In Re Debra Carlton, 10-40388-JJR-13.

• Decision Date: 09 September 2010
• Docket Number: No. 10-40388-JJR-13.,10-40388-JJR-13.
• Citation: 437 B.R. 412
• Parties: In re Debra CARLTON, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Alabama

437 B.R. 412

In re Debra CARLTON, Debtor.

No. 10-40388-JJR-13.

United States Bankruptcy Court,N.D. Alabama,Eastern Division.

Sept. 9, 2010.

COPYRIGHT MATERIAL OMITTED.

Marcus A. Semmes, Thomas M. Semmes, Legal Clinic of Semmes & Semmes, Anniston, AL, for Debtor.

MEMORANDUM OPINION

JAMES J. ROBINSON, Bankruptcy Judge.

The Debtor's chapter 13 plan (Doc. 29 and herein the “Plan”) came before the Court for confirmation, and although the Plan was confirmed, the Confirmation Order (Doc. 52) reserved ruling on whether confirmation should include the atypical provisions in the Plan that purported to apply to mortgage creditors (the “Mortgage Provisions”). The Standing Chapter 13 Trustee for this Division, Linda B. Gore, supported the inclusion of the Mortgage Provisions in the Plan and their confirmation. Unlike counsel for the Debtor, the Trustee filed a Brief supporting her position.

The eight-paragraph Mortgage Provisions are attached as Addendum-1 to this Opinion. ¹ For the reasons stated below, the Court finds the Mortgage Provisions are not appropriate for inclusion in a chapter 13 plan, and in many instances are inconsistent with the Bankruptcy Code. ² Accordingly, the Confirmation Order will not be supplemented to include the Mortgage Provisions as part of the Debtor's confirmed Plan.

This Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 157 and 1334, and the General Order of Reference, as amended, entered by the United States District Court for the Northern District of Alabama. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L); therefore, the Court has authority to enter a final order. In compliance with Rule 7052(a) of the Federal Rules of Bankruptcy Procedure, the following shall constitute the Court's findings of fact and conclusions of law. ³

BACKGROUND:

As mentioned above, the Mortgage Provisions in the Debtor's Plan are purported to apply to mortgage creditors: “holders and/or servicers of mortgage claims.” No creditor holding or servicing a mortgage claim was specifically identified by name in the Mortgage Provisions. Nonetheless, in her schedules the Debtor disclosed that her real-property homestead was encumbered by a mortgage held by the First National Bank of Scottsboro (the “Bank”). The Plan described the Bank as the holder of a long-term secured debt in the amount of $21,200.17, and stated the prepetition arrears on that debt were $833.00. The Plan proposed that the Trustee would pay the postpetition monthly installments that will become due on the Bank's mortgage as well as the prepetition arrears. The Plan also proposed to pay administrative expenses, including the Debtor's attorney, and a nominal dividend to unsecured creditors.

The Bank made no objection to confirmation of the Plan, with or without the Mortgage Provisions. After the Confirmation Order was entered (reserving further consideration of the Mortgage Provisions) the Bank filed two proofs of claim-one for its total mortgage debt and the other for the prepetition arrears-but still made no mention of the Mortgage Provisions. ⁴

CONCLUSIONS OF LAW:

In all likelihood the Bank has not focused on the Mortgage Provisions and their potential impact on its claims. Notwithstanding the Bank's apparent lack of attention to, or interest in the Mortgage Provisions, decisions by the Supreme Court and Eleventh Circuit suggest, indeed require that bankruptcy courts, sua sponte, deny confirmation of chapter 13 plans that are found to be inconsistent with the Bankruptcy Code. These decisions admonished bankruptcy judges that they have an affirmative duty not to confirm plans which do not comply with the Code, even when a creditor fails to object to confirmation of an offending plan. ⁵ The Eleventh Circuit in Universal American Mortgage Co. v. Bateman (In re Bateman), 331 F.3d 821(11th Cir.2003) stated that “it is the independent duty of the bankruptcy court to ensure that the proposed plan comports with the requirements of the bankruptcy code.” Id. at 828 n. 6 (emphasis added). And, “every party in interest-[the debtor, the creditor], the trustee, and even the bankruptcy judge-should have noticed and rectified [the discrepancy in the Plan] before the Plan was confirmed.” Id. at 833 (emphasis added).

