In re Perez

• Decision Date: 23 March 2006
• Docket Number: No. 06-30021-13.,No. 05-95102-13.,No. 06-30008-13.,No. 05-95103-13.,No. 05-95264-13.,05-95103-13.,05-95102-13.,06-30021-13.,06-30008-13.,05-95264-13.
• Citation: 339 B.R. 385
• Parties: In re Mario and Maria PEREZ, Eddie Lanier, Dionisio Frias & Renee Bryan, Joey Wayne Hatcher, Clayton R. Stewart, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of Texas

339 B.R. 385

In re Mario and Maria PEREZ, Eddie Lanier, Dionisio Frias & Renee Bryan, Joey Wayne Hatcher, Clayton R. Stewart, Debtors.

No. 05-95103-13.

No. 05-95102-13.

No. 06-30021-13.

No. 06-30008-13.

No. 05-95264-13.

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

March 23, 2006.

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Reese W. Baker, Baker and Associates LLP, Houston, TX, for Mario and Maria Perez, Eddie Lanier, Dionisio Frias, Renee Bryan, and Joey Wayne Hatcher.

David W. Barry, Law Office of David W. Barry, Houston, TX, for Clayton R. Stewart.

MEMORANDUM OPINION

JEFF BOHM, Bankruptcy Judge.

I. INTRODUCTION

This Memorandum Opinion is written to address a very important issue to Chapter 13 debtors in general and the several Chapter 13 Debtors referenced above: Should they be allowed to pay their home mortgage lenders directly instead of remitting the necessary funds to the trustee for distribution to the mortgagees? Debtors Perez, Lanier, Frias, Bryan, Hatcher, and Stewart (the Debtors) assert that they should be allowed to do so.¹ This Court disagrees. This Opinion sets forth how the Court has arrived at its decision.

II. HISTORICAL BACKGROUND

The duties of a Chapter 13 trustee include serving as the disbursing agent.² In re Mendoza, 111 F.3d 1264, 1267 (5th Cir.1997); In re Weaver, 632 F.2d 461, 465 (5th Cir.1980). The general rule is that debtors make monthly payments to the trustee, who then disburses the monies to holders of allowed claims. 11 U.S.C. § 1326(b) (2005); In re Foster, 670 F.2d 478, 486 (5th Cir.1982) (observing, "Nonetheless, § 1326(b) also `akes it clear that the Chapter 13 trustee is normally to make distributions to creditors of the payments made under the plan by the debtor.'" (citations omitted)).³ The rationale for this system is this: (a) in order for consumer debtors to successfully reorganize, they need to be shielded from all their creditors so that they can focus on generating maximum income to pay the trustee; (b) in order for creditors to timely receive payments on their claims without having to spend undue time and expense, they need to avoid having to deal extensively with troubled borrowers and their attorneys; and (c) the trustee serves as a buffer between debtors and creditors by assuming the responsibility for receiving payments from debtors and remitting funds to claim holders. See In re Barber, 191 B.R. 879, 881 (D.Kan.1996) (stating, "The bankruptcy court noted that the preference is for payments to be made through the trustee and explained the reasons for that preference: It's certainly administrative efficiency; the ability to track to whom and when and what payments are made; fairness and treatment of various creditors and there is greater opportunity for the debtor to fail, should the debtor make his own payments as opposed to making them through the trustee.'"); In re Harris, 107 B.R. 204, 206-07 (Bankr. D.Neb.1989); In re Barbee, 82 B.R. 470, 474-75 (Bankr.N.D.Ill.1988).

As with most general rules, there are exceptions. The Bankruptcy Code does allow for debtors to bypass the trustee and make payments directly to creditors. 11 U.S.C. § 1326(b); Foster, 670 F.2d at 486 (stating that "[the Fifth Circuit] agrees with those courts which have concluded that Congress left open in § 1326(b) the possibility of direct disbursements `under the plan' by the Chapter 13 debtor.").⁴ However, whether a debtor may do so rests within the discretion of the bankruptcy court. Foster, 670 F.2d at 486. Direct disbursements by debtors is not an unqualified right; rather, it is a privilege. In re Slaughter, 188 B.R. 29, 31 (Bankr.D.N.D.1995); In re King, 116 B.R. 413, 414 (D.N.J.1990).

For many years within the Southern District of Texas, Chapter 13 debtors were routinely allowed to make their monthly mortgage payments directly to their home lenders.⁵ In 2003, this practice ceased in three divisions of the Southern District of Texas: the Corpus Christi, Brownsville and McAllen Divisions. The debtors in these divisions were no longer routinely permitted to serve as their own disbursing agent; their only payments since have been through the Chapter 13 trustee. The Chapter 13 trustee for these divisions has been making all disbursements, including payments to mortgage companies.

