Russell K. Materne
Before the Court are objections by secured creditors to confirmation of Chapter 13 plans in two unrelated cases. While the plans and the confirmation objections of the secured creditors are not identical, the cases share certain common issues presented by Chapter 13 “sale” plans, pursuant to which a debtor treats the claim of a secured creditor, including prepetition arrears, by proposing to sell the debtor‘s principal residence that secures the mortgage during the term of the plan. In the plans before me, the debtors do not specify a time for the sales to occur, such that the sales could take place at any time before the respective plan terms expire. As the objections to confirmation raise overlapping legal issues related to sale plans, I am issuing a single memorandum of decision to address the issues together. For the reasons set forth below, I will sustain the objections of the secured creditors in each of the cases.1
A. Dominique J. Gnaman
On June 6, 2019, Dominque J. Gnaman filed a petition for relief under Chapter 13 of the
Wilmington objects (Case No. 19-40930, Dkt. No. 36) to confirmation of the Chapter 13 plan (Case No. 19-40930, Dkt. No. 26) proposed by Mr. Gnaman.2 Mr. Gnaman seeks to cure his prepetition arrears by selling the property that secures Wilmington‘s mortgage at any time up to the conclusion of the plan‘s 60-month term. The plan provides that, until the property is sold, Mr. Gnaman will pay contractual monthly mortgage payments directly to Wilmington. Mr. Gnaman proposes to pay Wilmington the full amount of its claim from proceeds of the proposed
Mr. Gnaman addresses Wilmington‘s secured claim in two sections of his plan, each of which must be considered to determine Wilmington‘s plan treatment. Part 3.A.2 of the plan, Maintenance of Contractual Installment Payments (To Be Paid Directly to Creditors), provides that Mr. Gnaman will directly maintain contractual mortgage payments to Select Portfolio Servicing, Inc.4 “outside” of the plan, meaning that the debtor will make the payments directly to the mortgagee, instead of through the Trustee as a conduit.5 Additionally, in Part 8.6 of the plan, Nonstandard Plan Provisions, the debtor proposes to pay the balance of the mortgage claim of Wilmington in a lump sum (sometimes called a “balloon payment“), including prepetition arrearages, through the sale of the Franklin Property. Mr. Gnaman‘s plan specifically provides that:
Subject to further order of the Court[,] the Debtor is to sell his real property located at 102 Jordan Rd., Franklin, MA 02038-1219[.]
Proceeds of the sale shall be distributed as follows:
(1) To pay any secured claim against the property[,] including a mortgage to Select Portfolio Servicing, Inc[;]
(2) To pay any expenses associated with a real estate transaction, including but not limited to, attorney‘s fees, closing costs, realtor commissions;
(3) Any exempt funds shall be retained by the debtor; and
(4) Any non-exempt funds shall be turned over the standing trustee to pay creditors.
Gnaman Plan 6, Part 8.6.
Mr. Gnaman left Part 3.A.1 of the plan blank, which references “prepetition arrears to be paid through this plan.” There is also no timetable associated with the sale of the Franklin Property, so Mr. Gnaman is proposing to retain the Property for a period of up to 60 months in which he would sell the Franklin Property and pay Wilmington‘s claim balance from the sale proceeds of its collateral. The debtor does not provide for any alternative treatment of Wilmington‘s claim if the Franklin Property is not sold during the 60-month plan period.
There does not appear to be any sale presently in prospect. Mr. Gnaman has never sought to employ a broker to list the Franklin Property in his case. Wilmington also asserts, upon information and belief, the property is not listed for sale.
