In re Wimmer
Chapter 13
MEMORANDUM DECISION DENYING CONFIRMATION AND DISMISSING CASE
Chapter 13 Debtors filed a motion to avoid hens, heard in conjunction with confirmation of the Debtors’ chapter 13 plan, that sought to bifurcate and cram down a first mortgage while avoiding a wholly unsecured second mortgage. Debtors proposed to pay the contractual rate of interest rather than the rate of interest prescribed in Till v. SCS Credit Corp.,
Jurisdiction
This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a), and the Amended Standing Order of Reference signed by Chief Judge Loretta A. Preska dated January 31, 2012. This is a “core proceeding” under 28 U.S.C. §§ 157(b)(2)(A) (matters concerning administration of the estate), 157(b)(2)(B) (allowance of claims against the estate), and 157(b)(2)(L) (confirmation of plans).
Background
Klaus and Linda Wimmer (“Debtors”) filed this chapter 13 case on November 19, 2013. Vol. Pet., ECF No. 1. In their petition, the Debtors listed their street address as 12 Blueberry Hill Road in Hopewell Junction, New York (the “Blueberry Hill Property”). Id. at 1. In the Debtors’ Schedule A, which was filed on December 17, 2013, the Debtors listed the Blueberry Hill Property as their only real property. Scheds. 3, ECF No. 8. The Blueberry Hill Property is allegedly encumbered by a first mortgage in the amount of $1,223,033.54 in favor of OneWest Bank, FSB (“Creditor”). Conf. Obj. 1, ECF No. 25. Creditor also purportedly holds a second mortgage against the property in the amount of $153,981.81. Mot. 5, ECF No. 18.
On January 6, 2014, the Debtors filed an amended petition and amended schedules. Am. Scheds., ECF No. 11. The Debtors’ amended petition lists their street address as 747 North Quaker Hill Road in Pawling, New York (the “Quaker Hill Property”). Id. at 1. The Debtors’ Schedule A does not list an interest in the Quaker Hill Property. Id. at 10. In response to Question 15 of the Debtors’ Statement of Financial Affairs (requesting prior addresses within three years of the petition date), the Dеbtors listed the Blueberry Hill Property as a prior address. Id. at 32. The column where the Debtors are asked to fill in the dates of occupancy of the Blueberry Hill Property is left blank. Id.
A. Motion to value collateral and bifurcate claims.
On January 31, 2014, the Debtors filed a motion to determine that the value of the
The motion states that the Debtors fell behind on their mortgage payments on the Blueberry Hill Property and Creditor initiated foreclosure. Id. at 4. The motion alleges that Creditor engaged in misconduct in the foreclosure proceeding, stating:
Throughout the course of settlement conferences in the state court action the Creditor refused to consider the Debt- or[s] for loss mitigation because the amount owed to the Creditor exceeded the loan limits for loss mitigation programs available through [Creditor],
As a result of the intransigence of [Creditor], the Debtor[s] sought to find a place to live that would afford [them] а lower monthly payment for rent, while enabling [them] to rent the [Blueberry Hill] Property to someone who could afford the payment amount dictated by the mortgage. In September 2013 the Debtor[s] ... took up residence at 747 North Quaker Hill Road, Pawling, N.Y. 12564.
Id. The motion does not specify what interest, if any, the debtors have in the Quaker Hill Property. See id.
Debtors attach what appears to be a full interior appraisal of the Blueberry Hill Property conducted on October 11, 2013. Mot. Ex. A, ECF No. 18.
B. Creditor’s first opposition papers.
On March 11, 2014, Creditor filed opposition to the motion. Opp’n, ECF No. 29. Creditor raised two issues in its initial opposition. Id. at 3-5. Creditor claims that § 1322(b)(2) and In re Pond,
C. Prior ease.
On June 7, 2012, Mr. Wimmer filed a chapter 7 bankruptcy individually (Case No. 12-36464). Vol. Pet., In re Wimmer,
The promissory note and mortgage for both the first and second mortgages are only signed by Mr. Wimmer. Opp’n Ex. A, at 7, 24, ECF No. 29 (first mortgage); Proof of Claim Ex., at 16, Claim Reg. 1-1 (second mortgage).
