In re Brown, CASE NO. 16-10216

Decision Date02 August 2016
Docket NumberCASE NO. 16-10216
Citation559 B.R. 704
Parties In the Matter of: Chris A. Brown, Christine J. Brown, Debtors
CourtU.S. Bankruptcy Court — Northern District of Indiana

R. David Boyer II, Fort Wayne, IN, for Debtors.

DECISION AND ORDER DENYING CONFIRMATION

Robert E. Grant, Chief Judge, United States Bankruptcy Court

On August 2, 2016.

A chapter 13 plan may not modify the rights of the holder of “a claim secured only by a security interest in real property that is the debtor's principal residence.” 11 U.S.C. § 1322(b)(2). The debtors' proposed chapter 13 plan, as modified, contains the following provision:

The failure of Citi Mortgage to file a proof of claim by the claims bar date shall result in the waiver of any secured mortgage arrearage, and any mortgage arrears being reduced to $0.00. Agreed Modification of Chapter 13 Plan, filed April 8, 2016, ¶ 1.1

The court has questioned whether a plan containing such a provision can be confirmed. Although the debtors acknowledge that this provision constitutes a modification of Citi Mortgage's rights, both the debtors and the trustee argue that, for various reasons, the plan is confirmable. That is the issue presently before the court.

To be worthy of confirmation the court must find that “the plan complies with the provisions of [chapter 13] and with the other applicable provisions of [title 11].” 11 U.S.C. § 1325 (a)(1). A plan that attempts to do what § 1322(b)(2) forbids does not satisfy this requirement.2 Nonetheless, it is argued that the court should not consider the issue because Citi Mortgage was given a separate notice of what has been proposed, the modification was the subject of a separate hearing, to which Citi Mortgage was invited, and it did not appear or object. As the trustee phrases it, under these circumstances, “acquiescence has to be presumed.”

As appealing as that argument might seem, and as much as the court might like to accept it, it cannot. It is diametrically opposed to the instructions the Supreme Court handed down in United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010). There, the Court took issue with the Ninth Circuit's comments that the bankruptcy court should confirm a plan with provisions that conflict with the Bankruptcy Code and Rules of Procedure unless the creditor affected raised a timely objection. Id. , 559 U.S. at 276, 130 S.Ct. at 1380. Instead, the Court stated the failure to comply with those requirements “should prevent confirmation of the plan even if the creditor fails to object or to appear in the proceeding at all.” Id. That is the situation here. The Court went on to observe: Section 1325(a)... requires bankruptcy courts to address and correct a defect in a debtor's proposed plan even if no creditor raises the issue.” Id. , 559 U.S. at 277, 130 S.Ct. at 1381 n.14 (emphasis original). This court cannot correct a defect in the proposed plan” unless it independently determines whether a plan containing such a provision satisfies the requirements of § 1325(a), even if no creditor appears or raises the issue. See, In re Carlton, 437 B.R. 412, 417 (Bankr. N.D. Ala. 2010) (“After Espinosa there can be no doubt about a bankruptcy court's authority and responsibility to deny confirmation of an offending plan although the creditor who would suffer the consequences of confirmation fails to object.”)

The Supreme Court's instructions in Espinosa are not as unusual as some might believe. To the contrary, they are entirely consistent with the court's role in traditional civil litigation when a plaintiff seeks a default judgment after the defendant's failure to respond to a complaint against it. The defendant's default is not a confession of the plaintiff's right to the relief it seeks, but only an admission of the well pleaded allegations in the complaint.

Even after the default, the court has the obligation satisfy itself that those allegations state a legally sufficient claim before judgment can be entered. See, Nishimatsu Constr. Co. Ltd. v. Houston Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975) ; Black v. Lane, 22 F.3d 1395, 1399 (7th Cir. 1994) ; United States v. Di Mucci, 879 F.2d 1488, 1497 (7th Cir. 1989) ; Dundee Cement Co. v. Howard Pipe & Concrete Products, Inc., 722 F.2d 1319, 1323 (7th Cir. 1983) ; Owens v. Layton, 1995 WL 803822 *4 (N.D. Ind. 1995). If they do not, the requested judgment should be denied. See, Aldabe v. Aldabe, 616 F.2d 1089, 1093 (9th Cir. 1980) ; Lusby v. Hill, 2006 WL 3842196 (D. M.D. Fla. 2006) ; Owens, 1995 WL 803822 *4–5. That is all the court is doing here. Although Citi Mortgage has defaulted, by failing to object to confirmation, the court is asking whether the debtors' plan is legally sufficient: in other words whether it satisfies the legal requirements for confirmation. It is not questioning any of the facts upon which the plan is based, such as property valuations, interest rate, disposable income, or the other factual components of § 1325, but only asking whether the plan contains an “obvious defect” that prevents confirmation. In re Euliano, 442 B.R. 177, 184 n. 14 (Bankr. D. Mass. 2010) (“where the possible impediment to confirmation ... is not ‘an obvious plan defect,’ the onus is on interested parties ... to bring those issues to the court's attention.”).3 This plan does.

