In re Rodriguez

• Decision Date: 18 September 2008
• Docket Number: Bankruptcy No. 02-10605.,Adversary No. 08-01004.
• Citation: 396 B.R. 436
• Parties: In re Ydalia RODRIGUEZ; aka Idalia Rodriguez; aka Ydalia Pardo, Debtor(s) Ydalia Rodriguez, et al, Plaintiff(s) v. Countrywide Home Loans, Inc., Defendant(s).
• Court: U.S. Bankruptcy Court — Southern District of Texas

Page 436

396 B.R. 436

In re Ydalia RODRIGUEZ; aka Idalia Rodriguez; aka Ydalia Pardo, Debtor(s)

Ydalia Rodriguez, et al, Plaintiff(s) v. Countrywide Home Loans, Inc., Defendant(s).

Bankruptcy No. 02-10605.

Adversary No. 08-01004.

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

September 18, 2008.

COPYRIGHT MATERIAL OMITTED

Ellen C. Stone, The Stone Law Firm PC, McAllen, TX, Ellen C. Stone, The Stone Law Firm, P.C., Brownsville, TX, Karen L. Kellett, Attorney at Law, Dallas, TX, for Plaintiff(s).

Barbara E. Rutkowski, David L. Permut, Goodwin Procter, Washington, DC, Elizabeth Carol Freeman, Thomas H Grace, Locke Lord Bissell & Liddell LLP, Houston, TX, for Defendant(s).

Memorandum Opinion

MARVIN ISGUR, Bankruptcy Judge.

For nearly a century, the Supreme Court has recognized that individual debtors who successfully emerge from bankruptcy should receive a fresh start. Williams v. U.S. Fidelity & Guar., Co., 236 U.S. 549, 554, 555, 35 S.Ct. 289, 290, 59 L.Ed. 713 (1915).

The fresh start "gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy, a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt. The various provisions of the Bankruptcy Act were adopted in the light of that view and are to be construed when reasonably possible in harmony with it so as to effectuate the general purpose and policy of the act." Local Loan Co. v. Hunt, 292 U.S. 234, 244-45, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934).

The Bankruptcy Code has seen many amendments over the years, but the fundamental fresh start purpose remains. The Supreme Court "has certainly acknowledged that a central purpose of the Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy a `new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.'" Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (quoting Local Loan Co., 292 U.S. at 244, 54 S.Ct. 695). Just last year, the Supreme Court reiterated that the fundamental purpose of the Bankruptcy Code is to grant "the honest but unfortunate debtor a fresh start." Marrama v. Citizens Bank of Mass., 549 U.S. 365, 127 S.Ct. 1105, 1106, 166 L.Ed.2d 956 (2007). This adversary proceeding raises allegations that, if proven, corrupt the promised fresh start.

Summary of Allegations

Plaintiffs are former chapter 13 debtors who have mortgage contracts with Countrywide Home Loans, Inc. ("Countrywide"). Plaintiffs allege that they diligently completed their chapter 13 plans and received a discharge. Plaintiffs' plans provided for the cure of all arrears on their home mortgages. Accordingly, when Plaintiffs completed their final plan payment, they should have faced a "new opportunity in life with a clear field for future effort," unfettered by alleged arrearages on their home mortgages. Local Loan Co., 292 U.S. at 244-45, 54 S.Ct. 695.

Plaintiffs allege that they entered their first day of post-discharge life in default. Essentially, Plaintiffs allege that Countrywide managed their mortgage accounts in a manner that violated Plaintiffs' chapter 13 plans. Plaintiffs allege that Countrywide allocated chapter 13 plan payments among arrearages, pre-petition debts, and current principal and interest in contravention of Plaintiffs' plans. Plaintiffs also allege that defendant Countrywide charged or accumulated undisclosed attorneys' fees and related expenses during their chapter 13 bankruptcy cases without notice to Plaintiffs or the Court. Plaintiffs allege that only now, after Plaintiffs received their discharge and the bankruptcy court's eyes have turned to other cases, Countrywide is seeking to collect the accrued fees and expenses. Plaintiffs allege that Countrywide is threatening to, and in fact, will foreclose on their homes if they do not pay the thousands of dollars in accumulated fees and expenses.