In its objection, as supplemented by its additional briefing, Wilmington objects to the plan on numerous grounds.6 Specifically, Wilmington argues that (i) cure of Mr. Gnaman‘s default under a 60-month sale plan is an unreasonable period of time and, because it is does not provide for cure “within a reasonable time,” runs afoul of the anti-modification provision of
B. Russell K. Materne
On January 7, 2020, Russell K. Materne filed a petition for relief under Chapter 13 of the
BoA has filed two separate objections to confirmation, (Case No. 20-40027, Dkt. No. 50, the “First Mortgage Objection“)7 and (Case No. 20-40027, Dkt. No. 68, the “Second Mortgage Objection“), of the debtor‘s Chapter 13 plan (Case No. 20-40027, Dkt. No. 25).8 Mr. Materne proposes to cure his prepetition arrears by selling the property that secures BoA‘s first and second mortgages at any time prior to the conclusion of the plan‘s 36-month term. Until the property is sold, Mr. Materne proposes to make monthly “adequate protection” payments to BoA
With respect to the specific treatment of BoA under his plan, Mr. Materne marked “none” in Part 3 of the plan governing secured claims and addresses the BoA claims entirely in Part 8 of his plan, Nonstandard Plan Provisions. In Part 8.7 of the plan, which the debtor captions “[t]reatment of secured lender mortgage / sale [p]lan,” the debtor notes that he and his non-filing spouse will sell the Carlisle Property, which will be subject to further order of the Court, and that the claims of BoA, including prepetition arrearages, will be paid in a lump sum from the proceeds of such sale. The plan specifically provides that:
Proceeds of the sale shall be distributed as follows:
(1) To pay any secured claim against the property[, u]pon information and belief there is a first and second mortgage held against the [Carlisle Property] to Pnc Mortgage[;]
(2) To pay any expenses associated with a real estate transaction, including but not limited to, attorney‘s fees, closing costs, realtor commissions;
(3) The non-filing spouse shall retain her 50% interest in the net sale proceeds;
(4) Any exempt funds shall be retained by the debtor; and
(5) Any non-exempt funds, to the extent necessary to pay claims, shall be turned over the standing trustee to such creditors.
The Chapter 13 Trustee is to make monthly adequate protection / maintenance payments to the secured lender in the amount of $1,525.50 per month. Said payment shall include impounding for property tax and property insurance.
The adequate protection payment shall cease upon the earliest of (1) dismissal of the case, (2) [conversion] of the case to another chapter, (3) the filing of a further amended plan, (4) [a]pproval by the Court of a [h]ome loan [m]odification, (5) Order of the Court to cease the payments on the [m]otion of the [d]ebtor or other interested party, [or] (7) [t]he Court granting relief from the automatic stay as to the subject property.
Id.11
There is no timeline proposed for the sale of the Carlisle Property, so Mr. Materne is proposing to retain the Carlisle Property for a period of up to 36 months during which he and his non-debtor spouse would sell the property and pay BoA‘s claims in full from the sale proceeds. The debtor does not provide for any alternative treatment of BoA‘s claims if the Carlisle Property is not sold during the plan term. With respect to the first mortgage, BoA states that the monthly post-petition mortgage payments total $4,727.63 and that the proposed adequate protection payments of $1,525 do not cover the tax and insurance escrow amount of $1,931.70.
There does not appear to be any sale presently in prospect regarding the Carlisle Property. Mr. Materne notes he has been “self-marketing” the property since the commencement of the case and that he is working on unspecified improvements to the property “to make it more marketable.” Materne Br. 3 (Case No. 20-40027, Dkt. No. 89). In his response to the First Mortgage Objection, Mr. Materne states he has employed a real estate broker, see Materne Resp.
In the First Mortgage Objection, as supplemented,12 BoA argues that (i) Mr. Materne‘s attempt to reduce contractual payments and cure the prepetition default through a sale is a modification that violates the anti-modification provision of
II. JURISDICTION
This Court has jurisdiction over confirmation of a plan, which arises under the
III. DISCUSSION
A court shall confirm a Chapter 13 plan if it meets all of the confirmation requirements of
The debtors’ plans provide that the secured claims of Wilmington and BoA, respectively, including amounts necessary to cure prepetition arrearages, will be paid in full through a sale at some unspecified time during the term of the plan. Each of the debtors request that his plan be confirmed over the secured creditors’ objections and attempt to cure prepetition arrearages through a sale, although in Mr. Materne‘s case, the debtor takes great care to avoid characterizing his treatment of BoA‘s claims as a “cure” of prepetition arrears.13 Both debtors
With respect to the Wilmington objection, Mr. Gnaman also acknowledges in his supplemental brief that the plan is silent as to which subsection of
Rather the Debtor is simply paying the claims in full through the sale of the property. It is completely unnecessary to use any provision of
11 U.S.C. §1322 (b) for the full payment of a claim.
Materne Br. 5 (Case No. 20-40027, Dkt. No. 89).
