Bullard v. Hyde Park Sav. Bank

• Decision Date: 24 May 2013
• Docket Number: BAP No. MB 12–054.,Bankruptcy No. 10–23503–WCH.
• Citation: 494 B.R. 92
• Parties: Louis B. BULLARD, Debtor. Louis B. Bullard, Appellant, v. Hyde Park Savings Bank, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, First Circuit

494 B.R. 92

Louis B. BULLARD, Debtor.Louis B. Bullard, Appellant,

v.Hyde Park Savings Bank, Appellee.

BAP No. MB 12–054.

Bankruptcy No. 10–23503–WCH.

United States Bankruptcy Appellate Panel of the First Circuit.

May 24, 2013.

David G. Baker, Esq., Boston, on brief for Appellant.

Andrew E. Goloboy, Esq. and Ronald W. Dunbar, Jr., Esq., Boston, on brief for Appellee. Tara Twomey, Esq., on brief for amicus curiae, National Association of Consumer Bankruptcy Attorneys.¹

Before HAINES, TESTER, and GODOY, United States Bankruptcy Appellate Panel Judges.

HAINES, Bankruptcy Judge.

Louis B. Bullard appeals the bankruptcy court's order denying confirmation of his third amended chapter 13 plan. As explained below, we AFFIRM.

Bullard's plan proposed to bifurcate Hyde Park Savings Bank's secured claim. It sought to reduce the secured portion of the claim to the value of the collateral and to pay the balance a dividend (cents on the dollar) as an unsecured claim. At the same time, the plan proposed that the secured portion of the claim would be paid beyond the plan's term. Such plans, which attempt to take advantage of the “modification” provisions of § 1322(b)(2)² and the “cure and maintain” provisions of § 1322(b)(5), are often referred to as “hybrid” plans.³

The court below concluded that the plan was inconsistent with governing sections of the Bankruptcy Code and, thus, was not confirmable.⁴ Although our rationale differs somewhat, we agree.

BACKGROUND

Hyde Park holds a mortgage on Bullard's residential real estate as security for repayment of a promissory note with a maturity date of June 2035. The home includes a second unit and, thus, is not exclusively his residence. His bankruptcy schedules posited that the property's value was less than what he owed Hyde Park and represented that, at filing, he was current on his payment obligations under the secured note. Neither point is in contest.

Bullard's plan proposed that Hyde Park's claim would be bifurcated; that the unsecured portion would be paid a dividend over 60 months; and that monthly payments, in the same amount as called for under the note, would be remitted directly to Hyde Park until the secured claim was fully paid. Specifically, the plan provided:

The Confirmation Order shall effectively reduce the secured claim held by Hyde Park Savings Bank to the value of the real estate securing the loan.... The unsecured portion of the claim shall be treated consistently with all other claims in this plan. Pursuant to Section 1322(b)(5) the Debtors [sic] shall continue to make monthly payments as determined by the terms of the note. The Bank shall allocate principal, interest and escrow in accordance with the terms of the note. The Debtor shall file a Motion for Entry of Discharge ... which shall also include a document reflecting this adjustment of the principal balance for recording purposes. The motion will seek an accounting from the Bank to ensure that as of the date of discharge, the [sic] principal balance is consistent with the terms of the plan.

In the event the case is dismissed prior to or without a discharge being entered, all payments received by the Bank from the Ch. 13 Trustee shall be applied to principal and interest in accordance with the terms of [sic] the note.

The bankruptcy court ruled, as a matter of law, that Bullard's hybrid plan was not confirmable. Bullard appealed. The bankruptcy court has continued generally the deadline for Bullard to file an amended plan, pending the outcome of this appeal.

JURISDICTION

A bankruptcy appellate panel is authorized to hear appeals “from final judgments, orders, and decrees [pursuant to 28 U.S.C. § 158(a)(1)], or with leave of the court, from interlocutory orders and decrees [pursuant to 28 U.S.C. § 158(a)(3)].” Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998) (internal quotations omitted). An interlocutory order “ ‘only decides some intervening matter pertaining to the cause, and which requires further steps to be taken in order to enable the court to adjudicate the cause on the merits.’ ” Id. at 646 (quoting In re American Colonial Broad. Corp., 758 F.2d 794, 801 (1st Cir.1985)). Previously, we have ruled that an order sustaining an objection to confirmation of a chapter 13 plan is not a final order if a debtor is free to propose an alternate plan. Watson v. Boyajian (In re Watson), 309 B.R. 652, 659 (1st Cir. BAP 2004), aff'd,403 F.3d 1 (1st Cir.2005) (citing Bentley v. Boyajian (In re Bentley), 266 B.R. 229, 233 (1st Cir. BAP 2001)).

