In re Cox, Bankruptcy No. 91-82729. Adv. No. 91-8213.

• Decision Date: 12 December 1994
• Docket Number: Bankruptcy No. 91-82729. Adv. No. 91-8213.
• Citation: In re Cox, 175 B.R. 266 (Bankr. C.D. Ill. 1994)
• Court: U.S. Bankruptcy Court — Central District of Illinois
• Parties: In re Bobby Gene COX and Verna Jean Cox, Debtors. HERITAGE FEDERAL CREDIT UNION, as Successor in Interest to Knox County School Employees Credit Union, Plaintiff, v. Kimberly K. COX, Bobby Cox, Verna Cox, B.J. Bellemey, Edward B. Beasley, Dean L. Johnson, d/b/a D & E Investments, and Unknown Owners, Defendants.

175 B.R. 266 (1994)

In re Bobby Gene COX and Verna Jean Cox, Debtors HERITAGE FEDERAL CREDIT UNION, as Successor in Interest to Knox County School Employees Credit Union, Plaintiff, v. Kimberly K. COX, Bobby Cox, Verna Cox, B.J. Bellemey, Edward B. Beasley, Dean L. Johnson, d/b/a D & E Investments, and Unknown Owners, Defendants.

Bankruptcy No. 91-82729. Adv. No. 91-8213.

United States Bankruptcy Court, C.D. Illinois.

December 12, 1994.

Francis Van Hooreweghe, John P. Harris, Moline, IL, for Heritage Federal Credit Union.

Barry M. Barash, Galesburg, IL, for Cox defendants.

OPINION

WILLIAM V. ALTERNBERGER, Chief Judge.

This case is before the Court on remand from the Honorable Michael M. Mihm, Chief United States District Judge for the Central District of Illinois.

The Debtors, BOBBY GENE COX and VERNA JEAN COX¹, filed a Chapter 13 bankruptcy petition on November 25, 1991, but the controversy underlying this dispute did not begin there. Back in 1985, the DEBTORS began residing at a house located at 404 West Lower St., Abingdon, Illinois. According to BOBBY GENE COX's testimony, when he mentioned to his son's father-in-law, Robert Williams, (WILLIAMS) that he liked the residence, WILLIAMS suggested that WILLIAMS buy the residence and that BOBBY GENE COX could make the mortgage payments. WILLIAMS purchased the residence and title remained in his name. The DEBTORS furnished the down payment and paid the real estate taxes and insurance. The DEBTORS made the mortgage payments for a period of about two years.

Their son's marriage fell apart, however, and WILLIAMS threatened to sell the residence. The DEBTORS could not borrow the money from the Knox County School Employees Credit Union (CREDIT UNION), because they would exceed the CREDIT UNION's internal lending limits. At the suggestion of the CREDIT UNION's then manager, WILLIAMS conveyed title to the residence to Kimberly Kaye Cox (KIMBERLY), the DEBTORS' daughter, and the loan from the CREDIT UNION was made in her name. As part of the loan transaction, KIMBERLY gave the CREDIT UNION a first mortgage on the residence which waived homestead interests. The DEBTORS continued to live in the home, paying the taxes and insurance and making the mortgage payments to the CREDIT UNION.

KIMBERLY filed a Chapter 7 petition in bankruptcy on February 22, 1989. The Chapter 7 Trustee filed a two-count complaint against the CREDIT UNION, alleging violations of the Truth in Lending Act, 15 U.S.C. § 1601 et seq., seeking statutory damages and rescission. In In re Cox, 118 B.R. 94 (Bkrtcy.C.D.Ill.1990), this Court determined that the annual percentage rate disclosure was inaccurate and granted judgment in favor of the Trustee. This Court also held that the Chapter 7 Trustee was not entitled to rescind the mortgage, because the residence was not KIMBERLY's principal residence. Though the Trustee had added the DEBTORS as Defendants in that action and obtained service, the DEBTORS never filed a responsive pleading.

The CREDIT UNION then filed a foreclosure complaint in state court on August 28, 1991, naming KIMBERLY and the DEBTORS as Defendants, seeking a deficiency judgment only against the DEBTORS. KIMBERLY and the DEBTORS answered the complaint, with the DEBTORS alleging as an affirmative defense that they had no personal liability because they did not sign the note. The DEBTORS asserted a counterclaim, seeking statutory damages for an inaccurate disclosure of the annual percentage rate and rescission of the transaction. The CREDIT UNION filed a motion to dismiss the counterclaim and on November 4, 1991, the counterclaim was dismissed by the state court with the DEBTORS being given leave to replead.

Instead of repleading, the DEBTORS filed a Chapter 13 proceeding in bankruptcy on November 25, 1991, and had the foreclosure proceeding removed to this Court as an adversary proceeding. The CREDIT UNION moved for abstention and remand to the state court. This Court denied the CREDIT UNION's motion, and the appeal taken by the CREDIT UNION from that decision was dismissed by the District Court in July, 1992, as a premature, interlocutory appeal.