Each debtor argues that the unrestricted duration of obtaining a sale over the life of a Chapter 13 plan is appropriate, arguing that the only temporal limitation under the Bankruptcy Code to effectuate a “cure through sale” is the statutory plan term limit under
A. Application of §§ 1322(b) and 1325(a)(5)
“Sections 1322 and 1325 establish, respectively, the content and methods of confirming a proposed reorganization plan.” Wells Fargo Bank, N.A. v. Sagendorph (In re Sagendorph), 562 B.R. 545, 547 (D. Mass. 2017).
Determination of the objections to confirmation of the “sale” plans in these cases require me to construe several provisions of both
As discussed,
It is uncontroverted that each plan complies with
Upon the Court‘s review, cases prohibiting balloon payments as contrary to the history or purpose of
§ 1325(a)(5)(B)(iii)(I) do so based on unsupported judicial speculation, rather than formal legislative history[.]. . .
This lack of cited authority is not surprising, as the only formal legislative history found by this Court . . . merely echoes the wording of the subsection, without any insight as to the purpose of its enactment.
. . .
[I]t seems that Congress intended to give creditors more certainty and regularity as to any proposed [sic] stream of payments. Requiring any stream of payments to be equal falls within the periodic payments language and functions in tandem with Congress‘s concerns over protecting holders of claims secured by personal property (as evident from
§ 1325(a)(5)(B)(iii)(II) ). Accordingly, the Court determines that Congress had reasons other than prohibiting balloon payments in enacting the equal payment provision—reasons that fit more naturally with the language of the statute, and that are not implicated by the Debtor‘s Plan.. . .
Moreover, the majority rule runs against the grain of Chapter 13‘s underlying purposes. “In determining the meaning of the statute, we look not only to the particular statutory language, but to the design of the statute as a whole and to its object and policy.” . . . The interpretation argued by the [majority] would go against Congress‘s intent to provide a flexible means for the debtor to protect his assets, most importantly those assets necessary to pay his creditors by completing his plan, such as a house to live in or car to drive to work. This flexibility is evident in the structure of Chapter 13 itself. . . . This flexibility is further reflected in the legislative history.
In re Cochran, 555 B.R. at 901–02, 904-05 (internal citations omitted).
How does the equal payments provision of
Section 1322, entitled “Contents of Plan,” lists mandatory and optional provisions that a debtor may propose in a plan. See
Section
Section
Subsection 1322(b)(3) broadly permits [a chapter 13] plan to provide for the curing or waiving of any default and subsection (b)(5) permits the plan 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.
In re Vertullo, 610 B.R. 399, 406 (B.A.P. 1st Cir. 2020) (quotations and citations omitted). The primary difference between the subsections, is that
While the general cure provision of
Section 1322(b)(5) states that, “notwithstanding” the anti-modification prohibition for debt secured by a debtor‘s principal residence of
While these debtors argue that the provisions of
B. Does § 1325(a)(5)(B)(iii) apply to postpetition contractual “maintenance” payments?
If a debtor is providing for payment of a long-term home mortgage loan in a plan, the Code would appear to require a debtor to comply with
As used in
§ 1328(a) , that phrase is commonly understood to mean that a plan ‘makes a provision’ for, ‘deals with,’ or even ‘refers to’ a claim. [Citation omitted]. In addition,§ 1328(a) unmistakably contemplates that a plan ‘provides for’ a claim when the plan cures a default and allows for the maintenance of regular payments on that claim, as authorized by§ 1322(b)(5) . Section 1328(a) states that ‘all debts provided for by the plan’ are dischargeable, and then lists three exceptions. One type of claim that is ‘provided for by the plan’ yet excepted from discharge under§ 1328(a) is a claim ‘provided for under section 1322(b)(5) of this title.’§ 1328(a)(1) . If claims that are subject to§ 1322(b)(5) were not ‘provided for by the plan,’ there would be no reason to make an exception for them in§ 1328(a)(1) .
