In re Cardwell, Case No. 13-60311-13

Decision Date07 November 2013
Docket NumberCase No. 13-60311-13
CourtU.S. Bankruptcy Court — District of Montana

At Butte in said District this 7th day of November, 2013.

Pending in this Chapter 13 case are: (1) Debtors' Objection (Docket No. 23) to Proof of Claim No. 4 filed by JPMorgan Chase Bank, National Association ("JPMorgan Chase Bank") based on 11 U.S.C. § 506(b) on the grounds it is undersecured; and (2) confirmation of Debtors' Chapter 13 Plan (Dkt. 8) and objections thereto filed by the Chapter 13 Trustee and JPMorgan Chase Bank. A hearing on these contested matters was scheduled for September 6, 2013, at Great Falls. Debtors were represented at the hearing by attorney D. Randy Winner ("Winner") of Great Falls. JPMorgan Chase Bank was represented by attorney Erica R. Peterman ("Peterman") of Missoula. Counsel agreed to submit the matters on stipulated facts, so the Court vacated the hearing and granted the parties time to file stipulated facts and briefs. The parties' briefs have been filed, but the parties did not file a separate statement of stipulated facts. After review of the briefs and the record, the Court deems these matters are ready for decision. For the reasons setforth below Debtors' Objection to JPMorgan Chase Bank's Proof of Claim will be sustained in part and overruled in part; confirmation of Debtors' Plan is denied, and Debtors will be granted leave to file an amended Plan curing JPMorgan Chase Bank's default as required under 11 U.S.C. § 1322(c).

This Court has jurisdiction of this Chapter 13 bankruptcy under 28 U.S.C. § 1334(a). Debtors' Objection to JPMorgan Chase Bank's claim and confirmation of Debtors' Plan are core proceedings under 28 U.S.C. § 157(b)(2). This Memorandum includes the Court's findings of fact and conclusions of law.


The parties agree that no disputes of material fact exist. A promissory note attached to JPMorgan Chase Bank's Proof of Claim 4 shows that Debtors Garry E. Cardwell and Carolyn Cardwell signed a note dated September 22, 2009, in the amount of $122,812.00 payable to lender First Interstate Bank The note calls for monthly payments in the amount of $678.17 for 30 years, with interest on the unpaid principal charged until the full amount of the principal has been paid at the annual rate of 5.25 percent (5.25%). Paragraph 6 of the note provides for a late charge calculated at 4% of the payment amount when made 15 days after the payment due date, and an addition provides for payment of costs and customary attorneys' fees. An indorsement on the last page of the note makes the note payable to the order of JPMorgan Chase Bank.

Darryl also signed a "Deed of Trust" ("DOT") dated September 22, 2009, which provides as security for repayment of the note the Debtors' residence at 811 ½ 13th St. Sw, Great Falls, Montana 59404.1 The DOT was recorded on September 28, 2009. The DOT provides atparagraphs 10 and 18, in the event of default, reinstatement or foreclosure proceedings, the lender may charge the costs, expenses and fees including customary attorneys' fees.

Debtors defaulted on the note. Debtors filed their voluntary Chapter 13 petition on March 13, 2013, with their Schedules, Statement of Financial Affairs and Chapter 13 Plan. Debtors' residence2 is listed on Schedule A with a current value of $120,000,3 encumbered by a secured claim stated in the amount of $137,000.00. Debtors claim a homestead on their residence. Schedule D lists JPMorgan Chase Mortgage as having a claim in the amount of $137,000.00 secured by Debtors' residence.

The hearing on confirmation of Debtors' Chapter 13 Plan was scheduled originally to be held on May 10, 2013, but was continued several times until September 6, 2013. Debtors' Plan provides for 60 months of payments in the amount of $460 per month. Paragraph 2(b) of the Plan lists no impaired secured claims. Paragraph 2(c) treats the claim of JPMorgan Chase as an unimpaired secured claim, secured by their residence, which is not provided for by the Plan and receives no payments through the Trustee except with regard to the arrearage. Paragraph 2(c) lists a single arrearage on JPMorgan Chase "unimpaired secured claim[]" in the amount of "$22,000.00 (estimated)." Just above that arrearage the Plan states that "the following arrearages on unimpaired secured claims, if any, shall be paid through the Trustee on a pro rata basis until the same have been paid in full." The Trustee and JPMorgan Chase Bank both filed objections to confirmation based in part on the treatment of JPMorgan Chase Bank's arrearage.