Bullard moved for leave to appeal, arguing that courts in this circuit are divided on the issue whether hybrid plans can be confirmed. He asserted that, absent leave to appeal, the issue is unlikely to receive timely appellate guidance. In granting the motion, a decision which we ratify, we determined that the matter met pertinent standards for interlocutory review.⁵

STANDARD OF REVIEW

Appellate courts apply the clearly erroneous standard to findings of fact and de novo review to conclusions of law. Rockwood v. SKF USA Inc., 687 F.3d 1, 10 (1st Cir.2012). The bankruptcy court's order entered was based on its determination that, as a matter of law, Bullard's plan could not be confirmed over objection. We therefore proceed to review that conclusion de novo. Fed. Nat'l Mortgage Ass'n v. Ferreira (In re Ferreira), 223 B.R. 258, 260 (D.R.I.1998); Stornawaye Fin. Corp. v. Hill (In re Hill), 387 B.R. 339, 345 (1st Cir. BAP 2008).

DISCUSSION

I. Chapter 13 Modification, Maintenance, Distribution, and Discharge: Cross–Reference and Context

Massachusetts bankruptcy courts are split on the issue of hybrid plans. Compare In re Pires, 2011 WL 5330772, at *7, with In re McGregor, 172 B.R. 718 (Bankr.D.Mass.1994). Decisions elsewhere are in disarray. Compare In re Elibo, 447 B.R. 359, 363 (Bankr.S.D.Fla.2011) (adopting McGregor );⁶ and In re Pruett, 178 B.R. 7, 8 (Bankr.N.D.Ala.1995) (adopting McGregor ) with Enewally v. Washington Mutual Bank (In re Enewally), 368 F.3d 1165, 1171–72 (9th Cir.2004) (concluding hybrid plan incompatible with applicable Code provisions); Columbia Nat'l Inc. v. Brown (In re Brown), 399 B.R. 574, 575 (D.Conn.2008) (relying on Koper, infra, for proposition that § 1322 options are mutually exclusive); In re Fortin, 482 B.R. 35, 43 (Bankr.D.Mass.2012) (“After careful consideration of the matter, I am convinced that the Bankruptcy Code does not permit the use of subsections (b)(2) and (5) in the same plan with respect to the same claim.”); In re Hinkle, 474 B.R. 460, 465 (Bankr.M.D.Pa.2012) (“Consistent with this enduring principle [that liens pass through bankruptcy unaffected], any allowable modification of the Claim must occur within the term of the Plan.”); In re Martin, 444 B.R. 538, 545 (Bankr.M.D.N.C.2011) (agreeing with Enewally and rejecting hybrid plan); In re Valdes, No. 09–26712–BKC–AJC, 2010 WL 3956814 (Bankr.S.D.Fla. Oct. 4, 2010) (same); In re Russell, 458 B.R. 731, 739 (Bankr.E.D.Va.2010) (explaining how hybrid plan would negatively effect discharge exclusion for § 1322(b)(5) plan); In re Bulson, 327 B.R. 830, 847 (Bankr.W.D.Mich.2005) (relying on In re Stivender ); In re Stivender, 301 B.R. 498, 500 (Bankr.S.D.Ohio 2003) (“In other words, the invocation of § 1322(b)(5)'s cure and maintain provision does not change the fact that § 1322(b)(2)'s strip and pay provision is subject to the five year limitation of § 1322(d).”); In re Koper, 284 B.R. 747 (Bankr.D.Conn.2002) (“A secured claim that is modified by a plan is plainly ‘provided for’ by that plan, as contemplated by Section 1325(a)(5).... the time period allowed to amortize the modified secured claim is constrained by Section 1322(d); namely, the plan cannot provide for distributions which extend beyond five years”).⁷

Though it is tempting to start with a review of the case law, to assay how a chapter 13 plan may permissibly treat a secured claim, we properly commence our inquiry with the language of the Bankruptcy Code. See Shamus Holdings, LLC v. LBM Fin., LLC (In re Shamus Holdings, LLC), 642 F.3d 263, 265 (1st Cir.2011) (“Statutory interpretation starts—and often ends—with the text of the statute.”). When a statute is clear, “the sole function of the courts is to enforce it according to its terms.” Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 61 L.Ed. 442 (1917); accord Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 253–54, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992). Although our conclusion today springs directly from the Bankruptcy Code's terms, we eschew a declaration that it is simply a matter of “plain meaning.” ⁸ The answer to the puzzle posed by Bullard's hybrid plan can be drawn from the text of all pertinent Code sections touching on treatment of secured claims in chapter 13, but doing so requires a good deal of effort.

A. Section 1322(b)(2): Modification of Creditors' Rights

Subsection § 1322(b)(2) provides:

(b) Subject to subsections (a) and (c) of this section,[ ⁹] the plan may—...

(2) 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).

As Bullard's residential real estate includes a unit separate from the one in which he resides, Hyde Park's claim is not secured solely by his primary residence. Its note and mortgage are subject to modification by way of § 1322(b)(2).

“Rights” is not a defined term in the Bankruptcy Code, so we look to underlying state law to determine what creditor rights are subject to modification. See Butner v. United States, 440 U.S. 48, 54–55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (ownership and security interests, including the interest of a mortgagee, are created and defined by state law); see also Barnhill v. Johnson, 503 U.S. 393, 398, ...