In re Lynch

• Decision Date: 14 July 1981
• Docket Number: Bankruptcy No. MM13-81-00580.
• Citation: 12 BR 533
• Parties: In the Matter of Robert W. LYNCH and Susan M. Lynch, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

12 B.R. 533 (1981)

In the Matter of Robert W. LYNCH and Susan M. Lynch, Debtors.

Bankruptcy No. MM13-81-00580.

United States Bankruptcy Court, W.D. Wisconsin.

July 14, 1981.

Roy L. Prange, Ross & Stevens, S.C., Madison, WI, for First Wisconsin National Bank of Madison.

J. Thomas Haley, Madison, WI, for debtors.

Stephen C. Beilke, Kuemmel & Beilke, S.C., Madison, WI, for Thorp Finance Corporation.

OPINION AND ORDER

ROBERT D. MARTIN, Bankruptcy Judge.

Two secured creditors, First Wisconsin National Bank of Madison and Thorp Finance, have objected to the confirmation of the debtors' chapter 13 plan and have requested relief from the § 362 stay. Prior to commencement of this case, First Wisconsin received a judgment in the amount of $13,379.29 which also foreclosed the Bank's first and second mortgages on the debtors' homestead. Thorp received a judgment in the amount of $23,201.86 foreclosing its third mortgage on the debtors' homestead. The homestead was sold by the Dane County Sheriff to the highest of several unrelated bidders for $47,600.00 on March 24, 1981. On April 3, 1981, the date set for confirmation of the sale, the debtors filed their chapter 13 petition. No hearing on confirmation of the sheriff's sale has been held.

The creditors' right to relief from stay is governed by 11 U.S.C. § 362(d) which states:

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay —

(1) for cause, including the lack of adequate protection of an interest in property of such party in interest; or

(2) with respect to a stay of an act against property, if —

(A) the debtor does not have an equity in such property; and

(B) such property is not necessary to an effective reorganization.

The creditors argue that because the property was sold prior to the debtors filing a petition in bankruptcy, the debtors have no interest or equity in the property. This position is supported by In Re Butchman, 4 B.R. 379, 380, 6 B.C.D. 403, 2 C.B.C.2d 174, Bankr.L.Rep. (CCH) ¶ 67,454 (Bkrtcy.S.D.N. Y.1980). In Butchman, the debtors' home was sold pursuant to a foreclosure judgment several hours prior to the filing of the debtors' chapter 13 bankruptcy petition. Judge Schwartzberg found that because "the foreclosure sale effectively cut off the debtors' legal title or equity of redemption in the mortgaged premises," the debtors were not entitled to cure the default as part of their chapter 13 plan. This holding was premised on the finding that "it is settled law in New York that a valid judgment and sale in a mortgage foreclosure action entitle the purchaser at the sale to receive a deed to the premises upon compliance with the terms of the sale and that the mortgagor has no right to redeem the premises after the sale but before the purchaser has received a deed." Butchman at page 380. Although New York Statute R.P.A.P.L. § 1355 requires confirmation of a foreclosure sale, the right to redeem property in New York is limited to "any time before an actual sale under a judgment of foreclosure." Belsid Holding Corp. v. Dahm, 207 N.Y.S.2d 91, 12 A.D.2d 499 (1960).

A similar finding was made in In Re Sparkman, 9 B.R. 359, 3 C.B.C.2d 856 (Bkrtcy.E.D.Pa.1981). In Sparkman, the mortgagee sought relief from the stay when the debtor filed a chapter 13 petition after the mortgaged property was sold at a sheriff's sale. Judge Goldhaber stated:

We conclude that the mortgagee and the VA are entitled to the relief sought because the debtor lacks any interest in the foreclosed property since it was sold at sheriff\'s sale and all acts necessary under Pennsylvania law to divest the debtor of his interest in the property were taken prior to the filing of the debtor\'s petition under chapter 13 of the Code.

....

Under Pennsylvania law, the debtor lost all title and interest in the property in question when the mortgagee\'s attorney bid it in at the sheriff\'s sale, executed the required documents, and the acknowledged deed was delivered by the prothonotary to the sheriff. See Pa.Stat.Ann. tit. 12, § 2537 (Purdon). Consequently, the debtor had no interest whatsoever in that property when he subsequently filed his petition under chapter 13 of the Code. Therefore the debtor can have no equity in that property within the meaning of that term in § 362(d)(2), and the mortgagee is entitled thereunder to relief from the stay. Sparkman at pages 361 and 363.

