In Re Allan G. Cormier, 09-44865-HJB.

• Decision Date: 15 July 2010
• Docket Number: No. 09-44865-HJB.,09-44865-HJB.
• Citation: 434 B.R. 222
• Parties: In re Allan G. CORMIER, Deborah A. Cormier, Debtors.
• Court: U.S. Bankruptcy Court — District of Massachusetts

434 B.R. 222

In re Allan G. CORMIER, Deborah A. Cormier, Debtors.

No. 09-44865-HJB.

United States Bankruptcy Court,

D. Massachusetts,

Central Division.

July 15, 2010.

COPYRIGHT MATERIAL OMITTED

Walter Oney, Attorney at Law, Fitchburg, MA, for Debtors.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

The issues presented in this Chapter 13 case raise important questions regarding the interplay between the rights of mortgage holders and those of financially-strapped property owners seeking relief under the Bankruptcy Code. At a time when the soaring foreclosure rate has left a backlog of bank-owned properties, and both owners and banks often choose to simply walk away-leaving abandoned homes and buildings to blight and burden their neighborhoods, cities, and towns-the inadequacy of existing state and federal laws to provide meaningful, responsible solutions becomes distressingly obvious. Yet, judges are interpreters and not architects of the law.

I. FACTS AND TRAVEL OF THE CASE

On November 13, 2009, Allan and Deborah Cormier (the “Debtors”) filed a petition for relief under Chapter 13 of the United States Bankruptcy Code (the “Bankruptcy Code” or the “Code”).¹ In the required financial schedules and statements filed with the case (the “Schedules”), the Debtors disclosed ownership interests in two pieces of real property: their residence and a three-family house located in Fitchburg, Massachusetts (the “Property”). On Schedule A-Real Property, the Debtors listed the current market value of the Property as $75,000, and subject to a secured claim in the amount of $94,747.58. On Schedule D, the Debtors listed American Home Mortgage Service, Inc. (“American”) as the holder of the relevant mortgage.

On Schedule I-Current Income of Individual Debtor(s), the Debtors reported the sum of $5,681.32 as their monthly income net of taxes, insurance, and other deductions. On Schedule J-Current Expenditures of Individual Debtor(s), the Debtors listed their average monthly expenses as $5,263.70, and thereby calculated a monthly surplus of $417.62.²

On November 19, 2009, the Debtors filed and served their Chapter 13 plan (the “Plan”). Under Section C of the Plan-“Modification of Secured Claims”-the Debtors propose to surrender American's collateral (the Property) “in full satisfaction of debt.” The Debtors' Plan also provides an 8.785% dividend on unsecured claims and calculates the monthly Plan payments at $418.

On February 3, 2010, American filed a motion requesting relief from the automatic stay imposed by § 362(a) (the “Motion for Relief”), and indicating the Debtors' assent thereto. According to the Motion for Relief, the pre-petition arrearage on American's secured claim totaled $5,606.94, and the Debtors had made no post-petition payments. American seeks relief from the automatic stay so that it may “exercis[e] its various non-bankruptcy rights and remedies including and without limitation: i. taking possession of the Property, obtaining a deed-in-lieu of foreclosure and/or foreclosing the Mortgage at issue; and ii. taking such action as may be necessary to evict the Debtor(s) and/or any occupant from the Property.”

On February 12, 2010, before the Court could act on the Motion for Relief, ³ the Debtors filed a “Motion to Require American Home Mortgage Servicing, Inc. to Acknowledge the Debtor's Surrender of the Property [ ] and to Allow an Administrative Claim for the Debtors' Post-Petition Expenses for Insuring and Preserving that Property” (the “Debtors' Motion”). Through their Motion, the Debtors seek an order “(a) directing [American] to acknowledge that the Debtors have surrendered their interest in [the Property], and (b) allowing them to deduct from their plan payments, on account of administrative expenses, the actual amounts they are incurring to insure and preserve that property.” In their memorandum in support of the Motion (the “Debtors' Brief”), the Debtors clarify that they want American to “formally acknowledge the surrender of the property so they can reasonably stop paying to insure and preserve it.”

Neither American nor the Chapter 13 trustee (the “Trustee”) have filed objections to the Debtors' Plan (which remains unconfirmed). However, on April 14, 2010, the Court held a hearing on the Debtors' Motion and the Motion for Relief (the “Hearing”) and took both matters under advisement.

