In re Pearson

• Decision Date: 31 March 1981
• Docket Number: Bankruptcy No. 180-02638-21.
• Citation: 10 BR 189
• Parties: In re Godfrey and Audrey PEARSON, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of New York

10 B.R. 189 (1981)

In re Godfrey and Audrey PEARSON, Debtors.

Bankruptcy No. 180-02638-21.

United States Bankruptcy Court, E.D. New York.

March 31, 1981.

Gerald A. Kagan, New York City, for debtors.

Aaron, Mattikow & Lorenz, P.C. Jericho, N.Y., for creditor Vanguard Holding Corp.

Robert W. Tauber, Brooklyn, N.Y., Trustee in Bankruptcy.

OPINION

CECELIA H. GOETZ, Bankruptcy Judge:

This proceeding raises the question whether, after entry of a judgment of foreclosure and sale with respect to the debtors' principal residence, the bankruptcy court should confirm a Chapter 13 plan which proposes to pay the judgment creditor, the mortgagee, over the life of the plan less than the face amount of the judgment.

THE FACTS

The relevant facts in this case are not in dispute and may be briefly stated.

Audrey and Godfrey Pearson purchased their home at 8 Gusta Lane, Roosevelt, New York, in June, 1978 by paying $5,000 in cash and borrowing $36,800 from the Vanguard Holding Corporation ("Vanguard"). Vanguard was given a purchase money security interest in the property. The debtors stopped making payments on the mortgage in January, 1979 — only seven months after they bought the property. Thereafter, Vanguard elected to accelerate the mortgage and proceed to obtain by default a judgment of foreclosure and sale which was entered in the Nassau County Supreme Court on March 20, 1980. A public auction of the property, scheduled for May 16, 1980, was arrested by the filing of a Chapter 13 petition on May 15, 1980.

Under the plan filed by the petitioners, $225 per month is to be paid the Chapter 13 trustee for 36 months, out of which the arrearages under the mortgage are to be satisfied. Current payments under the mortgage are to be made by the petitioners directly to the mortgagee.

Beneficial Finance Company of New York, Inc. ("Beneficial") is the only creditor other than Vanguard listed by the Pearsons on their petition. Beneficial is described as a creditor holding an unsecured claim in the amount of $2,405.

Under the plan, payments to the trustee, in addition to curing the arrearages on the Pearsons' mortgage, are to go to pay attorney's fees, priority debts (the petition lists none), the Chapter 13 trustee's fee, and other costs of administration, and a 1 percent first and final dividend to be paid the unsecured creditor.

Vanguard has objected to confirmation of the plan on the ground that its mortgage merged into the judgment of foreclosure and sale, rendered by the New York State Supreme Court, Nassau County, on March 20, 1980, and that the debtors can therefore no longer cure the default under the mortgage. It has filed a proof of claim in the amount of $45,185.96 and a written objection to the plan.

For reasons independent of Vanguard's objection, the debtors' present plan cannot be confirmed. The New York State Tax Commission, although not listed in the debtors' petition as a creditor, has filed a proof of claim in the amount of $517.54 for unpaid income taxes for the years 1976 and 1977. This is a priority obligation which must be paid ahead of other debts. 11 U.S.C. § 507. If the amount of the tax claim is deducted from the total to be paid under the plan, the remainder is insufficient to satisfy even the arrearages under Vanguard's mortgage.

In addition, Beneficial has filed a claim in which it describes itself as a secured creditor owed $2,118.19. The debtors' plan does not propose to pay the amount required by its secured status, and no objection to Beneficial's claim has been filed.

However, since the time the debtors' plan was filed, the Pearsons' take-home pay has increased by $1,100 per month.¹ This would give them the means to fund a plan which would adequately provide for payment of the claims filed by the State Tax Commission and Beneficial, as well as the arrearages which were due and owing Vanguard prior to the entry of Vanguard's judgment. Accordingly, it seems to be in the best interests of all concerned, and most economical of judicial time, to deal immediately with the issue raised by Vanguard, rather than delay until a plan otherwise satisfying the Code is submitted.

