In re Fortin

• Decision Date: 31 October 2012
• Docket Number: Nos. 11–41881–MSH, 11–43774–MSH.,s. 11–41881–MSH, 11–43774–MSH.
• Citation: 482 B.R. 35
• Parties: In re Bruce F. FORTIN, Rebecca A. Fortin, Debtors.
• Court: U.S. Bankruptcy Court — District of Massachusetts

482 B.R. 35

In re Bruce F. FORTIN, Rebecca A. Fortin, Debtors.

Nos. 11–41881–MSH, 11–43774–MSH.

United States Bankruptcy Court,

D. Massachusetts,

Central Division.

Oct. 31, 2012.

Lawrence E. Cohen, Worcester, MA, for Bruce and Rebecca Fortin.

Martin A. Mooney, Deily, Mooney & Glastetter, LLP, Albany, NY, for Residential Mortgage Trust 2008–R1.

MEMORANDUM OF DECISION AND ORDER REGARDING CONFIRMATION OF SECOND AMENDED CHAPTER 13 PLAN

MELVIN S. HOFFMAN, Bankruptcy Judge.

Residential Mortgage Trust 2008–R1 (“RMT”) has objected to confirmation of the Second Amended Chapter 13 Plan dated November 8, 2011 of Bruce K. Fortin and Rebecca A. Fortin, the debtors in these jointly administered cases.

The background facts are straightforward. On December 18, 2006, the Fortins borrowed $215,000 from Lendia, Inc., securing their obligation by granting Lendia's nominee, Mortgage Electronic Registration Systems, Inc., a first mortgage on their 3 unit investment property at 5 Hill Street in Webster, Massachusetts. RMT is the current holder of the mortgage. The Fortins fell behind on their loan payments and collection efforts ensued. Mr. Fortin filed his chapter 13 petition on May 3, 2011; Ms. Fortin filed hers on September 3, 2011. The cases are being jointly administered. As of May 3, 2011, RMT was owed $279,466.11. This includes pre-petition arrearages totaling $62,860.81.

Based on a motion filed by the Fortins to determine RMT's secured status under Bankruptcy Code § 506 (11 USC § 101 et seq.), the parties agreed that the value of the Hill Street property is $185,000 and that RMT has a secured claim in the amount of $183,707.41 and an unsecured claim in the amount of $95,758.70.

Under their plan, the Fortins proposed to pay a total of $75,268.18 to their chapter 13 trustee over five years, $557 in 59 equal monthly installments and a balloon payment of $39,620.18 in the 60th month ($2785 having already been paid to the trustee prior to filing the plan). The plan calls for the Fortins' general unsecured creditors (including RMT to the extent of its bifurcated unsecured claim) to receive no dividend.

In an agreed statement of facts the parties stipulated that the Fortins intend to pay RMT a total of $183,707.41 (the secured portion of its claim) in the following manner: the pre-petition arrearage of $62,860.81 through the plan and $120,846.60, RMT's secured claim less the arrearage, directly to RMT in equal monthly installments of $2019.04 including interest at the rate of 8% per annum, all as called for in RMT's loan documents.¹ As stated previously, RMT will receive nothing in payment of its unsecured claim of $95,758.70.

In practical terms the Fortins' plan proposes to pay RMT its pre-petition arrearage of $62,860.81 in 60 months (59 equal monthly payments and a substantial balloon payment at the end) to be applied in reduction of RMT's bifurcated secured claim of $183,707.41. Contemporaneously with their plan payments the Fortins propose to pay to RMT directly $2019.04 per month (the regular monthly contract payment) also to be applied in reduction of RMT's bifurcated secured claim. The secured claim will bear interest at the agreed-upon rate of 8% per annum until paid in full. During the five year plan term, therefore, RMT will receive $62,860.81 plus monthly payments of principal and interest, all on account of its secured claim. The presumption is that at the end of five years, the payments received by RMT will have been insufficient to pay its secured claim in full and that the Fortins will continue to make monthly payments at the agreed-upon rate until the secured claim is paid. RMT will receive no payment on account of its unsecured claim.

RMT objects to confirmation of the plan for three reasons. First, it complains that the plan proposes to apply the pre-petition arrearage payments to reduce RMT's secured claim. RMT believes it is entitled to payment of its arrearage claim of $62,860.81 through the plan without applying the arrearage payments to reduce its bifurcated secured claim of $183,707.41. Second, RMT asserts that the arrearage must be paid in 60 equal monthly installments under the plan, not 59 with a sizeable balloon payment at the end. Finally, RMT objects to the debtors' proposal to pay its secured claim over a period longer than the 60 month plan term citing recent decisions by my colleagues in this district. See In re Bullard, 475 B.R. 304 (Bankr.D.Mass.2012), on appeal to Bankruptcy Appellate Panel for the First Circuit, and In re Pires, 2011 WL 5330772 (Bankr.D.Mass. Nov. 7, 2011). Evaluating RMT's third objection first will prove most practical as it will facilitate disposition of the other two as well.

