ORDER AND OPINION DENYING CONFIRMATION OF PLAN
THIS MATTER came before the Court on December 2, 2010, after due and proper notice, for a hearing on the Debtors’ proposed Chapter 13 plan. Edward C. Boltz appeared at the hearing on behalf of the Debtors and Benjamin Lovell appeared on behalf of the Chapter 13 Trustee. Having considered the proposed plan, the evidence offered at the hearing, and other matters of record, the Court makes the following findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure:
BACKGROUND FACTS
The Debtors filed a petition for relief under Chapter 13 of the Bankruptcy Code on July 20, 2010 (the “Petition Date”). The male Debtor is the Chief Water Plant Operator for the Orange County Water and Sewer Authority and the female Debt- or is unemployed. The Debtors have two dependent children, a son age 10 and another son age 24. According to their B22C, the Debtors have below-median income in the amount of $4,288.00 per month.
On their Schedule A, the Debtors listed an interest in one parcel of real property. The real property, the Debtors’ primary residence, consists of a mobile home and lot located at 325 Kimberly Lane, Siler City, North Carolina (the “real property”). The current value of the Debtors’ interest in the property is listed at $62,052.60, and the property is listed as subject to a secured claim in the amount of $132,429.97.
Colonial Savings (“Colonial”) filed a proof of claim in the amount of $134,391.64 on August 23, 2010. The proof of claim indicates that Colonial’s claim is seсured by a deed of trust on the Debtors’ real property. The deed of trust and accompanying adjustable rate note were attached to Colonial’s proof of claim. The note asserts the principal balance of the loan was $144,728.00, to be repaid over a term of 30 years at a rate of $861.81 per month with an adjustable interest rate to begin at 4.5%. In addition, the proof of claim asserts a pre-petition arrearage of $2,527.17.
On September 8, 2010, the Debtors filed a notice of рroposed Chapter 13 plan pro
The Debtors propose thаt the mortgage with Colonial shall be modified to re-amortize the $62,052.60 fair market value of the real property over a term of 108 months, from November of 2010 to October of 2019, at a permanently fixed interest rate of three and one-half percent (3.5%) per annum. The Debtors propose principal and interest payments of $668.59 for the remaining term of the modified loan. Colonial is entitled to escrow payments of $193.22 per month; therefore, Colonial shall be allowed a long-term continuing debt through the plan with payments of $861.81 per month effective September of 2010. The arrearage through August of 2010 is re-amortized into the mortgage loan; therefore, no payments shall be made on the arrearage claim of Colonial.
Failure to file a timely objection to this plan shall constitute acceptance of this plan by Colonial, pursuant to 11 U.S.C. § 1325(a)(5)(A). In the event that Colonial objects to the periodic payments extending beyond the length of the plan, the Debtors shall distribute, pursuant to 11 U.S.C. § 1325(a)(5)(B)(ii), property to Colonial in the form of a new deed of trust complying with the beforementioned terms. This modification shall be deemed to be in compliance with the requirements of HAMP and the Debtors and Colonial shall be entitled to any allowed distributions from the United States Department of the Treasury under such program.
On September 8, 2010, Notice of the Proposed Plan and Order Confirming Plan and Time for Filing Objections Thereto was transmitted to all parties in interest. The Notice provided that objections to thе proposed plan must be filed and served within 28 days of the date of the Notice. The Notice also provided that “There will be no hearing on Confirmation unless a timely objection is filed or a hearing is ordered.”
Colonial did not file an objection. On September 13, 2010, the Court entered an Order that a hearing should be held on the proposed plan and set a confirmation hearing for October 21, 2010. The confirmation hearing was continued to December 2, 2010. Colonial did not appear at the confirmation hearing and did not file a written objection.
ISSUE PRESENTED
The primary issue is whether the Debtors’ proposed plan complies with the requirements of § 1325 even though the plan proposes to modify the terms of the Debtors’ mortgage by decreasing the principal of the original loan, instituting a fixed interest rate that is significantly lower than the Till interest rate in place of the original adjustable interest rate, and re-amortizing any existing arrearage claim over the life of the new modified loan.
DISCUSSION
Section 1325(a)(1) dictates that “[ejxceрt as provided in subsection (b), the court shall confirm a plan if the plan complies with the other applicable provisions of this title.” 11 U.S.C. § 1325(a)(1). This language bestows bankruptcy courts with the responsibility of ensuring that all confirmed plans adhere to the requirements of the Bankruptcy Code.