D. Debtors’ second motion.
Debtors filed a second motion. 2d Mot., ECF No. 36. This motion objects to claim 14-1, which is the first mortgage secured claim of Creditor. Id. at 3. Debtors seek complete reclassification of claim 1-1 to zero and reclassification of claim 14-1 аs a secured claim of $545,000 (based on the appraisal) and an unsecured claim of $678,033.54. Id. at 5.
In the second motion, the Debtors also argue that Mr. Wimmer’s prior chapter 7 discharge renders the unsecured portions of the potentially avoided liens unenforceable. Id. at 4.
E. Debtors’ reply to Creditor’s opposition.
Debtors also filed a reply to Creditor’s opposition to the first motion. Reply, ECF No. 38. As to the second mortgage, Debtors argue that Pond and Nobelman v. Am. Sav. Bank,
As to the first mortgage, Debtors argue that they can de-accelerate the loan while paying the value of the collateral over a term that is longer than the duration of the five-year chapter 13 plan. Id. at 5-6. Debtors seek to continue the remaining duration of the note (270 months), pay only the $545,000 value of the property, and pay the contract rate of interest. Id. at 8-11.
Debtors reiterate their argument that the unsecured portion of the loans should be deemed void due to the prior chapter 7 discharge. Id. at 12-15. Debtors argue that disallowance would mean that the debt does not count towards the debt limit of § 109. Under § 109(e), “[o]nly an individual with regular income that owes, on the date of the filing of the petition, non-contingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525 can be a debtor under chapter 13. The debt limits apply equally to married couples filing jointly.” 11 U.S.C. 109(e). With these two motions, Debtors seek a total reclassification of $832,015.35 to unsecured, which exceeds the unsecured debt limit by nearly double. Consequently, Debtors seek a Court determination that these portions do not count towards the debt limit. Rep. 12, ECF No. 38. Otherwise, by prevailing on these motions, the Debtors would render themselves ineligible for chapter 13.
F.Creditor’s additional response.
Creditor put forth additional briefing in support of its opposition. Cr. Rep., ECF No. 46. Creditor asserts that the Blueberry Hill Property is actually the Debtors’ principal residence, meaning the first mortgage claim cannot be bifurcated. Id.
In the event the Court finds this to be investment property, the Creditor believes it must be paid the secured portion of its claim in full over the life of the chapter 13 plan with Till interest. Id. Creditor argues that the 270-month repayment proposed by the Debtors exceeds the 60-month applicable commitment period for the chapter 13 plan. Id. at 12. According to Creditor, the current prime rate is 3.25% and a risk adjustment of 3% is appropriate given Mr. Wimmer’s prior chapter 7 filing, which indicates he is a credit risk. Id. If paid over the life of the plan, the total monthly payment, assuming a Till interest rate of 6.25%, would be $11,340.59 per month. Id. at 12-13. Creditor asserts that the plan is entirely infeasible where Debtors’ gross monthly income on the petition is $10,792.08 per month. Id. at 13.
G. Creditor’s objection to confirmation.
Creditor also objects to confirmation of the Debtors’ plan on the grounds that the plan does not propose to repay any arrears on account of the first mortgage, and on the grounds that the Creditor objects to the motion to avoid liens. Obj. Conf. 1, ECF No. 25. Arrears are allegedly $207,990.03. Id.
Discussion
I. Matters relevant to the motions to avoid liens.
For the reasons set forth below, the Court dismisses the case, thereby mooting the motions to avoid liens. See Aetna Life Ins. Co. v. Haworth,
I. Liens may still be avoided where the •property is not a principal residence.
Creditor contends that § 1322(b)(2) and Pond only allow the Debtors to avoid liens against their principal residence, not against investment property. Creditor misreads the law. Section 1322(b) states that a chapter 13 plan may, among other things, “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 .... ”
The “anti-modificatiоn” exception of § 1322(b)(2) prohibits the debtors from modifying certain secured claims against their principal residence. Nobelman,
This is consistent with Pond. In that case, the Second Circuit held that a debtor could avoid a junior mortgage holder’s liens. Id. at 127. The Second Circuit held
The same is true here. Creditor is not the holder of a “claim secured only by a security interest in real property that is the debtor’s principal residence.” 11 U.S.C. § 1322(b)(2). Creditor’s “rights in [its] lien are not protected by the anti-modification exception of § 1322(b)(2)” and may be modified. Pond,
II. The liens may still be avoided if the plan is infeasible.
Creditor next contends that the motion should be denied as the Debtors have not proposed a feasible plan for confirmation. Creditor’s opposition is based on Debtors’ insufficient income to propose a confirmable plan that will pay the full amount of Creditor’s secured claim plus interest over the life of the plan. Presumably, Creditor objects to the avoidance of its lien in the event that the Debtors’ chapter 13 plan is not confirmed.