Some courts have distinguished Rake in other contexts and others have come to a different conclusion as to whether maintenance payments are “provided for under the plan.” See, e.g., Cohen v. Lopez (In re Lopez), 372 B.R. 40, 49–50 (B.A.P. 9th Cir. 2007), aff‘d and opinion adopted, 550 F.3d 1202 (9th Cir. 2008) (holding, in the context of a Chapter 13 trustee‘s objection to maintenance payments being made directly to a lender outside the plan, that regular, postpetition maintenance payments are in amounts no different from what the debtor would have paid had he or she never defaulted and are not modified by the Chapter 13 bankruptcy and not provided for by the plan); In re Bullard, 475 B.R. 304, 308–309 (Bankr. D. Mass. 2012), aff‘d, 494 B.R. 92 (B.A.P. 1st Cir. 2013) (in the context of a hybrid plan appearing to involve multi-unit property in which one of the units is the debtor‘s principal residence and with respect to which the creditor did not object to bifurcation based on the nature of the property, concluding that under
In Lopez, the Bankruptcy Appellate Panel for the Ninth Circuit addressed the “provided for” language in the context of determining whether direct payments could be made to a home mortgage lender and ruled that “[w]hile this is a difficult issue, with arguments on both sides, this panel nevertheless concludes that the ongoing maintenance payments are not modified by the Chapter 13 bankruptcy.” In re Lopez, 372 B.R. at 50. The court was persuaded by the following passage in Rake as supporting its conclusion: “‘[a]s authorized by
…Rake assumed that the entire home mortgage claim was comprised of two separate parts. First, there is the amount in arrears. This amount consists of prepetition obligations due but not paid—that is, the claims are “mature“—as of the filing. Second, there is the regular, ongoing post-petition maintenance payments, in amounts no different from what the debtor would have paid had he or she never defaulted. These consist of obligations under the relevant documents that, but for any pre-petition acceleration of maturity, would be unmatured as of the filing. Thus, bankruptcy law and the plan only modify the claim in relation to the scheduled payments in default at filing. Post-petition payments are different; they are ongoing payments, not due at filing, which will continue to be made after plan completion. They are not altered by the plan.
In re Lopez, 372 B.R. at 48–49. The Lopez court concluded any statements that could be read to classify maintenance payments as being “provided for” by a plan in Rake should be viewed as distinguishable dicta since the focus in that case was the treatment of payments necessary to cure arrears and there was other language in Rake “contradict[ing] the unitary view of home mortgage claims.” Id. at 48.26
“The Bankruptcy Code does not define ‘maintenance of payments,’ but courts have interpreted this provision to mean the original contractual payments of principal and interest over
C. Does § 1325(a)(5)(B)(iii) preclude lump-sum payoffs upon the sale of a principal residence?
First, the Bankruptcy Code does not expressly contemplate post-confirmation adequate protection payments as part of a plan. Section 361 provides the means by which adequate protection may be provided when required by
The majority holds this subsection prohibits balloon payments. See, e.g., In re Miceli, 587 B.R. 492, 502 n.13 (Bankr. N.D. Ill. 2018) (noting the “nearly universal line of cases which ha[ve] held that the subsection prohibits balloon payments“). These cases argue a balloon payment is part of the stream of periodic payments. It follows that the monthly payments and eventual balloon payment are periodic payments not in “equal monthly amounts.” . . . A growing minority view interprets the “periodic payments” language differently.