See, e.g., In re Ni
Section 1322(b)(2) states that “[t]he plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.” 11 U.S.C. § 1322(b)(2). Furthermore, § 1322(b)(5) allows a debtor, “notwithstanding paragraph (2) of this subsection,” to “provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.” 11 U.S.C. § 1322(b)(5). Together, sections 1322(b)(2) and 1322(b)(5) allow a debtor to bifurcate a “secured creditor’s claim into secured and unsecured portions if the amount of the claim exceeds the value of the collateral securing the claim.”
In re Bradsher,
In In re Bradsher, the Middle District of North Carolina addressed the issue of whether escrow funds that were paid to Wells Fargo, the mortgagee, by the debtor constitute real property аs defined in North Carolina. Id. at 389. According to the terms of the deed of trust in Bradsher, monthly payments were to include “principal and interest plus an additional sum to cover the payment of ‘escrow items’ consisting of taxes and special assessment, leasehold payments or ground rents, and insurance premiums.” Id. at 388. The court examined the contractual provisions regarding the escrow funds and held that “the Wells Fargo indebtedness is not secured solely by real estate that is the Debtor’s principal residence and thus Wells Fargo is outside the protection from modification provided under section 1322(b)(2).” Id. at 391-92. In reaching this conclusion, the court reasoned that “[t]he escrow provisions do not characterize or describe the rights arising from such provisions as being a component of the land described in the deed of trust or as constituting a right or privilege belonging or appertaining to such land.” Id. at 391. As was the case in Bradsher, Colonial’s claim in the present case is secured by a deed of trust on the real property and the Debtors’ interest in an escrow account. Therefоre, the Debtors’ proposed plan is correct in asserting that the anti-modification provisions of § 1322(b)(2) do not apply to the claim of Colonial.
Nonetheless, even though the anti-modification provision of § 1322(b)(2) does not apply in cases where the deed of trust is secured by both real property that is a debtor’s principal residence and an escrow account, a debtor is not permitted to modify a mortgagee’s claim without limitation. More specifically, “[p]ayments
Alternatively, if a debtor chooses to modify the terms of the mortgage note, then the requirements of § 1322(d) are triggered, which requires that the full amount of the secured claim be paid over the life of the plan.
In re Hayes,
No. 10-81284C-13D,
In addition, the Debtors’ proposed plan does not comply with 11 U.S.C. § 1325(a)(5)(B)(ii). Section 1325(a)(5), which governs the treatment of secured creditors, sets forth the three options a debtor has when dealing with secured claims. Because Colonial has not accepted the plan, see § 1325(a)(5)(A), and because the Debtors have not surrendered the property to Colonial, see § 1325(a)(5)(C), the present controversy concerns § 1325(a)(5)(B).
3
Section 1325(a)(5)(B) is known as the “cram down” option. Asso
ciates Commercial Corp. v. Rash (Rash),
Under the cram down option, the debtor is permitted to keep the property over the objection of the creditor; the creditor retains the lien securing the claim, see § 1325(a)(5)(B)®, and the debtor is required to providе the creditor with payments, over the life of the plan, that will total the present value of the allowed secured claim, i.e., the present value of the collateral, see § 1325(a)(5)(B)(ii).
Id. (emphasis added). In the present case, the Debtors’ proposed plan does not provide Colonial with payments, over the life of the plan, that total the present value of Colonial’s allowed secured claim. Instead, the Debtors’ proposed plan states that “[i]n the event that Colonial objects to the periodic payments extending beyond the length of the plan, the Debtors shall distribute, pursuant to 11 U.S.C. § 1325(a)(5)(B)(ii), property to Colonial in the form of a new deed of trust complying with the beforementioned terms.” As the provision of a new deed of trust is not equivalent to periodic cash payments, the Debtors’ proposed substitution does not meet the requirements of § 1325(a)(5)(B)(ii).
Debtors’ counsel argues that Justice Thomas’s concurrence in
Till
supports the notion that a new promissory note constitutes “property” under the Bankruptcy Code and therefore satisfies the debt within five years. In
Till,
Justice Thomas stated that “ ‘property’ can be cash, notes, stock, personal property or real property; in short, anything of value.”
Till,
Debtors’ counsel argues that, even though the proposed plan does not comply with the requirements of § 1322(b)(5), the plan should still be confirmed because Colonial’s continued silence amounts to acceptance of the plan pursuant to § 1325(a)(5)(A). Section 1325(a)(5)(A) allows a proposed plan to be confirmed, despite not treating a secured claim in accordance with requirements of the Code, where the secured creditor holding the claim accepts thе plan. 11 U.S.C. § 1325(a)(5)(A). Yet, neither the Code, nor the Bankruptcy Rules, dictate the manner in which the holder of a secured claim is to accept a plan in a Chapter 13 case. Keith M. Lundin, Chapter 13 Bankruptcy § 101.2 (3d ed. 2007). This is different in cases under Chapter 11, where the voting process is clearly described by Rule 3018(c).
