In re McKinney
| Decision Date | 03 October 1994 |
| Docket Number | Bankruptcy No. 94-11460-MAM-13. |
| Citation | 174 BR 330 |
| Parties | In re Earnest McKINNEY and Annie (NMN) McKinney, Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of Alabama |
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William E. Kimbrough, Thomasville, AL, for debtors.
Goodman G. Ledyard, Mobile, AL, for movant Jim Walter Homes, Inc.
This matter is before the Court upon the motion of Jim Walter Homes, Inc., for relief from the automatic stay pursuant to 11 U.S.C. § 362 in order to obtain possession of real estate. The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the Order of Reference of the District Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (G). Proper notice of the hearing was given and appearances were as noted in the record.
This case involves husband and wife debtors who filed two bankruptcy proceedings in 1993 to deal with their financial problems, including problems with their home mortgage. Their second bankruptcy was dismissed on January 21, 1994, and the debtors, as a part of the dismissal order, were enjoined from any new bankruptcy filings for 180 days or until July 22, 1994. Upon dismissal of that second case, Jim Walter Homes, Inc. was free to proceed with foreclosure of the mortgage on the debtors' property. It did. On July 18, 1994, the foreclosure sale occurred. On July 28, 1994, after the expiration of the injunction period, the debtors filed a third bankruptcy case under Chapter 13 of the Bankruptcy Code.1 The debtors have proposed a Chapter 13 plan which would revive their Jim Walter Homes, Inc. mortgage, cure the arrearages on the note during the life of the plan, and allow them to pay the normal monthly mortgage payments to Jim Walter Homes, Inc. directly outside the plan and continue to do so after the case is over. The plan confirmation hearing is scheduled to be held on October 6, 1994. Jim Walter Homes, Inc. filed this Motion for Relief from the Stay on August 10, 1994 and seeks relief under §§ 362(d)(1) and (2) on the basis that the plan of debtors cannot be confirmed as a matter of law.2 Jim Walter Homes, Inc. alleges that a mortgage, once properly foreclosed, is not subject to reinstatement and cure under 11 U.S.C. §§ 1322(b)(2), (3) or (5). For the reasons stated below, the motion of Jim Walter Homes, Inc. is granted.
The court must answer two questions to resolve this issue. 1) Under Alabama law, after a foreclosure sale has occurred, what are the rights of a mortgagor in relation to the foreclosed mortgage? 2) Based upon these rights, what can a plan provide under 11 U.S.C. § 1322(b) as to the mortgage?
There is no federal foreclosure law and therefore the court's starting point in determining a mortgagor's status vis á vis a foreclosed mortgage is state law. In this case, the applicable law is Alabama foreclosure law. The United States Supreme Court has long recognized the right of states to regulate property interests in the individual states. In Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979), the Supreme Court concluded the following:
Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interest should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a state serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving "a windfall merely by reason of the happenstance of bankruptcy." Lewis v. Manufacturers Nat\'l Bank, 364 U.S. 603, 609, 81 S.Ct. 347, 350, 5 L.Ed.2d 323 (1961). The justifications for application of state law are not limited to ownership interests; they apply with equal force to security interests . . . the basic federal rule is that state law governs.
Id. at 55, 99 S.Ct. at 918, 919.
In a recent decision, the Supreme Court again reiterated this view, specifically as to state foreclosure law. In BFP v. Resolution Trust Corp., ___ U.S. ___, ___, 114 S.Ct. 1757, 1764, 128 L.Ed.2d 556, 580 (1994), the Court stated:
Federal statutes impinging upon important state interests cannot . . . be construed without regard to the implications of our dual system of government . . . When the Federal Government takes over . . . local radiations in the vast network of our national economic enterprise and thereby radically readjusts the balance of state and national authority, those charged with the duty of legislating (must be) reasonably explicit . . . It is beyond question that an essential state interest is at issue here: we have said that "the general welfare of society is involved in the security of the titles to real estate" and the power to ensure that security "inheres in the very nature of (state) government" . . . To displace traditional State regulation in such a manner, the federal statutory purpose must be "clear and manifest" . . . (cites omitted).
Thus Alabama foreclosure law controls the rights of mortgagors and mortgagees unless clearly and manifestly displaced by federal law.