Since the confirmation hearing and while the issue before the court was being briefed, Citi Mortgage filed a timely proof of claim, four days before the claims bar date expired.4 As a result, both the debtors and the trustee argue that the plan provision in question is no longer operative and so the question of its propriety is moot. It is not. It would be if, for example, the plan was withdrawn, leaving the court with nothing to decide. But that is not what the debtors want. They want the court to confirm this plan and to do so the court must find that it “complies with the provisions of [chapter 13] and with the other applicable provisions of [title 11].” 11 U.S.C. § 1325 (a)(1). That refers to the entire plan; not just bits and pieces of it. Since the court is still being asked to confirm the plan—and if it does not the debtors will be confronted with options as to what to do next, either a new plan or dismissal—they continue to have “a legally cognizable interest in the outcome” and the case is not moot. See, Powell v. McCormack, 395 U.S. 486, 496, 89 S.Ct. 1944, 1951, 23 L.Ed.2d 491 (1969). That “raw ability” to take action that will have an effect on their rights means the case is not moot. See, Germeraad v. Powers, 826 F.3d 962, 967–69 (7th Cir. 2016) (expiration of maximum term for post confirmation plan modification and completion of payments did not moot appeal from order denying modification); Matter of UNR Industries, Inc., 20 F.3d 766, 768 (7th Cir. 1994).5

The primary argument advanced by the debtors and the trustee is that the provision in question is not a modification of Citi Mortgage's rights, but only a sanction for the failure to file a timely claim: the sanction being the loss of any arrears. In the court's opinion, this is nothing more than semantics. “Labels should not determine rights.” Blau Plumbing, Inc. v. S.O.S. Fix – it, Inc., 781 F.2d 604, 608 (7th Cir. 1986). Placing a different label upon something does not change what it truly is. See, William Shakespeare, Romeo & Juliet, Act II, Scene II (“What's in a name? That which we call a rose by any other name would smell as sweet.”). See also, National Federation of Independent Business v. Sebelius, ––– U.S. ––––, 132 S.Ct. 2566, 183 L.Ed.2d 450 (2012) (what Congress called a “penalty” is a “tax”). Call it what you will, if the plan modifies Citi Mortgage's rights6 it runs afoul of the prohibition of § 1322(b)(2) and § 1325(a)(1). In general terms, a plan modifies a residential mortgage holder's rights if it does anything other than maintain the regular payments while the case is pending and cure any default within a reasonable time. 11 U.S.C. § 1325(a)(5). It may not bifurcate the creditor's claim into secured and unsecured components, change the interest rate, amortization schedule, payment required or the amount due. See, Nobelman, 508 U.S. 324, 113 S.Ct. 2106 ; In re Litton, 330 F.3d 636, 643–44 (4th Cir. 2003) ; Anderson v. Hancock, 820 F.3d 670, 672 (4th Cir. 2016) ; In re Rogers, 500 B.R. 537, 540 (Bankr. W.D. Mich. 2013). Yet, changing the amount due Citi Mortgage is precisely what the plan proposes to do, by waiving any arrears and reducing them to nothing. See, In re Matteson, 535 B.R. 156, 162 n.6 (6th Cir. BAP 2015) (observing that a hypothetical plan provision reducing debt without payment may be unlawful).

The “permissible sanction and not a modification” argument is based upon the provisions of Rule 3001(c). That rule specifies the information a creditor must provide with its proof of claim and prohibits it from using any omitted information as evidence in the case, or allows the court to award other appropriate relief, including fees and expenses. Fed. R. Bankr. P. Rule 3001(c)(1), (2)(A-D). The argument is that mortgage creditors are required to provide information concerning any arrears and the amount needed to cure any default in their claims, and by not filing a timely proof of claim they fail to provide that information, justifying the sanction of Rule 3001(c)(2)(D). The proposed plan's waiver of any arrears and reducing it to nothing is characterized as essentially the same thing as prohibiting the lender from offering the omitted information as evidence in the proceeding.

The argument suffers from at least two flaws. The first is that there is a significant distinction between what the Bankruptcy Rules may authorize, and the procedures they establish to get there, and achieving a similar result through the plan confirmation process. Cf., Espinosa, 130 S.Ct. at 1380–81 (plan providing for the discharge of student loans without an adversary proceeding should not...

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