In re Padilla

• Decision Date: 26 March 2007
• Docket Number: No. 98-18621ELF.,98-18621ELF.
• Parties: In re Irene PADILLA, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

Page 492

365 B.R. 492

In re Irene PADILLA, Debtor.

No. 98-18621ELF.

United States Bankruptcy Court, E.D. Pennsylvania.

March 26, 2007.

Brian M. Felgoise, Philadelphia, PA, for Debtor.

MEMORANDUM OPINION

ERIC L. FRANK, Bankruptcy Judge.

I. INTRODUCTION

In many chapter 13 bankruptcy cases, the ongoing, postpetition relationship between the debtor and the holder of a residential mortgage determines whether the debtor will be successful in achieving the financial rehabilitation sought in the case. A common, if not the most common, chapter 13 plan proposed is one requiring that a debtor make two types of ongoing payments to reinstate a delinquent mortgage: (1) periodic payments to the chapter 13 trustee over the time period of the chapter 13 plan in amount sufficient to cure a. prepetition delinquency ("the Prepetition Delinquency") and (2) continuing performance of the debtor's obligations under the note and mortgage, most notably, payment of the regular monthly instalments as they fall due postpetition ("the Postpetition Obligation").¹

From the debtor's perspective, full payment of the Prepetition Delinquency through the chapter 13 plan payments and fulfillment of the Postpetition Obligation should result in the cure of the prepetition mortgage delinquency and reinstatement of the mortgage. Many chapter 13 plans expressly so provide.

The Postpetition Obligation may also include other monetary obligations arising postpetition under the loan documents besides the regular monthly instalment payments. Depending upon the terms of the loan documents, those other monetary obligations may include payment of insurance and real estate taxes to third parties (if not satisfied through an escrow component of the monthly instalments paid to the mortgage lender) as well as reimbursement of legal expenses that the mortgage lender may incur postpetition.

A debtor's failure to pay the Postpetition Obligation will likely constitute a breach of the terms of the confirmed chapter 13 plan. See 11 U.S.C. § 1322(b)(5) (requiring "maintenance of payments while the case is pending" when a plan proposes to cure a prepetition default). Such a breach may result in the grant of relief from the automatic stay, see 11 U.S.C. § 362(d), and the demise of the chapter 13 case. In some cases, however, mortgage lenders wait until after the conclusion of the bankruptcy case to assert that other amounts fell due during the pendency of the bankruptcy case. In such cases, the mortgage lender may assert, only after the conclusion of the bankruptcy case, that: (1) the Postpetition Obligation was not fully paid during the pendency of the case and (2) the debtor did not cure the Prepetition Delinquency and reinstate the subject mortgage.

The practice of some mortgage lenders of waiting until after the completion of a chapter 13 bankruptcy case to demand payment of some type of Postpetition Obligation implicates a variety of legal issues, including: (1) whether the bankruptcy court has subject matter jurisdiction to resolve such disputes; (2) whether the creditor has the obligation to provide some notice during the pendency of the bankruptcy case of the Postpetition Obligation; and (3) whether such conduct violates the terms of the confirmed chapter 13 plan or a specific provision of the Bankruptcy Code.

Within the past ten (10) years, debtor advocates have invoked a variety of legal theories challenging the right of mortgage lenders to make a post-bankruptcy demand for payment of amounts allegedly incurred during the pendency of the bankruptcy case.² In particular, debtor advocates have targeted demands for reimbursement of legal expenses allegedly incurred by mortgage lenders during the pendency of the bankruptcy case. Debtor advocates have had mixed success in their efforts to remedy what perhaps they perceive as a systemic problem in the bankruptcy system.

The present case is another in the line of cases in which a debtor challenges the validity of legal expenses incurred before or during a bankruptcy case, but demanded by a mortgage lender after the completion of the bankruptcy case. The Debtor in this case has moved to reopen her bankruptcy case so that she may initiate an adversary proceeding against her former mortgage lender. Although only the motion to reopen is before me, the parties comprehensively briefed many legal issues that go to the merits of the Debtor's complaint.

As explained below, I conclude that based on the facts alleged by the Debtor, she may be entitled to some relief from this court. On that basis, I will reopen this bankruptcy case. However, at this time, I find it unnecessary to resolve other substantial, substantive and significant issues debated by the parties.

