In re Euliano

• Decision Date: 29 November 2010
• Docket Number: No. 09–30413–HJB.,09–30413–HJB.
• Citation: 442 B.R. 177
• Parties: In re Francis W. EULIANO, Jr., Susan Y. Euliano, Debtors.
• Court: U.S. Bankruptcy Court — District of Massachusetts

442 B.R. 177

In re Francis W. EULIANO, Jr., Susan Y. Euliano, Debtors.

No. 09–30413–HJB.

United States Bankruptcy Court, D. Massachusetts,Western Division.

Nov. 29, 2010.

Justin H. Dion, Bacon Wilson, P.C., Springfield, MA, for Debtors.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

Before the Court is a motion filed by Denise M. Pappalardo, Chapter 13 trustee (the “Trustee”), to dismiss this Chapter 13 bankruptcy case under 11 U.S.C. § 1307(c)(1), on the grounds that the failure of the debtors' plan to provide for full payment of a mortgagee's prepetition arrearage claim constitutes an unreasonable delay prejudicial to creditors. Because the plan has already been confirmed without objection, the Court must determine whether the failure to fully provide for the secured creditor's claim through the plan now warrants dismissal of this case.

I. FACTS AND TRAVEL OF THE CASE

On March 20, 2009, Francis W. Euliano, Jr. and Susan Y. Euliano (the “Debtors”) filed a petition seeking relief under Chapter 13 of the United States Bankruptcy Code (the “Bankruptcy Code” or the “Code”).¹ On Schedule A—Real Property, the Debtors listed their residence (the “Property”) and, on Schedule D—Secured Creditors, indicated that Countrywide Home Loans (“Countrywide”) held a mortgage on the Property (the “Mortgage”), securing a claim in an outstanding amount of $228,370.

On March 24, 2009, the Court issued its standard “Notice of Chapter 13 Bankruptcy Case, Meeting of Creditors, & Deadlines,” ECF No. 11, which notice was served on all creditors, including Countrywide. See BNC Certificate of Mailing—Meeting of Creditors, March 26, 2009, ECF No. 12. Consistent with relevant Federal Rules of Bankruptcy Procedure (the “Rules” or “Bankruptcy Rules”) and Massachusetts Local Bankruptcy Rules (“MLBR” or the “Local Rules”), the notice informed parties in interest that the deadline for all creditors (except governmental units) to file proofs of claim was July 28, 2009 (the “Bar Date”) ² and that objections to the Debtors' Chapter 13 plan must be filed by the later of: (i) thirty days after the first date set for the meeting of creditors pursuant to § 341 or (ii) thirty days after the service of a modified plan.³ As the § 341 meeting was scheduled for April 29, 2009, the deadline for filing objections to the Debtors' Chapter 13 plan was May 29, 2009—approximately one month prior to the Bar Date.

On April 22, 2009, the Debtors filed their Chapter 13 plan (the “Plan”), ECF No. 16, which was served on all creditors and the Trustee on May 6, 2009. See Amended Certificate of Service, ECF No. 23. The Plan provides for monthly payments of $165 for sixty months, allocated between the prepetition arrears on the Mortgage, a small (approximately two percent) dividend to unsecured creditors, and the Trustee's administrative fee. Prepetition Mortgage arrears in the amount of $8,000 were to be paid in full through the Plan, but the postpetition monthly Mortgage payments would be paid directly to Countrywide (i.e., not through the Plan).

Countrywide timely filed a proof of claim (the “Countrywide Claim”) on June 12, 2009—before the Bar Date, but almost two weeks after the deadline for filing an objection to the Plan. The Countrywide Claim reflected a secured claim in the total amount of $246,473.37, of which $15,871.83 was due in prepetition arrears. Despite the fact that the Plan represented the prepetition arrears owed to Countrywide as only $8,000, Countrywide did not file an objection to the Plan.⁴

And despite the fact that Countrywide's claim for prepetition arrears was almost double the amount provided for by the Plan, the Debtors did not file an objection to the Countrywide Claim,⁵ nor did they amend the Plan to account for the higher arrearage amount.⁶ The Trustee likewise failed to raise an objection to either the Plan or the Countrywide Claim. Instead, on December 30, 2009, more than six months after the Countrywide Claim was filed, and well after the deadlines for objecting to the Plan or proofs of claim had expired, the Trustee submitted a proposed confirmation order to the Court, and the Plan was confirmed that day (the “Confirmation Order”).⁷ The Confirmation Order specifically addressed the payment of Mortgage arrears and ongoing postpetition monthly Mortgage payments:

Countrywide Home Loans (the “Mortgagee”) is retaining its lien on the [P]roperty.... The debtor shall continue to make regular monthly payments in accordance with the contract with the Mortgagee. The Mortgagee will be paid its prepetition arrearage in the sum of $8,000.00 over 60 months at the sum of $133.34 each month.Order Confirming Chapter 13 Plan, December 30, 2009, ECF No. 35.

