In re Gonzales

• Decision Date: 17 May 2017
• Docket Number: CASE NO: 11–10778
• Citation: 570 B.R. 788
• Parties: IN RE: Benito GONZALES Jr., et al., Debtors
• Court: U.S. Bankruptcy Court — Southern District of Texas

570 B.R. 788

IN RE: Benito GONZALES Jr., et al., Debtors

CASE NO: 11–10778

United States Bankruptcy Court, S.D. Texas, Brownsville Division.

Signed May 17, 2017

Marcos Demetrio Oliva, Leigh Ann Tognetti, Marcos D. Oliva PC, McAllen, TX, for Debtors.

MEMORANDUM OPINION

GRANTING DEBTORS' MOTION FOR ENTRY OF CHAPTER 13 DISCHARGE

[Resolving ECF No. 76 ]

Eduardo V. Rodriguez, United States Bankruptcy Judge

I. INTRODUCTION

Chapter 13 debtors are entitled to a discharge of most debts upon, inter alia , completion of all payments under the plan. In the case at bar, the below-median income debtors moved for entry of a chapter 13 discharge despite failing to remain current on their post-petition mortgage payments but then, and pursuant to an agreed order entered after the chapter 13 Trustee's notice of plan completion but prior to the 60^th month of the plan, paid the remaining claim in full. Given this set of facts, the question of first impression for this Court is whether the debtors are in fact eligible to receive a discharge?

II. FINDINGS OF FACT

This Court makes the following Findings of Fact and Conclusions of Law pursuant to Fed. R. Bankr. P. 7052, which incorporates Fed. R. Civ. P. 52, and 9014. To the extent that any Finding of Fact constitutes a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law constitutes a Finding of Fact, it is adopted as such.

On December 21, 2011, Benito Gonzales Jr. ("Debtor ") and Celia H. Gonzales (collectively, the "Debtors ") filed their petition under chapter 13 of title 11 of the United States Bankruptcy Code¹ . [ECF No. 1]. Schedule A lists the property at 545 Chapman St., San Benito, Texas (the "Property ") as their homestead which was valued at $24,095.00 with a lien in the amount of $19,999.86. Id. at 8. Additionally, Schedule D lists "Onemain Financial" ("OneMain ") as holding a secured claim on the Property in the amount of $18,772.00. Id. at 18. Finally, Schedule J lists the monthly mortgage payment as $224.00 per month. Id. at 27. Contemporaneously with the petition, Debtors filed their chapter 13 plan. [ECF No. 2] (the "Plan "). Although Debtors are below-median income wage earners and were only required to file a 36 month plan, Debtors proposed a 60 month plan. See id. Section 1 of the Plan provisions for 60 monthly payments in the amount of $450.00 to the chapter 13 Trustee ("Trustee ") totaling $27,000.00. Id. at 1. Additionally, Section 7 of the Plan provisions for Debtors to pay the OneMain monthly mortgage in accordance with the pre-petition contract and not through the Trustee. Id.

On June 7, 2012, the Court confirmed Debtors' 60 month Plan. [ECF No. 35].

On August 19, 2013, CitiFinacial, Inc. ("CitiFinancial ") filed a proof of claim in the amount of $18,746, in which OneMain continued to act as servicer for the mortgage. [Claim No. 12–1]. On April 30, 2014, CitiFinancial amended its claim and took over as the servicer on the mortgage. [Claim No. 12–2].

On July 11, 2016, CitiFinancial filed a Motion for Relief from Stay alleging that Debtors were $2,577.28 behind in their post-petition mortgage payments. [ECF No. 68].

On July 26, 2016, while CitiFinancial's motion for relief was pending, Trustee, after receiving all payments required by the Plan, issued a Notice of Plan Completion in which Trustee represented, inter alia , that Debtors had made all payments to Trustee under the Plan. [ECF No. 69] (the "Notice "); see also [ECF No. 87]. Specifically, the Notice reads that Trustee "represents that the Debtors have attended a meeting of creditors, submitted to an examination under oath and have made all payments to the Chapter 13 Trustee as required by the Order Confirming the Chapter 13 Plan." [ECF No. 69]. Additionally, the Notice lists various options regarding Debtors' mortgage, which provides that:

A. no home mortgage payments were made under the plan, or

B. the mortgage was paid pro-rata, or

C. the collateral was surrendered, or

D. the Debtors made home mortgage payments directly to the mortgagee, or

E. the Trustee made ongoing mortgage payments during the course of the plan; however no payment changes were noticed by the mortgagee subsequent to confirmation or the last modification of the plan, or

F. all unsecured claims were paid in full per confirmation requirements, or

G. there was a net decrease in the mortgage payment.

Id. Under the terms of the confirmed Plan, July 2016 was month 55 of Debtors' Plan.

