In re Clay, Bankruptcy No. 96-03959-BGC-11.
| Decision Date | 16 September 1996 |
| Docket Number | Bankruptcy No. 96-03959-BGC-11. |
| Citation | 204 BR 786 |
| Parties | In re Mark D. CLAY, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Alabama |
Steven C.R. Brown, Birmingham, Alabama, for Debtor.
Harold Goings, Birmingham, Alabama, for Movants.
ORDER ON MOTION FOR RELIEF FROM STAY
(Filed by Bobby E. Collier and Beverly K. Collier)
The matter before the Court in this Chapter 11 case is a Motion for Relief from Stay filed on June 17, 1996 by Bobby E. Collier and Beverly K. Collier, the mortgagees of the debtor. After notice, a hearing was held on August 8, 1996. Dr. Mark D. Clay, the debtor; Steven C.R. Brown, the attorney for debtor; Bobby E. and Beverly K. Collier, the movants; and Harold Goings, the attorney for the movants, appeared. The matter was submitted on testamentary and documentary evidence.
Because the matter before the Court may be resolved solely as a matter of law, this Court has considered only the issue of whether a Chapter 11 debtor may cure the default of a balloon-type mortgage payment through a Chapter 11 plan. And for the reasons expressed below, this Court finds that in this district, such a cure is not allowed.1
The facts necessary to decide this matter are undisputed.2 The parties agree that the debtor purchased a home from the movants and that the debtor failed to make a balloon-type mortgage payment that became due on April 1, 1996. The debtor seeks to cure that default in this Chapter 11 case. The movants are opposed.
The parties agree that the debtor purchased real estate from the movants and a partner on March 28, 1991. In general terms the purchase was to be made through monthly payments, based on a 30-year mortgage amortization, beginning in May 1991 for approximately five years after which a final balloon payment of the balance due would be paid on April 1, 1996.3
The purchase price was $209,000.00. A $15,000.00 downpayment was due at the closing of the sale. In addition to the monthly payments, two $5,000.00 payments were due, one for October 1991 and one for April 1992 and a $10,000.00 payment was due for April 1993. The debtor made these payments although the $10,000.00 was made in the form of a promissory note.
The parties agree that the debtor has paid approximately $41,000.00 toward the purchase of the property but that he is in default for one month's payment and in default for failing to make the April 1, 1996 balloon payment for the balance due. The Mr. Collier testified that the current balance due, including expenses is $178,024.37. Movants Ex. 4.
The debtor testified that all of his negotiations were with the movants' partner Hyram Gilbert, although the note (Movants' Ex. 1) and the mortgage (Movants' Ex. 2) were between the debtor and the debtor's wife and the movants.4 The debtor explained that he had approached Mr. Gilbert to discuss construction of a house and that Mr. Gilbert offered the subject property to him. The debtor testified that after many calls to him from Mr. Gilbert (approximately 20) asking him to buy the property, the debtor agreed. The debtor testified that Mr. Gilbert promised that if the debtor was unable to make the balloon payment that new financing would be available. Mr. Collier testified that no such promise was made and that the original sale and financing by him was made as a consideration to the debtor because the debtor had filed a previous bankruptcy petition and according to Mr. Collier was having some problem obtaining financing to purchase any other property.5
The parties could not agree on the current condition and fair market value of the property. Mr. Collier testified that, because of the condition of the house, the property was worth no more than the balance due. Mr. Collier testified that the house was in generally bad condition although he had not been in the house and had no personal knowledge of the condition. Mr. Collier did not have an opinion on the actual value of the property. The debtor testified that the condition of the house was good and that any existing problems were cosmetic. The debtor testified that the fair market value of the house was $195,000.00. The debtor testified that since the house was built, the unfinished downstairs has been finished to include two bedrooms and a bath and a 600 square foot den. The debtor testified that he gave the movant a promissory note of $10,000.00 to pay for the bedroom and bath completion but that he paid $15,000.00 from his personal funds for the den improvement. The total amount of improvements according to the debtor is approximately $25,000.00.6 This Court finds that the only admissible evidence of the condition and fair market value of the property is that offered by the debtor.