The DEBTORS' Chapter 13 plan provided that the DEBTORS would pay the Chapter 13 Trustee $78.00 every other week for a period of three years, totalling $5,616.00. Under the terms of the plan, priority creditors, totalling $1,798.00 were to be paid first, with payment of the balance due on attorney's fees of $800.00 being paid next. The DEBTORS' plan then proposed to pay the secured claim of the CREDIT UNION on a vehicle in the amount of $300.00. The DEBTORS' plan provided the following with respect to the mortgage held by the CREDIT UNION and the pending adversary proceeding:

Debtors have alleged that the credit union is entirely unsecured, claiming violations of the Truth in Lending Act. They have removed the credit union\'s foreclosure action from state court to this court; the credit union has moved to remand.

If the court finds that the credit union is entirely unsecured, then debtors do not propose to pay the credit union anything on the mortgage note. However, if the court finds that the credit union\'s mortgage is valid, then debtors intend to pay the fair market value of the real estate at 404 W. Lower, Abingdon, Illinois, to the credit union at the rate of $200 per month, outside the plan, which amount includes interest at 9%.

At the time of the filing of the Chapter 13, BOBBY GENE COX was unemployed and the schedule of current income showed a combined monthly income, strictly from wages of VERNA JEAN COX of $1,314.00. The schedule of current expenditures showed total monthly expenses of $1,314.00, including a $200.00 monthly mortgage payment to the CREDIT UNION and a monthly payment to the Chapter 13 Trustee of $156.00. The DEBTORS listed unsecured claims in the amount of $11,043.00² and the dividend to unsecured creditors was estimated to be 6%.

The CREDIT UNION filed an objection to the plan, raising the additional objection that § 1322(b)(2) of the Bankruptcy Code, 11 U.S.C. § 1322(b)(2), prohibits the modification of a secured claim secured only by a security interest in real property that is the debtor's principal residence³ and, while the appeal was still pending before the District Court, a confirmation hearing was held on April 10, 1992. The DEBTORS assured the Court that the alternatives set forth in the plan covered all the bases and that the pending litigation in the adversary proceeding posed no bar to confirmation. The CREDIT UNION indicated that confirmation of the plan should not be construed to be a concession by the CREDIT UNION as to any issues raised in the adversary proceeding. The DEBTORS stated that they just wanted to be able to make the regular payments to the other creditors. At the Court's invitation, the parties submitted an agreed order confirming the plan which was entered on May 19, 1992.

KIMBERLY and the DEBTORS then moved to amend their answer, affirmative defenses and counterclaim, to reflect that on March 11, 1992, KIMBERLY deeded the residence to the DEBTORS. That motion was denied by the Court. A pretrial conference was held on the adversary proceeding and the Chapter 13 Trustee's objection to the claim filed by the CREDIT UNION on February 9, 1993. The CREDIT UNION asserted that it had a right to foreclose the mortgage because KIMBERLY was the borrower and the title holder at the time the note and mortgage was executed. The CREDIT UNION also contended that the DEBTORS were not entitled to any of the protections of the Truth in Lending Act because they were not the borrowers and that they may not maintain an action under that law because they are not the title holders. The DEBTORS contended that KIMBERLY's liability on the note had been discharged by her bankruptcy and that the CREDIT UNION had no claim against the DEBTORS because they did not sign the note. Relying on Shay v. Penrose, 25 Ill.2d 447, 185 N.E.2d 218 (1962), the DEBTORS maintained that they were the owners of the residence. The DEBTORS took the position that they were entitled to rescind the transaction and to statutory damages for the CREDIT UNION's failure to give them the required disclosures under the Truth in Lending law. On the eve of trial, the CREDIT UNION filed a motion to dismiss the affirmative defenses and the counterclaim for rescission, asserting that those actions were time-barred.

A trial of all issues was held on July 16, 1993. No mention was made of the DEBTORS' claim to a homestead exemption and, in fact, it was admitted during argument following the close of the evidence, that if the Court would find the mortgage to be valid that the DEBTORS would have to pay the mortgage balance in full. Post-trial briefs were filed by the parties. In their post-trial brief the DEBTORS for the first time claimed they were entitled to a homestead exemption. This Court issued its opinion and order on December 29, 1993, holding that the DEBTORS could treat the CREDIT UNION's claim in their Chapter 13 proceeding, and that the DEBTORS must pay 100% of the CREDIT UNION's secured claim. This Court ruled in favor of the CREDIT UNION on the DEBTORS' claims for rescission and statutory damages under Truth in Lending.

In its prior Opinion, this Court remarked upon the peculiar facts and posture of the parties throughout this case, stating:

These oddities are easily explainable. The loan was in reality for the benefit of the DEBTORS. Prior to the loan the DEBTORS resided in the residence. The loan was structured in the manner that it was because the DEBTORS did not qualify for a loan. Both the CREDITOR and the DEBTORS participated in the charade.

After the loan was made, the DEBTORS continued to reside in the residence and they made the loan payments. The parties\' actions reflect the true nature of the transaction. In reality the residence belonged to the DEBTORS. The legal theory supporting their position is one of a

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