they are entitled to the same relief afforded the debtor in
In re Walker,
American Home argues the
Rooker-Feldman
and
res judicata
doctrines bar the debtors from challenging its standing to oppose confirmation of the plan because the state court has entered a judgment of foreclosure.
See Long v. Shorebank Dev. Corp.,
American Home points out that the mortgage was accelerated by default when the foreclosure judgment was entered, and the plan’s proposal to modify its mortgage violates the anti-modification provision of 11 U.S.C. § 1322(b)(2). Under controlling law,
see Matter of Clark,
DISCUSSION
In the case at bar, the debtors have set forth in Schedule C that the property is their homestead, and the debtors reside on the property; therefore, the property is the debtors’ principal residence. There is no question that Fannie Mae holds a lien on the property and that it has no other collateral securing the first lien note. The issue here — whether a chapter 13 debtor with no personal liability on an accelerated loan on a principal residence may strip the mortgage down to the value of the real estate — presents two competing bankruptcy principles.
One the one hand, section 1322(b)(2) prohibits the modification of a claim that is secured only by a security interest in real property that is the debtor’s principal residence. In
Nobelman v. Am. Sav. Bank,
The basic facts in Nobelman were un-controverted. The debtors fell behind on their mortgage, so they filed a chapter 13 case. The value of the property was about one-third the amount of the debt, and the debtors proposed to pay only the current value, treating the difference as unsecured, with unsecured creditors receiving nothing. The debtors argued that the anti-modification language of section 1322(b)(2) applied only to the extent the mortgagee held a secured claim in the residence and the court must look first to section 506(a) to determine the value of that claim. The Court explained the debtors’ syllogism:
Section 506(a) provides that an allowed claim secured by a lien on the debtor’s property “is a secured claim to the extent of the value of [the] property”; to the extent the claim exceeds the value of the property, it “is an unsecured claim.” Petitioners contend that the valuation provided for in § 506(a) operates automatically to adjust downward the amount of a lender’s undersecured home mortgage before any disposition proposed in the debtor’s Chapter 13 plan.
This interpretation fails to take adequate account of § 1322(b)(2)’s focus on “rights.” That provision does not state that a plan may modify “claims” or that the plan may not modify “a claim secured only by” a home mortgage. Rather, it focuses on the modification of the “rights of holders” of such claims. By virtue of its mortgage contract with petitioners, the bank is indisputably the holder of a claim secured by a hen on petitioners’ home.
Id.
The Court recognized that applying section 506(a) would acknowledge the bank had a secured claim for the value of the property; “however, that determination does not necessarily mean that the ‘rights’ the bank enjoys as a mortgagee, which are protected by § 1322(b)(2), are limited by the valuation of its secured claim.”
Id.
at 329,
The Court continued:
The term “rights” is nowhere defined in the Bankruptcy Code. In the absence of a controlling federal rule, we generally assume that Congress has “left the determination of property rights in the assets of a bankrupt’s estate to state law,” since such “[pjroperty interests are created and defined by state law.” Moreover, we have specifically recognized that “[t]he justifications for application of state law are not limited to ownership interests,” but “apply with equal force to security interests, including the interest of a mortgagee”. The bank’s “rights,” therefore, are reflected in the relevant mortgage instruments,which are enforceable under Texas law. They include the right to repayment of the principal in monthly installments over a fixed term at specified adjustable rates of interest, the right to retain the lien until the debt is paid off, the right to accelerate the loan upon default and to proceed against petitioners’ residence by foreclosure and public sale, and the right to bring an action to recover any deficiency remaining after foreclosure .... These are the rights that were “bargained for by the mortgagor and the mortgagee,” ... and are rights protected from modification by § 1322(b)(2).
Id.
at 329-30,
Thus, if there were no material facts other than an undersecured mortgage, the plan provision cramming down the creditor’s claim to the value of its security would be unconfirmable.
Bankruptcy Principle No. 2: Non-Recourse Obligations After Johnson v. Home State Bank.
Prior to the
Nobelman
decision, the Supreme Court considered the nature of a secured obligation that remains after the borrower receives a chapter 7 discharge in
Johnson v. Home State Bank,
The bankruptcy court then lifted the automatic stay, allowing the bank to obtain an in rem judgment against the debtor’s property. Prior to the new foreclosure sale date, the debtor filed a petition for relief under chapter 13 and included the bank’s interest arising from its mortgage on his property as a claim to be treated through his plan. Against the bank’s objection, the bankruptcy court confirmed the 13 plan. On appeal, the district court and the Tenth Circuit both disagreed with the bankruptcy court and held that the bank did not hold a claim against the debtor because his personal liability was discharged in his chapter 7 bankruptcy case. Accordingly, the debtor could not use his chapter 13 plan to cure arrears under the mortgage held by the bank.
On subsequent appeal, the Supreme Court overruled the decisions of the district and circuit courts. It interpreted the term “claim” in the Bankruptcy Code broadly to include a “mortgage interest that survives the discharge of a debtor’s personal liability.”
In other words, the court must allow the claim if it is enforceable against either the debtor or his property. Thus, § 502(b)(1) contemplates circumstances in which a “claim,” like the mortgage lien that passes through a Chapter 7 proceeding, may consist of nothing more than an obligation enforceable against the debtor’s property. Similarly, § 102(2) establishes, as a “[r]ul[e] of construction,” that the phrase “ ‘claim against the debtor’ includes claim against property of the debtor.” A fair reading of § 102(2) is that a creditor who, like the Bank in this case, has aclaim enforceable only against the debt- or’s property nonetheless has a “claim against the debtor” for purposes of the Code.
