In re Dendy, C/A No. 00-05338-JW.

• Decision Date: 05 May 2008
• Docket Number: C/A No. 00-05338-JW.
• Citation: 396 B.R. 171
• Parties: In re Thomas B. DENDY and Charita R. Dendy, Debtors.
• Court: U.S. Bankruptcy Court — District of South Carolina

396 B.R. 171

In re Thomas B. DENDY and Charita R. Dendy, Debtors.

C/A No. 00-05338-JW.

United States Bankruptcy Court, D. South Carolina.

May 5, 2008.

Robert H. Cooper, Greenville, SC, for Debtors.

ORDER

JOHN E. WAITES, Bankruptcy Judge.

This matter comes before the Court on Thomas B. Dendy and Charita R. Dendy's ("Debtors") Motion for Sanctions ("Motion"). This Court has jurisdiction pursuant to 28 U.S.C. § 1334, and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (K), and (O). Pursuant to Fed.R.Civ.P. 52, made applicable to this proceeding pursuant to Fed. R. Bankr.P. 7052, the Court makes the following Findings of Fact and Conclusions of Law.¹

FINDINGS OF FACT

1. Debtors filed a petition for relief under chapter 13 of the Bankruptcy Code on June 19,2000.

2. With their petition, Debtors filed schedules indicating that the value of their residence was $98,000.00. Debtors' schedules further indicate that Chevy Chase Bank held a first mortgage on their residence, with a principal balance of $105,200.00. Debtors' schedules also indicate that Litton Loan Servicing LP ("Litton") held or was the servicing agent for a second mortgage.

3. On July 5, 2000, Debtors filed a chapter 13 plan. The chapter 13 plan was based upon the form chapter 13 plan used at that time in this District and was not modified as provided in SC LBR 3015-1(a).

4. The plan contained a motion to value the claim held or serviced by Litton (the "Litton Claim") pursuant to SC LBR 3015-1. Since there was no equity in the property beyond the first mortgage, Debtors moved to value Litton's secured claim at $0.00 and to pay it as an unsecured creditor in paragraph 4(c) of the plan. Notice of the motion to value was conspicuously stated on the first page of the plan and provided that Litton had twenty-five days to respond to the valuation on behalf of itself or its principal.

5. Debtors' chapter 13 plan and related motions were served on Litton. Debtors' evidence indicates that, at the time of the petition, Litton was the holder or the servicing agent of the second mortgage and therefore was the proper party to receive service of the plan and motion.²

6. Neither Litton nor any other agent or purported holder of the second mortgage objected to confirmation nor did such parties file a proof of claim for the second mortgage.

7. Debtors' chapter 13 plan was confirmed on October 12, 2000.³ The order confirming Debtor's chapter 13 plan provides "[p]ursuant to 11 U.S.C. § 506(a), the court hereby values those secured claims set forth in the confirmed plan at the amounts set forth in the confirmed plan or by separate order and voids those liens to the extent permitted by 11 U.S.C. § 506(d) and applicable law."

8. Litton was served with a copy of the confirmation order but did not appeal the order or seek reconsideration under Fed. R. Bankr.P. 9023 or 9024.

9. At some point following confirmation of the plan, Aegis Mortgage Corporation ("Aegis") assumed Litton's role as the servicer of the second mortgage. No appearance in the Bankruptcy Court was filed by Aegis or any other holder of the second mortgage at any time.

10. On May 30, 2001, Aegis sent Debtors a letter, which stated that Debtors had failed to make payments on the second mortgage since May 1, 2000 and were past due in the amount of $8,193.12. The letter directed Debtors to contact Lori Tinsley about the past due amount owed on the account.⁴

11. On June 11, 2001, Debtors' counsel advised Aegis by letter that the second mortgage was valued at $0.00 by motion in Debtors' confirmed chapter 13 plan and that Debtors were paying the second mortgage through the plan. Counsel included a copy of Debtors' petition and plan with her letter to Aegis to demonstrate that Debtors were in bankruptcy and paying creditors pursuant to the terms of a plan.

12. Debtors completed the payments due under the confirmed plan and received a chapter 13 discharge on March 14, 2005.

13. The order discharging Debtors was served on Litton, as the party listed in the original schedules and statements.

14. Following discharge, Debtors attempted to refinance the first mortgage on their home. Debtors received a commitment from a lender on January 25, 2008 to refinance the debt on their first mortgage and on a vehicle at 5.75% per annum. The refinancing of these debts would have saved Debtors $498.00 per month. Debtors scheduled a closing on the loan for February 5, 2008.

15. Mrs. Dendy testified that she was advised on February 3, 2008 that the second mortgage still appeared as an encumbrance to her property. Mrs. Dendy further testified that she and her attorney contacted Aegis and Litton about removing the second mortgage from the county records. Litton advised Mrs. Dendy that it had sold or transferred its rights in the loan to Aegis in 2001 and instructed Debtors to contact Aegis about the loan. Debtors did not testify about the particular response they received from Aegis.

