In re Coates
| Decision Date | 17 April 2003 |
| Docket Number | No. 02-84836.,02-84836. |
| Citation | 292 B.R. 894 |
| Parties | In re Maria COATES, Debtor. |
| Court | U.S. Bankruptcy Court — Central District of Illinois |
Gregg W. Bittner, Peoria, IL, for debtor.
Pierce and Associates, Chicago, IL, for Litton Loan.
Michael D. Clark, Peoria, IL, trustee.
This matter is before the Court on the objection of Litton Loan Servicing Incorporated/Credit-Based Asset Servicing and Securitization LLC (LITTON LOAN) to confirmation of the Chapter 13 Plan filed by Maria Coates, the Debtor (DEBTOR), and the DEBTOR'S objection to Claim # 8 filed by LITTON LOAN. The main issue is the amount of LITTON LOAN'S prepetition mortgage arrearage that the DEBTOR proposes to cure in the plan.
On April 9, 1999, the DEBTOR borrowed $34,093.16 from Nationscredit Financial Services to purchase a home, executing a note and mortgage. The note and mortgage were assigned to LITTON LOAN. The mortgage contains a standard provision allowing for the recovery of attorney fees and expenses incurred by the mortgagee. The DEBTOR defaulted on her payments and LITTON LOAN instituted foreclosure proceedings.
The DEBTOR filed a Chapter 13 petition on October 25, 2002. She filed a plan proposing to pay LITTON LOAN'S arrearage in the amount of $1,950.00, while making current monthly mortgage payments outside the plan. LITTON LOAN filed a written objection to the plan, contending that the actual prepetition arrearage claim totaled $8,124.47. At the confirmation hearing held on December 16, 2002, in accordance with its earlier decision in In re McMullen, 273 B.R. 558 (Bankr.C.D.Ill.2001), the Court directed LITTON LOAN, appearing through local counsel, to file an affidavit with supporting documentation to substantiate its arrearage claim, including the various fees and costs (referred to as a "McMullen affidavit"). The DEBTOR was directed to respond to the affidavit within fourteen (14) days of its filing, by specifying her objection to each item, and a continued hearing was set for January 27, 2003.
On the same day as the confirmation hearing, LITTON LOAN filed a proof of claim in the amount of $8,124.47. Under a heading captioned "Remarks" at the bottom of the claim, LITTON LOAN added the following itemization:
12/01-10/02 11 @ 321.23 3,533.53
ESCROW SHORTAGE 1,069.59
PREV. FC ATTY FEES & COSTS 1,020.00
PROPERTY INSPECTIONS 80.00
FORECLOSURE COSTS 185.00
FORECLOSURE FEES 1,100.00
BANKRUPTCY FEES 450.00
BPO 100.00
PREVIOUS SERVICER EXPENSE 586.35
TOTAL 8,124.47
The only documents attached to the proof of claim were a copy of the mortgage, the corporate assignment and affidavits of service in the foreclosure action.
On December 30, 2002, in lieu of filing the requested affidavit, LITTON LOAN filed a "response" to the Court's directive, relying on Section 502(a) of the Bankruptcy Code and asserting that it need not "prove up" its claim, absent the filing of a written objection to the claim. LITTON LOAN requested that the Court reconsider its ruling.
On January 7, 2003, the DEBTOR objected to the proof of claim.1 In accordance with the procedures followed by this Court, notice was given to LITTON LOAN of the filing of the objection to its claim, directing it to file either an answer to the objection or an amended claim. LITTON LOAN'S response took the form of a motion for a more definite statement, again seeking information from the DEBTOR as a precondition to providing information to her.
On January 27, 2003, at a hearing upon LITTON LOAN'S response to the Court's direction to file a McMullen affidavit, this Court vacated its prior ruling, explaining that the procedure had been developed for the benefit of the litigants in an attempt to facilitate the exchange of information and identification of the issues and facts in dispute, but that mortgagees and their attorneys repeatedly failed to comply with the disclosure requirement. The Court set an evidentiary hearing on confirmation and the objection to the claim on March 4, 2003.