DISCUSSION

The question raised by Vanguard's objection to the Pearsons' plan is a recurring one. Many homeowners in this period of accelerating costs have found themselves unable to keep up with the mortgage payments on their homes. With the passage of the Bankruptcy Reform Act of 1978² (the Bankruptcy Code), many of them are trying to save their residences through filing for relief under Chapter 13 of the Code. That chapter is designed to permit a person with regular income, generally a wage earner, but also a self-employed individual, or even a person living on publicly-financed benefits,³ to rearrange his obligations so that they can be met while under the sheltering umbrella of the bankruptcy court.⁴

As is clear from its organization, Chapter 13 was intended to provide the wage earner with the same powers to reorganize his debts as large businesses have been enjoying under former Chapters X and XI of the Bankruptcy Act of 1898, and now under Chapter 11 of the new Bankruptcy Code. However, in sharp contrast with the elaborate provisions of Chapter 11, Chapter 13 is a relatively skeletal statute.⁵

Under Chapter 13, a debtor retains his property (§ 1306(b)), but must propose a plan providing for periodic payments to a court-appointed trustee (§ 1322(a)). The provisions required to be included in a plan are few. The plan must provide for full payment of all claims entitled to priority (§ 1322(a)(2)), and if the plan classifies claims, it must treat all claims within a class the same (§ 1322(a)(3)). The debtor is given great flexibility with respect to provisions which he may include in a plan. The permissible features of a Chapter 13 plan are listed in § 1322(b). The relevant paragraphs of that section provide that a 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;

"(3) provide for the curing or waiving of any default;

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"(5) notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due;

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"(10) include any other appropriate provision not inconsistent with this title." (Emphasis supplied.)

Section 1322(b)(5) was specifically intended by Congress to apply to mortgage debts. House Report No. 95-595, 95th Cong., 1st Sess. 429 (1977). See also 124 Cong.Rec.H. 11,106 (Sept. 28, 1978); S.17,423 (Oct. 6, 1978).

To confirm a Chapter 13 plan, the bankruptcy court must make various findings, including that the plan satisfies the provisions of the Bankruptcy Code; that it has been proposed in "good faith"; that it is feasible; that it is in the best interests of creditors; and that it treats holders of secured claims in one of three acceptable ways (§ 1325(a)).

Chapter 13 is being invoked by mortgagors at every stage of default: those who are only a few months in default; those whose mortgages have been accelerated, pursuant to contractual provisions authorizing such acceleration; those against whom judgments of foreclosure have been entered; and those whose property has already been sold.

In all these situations, the plan submitted by the debtor, like that proposed herein, customarily provides that payments adequate to satisfy the arrearages on the mortgage will be made to the Chapter 13 trustee, over the life of the plan, and at the same time the current payments called for by the mortgage will be made directly to the mortgagee. Where the financing institution involved is agreeable to the plan — and many are — no problem arises. However, in other cases, as in the instant one, the mortgagee objects. The issue which then confronts the bankruptcy court is whether the court may, nevertheless, accord the debtor the relief he seeks.

There is no division among the bankruptcy courts as to the results to be reached at either end of the spectrum. Thus, there is agreement that after a sale, the debtor cannot recover his home through filing under Chapter 13. In re Butchman, 4 B.R. 379, 6 B.C.D. 403 (Bkrtcy.S.D.N.Y. 1980). Equally, where no more has occurred than that the mortgagor has defaulted, but the mortgagee has not yet exercised the right to accelerate the total debt, assuming such right exists, the debtor may utilize Chapter 13 to cure the default (§ 1322(b)(5)). In re Johnson, 6 B.R. 34, 6 B.C.D. 579 (Bkrtcy.N.D.Ill.1980); In re Hartford, 7 B.R. 914, 7 B.C.D. 145 (Bkrtcy. D.Maine 1981).

There is uncertainty, however, on the correct result in the case where, as in this case, a judgment of foreclosure and sale has been entered, but the property has not yet been sold.

Outside the Eastern District of New York, two courts have held after a judgment of foreclosure, or its equivalent, the secured creditor is entitled to payment of the full amount of the mortgaged debt, not simply arrearages. In re Coleman, 5 B.R. 812 (W.D.Ky.1980); In re Robertson, 4 B.R. 213 (Bkrtcy.D.Colo.1980). Other courts have indicated that satisfaction of the amount in default may be sufficient. United Companies Financial Corp. v. Brantley, 6 B.R. 179, 6 B.C.D. 932 (Bkrtcy.Fla.1980); In re Breuer, 4 B.R. 499, 1 C.B.C.2d 712 (Bkrtcy.S.D.N.Y.1980).

In this District, one bankruptcy judge has concluded that acceleration of the entire mortgage debt by the creditor will by itself cut off the "right to cure a mortgage default under a Chapter 13 repayment plan as provided in Section 1322(b)(5) of the Code, 11 U.S.C. § 1322(b)(5)." In re LaPaglia, 8 B.R. 937 (B.C.E.D.N.Y.1981). This conclusion is based on the specific language of § 1322(b)(5),...