In re Olsen, 604 B.R. at 803 (in case were modification was permissible under
The BAP has followed the majority view and has ruled that a “balloon payment” at the end of a 60-month plan violated
Courts adopting the minority interpretation have held that, where applicable,
Because “periodic” payments are regularly reoccurring and balloon payments are not, balloon payments are not “property to be distributed ... in the form of periodic payments” and, consequently, are outside the scope of
§ 1325(a)(5)(B)(iii)(I) . This conforms with the common and technical understanding of these terms. For example, Webster‘s Third New International Dictionary defines “periodic” as something that is “characterized by periods,” occurs “at regular intervals,” and occurs “repeatedly from time to time.” … These definitions establish that a final, balloon payment is distinct and separate from the preceding “periodic payments.” Accordingly, it is only the periodic payments—and not the balloon payment—that are subject to the “equal monthly amounts” directive of§ 1325(a)(5)(B)(iii)(I) .The language of
§ 1325(a)(5)(B) indicates that the property distributed on account of a claim need not be of a singular type and need not be made in a singular manner. Importantly,§ 1325(a)(5)(B)(iii) does not include a definite article, such as ‘the.’ For example, the related, immediately preceding provision—§ 1325(a)(5)(B)(ii) —refers to ‘the value, as of the effective date of the plan, of property,’ indicating that there is only one value, but allowing for numerous articles ‘of property.’ Section 1325(a)(5)(B)(iii) does not state ‘if the property to be distributed pursuant to this subsection;’ rather, it states ‘if property.’
In re Cochran, 555 B.R. at 898–99.
It is difficult to conceive that Congress would have intended to prohibit confirmation of a plan that proposed to maintain contractual mortgage payments, cure arrears, and pay off the full amount of the secured claim in a reasonable period of time upon the sale of a property in which the mortgagee enjoys an equity cushion where the debtor demonstrates a good faith reason for delaying the sale.29 Yet, as discussed above, a majority of courts that have considered this issue have concluded that the equal payment provision of
The Code does provide some flexibility for plans to cure and satisfy allowed secured claims through a sale that might allow confirmation of a plan similar to the hypothetical plan discussed above. I interpret
The minority position is appealing and could be said to give life to both
D. Another path: §§ 1322(b)(8) and 1325(a)(5)
Each of the debtors argues that payment of a secured claim in full through a sale is consistent with
If the plans were to be amended to provide for a sale that is in prospect at the time of or at a reasonable time after confirmation, all statutory confirmation requirements must be met, and each debtor would have to demonstrate the reasonableness of the proposed timing for the sale and payment of the claim, feasibility, and good faith. Section 1325(a)(6) requires that “the debtor will be able to make all payments under the plan and to comply with the plan,”
In determining whether confirmation of a debtor‘s sale plan is appropriate, some courts have focused on the feasibility requirement in the context of determining the “reasonableness” of a proposed cure period and have required that sale plans identify, with sufficient specificity, the terms of the sale, including the listing price and terms, a timeline for the proposed sale, and a default remedy or other alternative if the sale fails to close within the proposed time frame. See In re Weltlich, No. 12-30181, 2012 WL 3782553 (Bankr. N.D. Ohio Aug. 31, 2012) (determining sale plan was reasonable and feasible effort, following listing of property for sale); In re Erickson, 176 B.R. at 758 (denying confirmation because plan failed to provide any specifics of conditions or timing of sale); In re Newton, 161 B.R. at 218 (finding that court cannot confirm a plan unless specifics of condition and timing of the sale are provided). As one court explained:
The plan should specify the terms under which the debtor proposes to market the property, including the listing price and the length and commencement date of the listing agreement. It also should incorporate a default remedy to relieve the affected mortgagee(s) from the automatic stay, if the sale does not close by the end of the proposed cure period. If an affected mortgagee objects to confirmation, the debtor must produce evidence as to past marketing efforts, the state of the market for the subject asset, current sale prospects, the existence and maintenance of any “equity cushion” in the property, and all other circumstances that bear on whether the creditor will see its way out of the case financially whole. If the debtor cannot produce anything more than remote speculation as to the terms or date of a sale; if market conditions are eroding the value of the collateral; if the debtor‘s efforts at a sale are not directed or energetic enough; or if any other factors demonstrate that the creditor will not receive the value of its secured rights within a circumscribed, specified, and “reasonable” cure period, the court cannot confirm the plan.
In re Erickson, 176 B.R. at 757–58. Courts typically focus on whether a plan that provides for a sale of property has the necessary specificity to show that the debtor will be able to make all payments contemplated under the plan in order to meet the feasibility requirement of §
A plan must also be proposed in good faith in order to be confirmed.
- debtor‘s accuracy in stating her debts and expenses,
- debtor‘s honesty in the bankruptcy process, including whether she has attempted to mislead the court and whether she has made any misrepresentations,
- whether the Bankruptcy Code is being unfairly manipulated,
- the type of debt sought to be discharged,
- whether the debt would be dischargeable in a Chapter 7, and
- debtor‘s motivation and sincerity in seeking Chapter 13 relief.