On February 4, 2003, in an oral ruling, this Court denied LITTON LOAN'S motion for a more definite statement, first noting that under Federal Rule of Bankruptcy Procedure 7012(b), Federal Rule of Civil Procedure 12(e), which permits the filing of a motion for a more definite statement, applies in adversary proceedings, but does not apply to contested matters under Bankruptcy Rule 9014(c). Turning to the merits of LITTON LOAN'S request, this Court held that the "deemed allowed" status accorded a proof of claim under Section 502(a) of the Bankruptcy Code continues only until an objection to the claim is filed. Given the paucity of information in the proof of claim itself, this Court determined that the objection filed by the DEBTOR was sufficient to join the issue. Finally, noting LITTON LOAN'S refusal to comply with the Court's established procedure requiring an affidavit from the mortgagee followed by a specific response from the debtor, the Court suggested that the information vacuum was largely the result of its own making.
The evidentiary hearing was held on March 4, 2003. The only witness to testify was the DEBTOR. She admitted LITTON LOAN'S assertion that she was eleven (11) monthly payments behind at the time she filed for bankruptcy protection and testified that she would be able to increase her plan payments in order to provide for the increased payment arrearage. The DEBTOR testified that she was not aware of the pending foreclosure action that she was never served with process and that no one ever entered her home for a property inspection.2 LITTON LOAN offered no evidence at the hearing. Its attorney advised the Court that immediately before the hearing, he had filed an amended proof of claim with the Bankruptcy Clerk's Office. That claim was not introduced into evidence, nor was any other documentation introduced.
Perhaps the most common reason that debtors choose Chapter 13 over Chapter 7 is a desire to save their house from foreclosure. Most often, mortgage lenders will not agree to permit a Chapter 7 debtor who is in default on his mortgage payments to reaffirm unless the mortgage loan is brought current. Lacking the cash to cure the arrearage, such debtors turn to Chapter 13 which permits a prepetition payment default on a mortgage to be cured in installments through the Chapter 13 plan, while the regular postpetition mortgage payments are paid when due. 11 U.S.C. § 1322(b)(5).
A debtor's obligation to cure the prepetition mortgage arrearage is enforceable as a condition of confirmation. A plan that fails to provide for a complete cure is not confirmable over the objection of the mortgagee. Most of the Chapter 13 cases filed in this District involve the cure of a prepetition mortgage arrearage. Since only a small percentage of Chapter 13 plans provide for a one hundred percent (100%) payout to unsecured creditors, the determination of the allowed amount of the prepetition mortgage arrearage, in most cases, has a significant effect on unsecured creditors: the higher the amount of the arrearage, the less that unsecured creditors will be paid. The Supreme Court has characterized the claim determination process as one "of basic importance in the administration of a bankruptcy estate," without which "unmeritorious or excessive claims might dilute the participation of the legitimate claimants." Gardner v. State of N.J., 329 U.S. 565, 573, 67 S.Ct. 467, 471-72, 91 L.Ed. 504 (1947).3
Since mortgage lenders seldom sit on their rights in the face of nonpayment, it is often the case that a foreclosure action will have been commenced prepetition. As provided by most standard promissory notes and mortgages, attorney fees and expenses incurred by the lender on account of a default, are collectable from the mortgagor. These fees and expenses become part of the claimed arrearage amount that is so often at issue in Chapter 13 cases.4 Accordingly, this issue, so frequently litigated, should be addressed systematically.
The Bankruptcy Code dictates the standard by which the arrearage amount is to be determined. Section 1322(e) provides as follows:
Notwithstanding subsection (b)(2) of this section and sections 506(b) and 1325(a)(5) of this title, if it is proposed in a plan to cure a default, the amount necessary to cure the default, shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.
11 U.S.C. § 1322(e). This provision directs inquiry not only to the terms of the mortgage and note but also to applicable nonbankruptcy law which, in this case, is Illinois law.
Under Illinois law, whether expressly stated in the contract provision or not, a standard of reasonableness will be implied to all requests for reimbursement of attorney fees and expenses assessed by one party to a contract against the other. Kaiser v. MEPC American Properties, Inc., 164 Ill.App.3d 978, 983, 518 N.E.2d 424, 427, 115 Ill.Dec. 899, 902 (Ill.App. 1 Dist.1987). It is well-settled that the party seeking the fees, whether for himself or on behalf of a client, always bears the burden of proof and of production to present sufficient evidence from which the trial court can render a decision as to their reasonableness.5 Id; J.B. Esker & Sons, Inc. v. Cle-Pa's Partnership, 325 Ill.App.3d 276, 757 N.E.2d 1271, 259 Ill.Dec. 136 (Ill.App. 5 Dist.2001). See, also, Bruner v. Office of Personnel Management, 996 F.2d 290 (Fed.Cir.1993) ().
The allocation of the burden of proof by Illinois courts is...
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