In re Pugh, Case No. 19-20696-beh

• Decision Date: 03 September 2019
• Docket Number: Case No. 19-20696-beh
• Parties: In re: Zenell Pugh, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

In re: Zenell Pugh, Debtor.

Case No. 19-20696-beh

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF WISCONSIN

September 3, 2019

Chapter 13

DECISION AND ORDER ON U.S. BANK NATIONAL ASSOCIATION'S OBJECTION TO CONFIRMATION

Debtor Zenell Pugh filed his Chapter 13 petition and plan proposing to cure a pre-petition mortgage arrearage on his home, via a loan modification outside of bankruptcy, while maintaining current, post-petition mortgage payments.¹ Lender U.S. Bank National Association objected to plan confirmation, asserting that it holds a mortgage on the property, but that the debtor is not the person who had executed the note and mortgage. Instead, that person, Edward Tillman, is now deceased, and Pugh holds only a non-notarized quitclaim deed from the personal representative of Tillman's estate. The bank did not consent to the transfer. U.S. Bank argues that because the debtor has no legal obligation to the bank with regard to the property, the bank should not be required to negotiate with a non-borrower.² For the reasons set forth below, the Court sustains the bank's objection to confirmation.

FACTUAL BACKGROUND

Pugh has testified, by way of affidavit,³ that Edward Tillman, the original signer of the note and mortgage to U.S. Bank for the property at 2353-55 N.44th Street, Milwaukee, was his brother. Pugh attests that Tillman died "in 2013." ECF Doc. No. 50, at 1. He also asserts that "on or around June 1, 2014, the subject real estate was transferred" to the debtor. Id. Pugh provides no specifics as to the manner of transfer. The debtor asserts that he has made payments on the mortgage since his brother's death. His plan proposes to continue monthly mortgage payments of $560, and that "the debtor will complete mortgage modification with US Bank outside of bankruptcy, within 6 months. If debtor modification is not approved, debtor will amend plan to provide feasibility for arrearage claim or surrender real estate." ECF Doc. No. 4, §§ 3.1, 8.1

Pugh also notes that the instant case is not his only bankruptcy filing since the real estate was transferred. He filed a Chapter 13 case on January 4, 2016, Case No. 16-20010. Pugh listed U.S. Bank as a creditor, and his plan proposed to enter into a loan modification with the bank, through the Court's Mortgage Modification Mediation ("MMM") Program, to address approximately $4,500.00 in mortgage arrears (a mediation request to which the bank consented). Case No. 16-20010, ECF Doc. No. 10, at 5.⁴ In that case, U.S. Bank filed a secured claim including $6,502.00 in arrearages on the property loan. Case No. 16-20010, Claim No. 5-1. But Pugh's case was dismissed shortly after confirmation, in October, 2016, for failure to make payments. Case No. 16-20010, ECF Doc. No. 42. The mediator's report noted "bankruptcy has been dismissed and parties are continuing to negotiate regarding a loan modification outside of the mediation program." Case No. 16-20010, ECF Doc. No. 44.

Pugh filed another Chapter 13 case on March 22, 2017. Case No. 17-22362. He again listed U.S. Bank as a creditor, and in his plan proposed to enter into mortgage modification mediation to address approximately $9,000.00 in mortgage arrears. Case No. 17-22362, ECF Doc. No. 3, at 6.That plan was confirmed on October 24, 2017. Case No. 17-22362, ECF Doc. No. 31. The bank again consented to mediation. Case No. 17-22362, ECF Doc. No. 23. But the second mediation process failed to result in loan modification. Case No. 17-22362, ECF Doc. No. 33. Thereafter the bank filed a motion for relief from stay regarding the 44th Street property, which Pugh did not oppose. The court lifted the stay on January 11, 2018. Case No. 17-22362, ECF Doc. No. 37. On May 21, 2018, the court dismissed the case following the trustee's affidavit of default, due to Pugh's failure to file a modified plan to address the mortgage arrears as required under the MMM program. Case No. 17-22362, ECF Doc. No. 43.

Pugh asserts that his last case was dismissed because he lost his employment and was unable to make payments. He is now employed full-time. ECF Doc. No. 13. The Bank asserts that arrears are about the same as in the last case, or $8,236.07. Claim No. 7-1. The mortgage invoicing remains in the name of Edward Tillman. Id. at 34. The proof of claim includes a copy of the original note and mortgage. The Definitions section of the August 3, 2010 mortgage states:

"(Q) Successor in Interest of Borrower" means any party that has taken title to the Property, whether or not that party has assumed Borrower's obligations under the Note and/or this Security Instrument."

