Derham-Burk v. Mrdutt (In re Mrdutt)

• Decision Date: 06 May 2019
• Docket Number: Bk. No. 11-61029-HLB,BAP No. NC-17-1256-BTaF
• Parties: IN RE: David MRDUTT and Christina Mrdutt, Debtors. Devin Derham-Burk, Chapter 13 Trustee, Appellant, v. David Mrdutt; Christina Mrdutt, Appellees.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

600 B.R. 72

IN RE: David MRDUTT and Christina Mrdutt, Debtors.

Devin Derham-Burk, Chapter 13 Trustee, Appellant,

v.David Mrdutt; Christina Mrdutt, Appellees.

BAP No. NC-17-1256-BTaF

Bk. No. 11-61029-HLB

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on May 25, 2018, at San Francisco, California

Filed - May 6, 2019

Jane Z. Bohrer argued for appellant Devin Derham-Burk, Chapter 13 Trustee.

Before: BRAND, TAYLOR and FARIS, Bankruptcy Judges.

BRAND, Bankruptcy Judge:

Chapter 13¹ trustee, Devin Derham-Burk ("Trustee"), appeals an order granting the debtors' motion to modify their chapter 13 plan. The debtors proposed to modify their confirmed plan to surrender their residence to the lender. Trustee opposed the motion as untimely, because it was filed seven months after the debtors had completed their plan payments to Trustee. The bankruptcy court held that, because the debtors had not cured their prepetition mortgage arrears as provided for in the plan, the payments under the plan were not complete; therefore, the motion to modify was timely under § 1329(a). The court allowed the plan modification under § 1329(c) to surrender the residence, even though the 60-month time period set forth in § 1329(c) had already expired.

We agree with the bankruptcy court that the debtors' plan payments were not complete for purposes of § 1329(a). We conclude, however, that the debtors could not modify their plan to surrender their residence, because the surrender was a payment made outside the 60-month time limit. Accordingly, we REVERSE.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

David and Christina Mrdutt filed their chapter 13 bankruptcy case on November 30, 2011. Their residence, valued at $ 235,000, was encumbered by two deeds of trust in favor of Wells Fargo. Wells Fargo filed two related secured proofs of claim: one for $ 406,299.67 for the first lien (the primary mortgage), which included nearly $ 65,000 in prepetition arrears; and one for $ 42,427.01 for the second lien (a HELOC). The Mrdutts later obtained an order avoiding the wholly unsecured second lien, which was contingent upon their completion of a chapter 13 plan and receiving discharges.

Prior to plan confirmation, the Mrdutts filed a declaration required by local guidelines stating that their request to Wells Fargo to modify the primary mortgage loan was still pending.

Months later, with the loan modification still pending, the bankruptcy court confirmed the Mrdutts' second amended chapter 13 plan on December 11, 2012 ("Plan"). The 60-month Plan provided $ 0 for allowed general unsecured claims. The Plan also provided that all prepetition mortgage arrears would be cured if Wells Fargo approved the loan modification; if Wells Fargo disapproved it, the Mrdutts would file a modified plan to pay the arrears. The Mrdutts also agreed to make all postpetition mortgage payments directly to Wells Fargo.²

Following confirmation, the Mrdutts continued to make regular payments to Trustee and the case proceeded uneventfully until after they made their final Plan payment to her in October 2016, which she distributed in November. In December 2016, Mr. Mrdutt wrote a letter to the bankruptcy judge asking her to stop Wells Fargo from foreclosing on the residence. Sadly, Mrs. Mrdutt had passed away from cancer. Mr. Mrdutt explained that Wells Fargo was refusing to deal with him for a loan modification because the loan was in Mrs. Mrdutt's name only.

In January 2017, Wells Fargo moved for relief from stay to foreclose its first lien on the residence. The Mrdutts had failed to make postpetition mortgage payments totaling $ 123,819. The outstanding debt for the primary mortgage was now $ 536,861. The residence was still valued at $ 235,000. The bankruptcy court granted stay relief but ordered that its effectiveness was stayed until entry of the Mrdutts' discharges.

In June 2017, Trustee filed notices of plan completion and requested that the case be closed without discharge. Trustee asserted that the Mrdutts were not entitled to a discharge because they had failed to deal with their prepetition mortgage arrears.

In response, the Mrdutts³ moved to modify their Plan ("Motion to Modify"). Because they ultimately did not receive the loan modification, they wished to modify the Plan to surrender the residence. Trustee argued that the Motion to Modify was untimely, because plan payments had been completed months prior.

After a hearing, the bankruptcy court granted the Motion to Modify, finding that it was timely under § 1329(a) and that the Mrdutts could surrender the residence even though the 60-month time period under § 1329(c) had expired. Trustee timely appealed.

II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(L). We have jurisdiction under 28 U.S.C. § 158.