This change in practice in the Corpus Christi, Brownsville, and McAllen Divisions produced a more efficient administration of Chapter 13 cases. Mortgage companies filed fewer motions to lift stay. Since each motion to lift stay costs the debtor about $1,000.00,⁶ the reduction in such motions has materially reduced costs for the debtors in these three divisions and improved the prospects for successful completion of Chapter 13 cases. Indeed, in the Corpus Christi, McAllen, and Brownsville Divisions, more confirmed Chapter 13 plans have been successfully prosecuted, with debtors making all of their plan payments to the trustee and thereby obtaining a discharge.

These results were one reason that the five bankruptcy judges sitting in the Houston, Victoria, Laredo and Galveston Divisions decided in 2005 to implement the same approach in these four divisions. A second reason concerned the increasing frequency of disputes between debtors and their mortgage lenders as to whether and when payments have been made and received. Unfortunately, as mortgages are packaged and sold with increasing frequency and in greater numbers, the record-keeping of the note holders, and their servicing agents, has deteriorated. The absence of accurate records of payment receipts, combined with the endemic failure of consumer debtors to maintain accurate records of their payments, has caused confusion and delay in the prosecution and resolution of motions to lift stay and, in some cases, has resulted in debtors losing their homes because they could not prove that payments had been made. These circumstances have led the five judges to spend substantial court time on these matters, particularly in the Houston Division.

Bankruptcy courts across the nation have recognized the need for debtors to make residential mortgage payments through the trustee and have mandated it in increasing numbers:

The data ... show secured debt accounting for 54-59 percent of total disbursements over the years 1994-2003. Obscured in the numbers is a re-allocation of percentages of post-petition payments and mortgage arrearage payments. ... During the past four years, the numbers of trustees making post petition mortgage payments inside the plan ("conduit payments"), and the amounts being paid, have increased substantially. ... There are good reasons to believe that this practice works to the benefit of creditors, debtors, and trustees.

Gordon Bermant, Trends in Chapter 13 Disbursements, FEB-24 AM. BANKR.INST. J. 20 (2005) [App. E].

A research report sponsored by the endowment of the National Conference of Bankruptcy Judges carried out by Gordon Bermant, a retired research professional of the Federal Judicial Center, emphasizes that Chapter 13 plans are more effective when home mortgage payments are made through the trustee. Gordon Bermant, Paying the Ongoing Mortgage Through the Chapter 13 Plan:. A Beneficial Practice for All Involved (This report is a draft and will be developed further prior to publication.) [App. F]. In light of the benefits of making mortgage payments through the Chapter 13 trustee, the local rules for the Eastern District of Michigan virtually require debtors to do so:

The district has used local rules to make the practice virtually compulsory by placing the burden of justifying direct payments on the debtor. Debtor's attorneys have also settled on routine plan language that assures agreement between the trustee's records and the mortgage holder's records at the time the case is terminated. Another local rule requires holders to serve notice in advance of any changes contemplated for the size [of] a debtor's required monthly payment. Requiring notice avoids later litigation in circumstances where the mortgage holder has, for example, obtained force-placed insurance to protect the collateral and passes the cost to the debtor with unannounced increases in the loan amount. All of these provisions benefit the court as well as the debtor, by reducing the amount of litigation over alleged debt remaining at the time the case is terminated.

Id. at 29 (citing Marilyn R. Somers and Kimberly Shorter-Siebert, Is It Really a Fresh Start?, NACTT QUARTERLY 16 (2004)).

For these reasons, all six bankruptcy judges of the Southern District of Texas unanimously voted to implement a new Local Rule that took effect on October 17, 2005. Local Rule 3015(b) (the Local Rule) sets forth that "[h]ome mortgage payments will be made through the chapter 13 trustee, in accordance with Home Mortgage Payment Procedures (the Procedures). Home Mortgage Payment Procedures shall be procedures adopted by the Chapter 13 trustees and approved by the court." Local Rule 3015(b) is attached to this Memorandum Opinion as Appendix A, and the Home Mortgage Payment Procedures are attached as Appendix B. Debtors Perez, Lanier, Frias, Bryan, Hatcher, and Stewart seek relief from the Local Rule and the Procedures to allow them to make direct payments to their mortgage lenders. To be sure, the Local Rule allows any debtor to seek relief from the Procedures. The purpose of this memorandum opinion is to determine whether these Debtors qualify for relief from the Procedures.

The Debtors argue that if they have to make their mortgage payments through the trustee, the Debtors must pay the trustee not only the amount of the mortgage payment, but also an additional sum to cover the trustee's fee.⁷ Because the mortgage payments are overwhelmingly the largest monthly cash outlay for these Debtors, the trustee's fee is not insignificant.⁸ It is therefore not surprising that the Debtors argue that based primarily upon sheer...