16. Through applying for a loan, Debtors also discovered that the debts with Litton and Aegis appeared on their credit reports. In both of their credit reports, Debtors' account with Litton has a balance of $0.00 and the information on this balance was last reported by Litton pre-petition in May of 2000. Both credit reports also indicate that the account with Aegis was opened in January of 1997, had a high balance of $45,000.00, and was past due in the amount of $30,759.00. Debtors' account with Aegis appears under the category of "Adverse Accounts" in Mr. Dendy's credit report. The reports further indicate that the account with Aegis was closed in December of 2001 and that the information was last reported on the account in November of 2004, prior to the discharge being entered in this case.

17. Debtors filed the Motion on February 27, 2008. Debtors alleged that Litton and Aegis violated the discharge injunction of 11 U.S.C. § 524 by failing to remove the second mortgage from the real property records of Greenville County, South Carolina. Although not pled, Debtors also argued at the hearing on the Motion that the notations on their credit reports were a slander of their credit. Debtors seek relief under this Court's statutory contempt powers of 11 U.S.C. § 105(a) to compel these creditors to remove the second mortgage and to pay Debtors actual and punitive damages for previously failing to remove the second mortgage and for slander of credit.

18. Litton and Aegis were served with a copy of the Motion but failed to respond and failed to appear at the hearing on the Motion.

19. By separate order entered April 21, 2008, the Court found that the Greenville County clerk should record that the second mortgage has been voided by the confirmation order in this case. The Court reserved jurisdiction to consider Debtors' request for sanctions and other relief.

ISSUE

Whether Litton or Aegis violated the discharge injunction or confirmation order by failing to release a voided mortgage or by failing to correct entries in Debtors' credit reports following discharge.

CONCLUSIONS OF LAW

I. Debtors Properly Voided the Second Mortgage.

Subsequent to the Supreme Court's decision in Nobelman v. American Savings Bank, 508 U.S. 324, 331-32, 113 S.Ct. 2106, 2111, 124 L.Ed.2d 228 (1993), this Court and the majority of other courts have allowed debtors to void the mortgage of a creditor pursuant to 11 U.S.C. § 506(d)⁵ if the creditor's claim was fully unsecured beyond the value of the senior liens. See In re Meade, C/A No. 95-73378-W, slip op. (Bankr.D.S.C. Oct. 3, 1995); McDonald v. Master Financial, Inc. (In re McDonald), 205 F.3d 606 (3rd Cir.2000) (cert. denied, 531 U.S. 822, 121 S.Ct. 66, 148 L.Ed.2d 31 (2000)), see also John B. Butler, III, The Bankruptcy Handbook, ¶ 12.40 at pp. 12-57-12-59 (2008) (collecting cases).

In this District, debtors in chapter 13 cases value the claims and void the liens of junior mortgage creditors, whose liens are unsecured beyond the value of senior liens, by a motion contained within the chapter 13 plan.⁶ See SC LBR 3015-1(c). In this case, the chapter 13 plan specifically provided notice to Litton that Debtors were valuing the holder's claim pursuant to SC LBR 3015-1, which would thus void the lien pursuant to 11 U.S.C. § 506(d). See In re Thomas, 96-79381-W, slip op. at 4, 1997 WL 33343973 (Bankr.D.S.C. July 11, 1997) (discussing the due process provided to a creditor whose claim is valued by the form plan utilized in this District pursuant to SC LBR 3015-1). Though Litton may have subsequently transferred its rights under the mortgage, Debtors' evidence reflects that Litton was a proper party to receive notice of the valuation in as much as Litton was acting as a general agent for the holder of the mortgage by servicing the loan and collecting the loan payments. See In re Woodberry, 383 B.R. 373, 377-79 (Bankr.D.S.C.2008) (discussing the relationship between loan servicers and the holders of notes and mortgages and concluding that the loan servicer was a proper party in interest to act for the holder of the mortgage and move for relief from the automatic stay); Dupuis v. Federal Home Loan Mortgage Corp., 879 F.Supp. 139, 143-44 (D.Me.1995) (discussing the agency relationship between a servicer and the holder of the mortgage and concluding that the servicer was a general agent for the holder of the mortgage).

Litton failed to object to the valuation of the second mortgage claim. As a result, whatever claim Litton had or represented was unsecured pursuant to 11 U.S.C. § 506(a) and its lien was thus void pursuant to 11 U.S.C. § 506(d).⁷ The confirmation order specifically valued the second mortgage claim, pursuant to the provisions of the plan, and voided the lien represented by that mortgage. The confirmation order is binding on Litton, its principal, and any successors pursuant to 11 U.S.C. § 1327 and now defines the second mortgage creditor's rights and interest in Debtors' residence. See In re...