Following confirmation of the Plan, the Debtors continued to make timely Plan and Mortgage payments.⁸ However, six months later, on July 8, 2010, the Trustee awoke and filed the instant motion to dismiss the Debtors' case (the “Motion to Dismiss”). In her Motion to Dismiss, the Trustee recites that, after reviewing the claims register maintained by the Court, she concluded that “[t]he confirmed plan fails to adequately address those claims filed before the bar date ... [and] ... that the Debtor's failure to address the claims as filed or to file an amended plan constitutes unreasonable delay prejudicial to creditors pursuant to 11 U.S.C. § 1307(c)(1).” Motion of Chapter 13 Trustee to Dismiss Case, July 8, 2010, ECF No. 49. Specifically, the Trustee now was focused on the discrepancy between the prepetition arrearage amount set forth in the Countrywide Claim and the amount provided for under the Plan.

The Debtors' initial written response to the Motion to Dismiss indicated that they were reviewing the claims filed in the case and would be filing an amended plan. See Debtors' Response to Trustee's Motion to Dismiss Case, July 16, 2010, ECF No. 52. But at the hearing on the Motion to Dismiss (the “Hearing”), the Debtors took a different position, now arguing that the Motion to Dismiss should be denied and that the Debtors should not be required to amend the Plan for the reasons set forth below. Hr'g Tr. 3:25–4:10, Aug. 5, 2010. The Court took the matter under advisement at the conclusion of the hearing and granted the parties additional time to file supplemental briefs. Both parties have done so.

II. POSITIONS OF THE PARTIES

It is important to note what is and what is not presently before the Court. The Debtors have still not objected to the Countrywide Claim. Accordingly, under the Code and Rules and for these purposes, Countrywide's claim for prepetition Mortgage arrears is deemed to be in the allowed amount of $15,871.83 ⁹ Further, inasmuch as the Plan has been confirmed, all parties are bound, pursuant to § 1327(a), to the treatment of the Countrywide Claim provided for in the Plan—i.e., payment of $8,000 toward the arrears.¹⁰ Finally, the Debtors concede that any prepetition arrears not provided for by the Plan will remain due upon completion of the Plan and will remain secured by the Property pursuant to the Mortgage.¹¹ The dispute here is simply whether, in light of the confirmation of the Plan without objection and the disparity between the Plan allocation for Mortgage arrears and the amount of the Countrywide Claim as allowed, the Debtors can now be compelled to modify their Plan under § 1329 or face dismissal of their case for cause under § 1307(c)(1).¹²

A. Trustee

The Trustee raises several arguments in support of modification or dismissal. First, she argues that the harm to the Debtors in failing to account for the full amount of arrears ultimately outweighs the benefit the Debtors receive by completing the Plan as currently formulated. Because the unpaid prepetition arrears will remain secured by the Property after completion of the Plan, the likely outcome, she opines, is that the Debtors, after completing five years of Plan payments including $8,000 in payments to Countrywide, will still face a foreclosure of the Mortgage. In that respect, the Trustee argues, the failure to fully address the Mortgage arrears is inconsistent with the very purpose of Chapter 13 of the Code—namely, to provide the Debtors an opportunity to reorganize their financial affairs in order to achieve a “fresh start” upon emergence from bankruptcy. The Trustee contends that, by not curing the arrears on their secured debts, the Debtors here are not attempting a true reorganization to achieve this fresh start, but are instead merely delaying an inevitable foreclosure.

Second, the Trustee argues that the Debtors' failure to provide for the full amount of the arrears runs afoul of § 1322(b)(5), which permits a Debtor to reinstate a defaulted long-term debt by paying the full amount of arrears within a reasonable time and maintaining ongoing payments during the life of a Chapter 13 plan. Because the Debtors are not paying the full amount of the arrears, the Trustee maintains that the Debtors are not curing the arrears within a “reasonable time,” as required by the Code.

Third, the Trustee contends that the Plan disrupts the priority scheme of the Bankruptcy Code, since unsecured creditors, albeit receiving a small dividend, are being provided with payments that should be paid toward the Debtors' secured claims. In fact, the Trustee notes, the Debtors gain no benefit by making payments to unsecured creditors at the expense of their secured debt, since (to the extent the unsecured debts are dischargeable under the Code) those debts will be discharged upon completion of the Plan whether or not a dividend is provided.

Finally, the Trustee urges the Court to examine the overall purpose and structure of the Bankruptcy Code and to consider the inherently conflicting deadlines and procedures related to claims and plan objections and allowance. Since these deadlines and procedures lack clear synchronicity (i.e., Chapter 13 plans may be confirmed prior to the bar date for filing proofs of claim),...