In re Bullard

• Decision Date: 24 July 2012
• Docket Number: No. 10–23503–WCH.,10–23503–WCH.
• Citation: 475 B.R. 304
• Parties: In re Louis B. BULLARD, Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

475 B.R. 304

In re Louis B. BULLARD, Debtor.

No. 10–23503–WCH.

United States Bankruptcy Court,

D. Massachusetts,

Eastern Division.

July 24, 2012.

Avi L. Liss, Haneen Kutub, Liss Law, LLC, Brookline, MA, for the Debtor.

Amy Lipman–White, Stanton & Davis, Marshfield, MA, for Hyde Park Savings Bank.

MEMORANDUM OF DECISION

WILLIAM C. HILLMAN, Bankruptcy Judge.

I. INTRODUCTION

The matter before the Court is the “Objection to Confirmation of Third Amended Chapter 13 Plan” (the “Objection”) filed by Hyde Park Savings Bank (“Hyde Park”) and the “Response to Objection to Confirmation of Plan by Creditor Hyde Park Savings Bank” (the “Response”) filed by Louis B. Bullard (the “Debtor”). The question presented by the Objection is whether a debtor through his Chapter 13 plan may bifurcate a secured creditor's claim and then pay the secured portion of the claim over a period longer than the maximum five year term of a Chapter 13 plan.¹ For the reasons set forth below, I find that such treatment is incompatible with the provisions of the Bankruptcy Code and will sustain the Objection.

II. BACKGROUND

The facts necessary to resolve this issue are straightforward and undisputed. The Debtor owns real property located at 318 Union Street in Randolph, Massachusetts (the “Property”). Hyde Park holds a mortgage on the Property which secures a promissory note in the original principal amount of $387,000 and a maturity date of June 1, 2035.² The Debtor commenced the present case by filing a Chapter 13 petition on December 14, 2010. On June 17, 2011, Hyde Park filed a proof of claim in the amount of $346,006.54. The proof of claim does not reflect the existence of any prepetition arrears. Although the parties do not agree as to the current value of the Property, the Debtor and Hyde Park each providing competing appraisals in the amounts of $245,000 and $285,000, respectively, it is undisputed that the Property's value is substantially less than Hyde Park's claim.

On January 7, 2012, the Debtor filed the Third Amended Chapter 13 Plan (the “Plan”). Through the Plan, the Debtor proposes to bifurcate Hyde Park's secured claim into secured and unsecured components, further providing that:

[t]he Confirmation Order shall effectively reduce the secured claim held by Hyde Park Savings Bank to the value of the real estate securing the loan (318 Union St. Randolph MA). 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 shall continue to make monthly payments as determined by the terms of the note.... ³

Under the Plan, the unsecured portion of Hyde Park's claim would receive a dividend of approximately 5.26%. The payments on the secured portion of the claim would be paid directly by the Debtor to Hyde Park.

On February 16, 2012, Hyde Park filed the Objection. The Debtor filed the Response on March 1, 2012. I conducted a hearing on the Objection on April 26, 2012, and at the conclusion of oral arguments, took the matter under advisement. After the hearing, the parties each filed supplemental memoranda of law.

III. POSITIONS OF THE PARTIESHyde Park

Hyde Park argues that the Bankruptcy Code affords Chapter 13 debtors only two options for the treatment of secured claims: (1) cure any arrearage and maintain payments under 11 U.S.C. § 1322(b)(5); or (2) modify the rights of the holder of the secured claim pursuant to 11 U.S.C. § 1322(b)(2) and pay the claim in full during the term of the plan. Citing In re Pires⁴ and In re Bell,⁵ Hyde Park asserts that courts have consistently rejected “hybrid plans” like the one proposed by the Debtor and sanctioned by In re McGregor⁶ and its progeny which seek to combine those two options. As such, Hyde Park contends that the Plan cannot be confirmed because the Debtor impermissibly seeks to both modify its claim and maintain payments for a period exceeding the duration of the Plan.

The Debtor

While the Debtor concedes that the Plan is what is commonly referred to as a “hybrid plan,” he denies that he proposes to modify Hyde Park's rights pursuant to 11 U.S.C. § 1322(b)(2). Instead, the Debtor asserts that he is doing no more than what is expressly permitted by 11 U.S.C. § 1322(b)(5), as set forth in In re McGregor. He contends that the issue now before me hinges on the meaning of the phrase “modify the rights of holders of secured claims” contained in 11 U.S.C. § 1322(b)(2), and that Hyde Park's position is inconsistent with the definition of an “allowed secured claim” and otherwise ignores the distinction between a modification of “rights” and a modification of “claims.”