Both Butchman and Sparkman represent unexceptionable reasoning and make clear that when state law terminates a debtor's interest in mortgaged property, the Bankruptcy Court cannot perforce rejuvenate that interest as a part of a Chapter 13 plan. To consider the present case, the Wisconsin law must, therefore, be reviewed to determine the nature of the debtors' interest in the property at the time of filing. One case seems to be directly in point.

A foreclosure is not completed until the sale on foreclosure is confirmed. Allen v. Elderkin, 62 Wis. 627, 22 N.W. 842; Welp v. Gunther, 48 Wis. 543, 4 N.W. 647.... There can be no doubt but that the right to redeem persists at least until confirmation of sale, unless that right is cut off by statute.... It is clear that the title does not pass until confirmation so as to vest the purchaser with the right of possession. And it is equally clear that the right of redemption is not barred until confirmation of the sale. Gerhardt v. Ellis, 134 Wis. 191, 195, 196 114 N.W. 495 (1908).

Thus it appears that under Wisconsin law mortgagors retain an equitable interest, i.e., the right to redeem, until a foreclosure sale is confirmed pursuant to Wis.Stats. § 846.165. A foreclosure sale does not preclude the debtors having an equity interest in the property, so long as that sale has not been confirmed. First Wisconsin and Thorp cannot rely on the occurrence of the sale to carry their burden to demonstrate that the Lynches lack equity in the property.

A review of the evidence of the value of the property set against the liens, mortgages and security interests claimed in the property gives no further aid to the creditors in meeting their burden on the debtors' equity. The creditors' appraiser valued the property at $62,500.00. The various mortgages, taxes and judgment liens, costs and charges against the property total less than $61,000.00. It is apparent, therefore, that the property could be redeemed and represent an asset with equity for the debtors. Having failed to meet the burden assigned by 11 U.S.C. § 362(g), the creditors are not entitled to relief from the stay.

First Wisconsin and Thorp contend that they are not adequately protected. First Wisconsin is owed $15,729.92 on its mortgages as of May 28, 1981. Thorp is owed $25,241.90 as of May 28, 1981. There are 1979 and 1980 real estate taxes presently owing of $2,997.04 which comprise the only lien prior to the positions of First Wisconsin and Thorp. There was no evidence that the position of either creditor will deteriorate from the date the case was filed until the conclusion of the plan. Regular monthly payments to the creditors as provided in the plan have not been shown to be inadequate to maintain the ratio of secured debt to the value of the property which existed at the time the plan was filed. In view of the debtors' equity in the property, I am satisfied that the protection offered these creditors by the plan is adequate at the present time.

First Wisconsin and Thorp have also objected to the confirmation of the debtors' plan on several grounds. They contend that once the mortgage has been accelerated and reduced to judgment, a chapter 13 plan cannot cure a default by paying the arrearages plus regular monthly installments, but must pay the entire amount of the judgment. The Lynches are not proposing to pay only the arrearages plus regular monthly installments. Their plan proposes to pay the entire amount owed under the creditors' foreclosure judgment within the plans' three-year term. The cure the debtors' plan proposes is the one the creditors are arguing is required; payment under the plan of the entire amount of the judgment.

The creditors' next objection is that the plan does not propose a cure of the mortgage's defaults within a reasonable time as required by 11 U.S.C. § 1322(b)(5). The debtors' plan proposes to pay all secured and unsecured creditors 100 percent over the three-year period of the plan. The homestead is listed for sale with a real estate broker and the proceeds of the sale are proposed to supplement the debtors' income in the repayment of their debts. The arrearage will be paid within the 36 months for which the plan is scheduled unless paid earlier from proceeds of the house sale. Whether such a time is reasonable has been considered by other courts.

The question of what is a "reasonable time" to cure a default under Section 1322(b)(5) is not addressed by the Code. See 11 U.S.C. § 1322(b)(5). Nor does the Code\'s legislative history provide any guidance on this question, see H.R.Rep. No.95-595, 95th Cong., 1st Sess. 429 (1977); S.Rep.No.95-989, 95th Cong., 2d Sess. 141 (1978), and the commentators are also unhelpful. See 5 Collier on Bankruptcy ¶ 1322.013E (15th ed.); 5

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