Proof that the debtor will ultimately be able to confirm a plan is not required before the Court may entertain a motion to avoid a lien. “[T]he proper mechanic to value the mortgage lien under § 506(a) in chapter 13 cases is to bring a motion pursuant to Rules 3012, 9013, and 9014.” In re Miller,
If Creditor is correct that the debtors’ plan is unconfirmable, its lien will be reinstated. Failure to cоnfirm a plan will lead to dismissal or conversion of the case. 11 U.S.C. § 1307(c)(5). Upon dismissal, the liens will be restored. In re Wapshare,
II. Confirmation of the Debtors’ chapter 13 plan is denied.
A. Debtors cannot cure and maintain payments while also electing cram down.
Section 1325 sets forth the requirements for chapter 13 plan confirmation. One of the provisions, § 1325(a)(5), provides three options for dealing with a secured claim. The plan can provide for surrender of the collateral that secures the claim, provide a treatment the creditor will accept, or pay the claim in an amount “not less than the allowed amount of such claim.” In re Morales,
An allowed claim of a creditor sеcured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property ... and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim.
11 U.S.C. § 506(a); see also Rash,
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 provide the creditor with payments, over the life of the plan, that will total the present value of the allowed secured claim, ie., the present value of the collateral, see § 1825(a)(6)(B)®. The value of the allowed secured claim is governed by § 506(a) of the Code.
Id. at 957,
The duration of a chapter 13 plan is defined by reference to the “applicable commitment period” of § 1322(d) and § 1325(b)(4). Sections 1322(d) and 1325(b)(4) both provide that plans may be three or five years. If the debtor’s current monthly income, when multiplied by 12, is less than the median income of the state for a family of the debtor’s family’s size, the applicable commitment period is three years. 11 U.S.C. § 1325(b)(4)(A)®. If the debtor’s household income is greater than the state median, the applicable commitment period is “not less than 5 years....” 11 U.S.C. § 1325(b)(4)(A)(ii). In either case, “the court may not approve a period that is longer than 5 years.” 11 U.S.C. § 1322(d).
When combined with 1325(a)(5)(B), the applicable commitment period of §§ 1322(d) and 1325(b)(4) appears to mandate that the debtor pay the entire amount of all secured claims over a maximum of five years. This result would make it impossible for many chapter 13 debtors to retain their homes. The debtor would be forced to pay the entire balance of their home mortgage over five years regardless of the remaining term of the note.
The solution lies in § 1322(b)(5), which states that the plan may
notwithstanding paragraph (2) of this subsection, 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....
Under § 1322(b)(5), the plan may cure arrears on account of a secured claim, such as a home mortgage, through the chapter 13 plan. Aside from curing the default through the plan, the debtor also maintains the contractual monthly payment. 11 U.S.C. § 1322(b)(5). Section 1322(e) expressly excludes the § 506(a) valuation from the calculation of the amount necessary to cure the default under § 1322(b)(5), and mandates that the cure amount be determined in accordance with the applicable agreement and nonbank-ruptcy law. Moreover, § 1322(b)(5) expressly states that the debtor can cure and maintain “notwithstanding paragraph (2) of this subsection,” meaning that the anti-modification provision is not violated where the debtor seeks to cure and maintain a loan secured in his or her principal residence. “The effect of 1322(b)(2) and (5) is to potentially split the treatment of mortgagee’s secured claim by the plan— one secured claim for the mortgage going forward and one secured claim for the arrearage — but it does not compromise the amount of the aggregate secured claim or the rights of the secured creditor to recover the arrearage.” Universal Am. Mortg. Co. v. Bateman (In re Bateman),
Where the claim is allegedly secured in investment property, cram down is not
In In re Tavella,
The same reasoning has been followed in this Circuit. In In re Koper,
Recently, the court in In re Bullard,
The Court agrees with the foregoing cases and finds that the Debtors cannot cram down a secured claim while also maintaining the repayment term of the original contract. The Debtors have made no provision for the secured claim in the amended plan, making the plan unconfirmable as it stands. See 11 U.S.C. § 1325(a)(5). Confirmation is denied, and the request to utilize both §§ 1325(a)(5)(B)(ii) and 1322(b)(5) is denied.