On August 1, 2016, CitiFinancial and Debtors entered into an Agreed Order Conditioning the Automatic Stay wherein Debtors stipulated that the amount of unpaid post-petition mortgage payments totaled $2,776.80. [ECF No. 74] (the "Agreed Order "). Pursuant to the Agreed Order, Debtors were required to pay CitiFinancial $2,776.80 within 30 days after entry of the Agreed Order or file a plan modification and resume regular mortgage payments. Id. at ¶¶ 3–4. In exchange, CitiFinancial agreed that the automatic stay should remain in place on Debtors' Property until there was either: (i) a final default, (ii) case dismissal, or (iii) Debtors' received their discharge. Id. at ¶ 6.

On August 18, 2016, Debtors filed their Certification and Motion for Entry of Chapter 13 Discharge seeking an entry of discharge pursuant to 11 U.S.C. § 1328(a). [ECF No. 76] (the "Motion "). Further, the Motion certifies that Debtors made all payments required by the Plan. Id. at 2.

On September 15, 2016, this Court set a hearing on the Motion for October 4, 2016. [ECF No. 77]. At the October 4, 2016 hearing, Debtor testified that he made all required payments to Trustee and that he and his wife are current on their mortgage payments to CitiFinancial. The Court questioned Debtors as to whether the delinquent amount due under the Agreed Order had been paid. Debtor responded by stating that he sent a check, which CitiFinancial cashed, however, the Court was not provided any evidence of such check. Accordingly, the Court reset the hearing to November 7, 2016.

At the November 7, 2016 hearing, Debtors offered, and the Court admitted, Exhibit A which is a copy of a cancelled check, dated August 18, 2016, issued to CitiFinancial in the amount of $2,776.80, which represented the payment under the Agreed Order. See [ECF No. 81–1] (the "Check "). Debtors represented that they continue to make regular mortgage payments to CitiFinancial and requested entry of their discharge. The Court questioned Trustee's filing of the Notice, which attested to the fact that there were no mortgage payments made under the plan when, in fact, Debtors were making payments under Section 7 of the Plan to CitiFinancial, but were behind $2,776.80 at the time of the Notice. Debtors argued that Trustee was likely acknowledging that Trustee did not administer any mortgage payments through her office. Further, Debtors asserted that all payments have been completed and that they are entitled to a discharge. The Court requested briefing on the issue of whether Debtors have in fact timely completed all payments under the confirmed plan and were entitled to a chapter 13 discharge and ordered Debtors to submit a brief on or before December 7, 2016, and Trustee to file a responsive brief no later than December 22, 2016. [ECF No. 82].

On December 8, 2016, Debtors filed their Brief in Support of the Motion that asserted that all payments under the Plan were completed when Debtors complied with the Agreed Order, not when Trustee filed a Notice of Plan Completion. [ECF No. 82] ("Debtors' Brief ").

On December 22, 2016, Trustee filed her Response to Debtors' Brief and posits that filing the Notice was appropriate because Debtors had in fact completed all payments to Trustee under the Plan. [ECF No. 87] (the "Response "). Trustee asserts that it would be unreasonable to require her to determine whether a debtor made all direct mortgage payments and suggests that the Notice has no impact on whether Debtors are eligible for a discharge. Id. at 2. The matter is now ripe for decision.

III. LEGAL STANDARD

Section 1328(a) provisions for a bankruptcy court to grant a debtor a discharge of debts provided for by the plan "as soon as practicable after completion by the debtor of all payments under the plan." Notably, long-term mortgages in which the last payment is due after the date on which the final payment under the plan is due are not discharged when payments under the plan are completed. § 1328(a)(1). Nevertheless, the Fifth Circuit held that a debtor "may serve as a disbursing agent" as to some payments, including home mortgage payments under a chapter 13 plan. In re Foster , 670 F.2d 478, 493 (5th Cir. 1982).

Foster involved a bankruptcy court's refusal to confirm a chapter 13 plan because the plan called for the debtors to make regular mortgage payments directly to the mortgage holder, while curing the arrearages through the chapter 13 Trustee. Id. at 482. A specific cause of concern was the phrase "outside the plan:" to wit, debtors proposed that "the current payments (on their mortgage claim) will be outside the plan according to the terms of the Note and Deed of Trust." Id. at 485. The debtors intended "outside the plan" to mean that mortgage payments would be made directly to the creditor, whereas the bankruptcy court interpreted the phrase "to cause the current mortgage payments to be considered as not dealt with by the terms of the plan." Id. at 485–86. The Fifth Circuit reversed the bankruptcy court and determined that the plan could be confirmed with debtors paying a mortgage directly to the creditor. Id. at 482. Pursuant to 11 U.S.C. § 1326(b), the Fifth Circuit found that "Congress left open ... the possibility of direct disbursements ‘under the plan’ by the Chapter 13 debtor." Id. at 486. Accordingly, the Fifth Circuit determined that "[i]f the bankruptcy court concludes that the debtor's acting as disbursing agent with respect to the current mortgage payments will not impair the debtor's ability to make all payments...