II. BACKGROUND

A. Procedural History of the Main Bankruptcy Case

On July 7, 1998, the Debtor filed this chapter 13 bankruptcy case. On February 23, 1999, the court entered an Order confirming the Debtor's First Modified Chapter 13 Plan ("the Confirmed Plan").³ The Confirmed Plan provided for, inter alia:

(1) the Debtor to pay the Chapter 13 Trustee ("the Trustee") $175/month for 39 months, for a total of $6,825.00;

(2) all prepetition arrears on the GMAC Mortgage Corporation ("GMACM") mortgage to be paid in full from the plan payments delivered to the Trustee (including late charges and legal expenses); and

(3) the Debtor to resume making regular monthly mortgage payments to GMACM "according to contract terms."

The mortgage that is the subject of the Confirmed Plan contains an attorney's fee-shifting provision permitting GMACM to charge the Debtor for certain legal expenses, including those incurred in connection with bankruptcy proceedings.⁴ See generally Travelers Casualty & Surety Co. v. Pacific. Gas & Electric Co., ___ U.S. ___, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007) (unless subject to a restriction found in the Bankruptcy Code, attorney's fees collectible under applicable state law are allowable in bankruptcy cases). Paragraph 7 of the mortgage provides:

7. Protection of Lender's Rights in the Property; Mortgage Insurance.

If Borrower fails to perform the covenants and agreements in this Security Instrument, or there is a legal proceeding that may significantly affect Lender's rights in the Property (such as a proceeding in bankruptcy probate, for condemnation or to enforce laws or regulations), then Lender may do and pay for whatever is necessary to protect the value of the Property and the Lender's rights in the Property. Lender's actions may include ... paying reasonable attorney's fees....

Any amounts disbursed by Lender under this paragraph 7 shall become additional debt of Borrower secured by this Security Instrument....

(emphasis added).

The docket entries in this case do not reflect any activity by GMACM prior to the entry of the confirmation order. After confirmation, GMACM filed two motions for relief from the automatic stay — one on February 4, 2000 and the other on March 5, 2002. Both motions were resolved by settlements.⁵

On August 22, 2002, the court entered an Order discharging the Debtor. The bankruptcy case was closed on August 27, 2002.

B. Procedural History of the Motion to Reopen

On July 8, 2005, nearly three (3) years after the case was closed, the Debtor filed a motion to reopen her chapter 13 bankruptcy case. GMACM filed a response to the motion on August 15, 2005. After several continuances, a hearing was held on September 13, 2005. By Order dated October 12, 2005, the court denied the motion to reopen.⁶ However, the court granted the Debtor the opportunity to conduct certain "narrowly tailored" discovery and to file an amended motion to reopen by January 11, 2006.

On January 11, 2006, the Debtor filed an amended motion to reopen this case. For unknown reasons, that motion was withdrawn and re-filed, again styled as an amended motion to reopen the case, on January 23, 2006. On January 30, 2006, GMACM filed a response to the amended motion. After several continuances, a hearing on the amended motion was held oil April 19, 2006. After the hearing, the Court entered an Order permitting the parties to file memoranda of law in support of their respective positions.

On May 19, 2006, the Debtor filed her Memorandum of Law, accompanied by a second amended motion to reopen the case. On June 19, 2006, GMACM filed a Supplemental Memorandum of Law in opposition to the reopening of the case.⁷

C. The Debtor's Factual Allegations

In the Motion to Reopen, the Debtor makes the following material allegations:

• During the course of her chapter 13 bankruptcy case, the Debtor paid all of the required payments to the Trustee, as well as all required postpetition payments falling due on the mortgage held by GMACM against her residence.

• GMACM filed no proofs of claim and made no applications to the court for the allowance of post-petition, pre-confirmation attorney's fees and costs.

• Some time after the Debtor received her chapter 13 discharge on August 23, 2002, the Debtor refinanced the mortgage on her residence, resulting in a payoff of the GMACM mortgage.

• Included in the payoff statement ("the Payoff Statement") provided by GMACM were charges totaling $1,551.71, itemized below:

                • bankruptcy costs of: $ 206.50
                • attorney's fee of: $ 184.94
                • bankruptcy fee of: $1,160.27
                

• The Debtor paid the $1,5571.71 in charges.

Through the discovery authorized by the court's order of October 12, 2005, the Debtor obtained copies of two bills addressed to GMACM from a law firm in Roswell, Georgia named McCalla, Raymer, Padrick, Cobb, Nichols & Clark, LLC ("McCalla Raymer"). The sum of the two bills is $1,406.50. This amount does not correspond to the $1,551.71 in legal expenses demanded by GMACM in the payoff statement it sent to the Debtor in connection with the post-bankruptcy, refinancing transaction.⁸

D. The Parties' Contentions

The Debtor asserts that the $1,551.71 in charges were assessed on her mortgage account by GMACM...