B. Debtors must pay TM interest.
If utilizing § 1325(a)(5)(B)(ii), the debtor must pay “the value, as of the effective date of the plan” of the allowed amount of the secured claim. As noted above, the secured claim is determined with reference to § 506(a). “In Till, a pre-BAPCPA case, the Supreme Court addressed the appropriate method for determining the interest rate on the secured portion of a claim that was bifurcated under section 506.” In re Velez,
Debtors propose to use the contractual interest rate that varies from the Till rate. This treatment was rejected in Chrysler Fin. Co., LLC v. Taranto (In re Taranto),
The Court agrees with the analysis in Taranto. “The requirement that the ‘value’ of the property to be distributed be determined ‘as of the effective date of the plan’ incorporates the principle of the time value of money.” Till,
In deciding the appropriate risk adjustment, the court should consider “evidence included in the debtor’s bankruptcy filings, such as work history, job stability, cash flow, disposable income, the existence or absence of prior bankruptcy filings, and the contents of the Chapter 13 plan.” In re Martinez,
In any event, the proposed plan provides for no payments on account of the secured claim. Confirmation is denied. The request to set an interest rate other than the Till rate is denied.
III. Debtors’ case is dismissed due to ineligibility for chapter 13 relief.
Debtors ask the Court to detеrmine that the potential deficiency claims of the Creditor are not part of the “debt limit” of § 109(e). Section 109(e) provides
Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525, or an individual with regular income and such individuals spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $383,175 and noncontin-gent, liquidated, secured debts of less than $1,149,525 may be a debtor under chapter 13 of this title.
Also relevant is § 101(12), which defines “debt” as “liability on a claim.” Claim is a broad term, defined in § 101(5)(A) to be a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”
This case is a “chapter 20” bankruptcy in which the debtor files a chapter 7, receives a chapter 7 discharge, and then files a subsequent chapter 13. Where a chapter 7 discharge was issued within four years of the debtor’s chapter 13 petition date, § 1328(f)(1) renders the debtor ineligible for a chapter 13 discharge. While this provision eliminates a significant motivation for filing a chapter 13 case, the debtor can still utilize the chapter 13 plan to, among other things, avoid liens. See, e.g., In re Wapshare,
Mr. Wimmer’s personal liability to Creditor was discharged in the chapter 7 case. 11 U.S.C. § 727(b); Johnson v. Home State Bank,
The issue is whether the unsecured portions of these liens count towards the debt limit despite unenforceability against the Debtors personally. The Court concludes that those portions must be included in the calculation.
A. The underwater portions of the liens are unsecured claims despite the chapter 7 dischargе.
Notwithstanding Mr. Wimmer’s discharge, the Creditor still holds a bankruptcy claim for the unsecured deficiency. The Court agrees with the reasoning in In re Miller,
This treatment of an unsecured mortgage debt as an unsecured claim, even though the debtor has no personal liability, is consistent with the Supreme Court’s decision in Johnson v. Home State Bank,501 U.S. 78 ,111 S.Ct. 2150 ,115 L.Ed.2d 66 (1991), which held that a mortgage lien for which the debtor no longer has personal liability as the result of a chapter 7 discharge is a claim as defined under the Bankruptcy Code, and is a claim which may be treated in a chapter 13 plan.
Under Johnson, the in rem rights of the Creditor against the property create a secured claim in the bankruptcy case notwithstanding the discharge of personal liability.
Secured claims are also valued pursuant to § 506(a), whiсh only leaves only two possible results: a secured portion to the extent of the value of the collateral and an unsecured portion to the extent of the deficiency. There is no provision in
B. Unsecured portions of liens count towards the debt limit in chapter 13 cases where there is not a prior chapter 7 discharge.