III. ISSUES

1. Did the bankruptcy court err in determining that, because the Mrdutts had not completed all payments under the Plan due to their failure to satisfy the prepetition mortgage arrears, the Motion to Modify was timely under § 1329(a)?

2. Did the bankruptcy court err in determining that the Plan, as modified, complied with the time limits set forth in § 1329(c)?

IV. STANDARDS OF REVIEW

Modification under § 1329 is discretionary and is reviewed for an abuse of discretion. Powers v. Savage (In re Powers), 202 B.R. 618, 623 (9th Cir. BAP 1996). A bankruptcy court abuses its discretion if it applies the wrong legal standard or its factual findings are illogical, implausible or without support in the record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011).

While the bankruptcy court's decision whether to allow modification is reviewed for abuse of discretion, whether the bankruptcy court was correct in its interpretation of the applicable statutes is reviewed de novo. Mattson v. Howe (In re Mattson), 468 B.R. 361, 367 (9th Cir. BAP 2012) (citing Towers v. United States (In re Pac.-Atl. Trading Co.), 64 F.3d 1292, 1297 (9th Cir. 1995) ).

V. DISCUSSION

A. The bankruptcy court did not err in determining that Plan payments were not complete for purposes of § 1329(a) and that the Motion to Modify was timely .

A plan is a contract between the debtor and the debtor's creditors.

Max Recovery, Inc. v. Than (In re Than), 215 B.R. 430, 435 (9th Cir. BAP 1997). The order confirming a chapter 13 plan, upon becoming final, represents a binding determination of the rights and liabilities of the parties as specified by the plan. 8 COLLIER ON BANKRUPTCY ¶ 1327.02 (Richard Levin & Henry J. Sommer eds. 16th ed. 2019).

Under the Plan, the Mrdutts agreed to cure their prepetition mortgage arrears either through a loan modification or a modified plan. They also agreed to make all postpetition mortgage payments directly to Wells Fargo. When the loan modification failed, the Mrdutts sought to modify the Plan to surrender the residence to Wells Fargo sixty-seven months after the first Plan payment was due and after they had made all sixty Plan payments to Trustee.⁴ The Mrdutts acknowledged that the Code did not necessarily support their position. Nevertheless, they were seeking a way to get a discharge.

Section 1329 provides that the bankruptcy court may modify a confirmed plan "[a]t any time after confirmation of the plan, but before the completion of payments under such plan [.]" § 1329(a) (emphasis added). See Danielson v. Flores (In re Flores), 735 F.3d 855, 859 (9th Cir. 2013) (en banc) (plan modification must occur before the completion of payments under the plan); In re Profit, 283 B.R. at 573 (same). The bankruptcy court reasoned that plan modification was still possible under § 1329(a), because the Mrdutts had not completed their plan payments due to the outstanding obligation of the prepetition mortgage arrears.

The question before us is whether the Plan was "complete" for purposes of § 1329(a) even though the Mrdutts failed to cure their prepetition mortgage arrears. Trustee maintains that only payments to the chapter 13 trustee are "payments under such plan" and that plan payments are "complete" once the debtor has made all plan payments to the trustee. We must determine what constitutes "payments under such plan" within the meaning of § 1329(a). Is it limited to those payments made to the trustee or does it include a debtor's direct payments to creditors?

While no controlling authority defines payments for purposes of plan modification under § 1329(a), courts have held in the discharge context of § 1328(a)⁵ that a debtor's direct payments to a creditor for a debt treated by the plan are payments under the plan. Precisely, when the chapter 13 plan provides for the curing of prepetition mortgage arrears and a debtor's direct postpetition maintenance payments in accordance with § 1322(b)(5), such direct payments are "payments under the plan." And if the debtor does not complete "all payments under the plan," the debtor is not entitled to a discharge.

In re Coughlin, 568 B.R. 461, 474 (Bankr. E.D.N.Y. 2017), is an excellent example of the overwhelming majority of courts which have interpreted the term "payments" in § 1328(a) to include direct payments by the debtor to a creditor. See also Kessler v. Wilson (In re Kessler), 655 F. App'x. 242, 244 (5th Cir. 2016) (when a plan provides for the curing of mortgage arrears as well as direct maintenance payments, both payments fall "under the plan" for purposes of § 1328(a) because both payments concern the same claim; debtors' discharge properly denied for not making direct maintenance payments to creditor despite making all plan payments to trustee) (citing Foster v. Heitkamp (In re Foster), 670 F.2d 478 (5th Cir. 1982) (when the plan provides for curing of mortgage arrears, a debtor's direct mortgage payments to creditor are payments under the plan)); Evans v. Stackhouse, 564 B.R. 513, 518-20 (E.D. Va. 2017) (debtor's direct maintenance payments provided for in the plan were payments under the plan for...