The Debtor begins with the premise that 11 U.S.C. § 506(a) defines the nature of a secured claim such that an allowed secured claim is only secured to the extent of the value of the property securing it. As such, he argues a plain reading of the statute not only permits, but necessitates bifurcation of an undersecured claim into secured and unsecured portions based upon the value of the property. “To claim otherwise,” the Debtor urges, “would not only go against common sense, but also negate the clearly defined provisions of 506(a) of the Bankruptcy Code.” ⁷

With this in mind, the Debtor submits that because

section 506(a) permits bifurcation of a claim into secured and unsecured portions, it stands to reason that section 1322(b)(5) cannot be construed other than to allow the Debtor to continue the contractually due payments on the secured portion of the bifurcated claim beyond the term of the plan pursuant to the terms of the underlying contract. To interpret otherwise, would render section 1322(b)(5) moot.⁸

He relies on In re McGregor for the proposition that “[subsection (b)(5)' s] command is complied with so long as payments are maintained on the ‘secured claim.’ ” ⁹ The alternative, the Debtor maintains, “would require the Debtor to pay all debts ... during the life of the plan, which in most cases, would be impossible and ultimately defeat the purpose and intent of Chapter 13....” ¹⁰ He concludes:

In sum, to equate bifurcation of a claim into secured and unsecured portions pursuant to 506(a) with modification of a creditor's rights pursuant to section 1322(b)(2) would not only be inaccurate, but prejudicial. Such an interpretation would nullify section 506(a) and allow the secured creditor to redefine the nature of its claim and treat an otherwise unsecured claim, as defined by the code, as a secured claim. Such an outcome would unfairly prejudice the general unsecured creditors and provide the secured creditor with an unfair advantage.¹¹

IV. DISCUSSION

As recognized by Chief Judge Bailey of this district in In re Pires, “Chapter 13 offers two distinct and well-established options for treatment of secured claims, especially mortgage loans.” ¹² One option is that a plan may “modify the rights of holders of secured claims....” pursuant to 11 U.S.C. § 1322(b)(2).¹³ A modification under this section may include bifurcation of the claim into secured and unsecured components pursuant to 11 U.S.C. § 506(a), which provides that

[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ... and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim.¹⁴

Under this approach, both the secured and unsecured components of the claim would be paid through the plan, with the unsecured component receiving a dividend, typically much less than 100%, by the Chapter 13 trustee over the term of the plan.¹⁵ Put simply, the debtor is able to “strip off” a portion of the lien without full repayment.

Nevertheless, modification pursuant to 11 U.S.C. § 1322(b)(2) is subject to three limitations that, on a practical level, substantially reduce its availability. First, 11 U.S.C. § 1322(b)(2) expressly prohibits modification where the claim is “secured only by a security interest in real property that is the debtor's principal residence.” ¹⁶ Although ambiguous, the United States Court of Appeals for the First Circuit has held that this anti-modification provision “does not bar modification of a secured claim on a multi-unit property in which one of the units is the debtor's principal residence and the security interest extends to the other income-producing units.” ¹⁷ Second, 11 U.S.C. § 1322(b)(2) is subject to 11 U.S.C. § 1322(d), which states that “the plan may not provide for payments over a period that is longer than ... 5 years.” ¹⁸ Third, because the modified secured claim is “provided for by the plan,” the plan violates 11 U.S.C. § 1325(a)(5)(B)(ii) unless it provides for payment of the present value of the modified secured claim.¹⁹ As a result of these last two limitations, a debtor must pay the secured component of the modified secured claim in full within the five year term of the plan, effectively pricing this option out of the reach of most debtors.²⁰

The second option, provided by 11 U.S.C. § 1322(b)(5), is that a plan may,

notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.... ²¹

The Bankruptcy Code does not define “maintenance of payments,” but courts have interpreted this provision to mean the original contractual payments of principal and interest over the time frame specified in the note. ²² Therefore, by its own terms, 11 U.S.C. § 1322(b)(5) modifies the rights of the secured creditor only to the extent that it expressly permits the debtor to cure a default through the plan despite any contractual term to the contrary. Such a modification is made “notwithstanding” the...