In re Rogers

• Decision Date: 11 October 2013
• Docket Number: No. GL 13–01464.,GL 13–01464.
• Citation: 500 B.R. 537
• Parties: In re Melissa Starr ROGERS, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Michigan

500 B.R. 537

In re Melissa Starr ROGERS, Debtor.

No. GL 13–01464.

United States Bankruptcy Court,

W.D. Michigan.

Oct. 11, 2013.

Robert W. Dietrich, Esq., Lansing, MI, for Melissa Starr Rogers, Debtor.

James W. Batchelor, Esq., Grand Rapids, MI, for Ocwen Loan Servicing, LLC, Creditor.

OPINION DENYING CONFIRMATION OF DEBTOR'S PROPOSED CHAPTER 13 PLAN

JAMES D. GREGG, Bankruptcy Judge.

I. ISSUE.

May a chapter 13 plan be confirmed that modifies a protected residential mortgage so attorneys' fees may be paid first?

II. JURISDICTION.

This court has jurisdiction over the bankruptcy case. 28 U.S.C. § 1334. This bankruptcy case and all related proceedings have been referred to this court for decision. 28 U.S.C. § 157(a); L.Civ.R. 83.2(a) (W.D. Mich.). This contested matter is a core proceeding and this court may enter a final order. 28 U.S.C. § 157(b)(2)(L) (confirmations of plans).

III. FACTS AND PROCEDURAL HISTORY.

There are no contested facts in the matter before the court. At issue is a chapter 13 plan provision which has been objected to by a mortgage holder. A summary of the procedural history is helpful to understand this dispute.

On February 27, 2013, Melissa Starr Rogers (“Debtor”), filed her Chapter 13 Voluntary Petition. (Dkt. No. 1). Listed on Schedule A—Real Property is the Debtor's residence, owned as tenants by the entirety with her non-debtor husband Greg Rogers. Listed on Schedule D—Creditors Holding Secured Claims is Nationstar Mortgage, which has a mortgage on the residence. Although the record is somewhat unclear, it appears that Ocwen Loan Servicing, LLC (the “Mortgage Creditor”), is the servicer of the Nationstar (or its successor's) mortgage.

On February 28, 2013, the Debtor filed her Original Chapter 13 Plan (“Plan”). (Dkt. No. 6). The Plan provides that the monthly payment to the Mortgage Creditor is $971.96 and that the estimated arrearage on the mortgage is $4,000.00. The Plan provides that the Debtor shall pay $1,950.00 per month to the chapter 13 trustee (“Trustee”). Attorneys' fees are disclosed to be $3,000.00. Of this amount, $1,355.00 is to be paid directly by the Debtor and the balance of $1,645.00 is to be paid by the Trustee through the Plan.

In the priority of payments designated by the Plan, attorneys' fees and expenses are to be paid prior to payments on continuing claims, including the on-going monthly mortgage payments owed to the Mortgage Creditor. See Plan, ¶ IV.H.I.4. (striking the provision “subject to monthly continuing claims payments”). (Dkt. No. 6). This striking of this district's model plan provision is reiterated in paragraph IV.P.7. which states that attorneys' fees will be paid prior to the on-going monthly payments, including the Mortgage Creditor's regular mortgage payment.

On April 5, 2013, the Mortgage Creditor filed its Objections to Confirmation. (Dkt. No. 17). The principal objection is that “the Debtor's proposed Plan of Reorganization attempts to modify the mortgage held by [Mortgage] Creditor in contravention of 11 U.S.C. Section 1322(b)(2) by spreading post-petition/pre-confirmation payments over time.”

On May 13, 2013, the Debtor filed her First Pre–Confirmation Plan Amendment. (Dkt. No. 21). That amendment did not change the proposed priority of payment between attorneys' fees and the on-going future mortgage payments.

The initial confirmation hearing took place on May 14, 2013, in Lansing, Michigan. The court requested legal memoranda from the Debtor and the Mortgage Creditor. On June 14, 2013, the Debtor submitted her Brief in Opposition to Ocwen Loan Servicing, L.L.C.'s Objections to Confirmation (“Debtor's Brief”). (Dkt. No. 24). On July 5, 2013, the Mortgage Creditor filed its Brief in Support of Objections to Confirmation. (Dkt. No. 27). On July 8, 2013, the Debtor filed her Supplemental Brief. (Dkt. No. 28). At the adjourned confirmation hearing on July 12, 2013, the court took this matter under advisement.