Id.
Because the Code does not recount how a secured creditor is to accept a proposed plan, many courts have held that a creditor’s silence shall be interpreted as acceptance.
E.g., In re Mizell,
Section 502(a) of the Code states that “[a] claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest ... objects.” 11 U.S.C. § 502(a). Moreover, Rule 3001(f) dictates that “[a] proof of claim executed and filed in accordance with these rules shall constitute pri-ma facie evidence of the validity аnd amount of the claim.” Fed. R. Bankr.P. 3001(f). It should be noted that while the Code requires unsecured creditors to file a proof of claim for their claims to be allowed, the same is not true for secured creditors.
See
Fed. R. Bankr.P. 3002(a). This is because secured creditors can always rely on their collateral to satisfy them liens.
See, e.g., In re Bateman,
In the present case, the Debtors failed to file аn objection to Colonial’s proof of claim. Instead, the Debtors stated their position regarding the treatment of Colonial’s claim for the first time in their proposed plan. Rule 3007 does not permit a debtor to object to a creditor’s claim in such a manner. As the Eleventh Circuit held in In re Bateman:
Given the “deemed allowed” language of § 502, the explicit procedures set forth in Rule 3007 to effect a proper disallowance, the existence of a secured home mortgage claim, and the failure by the debtor here, not the creditor, to follow the proper procedures, we refuse to permit an inconsistent plan provision to constitute a constructive objection by reason of the Plan’s notation of dispute alone....
Debtors’ counsel further argues that the Supreme Court’s recеnt decision in
United Student Aid Funds, Inc. v. Espinosa,
— U.S.-,
In
Espinosa,
the debtor’s plan proposed to repay the principal balance of a student-loan debt and to discharge the outstanding interest owed onсe the principal was repaid.
Id.
at 1374. A discharge of government-sponsored student loan debt is permitted only if a bankruptcy court finds that such debt will inflict an undue hardship upon the debtor.
Id.
(citing 11 U.S.C. §§ 523(a)(8), 1328). Such a finding must occur in an adversary proceeding, “which the party seeking the determination must initiate by serving a summons and complaint on his adversary. ...”
Id.
(citing Rules 7001(c), 7003,
While the facts of Espinosa аre somewhat analogous to the present case, it is the language found in Part III of the Supreme Court’s opinion, which speaks more generally about the role of bankruptcy courts, that is most appurtenant. There, the Supreme Court instructs bankruptcy courts that they have “the authority” and “the obligation” to instruct a debtor to conform his plan with the requirements of the Code even where the creditor fails to object. Id. at 1381. It is this role of gatekeeper that the court adopts today. Though the issue with the debtor’s plan in Espinosa concerned § 523(a)(8), as opposed to the failure to comply with § 1322(b)(5), the holding in Espinosa is equally applicable. Bankruptcy courts cannot confirm plans that do not comply with the Code simply because a creditor fails to come forward.
Going forward, the Debtors have two options. First, the Debtors may bifurcate Colonial’s claim, provided that the Debtors propose to pay the secured portion of the claim in full over the life of the plan at the Till rate of interest. 4 Secоnd, the Debtors may propose to treat Colonial’s claim as a long-term continuing debt, whereby the Debtors agree to both continue making payments at the contractual rate specified in the mortgage note and to cure any existing arrearage during the life of the plan. The Debtors’ current plan proposes to do neither. As such, because the Debtors’ plan does not comply with § 1322(b)(5), the court must deny confirmation.
SO ORDERED.
Notes
. Section 1322(d) states:
(d)(1) If the current monthly income of the debtor and the debtor's spouse сombined, when multiplied by 12, in not less than—
(A) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner;
(B) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or
(C) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $575 рer month for each individual in excess of 4, the plan may not provide for payments over a period that is longer than 5 years.
(2) If the current monthly income of the debtor and the debtor’s spouse combined, when multiplied by 12, is less than'—
(A) in the case of a debtor in a household of 1 person, the median income of the applicable State for 1 earner;
(B) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or
(C) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $575 per month for each individual in excess of 4, the plan may not provide for payments over a period that is longer than 3 years, unless the court, for cause, approves a longer period, but the court may not approve a period that is longer than five years.
11 U.S.C. § 1322(d).
. In
Till v. SCS Credit Corp.,
. Section 1325(a)(5) provides in pertinent part:
(A) the holder of such claim has accepted the plan;
(B)(i) the plan provides that the holder of such claim retain the lien securing such claim ...
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or
(C) the debtor surrenders the property securing such claim to such holder.... 11 U.S.C. § 1325(a)(5).
. At the present time, the court makes no determination regarding the value of the Debtors’ real property.