In the ordinary chapter 18 case, where there is no prior chapter 7 discharge during the four years preceding the petition date, the unsecured portions of avoided liens count towards the debt limit even if the claims were originally filed as secured. See Scovis v. Henrichsen (In re Scovis),
C. The chapter 7 discharge does not remove the deficiency claims from the eligibility analysis.
The issue is whether the chapter 7 discharge affects the analysis under § 109(e) by rendering the now-unenforceable unsecured portions irrelevant. The analysis must begin with the language of § 109(e). U.S. v. Ron Pair Enters., Inc.,
Second, the legislative history to § 101(12) makes clear that the word “debt” is merely a different way to say “claim.” The House and Senate Reports state that “the terms are coextensive: a creditor has a ‘Claim’ against the debtor; the debtor owes a ‘Debt’ to the creditor.” H.R.Rep. No. 95-595, at 310 (1977); S.Rep. No. 95-989, at 23 (1978). While the court should look to the text of a statute first and foremost, legislative history can be used to “shed a reliable light on the enacting Legislaturе’s understanding of otherwise ambiguous terms.” Exxon Mobil Corp. v. Allapattah Svcs., Inc.,
Another possible interpretation is that the debt is not “owed” under § 109(e) by virtue of the discharge. At least one court has reached this conclusion. Peoples Bank v. Winder (In re Winder),
The case In re Dabrowski,
The debt is still “owed” notwithstanding the discharge; it is merely unrecoverable from the debtor personally. If it is not paid, the landlord (or, as in this case, the secured lender) can exercise other state law remedies. See In re Scotto-DiClemente,
This does not mean that every debt discharged in chapter 7 will count towards the debt limit in a subsequent chapter 20 case. To be a “debt” for purposes of § 109(e), there must be a “claim.” 11 U.S.C. § 101(12). Here, the secured debts constitute “claims” by virtue of the John
In reaching the same conclusion, the bankruptcy court in In re Scotto-DiClemente,
the U.S. Supreme Court in Johnson, supra, reaffirmed that the undischarged in rem claim remaining after a Chapter 7 discharge is subject to the treatment in a subsequent Chapter 13 case. As a result, the Court must also include the unsecured in rem claim when determining a debtor’s eligibility for relief under § 109(e).
Id. at 570-71.
The Court disagrees with the case cited by Debtors, Cavaliere v. Sapir,
D. Dismissal is appropriate.
Section 1307(c) provides that the court may dismiss or convert a chapter 13 case “for cause” upon request of a “party in interest.” Section 1307(c) also requires “notice and a hearing.” Notwithstanding the request, notice, and hearing requirements in § 1307(c), courts have held that § 105(a) empowers the court to dismiss a case sua sponte if the debtor is ineligible for relief. In re Moore,
Section 105(a), which allows the court to “issue any order, process, or judgment that is necessary or aрpropriate to carry out the provisions of this title,” was recently construed by the Supreme Court in Law v. Siegel, — U.S.-,
The Court does not believe that sua sponte dismissal for non-eligibility contravenes the request, notice, and hearing requirements in § 1307(c), as the Court does not believе that reliance on § 1307(c) is necessary. Dismissal can be accomplished through §§ 109(e) and 105(a) without § 1307(c). Sections 1307(c) and 109(e) deal with different scenarios. Section 1307(c) “sets out the standard (‘cause’) that a bankruptcy court must apply in deciding whether, in its discretion, an already filed Chapter 13 case should be dismissed or converted to Chapter 7.” Marrama v. Citizens Bank of Mass.,
The uncontroverted valuation in this case shows that the Blueberry Hill Property is worth $545,000. If it is not a principal residence, and is therefore subject to bifurcation under § 506(a), the unsecured portion is $678,033.54. This exceeds the unsecured debt limit. If it is a principal residence, the uncontested secured claim is $1,223,033.54, which exceeds the secured debt limit. Under either scenario, the Debtors are ineligible for chapter 13, and judicial resources would be preserved by dismissal of the case.
Conclusion
For the foregoing reasons, the Court denies confirmation and dismisses the case. The Creditor should submit an order consistent with this decision.
Notes
. Unless otherwise noted, all sectional references are to the United States Bankruptcy Code, 11 U.S.C. §§ 101-1532 (2012).
. Mr. Wimmer's chapter 7 case will be hereinafter short cited as “chapter 7 case.”