Id. at 17. Other provisions of the mortgage relate to successors in interest:

13. Joint and Several Liability; Co-signers; Successors and Assigns Bound ... Subject to the provisions of Section 18, any Successor in Interest of Borrower who assumes Borrower's obligations under this Security Instrument in writing, and is approved by Lender, shall obtain all of Borrower's rights and benefits under this Security Instrument. Borrower shall not be released from Borrower's obligations and liability under this Security Instrument unless Lender agrees to such release in writing. The covenants and agreements of this Security Instrument shall bind (except as provided in Section 20) and benefit the successors and assigns of Lender.

...

18. Transfer of the Property or a Beneficial Interest in Borrower. As used in this Section 18, "Interest in the Property" means any legal or beneficial interest in the Property, including but not limited to, those beneficial interests transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement, the intent of which is the transfer of title by Borrower at a future date to a purchaser.

If all or any part of the Property or any Interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender's prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law.

If Lender exercises this option, Lender shall give Borrower notice of acceleration.

...

Id. at 24-25.

U.S. Bank's response brief offers further detail, including that the borrower's date of death was April 2, 2013.⁵ The bank asserts that Tillman's mother, Cynthia Tillman, acquired title to the property as an heir of borrower. Cynthia Tillman quitclaimed the property to Pugh more than a year after the borrower's passing.⁶

ANALYSIS

1. What is the Nature of the Debtor's Interest in the Property and Rights Under the Note?

The debtor asserts that the bank should treat him as a borrower because he is a "successor in interest," as defined by 12 C.F.R. § 1024.31. ECF Doc. No. 48. That definition follows:

For purposes of this subpart:

. . .

Successor in interest means a person to whom an ownership interest in a property securing a mortgage loan subject to this subpart is transferred from a borrower, provided that the transfer is:

(1) A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;

(2) A transfer to a relative resulting from the death of a borrower;

(3) A transfer where the spouse or children of the borrower become an owner of the property;

(4) A transfer resulting from a decree of a dissolution of marriage, legalseparation agreement or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property; or

(5) A transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.

12 C.F.R. § 1024.31.

The debtor relies on a Consumer Financial Protection Bureau ("CFPB") interpretive rule and guidance to argue that a mortgage servicer has certain duties when the original borrower dies, citing to 12 C.F.R. Part 1026.⁷ He argues that when an heir already has acquired title to the home, adding the heir as a borrower on the mortgage does not trigger "Ability-to-Repay" requirements. He also argues that 12 C.F.R. § 1024.31 requires servicers to promptly identify and communicate with "successors in interest." ECF Doc. No. 48. Under that rule, Pugh asserts, successors in interest are afforded the same protections under federal mortgage servicing rules as the original borrower. Those protections include, according to Pugh, the ability to apply for loss mitigation options, including loan modifications. Id.

Pugh also points to a CFPB Bulletin from October 15, 2013, to assert that mortgage servicers must have policies and procedures in place to ensure they identify and communicate with surviving family members and others with a legal interest in the home, such as allowing heirs to continue to pay the mortgage, to take over the mortgage or qualify for loss mitigation options. According to Pugh's distillation of 12 C.F.R. § 1024.31, a "successor in interest" is someone who receives property upon the death of a relative. ECF Doc. No. 48, at 4. Pugh maintains that the bank has a duty to treat him as the borrower, and that the bank must enforce provisions of the servicing rules, such as loss mitigation procedural protections. Id. at 5.

U.S. Bank agrees that Pugh is a Successor-in-Interest as defined by the mortgage, see ECF Doc. No. 62, but is not a successor by testation. As a result, the bank argues Pugh lacks an ability to cure, or even a right to curethe mortgage arrears. Instead, the bank asserts that Cynthia Tillman's transfer of the property to Pugh triggered the due-on-sale clause of the mortgage. Consequently, the entire balance of the claim is due and owing now. See ECF Doc. No. 52, at 3 and ECF Doc. No. 62. The bank relies on 11 U.S.C. § 1322(b)(2), as well as In re Threats, 159 B.R. 241, 242-43 (Bankr. N.D. Ill. 1993) (allowing debtors to...