JPMorgan Chase Bank filed objections to confirmation on April 24, 2013, on the grounds the Plan fails to satisfy the requirement of 11 U.S.C. § 1325(a)(5)(B)(ii) that the Plan provide for full payment of its allowed claim. More specifically, JPMorgan Chase Bank objected that the amount of its arrearage is $24,997.06 in its Proof of Claim.4 It also objected that the Plan does not provide adequate protection of its interest and fails the feasibility test of 11 U.S.C. § 1325(a)(6).

JPMorgan Chase Bank filed Proof of Claim No. 4 on May 14, 2013, asserting a secured claim in the amount of $136,988.72 secured by the DOT. Section 4 of Proof of Claim 12 states that the claim is fully secured by 811 ½ 13th St. SW, Great Falls, Montana 59404, but left blank the value of the property. The amount of arrearage is stated in the amount of $24,997.06.

The attachment to Proof of Claim 12 itemizes the $24,997.06 arrearage as comprised of 24 installments of $678.17 due from April 1, 2011, to March 1, 2013 ($16,276.08), plus $8,720.98 in additional prepetition fees, expenses and other charges. The $8,720.98 in additional expenses is comprised of $98.27 in late charges incurred 3/1/2013, $487.50 in attorney's fees incurred 12/21/2012, $1,268.00 in title costs, $142.00 in recording fees, $252.00 in property inspection fees from 5/7/11 through 3/2/13, $5,660.76 described as "Escrow shortage or deficiency" dated 3/13/2013, and $425.00 in post-petition attorney fees "for filing the proof of claim, reviewing the plan and filing request for special notice."

On May 21, 2013, Debtors filed their Objection to Proof of Claim 4. Debtors object that JPMorgan Chase Bank's Claim 4 is undersecured under § 506(b) based on the scheduled value oftheir residence, $120,000. Debtors do not argue that the assessed charges, fees and costs on the attachment to Claim 4 are unreasonable, but rather they argue that JPMorgan Chase Bank's arrearage should be allowed only for the escrow shortage in the amount of $5,660.76, and the balance of JPMorgan Chase Bank's asserted $24,997.06 arrearage should be disallowed as a secured claim and allowed as an unsecured claim pursuant to § 506(b). Debtors further argue that Montana's prohibition against collection of a deficiency in a foreclosure of a trust indenture in MONT. CODE ANN. ("MCA") § 71-1-317 limits JPMorgan Chase Bank's arrearage claim to accrued principal and interest despite the anti-modification provisions of 11 U.S.C. § 1322(b)(2).

JPMorgan Chase Bank argues that it is entitled to fees, interest, costs and charges under the note and/or trust indenture and nonbankruptcy law, and frames the issue as whether it is entitled to fees and costs under § 1322(e) as part of an arrearage cure even though it is undersecured. JPMorgan Chase Bank contends that the plain meaning of the unambiguous text of § 1322(e) supersedes § 506(b) in determining the amount necessary to cure a default or arrearage in a chapter 13 plan.

I. Objection to Claim 4.

"The amount of a creditor's 'claim' is typically determined as of the petition date, and includes the principal amount of the obligation plus all matured prepetition interest, fees, costs, and charges owing as of the petition date. The allowability of these prepetition amounts as part of the secured creditor's 'claim' is not determined by section 506, but is governed by section 502 in conjunction with other provisions of the Code." 4 COLLIER ON BANKRUPTCY, ¶ 506.04[1] (15th ed. rev.). "Section 506(b) prescribes that postpetition interest, fees, costs or charges may beadded as part of the allowed amount of an allowed secured claim to the extend that the claim is oversecured." Id.

A proof of claim that is executed and filed in accordance with the Rules "shall constitute prima facie evidence of the validity and amount of the claim." Rule 3001(f); see also Garner v. Shier (In re Garner), 246 B.R. 617, 620 (9th Cir. BAP 2000) ("There is an evidentiary presumption that a correctly prepared proof of claim is valid as to liability and amount."). A claim "is deemed allowed, unless a party in interest . . . objects." § 502(a); Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Electric Co., 549 U.S. 443, 449, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007).

Upon objection, a bankruptcy court "shall determine the amount of such claim . . . as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that— (1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured." § 502(b)(1). The United States Supreme Court explained:

Section 502(b)(1) disallows any claim that is "unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured." This provision is most naturally understood to provide that, with limited exceptions, any defense to a claim that is available outside of the bankruptcy context is also available in bankruptcy. See 4 Collier ¶ 502.03[2] [b], at 502-22 (explaining that § 502(b)(1) is generally understood to "make available to the trustee any defense" available to the debtor "under applicable nonbankruptcy law"— i.e., any

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