In re Britton, Civ. No. H81-632
| Decision Date | 15 July 1982 |
| Docket Number | Civ. No. H81-632,Adv. No. 81-6046.,Bankruptcy No. 80-60826 |
| Parties | In re Norman Dale BRITTON, Debtor. WATERFIELD MORTGAGE COMPANY, Appellant, v. Norman Dale BRITTON and Andrew Gadzala, Trustee, Appellee. |
| Court | U.S. District Court — Northern District of Indiana |
Fred M. Cuppy, Merrillville, Ind., for appellant.
Steve Tokarski and Andrew Gadzala, Gary, Ind., for appellee.
Creditor appeals from an adverse judgment in the Bankruptcy Court on its Petition for Relief from the Automatic Stay. The Bankruptcy Court judgment is REVERSED.
The facts in this case are as follows: On October 6, 1977, the debtor executed a mortgage note in favor of Meridian Mortgage Company for the amount of $23,500.00. The note was secured by the debtor's residence and included an acceleration clause. The note and the security interest were assigned to Waterfield Mortgage Company, Inc. on January 31, 1980. The debtor defaulted on his mortgage payments beginning in July, 1979 and the mortgagee filed a state foreclosure action on December 21, 1979. On May 2, 1980, the Lake County Circuit Court entered a judgment of foreclosure in the amount of $26,038.46 plus interest. A sheriff's sale was scheduled for August 1, 1980.
The debtor filed his petition in bankruptcy under Chapter 13 on June 26, 1980. The sale of the debtor's residence was thus automatically stayed under 11 U.S.C.S. § 362. The debtor filed a Chapter 13 Plan which was amended on July 16, 1980 and confirmed without objection on September 18, 1980. The Plan provided for payment to the creditor herein all current mortgage payments as well as the outstanding arrearages. On February 10, 1981, the creditor filed its Petition for Relief from the Automatic Stay. The petition was granted by the Bankruptcy Court on April 15, 1981 which order was subsequently set aside. On October 7, 1981, after a trial on the matter, the Bankruptcy Court denied the creditor's petition. The creditor appeals to this Court for reversal of the Bankruptcy Court order.
MEMORANDUMThe creditor seeks relief from the automatic stay. Such relief is provided in 11 U.S.C. § 362(d):
The Bankruptcy Court below held that the creditor's interest was protected; that the debtor had equity in the real estate; and that the property was necessary for the debtor's rehabilitation. This Court holds that the Bankruptcy Court erred in finding that the creditor's interest is adequately protected and thus, there is no need to address the question of whether the debtor has equity in the property or whether the property is necessary for rehabilitation.1
There is no adequate protection of the creditor's interest in the property because the debtor's plan does not provide full payment to the creditor and probably cannot do so. The debtor's plan proposes to pay to the creditor certain amounts to cover the arrearages in the mortgage payments and also to pay the current monthly mortgage payments as they become due. The creditor argues that this plan cannot successfully rehabilitate the debtor because it has not provided for the payment of the entire amount due to the creditor under the state court foreclosure judgment. The creditor's argument is well-taken.
The initial question posed here is whether a Chapter 13 plan may reinstate a mortgage after the mortgage has been foreclosed by a state court judgment. Several lower courts have addressed this issue and have arrived at opposite conclusions. Representative of these decisions are In Re Taddeo, 9 B.R. 299 (Bkrtcy.Ct., E.D.N.Y.1981), aff'd. 15 B.R. 273 (D.Ct.E.D.N.Y.1981) and In Re Pearson, 10 B.R. 189 (Bkrtcy.Ct., E.D.N.Y.1981). Taddeo holds that a debtor may cure his mortgage default by use of a Chapter 13 plan up until the time of the foreclosure sale. Pearson holds that once a state court foreclosure judgment is entered, a Chapter 13 plan must provide for payment of the full amount of the judgment and such a plan will not reinstate the original schedule of payments as provided in the mortgage. After consideration of the relevant law on this subject, this Court finds the line of cases consistent with the Pearson holding to be more persuasive for several reasons. First, under Indiana law, owner or a part-owner of property may only redeem foreclosed property on full payment of the judgment amount. Second, 11 U.S.C.S. § 1322(b)(5) permits a debtor to cure a default on a loan secured by the debtor's principle residence only where the last payment on the loan is due after the final payment under the debtor's Chapter 13 plan. In the present case, there are no installments due after the final payment under the plan and § 1322(b)(5) is not applicable. Finally, if a debtor is permitted to utilize a Chapter 13 plan to revive a mortgage foreclosed by a state court judgment, great uncertainty will result as to the effect of that judgment.
In Indiana, where a judgment of foreclosure has been entered, and before the actual sale of the property, an owner or part-owner of the real estate may redeem the property only by paying the "amount of the judgment, interest and costs." Ind.Code Ann. § 32-8-16-3 (Burns 1980 Repl.). There is no authority in Indiana for the avoidance of a foreclosure judgment by the payment of the arrearages only. There is also nothing in the Bankruptcy Code to indicate Congressional intent that Chapter 13 plans can be used to annul a state court foreclosure judgment. This Court cannot assume such an intent without language making that intent clear.
The authority to cure defaults in 11 U.S.C.S. 1322(b)(5) may also not be used to undo a final state court judgment. That section permits a Chapter 13 plan to provide for the curing of a default on a "secured claim on which the last payment is due after the date on which the final payment under the plan is due." In the present case, no payment on the loan is due after the final payment under the debtor's plan. Rather, the entire amount owed to the creditor is due on the entry of the foreclosure judgment. This occurred before the debtor filed his petition in bankruptcy. As a result, the language of § 1322(b)(5) provides no authority for the debtor to void the final state court foreclosure judgment.
Finally, it is clear that Congress did not intend that a debtor's Chapter 13 plan could be used to void a state court foreclosure judgment. Such a result would create great uncertainty as to the effect of the state court judgment. If a debtor is permitted to reinstate the mortgage, what is to be the effect of the outstanding judgment? Is the judgment completely voided or does it take effect after the debtor completes his Chapter 13 plan? If a debtor may annul a final foreclosure judgment, what is the effect on the availability of home mortgage loans? This last point was addressed by the Bankruptcy Court in Pearson:
For this reason and the others discussed above, this Court holds that where a creditor obtains a judgment of foreclosure in a state court before the debtor files a petition in bankruptcy under Chapter 13, the debtor's Chapter 13 plan cannot merely provide for the payment of the arrearages and thereby reinstate the mortgage.2
Since the debtor's Chapter 13 plan in this case only provides for payment of the arrearages and current mortgage payments and there is no evidence that the debtor could pay the entire foreclosed judgment, the creditor's interest in the property is not adequately protected. The debtor places much emphasis on his contentions that he has equity in the property and that he is current in his payments under the Chapter 13 plan. The evidence in the lower court, viewed in a light most favorable to the judgment does indicate that the debtor has equity in the property, although his equity cushion in this instance is very thin.3 As for the contention that the debtor is current in his Chapter 13 payments, the creditor maintains that it has received none of the money owed to it and that there was insufficient...
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