In re Chitwood

Decision Date06 November 2013
Docket NumberCase No. 13-60257-13
CourtU.S. Bankruptcy Court — District of Montana

At Butte in said District this 6th day of November, 2013.

Pending in this Chapter 13 case are: (1) Debtors' Objection (Docket No. 30) to Proof of Claim No. 12 filed by Wells Fargo Bank, N.A. ("Wells Fargo Bank") based on 11 U.S.C. § 506(b) on the grounds it is undersecured; and (2) confirmation of Debtors' Chapter 13 Plan (Dkt. 12) and Wells Fargo Bank's objection thereto. The Chapter 13 Trustee filed a consent to confirmation. 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. Wells Fargo 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 set forth below Debtors' Objection to Wells Fargo Bank's Proof of Claim will be overruled; confirmation of Debtors' Plan is denied, and Debtors will be granted leave to file an amended Plan curing Wells Fargo 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 Wells Fargo 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 Wells Fargo Bank's Proof of Claim 12 shows that Debtor Darryl D. Chitwood ("Darryl") signed a note dated April 1, 2011, in the amount of $329,300.00 payable to Mann Mortgage LLC. The note calls for monthly payments in the amount of $1,793.00 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 5.125 percent (5.125%). 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. An attached allonge makes the note payable to the order of Wells Fargo Bank.

Darryl also signed a "Deed of Trust/Trust Indenture under the Small Tract Financing Act of Montana" dated April 1, 2011, which provides as security for repayment of the note the Debtors' residence at 36 Neuman School Road in Vaughn, Cascade County, Montana.1 The deed of trust was recorded on April 4, 2011. The deed of trust provides at paragraph 14 on page 8 that, in the event of default, the lender may charge the borrower fees for services performed in connection with the borrower's default, including "attorneys' fees, property inspection and valuation fees" as well as other fees.

Darryl defaulted on the note. Debtors filed their voluntary Chapter 13 petition on March 4, 2013. They filed their Schedules, Statement of Financial Affairs and Chapter 13 Plan on March 7, 2013, and filed amended Schedules on March 25, 2013. Debtors' residence at 36 Neuman School Road in Vaughn is listed on Schedule A with a current value of $329,300,2 encumbered by a secured claim stated in the amount of $324,890.00. Debtors claim a homestead on their residence. Schedule D lists Wells Fargo Mortgage as having a claim in the amount of $324,890.00 secured by Debtors' residence.

Debtors filed their Chapter 13 Plan (Dkt. 12) on March 7, 2013. The hearing on confirmation 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 $500 per month. Paragraph 2(b) of the Plan lists no impaired secured claims. Paragraph 2(c) treats the claim of Wells Fargo Mortgage 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 Wells Fargo Mortgage's "unimpaired secured claim[]" in the amount of "$24,000.00 (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 filed a consent to confirmation on March 26, 2013, stating that the Plan complies with the provisions of Chapter 13, has been proposed in good faith and not by any means prohibited by law.

Wells Fargo Bank filed objections to confirmation on April 12, 2013, on the grounds thePlan 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, Wells Fargo Bank objected that the amount of its arrearage is $26,625.07 in its Proof of Claim.3 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).

Wells Fargo Bank filed Proof of Claim No. 12 on May 8, 2013, asserting a secured claim in the amount of $346,701.13 secured by the deed of trust. Section 4 of Proof of Claim 12 states that the claim is fully secured by 36 Neuman School Road, but left blank the value of the property. The amount of arrearage is stated in the amount of $26,625.07.

The attachment to Proof of Claim 12 itemizes the $26,625.07 arrearage as comprised of 12 installments of $1,883.58 due from April 1, 2012, to March 1, 2013 ($22,602.96), plus $4,022.11 in additional prepetition fees, expenses and other charges. The $4,022.11 additional expenses is comprised of $376.70 in late charges from April to August 2012, $540 in attorney's fees from August 2012 to October 2012, $126.50 in filing fees and court costs, $1,002.08 in advertisement cost, $1,101 in title costs, $47 in recording fees, $105 in property inspection fees from February 2012 to January 2013, and $723.834 described as "Escrow shortage or deficiency."

On May 17, 2013, Debtors filed their Objection to Proof of Claim 12. Debtors object that Wells Fargo Bank's Claim 12 is undersecured under § 506(b) based on the scheduled value of their residence, $329,300. Debtors do not argue that the assessed charges, fees and costs on theattachment to Claim 12 are unreasonable, but rather they argue that Wells Fargo Bank's arrearage should be allowed only for the 12 installment payments ($22,602.96) plus the $723.83 in escrow shortage for a total arrearage of $23,326.79, and the balance 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 Wells Fargo Bank's arrearage claim to accrued principal and interest despite the anti-modification provisions of 11 U.S.C. § 1322(b)(2).

Wells Fargo 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. Wells Fargo 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 12.

"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 be added as part of the allowed amount of an allowed secured claim to the extend that the claim isoversecured." 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

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