Bankruptcy Code § 506(a) allows the court to determine when an allowed claim secured by a lien on property of a bankruptcy estate is a “secured claim” for purposes of the bankruptcy case. No matter how non-bankruptcy law defines a secured claim, for purposes of bankruptcy a claim is a secured claim only to the extent of the value of the creditor's interest in property of the estate. Woolsey v. Citibank, N.A. (In re Woolsey), 696 F.3d 1266, 1272–73 (10th Cir.2012). To the extent the claim exceeds that value, the balance is an unsecured claim.² This is the basis upon which RMT's claim has been bifurcated into secured and unsecured components. Bifurcation alone, however, is of little practical value unless the lien previously securing the unsecured component of the claim can be voided or, in bankruptcy parlance, “stripped down.” ³

In Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), the Supreme Court held that in a chapter 7 case § 506(d) does not provide the bankruptcy court with a statutory basis for voiding a lien to the extent of the unsecured component of an allowed claim that has been classified or bifurcated into secured and unsecured components under § 506(a). The Court ruled that § 506(d) is not an enforcement device when claims are bifurcated under § 506(a) because § 506(a) applies to allowed claims and § 506(d) to disallowed claims. Id. at 417, 112 S.Ct. at 778.Dewsnup holds that to strip down a claim secured by a lien to the value of the collateral securing it requires a separate source of authority and that chapter 7 of the Bankruptcy Code, including its historical antecedents, is devoid of such authority. Id. The Court suggested that only the reorganization chapters of the Code (chapters 11, 12 and 13) contain the requisite tools to effectuate lien stripping. Id. at 418–19, 112 S.Ct. at 779.

A year and a half after Dewsnup, the Supreme Court issued its ruling in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). Nobelman dealt with strip downs in chapter 13 and the extent to which chapter 13 debtors could invoke § 1322(b)(2) of the Bankruptcy Code to strip down a home mortgage in light of the section's anti-modification clause. ⁴

Bankruptcy Code § 1322(b)(2) states:

Subject to subsections (a) and (c) of this section, the plan may—

(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.... (Emphasis added).

In Nobelman the Supreme Court ruled that stripping down a homestead mortgage after the lender's claim had been classified into secured and unsecured components under § 506(a), even without modifying a single term of the underlying loan contract, was nevertheless a modification of the rights of the lender that was expressly prohibited by the anti-modification clause contained in § 1322(b)(2).

The upshot of Dewsnup and Nobelman is that allowed secured claims are freely classifiable under § 506(a) into secured and unsecured components based on the value of the lender's collateral that is property of the estate but that stripping liens on the unsecured component is subject to limitations. Lien stripping in chapter 7 is always prohibited ( Dewsnup ) while lien stripping in chapter 13 under § 1322(b)(2) is prohibited only with respect to homestead mortgages ( Nobelman ).⁵

Bankruptcy Code § 1322(b) presents a menu of 11 different provisions which may be incorporated into chapter 13 plans. These are optional provisions; none is mandatory nor does the statute insist that the inclusion of one requires inclusion or exclusion of another. A chapter 13 plan may include provisions modifying the rights of secured and unsecured creditors (§ 1322(b)(2)), curing pre-existing defaults (§ 1322(b)(3)) and curing defaults and maintaining payments on debts whose last payment is due after the end of the plan period (§ 1322(b)(5)). The key question presented by this case is can a chapter 13 plan contain both a provision for modifying a secured claim under § 1322(b)(2) and curing defaults and maintaining payment of that claim under § 1322(b)(5)?

If a chapter 13 plan proposes to modify the rights of the holder of a secured claim that is not a homestead claim, in order for that plan to be confirmed by the court it must pass muster under § 1325(a)(5) which provides:

(a) Except as provided in subsection (b), the court shall confirm a plan if—

(5) with respect to each allowed secured claim provided for by the plan—

(A) the holder of such claim has accepted the plan;

(B)(i) the plan provides that—

(I) the holder of such claim retain the lien securing such claim until the earlier of—

(aa) the payment of the underlying debt determined under nonbankruptcy law; or

(bb) discharge under section 1328; and

(II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law; and

(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than...