Alabama law provides two types of redemption for mortgagors who default. The first type is an equitable right of redemption which exists under the loan documents and which exists prior to the extinguishment of the mortgage by foreclosure. Alabama Home Mortgage Co. v. Harris, 582 So.2d 1080 (Ala.1991). The second type of redemption is a one-year statutory right of redemption which arises at the time of a foreclosure sale. Dominex, Inc. v. Key, 456 So.2d 1047 (Ala.1984); Trauner v. Lowrey, 369 So.2d 531 (Ala.1979); Code of Alabama, §§ 6-5-248(a) and (b) (1975). Section 6-5-248 states in pertinent part:
To determine the beginning of the statutory redemption period, the Alabama statute focuses on the word "sale." Alco Land & Timber Co. v. Baer, 289 Ala. 567, 269 So.2d 99 (1972). The term "sale" is defined as "any execution, judgment, or foreclosure sale, whether the sale is made under any power of sale in any mortgage or deed of trust or statutory power of sale, or by virtue of any judgment, in any court of competent jurisdiction." Code of Alabama, § 6-5-247(1) (1975). The statutory right of redemption arises when the foreclosure sale occurs.
Foreclosure marks the end of the mortgagor's equitable right of redemption. FDIC v. Morrison, 747 F.2d 610 (11th Cir. 1984). After the foreclosure sale, the equity of redemption under the mortgage is completely extinguished. There is no further mortgage to sustain such an equitable right. Allison v. Cody, 206 Ala. 88, 89 So. 238 (1921). The mortgagee is no longer a secured creditor of the debtor. The mortgagee owns the property. FDIC, supra; Dominex, supra. After the foreclosure, there is a merger of legal and equitable titles. Tomkins v. U.S. & IRS, 946 F.2d 817 (11th Cir.1991); Barnett & Jackson v. McMillan, 176 Ala. 430, 58 So. 400, 401 (1912) ().
Foreclosure marks the beginning of the mortgagor's statutory right of redemption. Hamm v. Butler, 215 Ala. 572, 112 So. 141 (1927); Johnson v. Shirley, 539 So.2d 165 (Ala.1988); In re Saylors, 869 F.2d 1434 (11th Cir.1989) (citing Wragg v. Federal Land Bank of New Orleans, 317 U.S. 325, 63 S.Ct. 273, 87 L.Ed. 300 (1943)). Upon sale, a mortgagor has a one-year period to regain the property according to statutory means. To exercise a statutory right of redemption, debtors have to pay the full amount of the debt owed under the mortgage. The Alabama Supreme Court has decided that "the law does not allow piecemeal redemption, absent an agreement providing for it . . ." Costa & Head (Birmingham One) v. National Bank of Commerce of Birmingham, 569 So.2d 360 (Ala.1990). This concept of full payment has recently been upheld in this district. In Shields v. Federal Nat'l Mortgage Ass'n, 1992 WL 687866, 1992 U.S.Dist. LEXIS 19567 (S.D.Ala. Dec. 14, 1992), the district court decided that "to redeem, a cash lump sum must be paid which includes the principal, interest and certain other charges." Id. at *3, 1992 U.S.Dist. LEXIS 19567 at 9; In re Read, 131 B.R. 188 (Bankr.M.D.Ala. 1991).
No party disputes that Jim Walter Homes, Inc. has properly foreclosed on the property at issue in this case. The foreclosure sale has been held. The mortgage has been extinguished. Therefore, under Alabama law, the only way to redeem the property is through a cash payment of the full amount of the mortgage debt under the right of statutory redemption.
This court must now determine what rights, if any, the debtors have to reinstate their mortgage through a Chapter 13 plan. After the July 28, 1994, bankruptcy filing, the debtors were subject to the constraints of the Bankruptcy Code in formulating a plan. Section 1322 of the Code contains 2 lists of provisions for Chapter 13 plans. Section 1322(a) lists items a plan must contain. Section 1322(b) lists provisions a plan may contain. Section 1322(b)(2) provides that Chapter 13 debtors may "modify the rights of holders of secured claims" except the claims of mortgagees that hold homestead mortgages. However, under Section 1322(b)(5), debtors are allowed to modify secured claims secured by homesteads in a limited manner. Section 1322(b)(5) states that debtors may "provide for the curing of any default . . . and maintenance of payments while the case is pending on any unsecured or secured claim on which the last...
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