Sullivan v. Solimini (In re Sullivan), 326 B.R. 204, 212 (B.A.P. 1st Cir. 2005). Good faith is ultimately “a concept, not a construct” that “derives from equity.” In re Puffer, 674 F.3d at 81. Wilmington appears to seek a bad faith determination premised on Mr. Gnaman‘s filing of a plan which requires a sale in order to be feasible. BoA argues that Mr. Materne‘s failure to address postpetition payments in a manner that would not increase postpetition arrears is bad faith. While the proposal of a sale plan alone is insufficient to establish bad faith, see, e.g., In re Nardini, No. 15-10244, 2015 WL 9438292, at *3 (Bankr. D. Vt. Dec. 23, 2015) (finding that filing a plan reliant on loan modification does not rise to the level of bad faith), a sale plan proposing sale periods that could run through the last month of the term of the plan, unaccompanied by milestones related to actual efforts to sell, such as the hiring of a broker or the listing of the property by a date certain, and, in Mr. Materne‘s case, the accrual of significant postpetition arrears, may constitute circumstances from which a lack of good faith might be inferred. In each case, evidence of the reason for a delay in the sale process will weigh in the determination of good faith.
IV. CONCLUSION
Applying the rulings and principles above, I will enter orders sustaining the objections of Wilmington and BoA to confirmation of the respective plans. Mr. Gnaman‘s plan provides for a lump-sum payment after periodic payments in contravention of
As have other courts and commentators, I have struggled with the issues presented by the provisions of the Code governing treatment of claims secured by a home mortgage under a Chapter 13 plan. In some instances, arguments on each side of an issue are almost equally persuasive, but at the same time, unsatisfactory. These provisions of the Code would benefit from legislative amendment or appellate precedent that might make application of the statute more uniform, while retaining the flexibility governing the Chapter 13 plan process.
A separate order will enter in each debtor‘s case in accordance with this decision.
By the Court,
Dated: April 7, 2022
Christopher J. Panos
United States Bankruptcy Judge
Notes
It would be easy to read the plan as a “cure” plan, but the Debtor has not used the term “cure” in the plan. The Debtor has not listed the mortgage claims in part 3 of the plan. The Debtor is not treating the mortgage claims under
11 U.S.C. §1322 (b) (3) or(5) .
7 Norton Bankr. L. & Prac. 3d § 149:8.[l]ittle has been written concerning the term ‘waiving’ of defaults found in Code
§ 1322(b)(3) , as contrasted with the “curing” of defaults. It can be postulated that to cure a default means to remedy a failure to perform a duty, i.e., to restore to a condition of full compliance, whereas the “waiving” of a default would mean a breach of duty or failure to perform is forgiven or ignored.
124 Cong. Rec. S. 17, 423 (1978).Section 1322(b)(2) of the House amendment represents a compromise agreement between similar provisions in the House bill and Senate amendment. Under the House amendment, the plan may modify the rights of holders of secured claims other than a claim secured by a security interest in real property that is the debtor‘s principal residence. It is intended that a claim secured by the debtor‘s principal residence may be treated with under Section 1322(b)(5) of the House amendment. (emphasis added).
Wilmington Br. 6. (Case No. 19-40930, Dkt. No. 67).If unable to obtain the assent of the affected secured creditor, a Chapter 13 debtor must walk a fine line of putting forth a plan which both satisfies the requirements of § 1325(a)(5) while, at the same time, being able to show that the creditor at issue is adequately protected during the limited and clearly defined sale term of the plan. For example, if a debtor proposed a sale plan which indicated that the property at issue would be sold within a six month time frame, provided that the property had sufficient equity, it would seem that the creditor would not be entitled to relief from the automatic stay during this time frame. For that reason, the debtor would presumably need not propose payments to the creditor during such sale period. As such, the Debtor would not be burdened with the task of satisfying the “equal monthly amounts” provision of § 1325(a)(5)(B)(iii)(I) as the plan would not contemplate “periodic payments.”