Countrywide disputes Plaintiffs' rendition of the facts. If Countrywide is correct and has not charged any unapproved fees and expenses, then they should certainly prevail in this litigation. That is a matter for trial. Countrywide also contends that, even if Plaintiffs' allegations are true, their mortgage contracts and Bankruptcy Code provisions allow them to delay collection of fees and expenses incurred during a pending chapter 13 case until after the debtor has received a discharge. Through this contention, Countrywide seeks a pre-emptive determination by the Court that absolves Countrywide of liability even if it did impose unapproved fees and expenses. Because Countrywide's theoretical argument is antithetical to chapter 13's fresh start, the Court denies Countrywide's motion to dismiss this lawsuit.

Mortgages in a Chapter 13 Case¹

Plaintiffs' claims cannot be understood without an explanation of the mechanics of handling chapter 13 mortgages.² Chapter 13 includes several provisions drafted specifically to deal with mortgages. The provisions grant mortgage lenders special rights no other creditors share. Combined, the provisions have the effect of precluding the modification of a mortgage lender's right to payments pursuant to the lender's pre-petition mortgage contract. A chapter 13 plan may not reduce the lender's claim to the value of the collateral under § 506 nor may the plan alter the contractual interest rate. The plan may not per se preclude the collection of fees and expenses allowed by the contract. Nor may the debtor obtain a discharge of amounts allowed by the contract.

Other provisions balance mortgage lenders' special rights with debtor rights and protections. The primary right provided to debtors is the right to cure arrearages and remain current on mortgage debt so that debtors emerge from chapter 13 with the promised fresh start.

Two sections of the Bankruptcy Code are at the heart of this dispute. Section 1322(b)(2) provides that a chapter 13 plan may:

modify the rights of holders of secured claims, other than a claim that is secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;

The breadth of § 1322(b)(2) is limited by § 1322(b)(5), which reads as follows:

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;

Section 1322(b)(2)'s protections are not limited to principal and interest payments. Rather, § 1322(b)(2)'s language is broad, precluding the modification of any contractual right. Most mortgage contracts, including Countrywide's, allow lenders to incur reasonable expenses necessary to protect their security interest in a debtor's home ("Reimbursable Expenses"). Many mortgage contracts, including Countrywide's, also contain provisions stating that the lender may charge and collect the incurred Reimbursable Expenses at any time. Mortgage lenders often, in fact, incur Reimbursable Expenses in a bankruptcy proceeding. Countrywide may have incurred such Reimbursable Expenses in these cases. For the purposes of this motion, the Court assumes that Countrywide also waited (at least in some instances) until Plaintiffs' bankruptcy cases were dismissed or closed before seeking to collect the Reimbursable Expenses.

Section 1322(b)(2)'s prohibition against modifying a mortgage lender's contract rights does not wholly immunize the lender from bankruptcy court oversight. Congress balanced mortgage lenders' protections by granting debtors the right to cure arrearages and remain current on the mortgage debt. Section 1322(b)(5) provides an explicit exception to § 1322(b)(2)'s mortgage modification prohibition. Regardless of the mortgage contract, § 1322(b)(5) allows debtors to cure mortgage arrearages and maintain current payments through a chapter 13 plan. 11 U.S.C. § 1322(b)(5).

Sections 1322(b)(2) and (b)(5), together, define how a mortgage lender will be paid in a chapter 13 plan. Based on these provisions, the plans in these cases provide that the debtors will pay a certain amount each month on account of their mortgages. A portion of the established amount must be allocated to the outstanding pre-petition arrearages, and the remainder must be allocated to current principal and interest payments.³

Section 1322(b)(5) gives debtors the explicit right and duty to maintain payments. If a lender seeks the fees without notice, then the debtor cannot remain current on the debtor's mortgage, but, rather, slips into default without any notice of the accruing fees. Requiring lenders to seek Reimbursable Expenses as they are incurred during a chapter 13 plan does not conflict with § 1322(b)(2)'s prohibition against modification of a mortgage lender's contract rights. Section 1325(b)(5) is a specific exception to § 1322(b)(2).

After a plan is confirmed, debtor and creditor rights and responsibilities are defined by the confirmed plan. The Court Order confirming the plan binds the debtor and mortgage lender to the allocation scheme provided for by the plan. 11 U.S.C. § 1327(a).⁴ The Court order imposes reciprocal rights and obligations on the debtor and the mortgage lender. Both the debtor and the mortgage lender must abide by their plan obligations to protect the other's rights. The debtor's obligations ensure payments to the mortgage lender and protection of the lender's collateral. Accordingly, the debtor must make all payments within the time and in the amount prescribed by the plan. If the debtor misses a payment, the debtor violates the terms of the plan and the debtor's...