II. POSITIONS OF THE PARTIESA. Debtors

In their Brief, the Debtors say that, since September 2009, they “have spent $105.29 on utility expenses for the [Property],” “have incurred $218.79 in unpaid charges,” and have “maintained in force property and liability insurance” on the Property. The Debtors further state that there is one tenant residing the property who has not paid the $700 rent since September 2009. In the Debtors' Brief and at the Hearing, counsel for the Debtors argued that the Debtors have committed all of their net income after expenses to the Plan and have experienced unexpected car repair and dental expenses that have consumed all of their other discretionary income. As such, the Debtors maintain that they can no longer afford to insure and preserve the Property, nor can they afford to file or prosecute a summary process action to evict the non-paying tenant.

The Debtors want American to take responsibility for the Property's expenses so they can devote all of their disposable income toward the Plan. In support of their argument that American can be held responsible for expenses associated with the Property, the Debtors rely on the fact that Massachusetts adheres to a “title theory” of mortgages. Because, under Massachusetts law, a mortgage conveys title to the mortgagee, the Debtors argue that American has accepted a conveyance of the Property. And since the Debtors have essentially abandoned the Property and are ceding possession to American, then American, as mortgagee, should have the duty to maintain it. The Debtors attempt to factually distinguish this case from Negron v. Gordon, 373 Mass. 199, 366 N.E.2d 241 (1977), where the Massachusetts Supreme Judicial Court (the “SJC”) held that a mortgagor, although financially unable to remedy sanitary code violations at the mortgaged property, was nonetheless legally responsible for the violations. The Debtors argue that the mortgagee was not held responsible in that case because, unlike here, the mortgagor had not taken action to surrender the property to the mortgagee.⁴

But the Debtors further contend that, to the extent Massachusetts law requires the mortgagee's consent before it can be compelled to take possession and responsibility of surrendered property, that requirement is preempted by § 1325(a)(5)(C) of the Bankruptcy Code. The Debtors argue that § 1325(a)(5)(C) allows debtors to surrender collateral to a secured creditor in satisfaction of a creditor's secured claim, and this ability to surrender cannot be thwarted by conflicting state law. Requiring the assent of a creditor in order to accomplish surrender under § 1325(a)(5)(C) would, according to the Debtors, “frustrate[ ] a federal purpose and impermissibly act[ ] within an exclusively federal field.” Because a surrender of the Property to American is an integral part of the Debtors' Plan, the Debtors say that their ability to unilaterally surrender the Property is essential to their right to relief under Chapter 13.

Finally, the Debtors seek reimbursement of the expenses they have incurred in insuring and preserving the Property. The Debtors equate these expenses to administrative claims, as the expenditures were actual, necessary costs and expenses of preserving the estate, which claims may be asserted by the Debtors as “entities” under § 503(b)(1)(A). To effectuate the reimbursement, the Debtors propose to deduct the expenses from their Plan payments after submitting proof of the payments to the Trustee.

B. American Home Mortgage Servicing, Inc.

American objects to the Debtors' Motion as an attempt by the Debtors to “impose a duty upon [American] for insuring and maintaining the Property,” to “ignore their duties as owners of the Property,” and “to shirk their responsibilities onto [American] because they can no longer an afford an investment property.” American also claims that the Debtors are seeking a “windfall” by having American shoulder the burden of evicting any tenants and paying for insurance and maintenance. In fact, argues American, the Debtor's Motion is unnecessary because American does accept the Debtors' proposed surrender of the Property through the Plan, although it objects to being compelled to take immediate possession of the Property.

According to American, the fact that Massachusetts is a title theory state is immaterial, since Massachusetts courts have routinely held that a mortgagor is regarded as the “owner” of a property so long as the mortgagor remains in possession. Here, American says, the Debtors remain the owners under Massachusetts law and American cannot be compelled to take possession and assume responsibility for maintaining and preserving the Property.

When asked at the Hearing whether the Debtors' proffer of a deed-in-lieu of foreclosure would resolve the issues here, counsel to American balked at the idea. American insists that it is entitled, upon an order lifting the automatic stay, to pursue its rights under the mortgage and state law at its discretion. American has not indicated a present refusal to take possession or conduct a foreclosure sale; rather, it maintains that it cannot be compelled to do so.⁵

C. Chapter 13 Trustee

The Trustee objects to the Debtors' request to deduct the claimed “administrative” expenses from Plan payments. Noting that the Debtors' Schedule J budgeted $300 per month for discretionary expenses, the Trustee says the approximately $65 per month the Debtors allegedly spent maintaining the Property should be paid from their discretionary funds. At the Hearing, the Trustee further argued that the expenses do not...