Id.
at 85,
The legislative history surrounding § 102(2) directly corroborates this inference. The Committee Reports accompanying § 102(2) explain that this rule of construction contemplates, inter alia, “nonrecourse loan agreements where the creditor’s only rights are against property of the debtor and not against the debtor personally.” Insofar as the mortgage interest that passes through a Chapter 7 liquidation is enforceable only against the debtor’s property, this interest has the same properties as a nonre-course loan.... [I]nsofar as Congress did not expressly limit § 102(2) to non-recourse loans but rather chose general language broad enough to encompass such obligations, we understand Congress’ intent to be that § 102(2) extend to all interests having the relevant attributes of nonrecourse obligations regardless of how these interests come into existence.
Id.
at 86-87,
Johnson is thus recognized for its holding that even though a debtor has discharged his or her personal liability on the obligation on a mortgage in a chapter 7 case, the debtor may still file a chapter 13 case to address the lender’s claim against the debtor’s real property. In this case, the debtors’ lack of personal liability on the obligation is not the result of a chapter 7 discharge; it is the result of acquiring property subject to a mortgage, followed by a state court foreclosure without deficiency. American Home’s claim is likewise only in rem as to the property, not in personam with recourse against Ms. Anderson.
A debtor may never have personal liability on the debt secured by the mortgage. Such is the nature of a nonrecourse mortgage. It may occur, as in Johnson, with a chapter 7 discharge, or as in the current case, taking title to encumbered property, followed by a foreclosure without deficiency. Several courts have addressed whether a debtor with encumbered property, which was transferred to the debtor without the lender’s consent, may modify the lender’s lien rights. Generally, the issue has arisen when the debtor is not the original mortgagor but nevertheless proposes a chapter 13 plan to prevent the lender from invoking its foreclosure rights under the due on sale clause. A majority of courts have permitted the debtor to cure the default under the mortgage, even if the debtor lacks privity with the mortgagee.
The apparent majority view allows a debtor to include such a mortgage in the plan based on a broad interpretation of the term ‘claim’ even though the debtor is not in privity with the mortgagee.
E.g., In re Newcomer,
Not all courts have been willing to confer the benefits of chapter 13 cure provisions on debtors who have acquired encumbered property in violation of due on sale clauses.
See, e.g., In re Tewell,
The debtors are not seeking to cure and reinstate the mortgage. The cases that allow curing of a default and reinstatement of a default might be persuasive, but they simply do not apply to what the debtors are trying to do. They want to reduce the creditor’s secured claim and to pay total payments equaling only the present value of the collateral.
The right to cram down a secured creditor’s interest in a debtor’s principal residence does not arise from lack of personal liability on the note. The creditor still has the bundle of rights described in
Nobel-man,
and these cannot be modified by the debtors’ proposed plan provision.
See In re Garcia,
Applicability of 11 U.S.C. § 1322(c)(2).
Section 1322(c)(2) provides an important exception to section 1322(b)(2), providing debtors with the opportunity to pay a mortgage indebtedness that has matured or matures during the term of a chapter 13 plan. Section 1322(c)(2) states:
(c) Notwithstanding subsection (b)(2) and applicable nonbankruptcy law — •
(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.
11 U.S.C. § 1322(c). The debtors in this case argue that their proposed modification is allowed under this provision. Section 1322(c)(2) provides for de-acceleration and cure of the matured secured claim, but the modification is in the timing of payment, i.e., it may extend over the term of the plan, with the same protections provided the secured creditor by section 1325(a)(5). It does not change the rights of the holder of the claim. Furthermore, this section only applies when the last payment on the
original payment schedule
is due before the plan completes. The last payment on the original debt in this case would have been April 1, 2037. The mort
Requirement of Equal Plan Payments.
Additionally, under the Bankruptcy Code, payments to secured creditors whose claims are to be paid in full under the plan must be in equal amounts. 11 U.S.C. § 1325(a)(5)(B)(iii)(I). In
In re Wagner,
Claim Preclusion and Standing.
American Home argues the debtors cannot at this time challenge their standing as creditors to object to their plan or to collect amounts due under their plan. The Andersons participated in the foreclosure action, in which American Home was the plaintiff, and stipulated to judgment, including the amount due. They could have raised the issue of whether American Home was a proper party and did not do so.
While the amount of the foreclosure judgment is subject to claim preclusion,
see In re Back Bay Restorations, Inc.,
Even if American Home is not able to prove its status as a creditor for the purpose of receiving distributions pursuant to a plan, the Court cannot ignore issues raised by it. The bankruptcy court cannot confirm a plan that contains provisions contrary to law, no matter how those defects come to its attention.
See United Student Aid Funds, Inc. v. Espinosa,
— U.S.-,
Notes
. A seller carryback is when the seller agrees to "carry back” some part of the purchase price themselves. The seller accepts a certain amount of the purchase price in the form of a promissory note from the buyer, usually secured by the property.
. Fannie Mae currently owns the indebtedness, but American Home continues to service it.
. After discovering that the wrong legal description was attached to the mortgage, American Home executed a partial release of Mr. Scimeca’s parcel. Subsequent assign-merits of the mortgage have added back the released parcel. American Home has stated in its brief that its mortgage only intended to encumber the residential property, not the parcel transferred to Mr. Scimeca. Mr. Scimeca was not a party to the foreclosure action.
. In the event the Court holds that they are bound by the terms of the contract, the debtors reserved the right in their reply brief to challenge whether American Home has the right to collect the payments under the terms of the note. As of the date of that brief, American Home had not documented, to the satisfaction of the debtors, that it was the servicing agent of Fannie Mae.