In ruling on the propriety of bankruptcy courts confirming chapter 13 plans that purported to discharge student loans by plan-declaration rather than through an adversary proceeding as contemplated by the Code and Bankruptcy Rules, the Supreme Court recently held that “contrary to the [Ninth Circuit] Court of Appeals' assertion, the Code makes plain that bankruptcy courts have the authority-indeed, the obligation-to direct a debtor to conform his plan to the requirements of §§ 1328(a)(2) and 523(a)(8).” Espinosa, 130 S.Ct. at 1381 (emphasis added). ⁶ After Espinosa there can be no doubt about a bankruptcy court's authority and responsibility to deny confirmation of an offending plan although the creditor who would suffer the consequences of confirmation fails to object:

In other contexts, we have held that courts have the discretion, but not the obligation, to raise on their own initiative certain nonjurisdictional barriers to suit.... Section 1325(a) does more than codify this principle; it requires bankruptcy courts to address and correct a defect in a debtor's proposed plan even if no creditor raises the issue.

Id. at 1381 n. 14 (citations omitted). See also, In re Booth, 399 B.R. 316, 328 (Bankr.E.D.Ark.2009) (“Taylor Mortgage did not object to these two provisions [in the proposed chapter 13 plan]. The court, however, is entitled to note that these provisions, on their face, are contrary to the Bankruptcy Code.”); Beskin v. Maupin (In re Maupin), 384 B.R. 421, 425 (Bankr.W.D.Va.2007) (“In addition, the court has, on its own motion, raised other objections to the Debtor's plan.”).

The Bankruptcy Code does not specifically address the propriety of plan declarations that have the import of those now under scrutiny in this opinion. Nonetheless, the starting point for this analysis will be Bankruptcy Code Sections 1322(b), 1325(a) and 1327(a). Paragraphs 1-10 of Section 1322(b) delineate what provisions are appropriate for inclusion in a plan, and the eleventh and final paragraph of that Section is a catch-all provision that states a plan may “include any other appropriate provision not inconsistent with this title.” Section 1322(b)(11) (emphasis added). Sections 1325(a)(1) and (3) read that “[e]xcept as provided in subsection (b), the court shall confirm a plan if ... the plan complies with the provisions of this chapter and with the other applicable provisions of this title ... [and] the plan has been proposed in good faith and not by any means forbidden by law....” (emphasis added). And finally, Section 1327(a) states that “[t]he provisions of a confirmed plan bind the debtor and each creditor ... whether or not such creditor has objected to, has accepted, or has rejected the plan.” Pursuant to those Code Sections, if the Confirmation Order is supplemented to include the Mortgage Provisions as part of the confirmed Plan, they will be binding on the Bank and control the treatment of its secured claim during the Plan's five-year commitment period or until the case is dismissed. Thus, it is essential that the Court examine the Mortgage Provisions and determine whether they are consistent with the Code.

Paragraphs 1, 4 and 8-Restatement of Section 1322(b)(5) and Forgiveness of Late Penalties

Paragraphs 1 and 4 of the Mortgage Provisions are, to a large extent, an attempt to restate or perhaps summarize the mechanics of the treatment of mortgage claims under chapter 13-in particular treatment under Section 1322(b). Section 1322(b)(2) prohibits a chapter 13 plan from modifying “a claim secured only by a security interest in real property that is the debtor's principal residence ...” (e.g. the Bank's claim in this case), but Section 1322(b)(5) carves out an exception. It states that “notwithstanding [Section 1322(b)(2) the plan may] provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending....” In other words, Section 1322(b)(5) allows a chapter 13 debtor to bifurcate payment of his home mortgage. First, the plan may provide for payment of the on-going, postpetition installments as they become due under the mortgage contract, and those installments are to be treated and applied as if there were no default and no arrears. Second, the plan may provide for the cure of the prepetition arrears by spreading their payment over a reasonable time, which is usually the life of the plan. “The effect of 1322(b)(2) and (5) is to potentially split the treatment of mortgagee's secured claim by the plan-one secured claim for the mortgage going forward and one secured claim for the arrearage-but it does not compromise the amount of the aggregate secured claim or the rights of the secured creditor to recover the arrearage.” Bateman, 331 F.3d at 821 n. 5 (citing Nobelman v. Am. Savs. Bank, 508 U.S. 324, 331-32, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993)).

Confirmation of a chapter 13 plan which proposes to pay both prepetition arrears and postpetition mortgage installments temporarily usurps the amortization otherwise applicable under the mortgage contract until the arrears are fully paid, or the case is dismissed. ⁷ Under chapter 13, amortization of the postpetition installments will continue apart from the prepetition arrears, while the arrears are recast over the length of the plan. Hence, at confirmation the mortgage is once again, albeit hypothetically, “current,” and it is up to the debtor to keep it that way. The foregoing benefits the debtor because late penalties will not accrue on the on-going postpetition installments, assuming they are timely paid. Contrary to Paragraph 8 of the Mortgage Provisions, if the postpetition mortgage payments are tardy,...