The debtor is a doctor of chiropractic medicine. For many months before he filed the current case he was physically incapacitated because of back and knee problems and could not work. He testified that his financial problems were directly associated with his medical problems. The debtor testified that prior to ceasing work his annual income from his chiropractic practice was $190,000.00 to $200,000.00. He is currently working with another doctor as he begins to reestablish his practice. His current monthly income is $2,000.00 to $3,000.00 but he expects that this income will approach his former income when his practice grows.
The parties agree that the debtor is currently liable for past due taxes of approximately $70,000.00 and that tax liens for that amount are attached to the property.
The debtor has not filed a plan in this Chapter 11 case and has not made any proposal for adequate protection to the movants.7
The debtor contends that the mortgage default cure provisions of Chapter 13 of the Bankruptcy Code apply to this Chapter 11 case and that the debtor may, pursuant to 11 U.S.C. § 1322 cure his mortgage default through a Chapter 11 plan. The debtor contends specifically that he may pay the April 1996 balloon payment over the life of that plan. The movants contend that the Bankruptcy Code does not allow for such a cure whether in Chapter 11 or Chapter 13 and even if it did that the debtor has not offered adequate protection to the movants in order to defeat the motion for relief from stay.
The Court finds that while defaults in mortgage payments that occur because of a failure to make a designed balloon payment may be cured through a Chapter 13 bankruptcy, the same type of default may not be cured in a Chapter 11 case. The Court bases this finding on the recent amendments to both Chapters 11 and 13 of the Bankruptcy Code in regards to defaults in mortgage payments secured by debtors' residences, on the reversal of the order entered by this Court in In re Eason, 181 B.R. 127, (Bankr.N.D.Ala. 1995), rev'd Dew v. Eason (In re Eason), CV-95-G-0729-S (N.D.Ala. April 30, 1996) and on the procedures that control the different chapters.
Congress addressed the issue of curing defaults in balloon mortgage payments in Section 301(c)(2) of the Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, 108 Stat. 4106 (1994). That section added Section 1322(c)(2) to the Bankruptcy Code as an exception to Section 1322(b)(2). Section 1322(c)(2) reads in part:
Id. 11 U.S.C. § 1322(c)(2) (parenthetical added).
In the same Act Congress addressed the rights of a Chapter 11 debtor to modify the rights of holders of secured claims that are secured by the debtor's residence. Section 206(3) of the Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, 108 Stat. 4123 (1994) added Section 1123(b)(5) to the Bankruptcy Code to allow a Chapter 11 debtor to propose a plan that would:
modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor\'s principal residence. . . .
Id. 11 U.S.C. § 1123(b)(5). The above language is identical not only to the current language of Section 1322(b)(2) but is also identical to the pre-1994 amendment language of Section 1322(b)(2) as it existed without the addition of Section 1322(c)(2). See 11 U.S.C. § 1322(b)(2) (1978). When Congress added Section 1322(c)(2) as an exception to Section 1322(b)(2) it allowed for the curing of defaults in balloon-type mortgage payments in Chapter 13 cases. When Congress added Section 1123(b)(5) to Chapter 11, Congress added the language of Section 1322(b)(2) but did not include the excepting language of Section 1322(c)(2); consequently, Chapter 11 became restrictive where it was not and Chapter 13 became more permissive where it had not been.
The debtor argues that the balloon payment cure provisions of Chapter 13 apply to this case, or that at least the right to make such should be allowed in a Chapter 11 case. This Court disagrees. The importance of the difference in the actions of Congress in amending different sections of the same statute in different manners is significant. The Court of Appeals for the Eleventh Circuit recently recognized a comparable situation in comparing Section 523(a)(1)(C) of the Bankruptcy Code to Section 7201 of the Internal Revenue Code. Judge Stanley F. Birch, Jr. wrote:
Where Congress knows how to say something but chooses not to,...
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