IV. DISCUSSION.

A. The Anti–Modification Provision and Protected Mortgages.

Chapter 13 of the Bankruptcy Code ¹ generally permits modification of the rights of secured creditors. § 1322(b)(2). However, an important exception exists. No modification of “a claim secured only by a security interest in real property that is the debtor's principal residence” is permitted. § 1322(b)(2); Nobelman v. American Sav. Bank, 508 U.S. 324, 329, 113 S.Ct. 2106, 2110, 124 L.Ed.2d 228 (1993) (“rights” that a mortgagee has are protected by § 1322(b)(2)). The court refers to this exception as the “anti-modification provision.” A mortgage covered by this provision is sometimes referred to as a “protected mortgage.” ²

Protected mortgages may not be modified in any manner. What a mortgage requires is binding upon a debtor. The major effect is that the monthly payments, the interest rate, and the amortization must remain constant. Cf. Nobelman, 508 U.S. at 331–32, 113 S.Ct. at 2111 (amount of monthly payment, interest rate and amortization schedule are interrelated contractual rights); see also Rake v. Wade, 508 U.S. 464, 468–69, 113 S.Ct. 2187, 2190, 124 L.Ed.2d 424 (1993) (“Section 1322(b)(2) authorizes debtors to modify the rights of secured claim holders, but it provides protection for home mortgage lenders by creating a specific ‘no modification’ exception for holders of claims secured only by a lien on the debtor's principal residence.”). Further, when a protected mortgage is not fully paid during the chapter 13 plan duration, the remaining balance is nondischargeable as a long term debt under § 1328(a)(1) (incorporating § 1322(b)(5)). Also, a debtor may not reject a protected mortgage's ancillary provisions such as payment of real property taxes, maintenance of adequate insurance, or the utilization of an escrow account. Cf. Nobelman, 508 U.S. at 329, 113 S.Ct. at 2110 (rights are determined by mortgage documents that are enforceable under state law).

In this district, nearly all protected mortgages are treated by paying postpetition monthly mortgage payments as they become due and curing any prepetition arrearages during the life of the plan within a “reasonable time.” § 1322(b)(5).³ The model chapter 13 plan used in this district provides for maintaining continuing payments and curing of past arrearages. Plan, ¶ 1V.H.5 (payment made on those “secured claims on which the last payment is due beyond the length of the plan and paid a set monthly payment ... including ... monthly mortgage payments”). (Dkt. No. 6).

B. Chapter 13 Plan Flexibility in Paying Attorneys' Fees.

The Debtor's argument is straightforward. Attorneys' fees are an administrative expense and entitled to a second priority, to be paid only after domestic support obligations. In chapter 13, administrative priority claims shall be paid before or concurrently with payments to creditors. § 1326(b)(1). Therefore, according to the Debtor, chapter 13 requires attorneys' fees to be paid “as a priority administrative expense, ahead of all lower priority, secured and unsecured creditor claims, other than domestic support obligations and the Trustee's commission.” Debtor's Brief at 4. (Dkt. No. 24). Stated differently, the Debtor asserts that unpaid attorneys' fees claims are to be paid first and in full. Debtor's Brief at 2 (citing In re DeSardi, 340 B.R. 790, 809 (Bankr.S.D.Tex.2006)).

The Debtor's argument requires the court to focus on the applicable Bankruptcy Code provisions. In order for attorneys' fees to be paid “[b]efore or at the time of each payment to creditors under the plan,” a claim must exist under section 507(a)(2). § 1326(b)(1). This requires an administrative expense allowed under section 503(b). § 507(a)(2). Allowed administrative claims include “compensation and reimbursement awarded under section 330(a).” § 503(b)(2) (emphasis added).

Section 330 deals with compensation of officers, including a chapter 13 debtor's attorney. § 330(a)(4)(B) (with consideration given to “the benefit and necessity of such services to the debtor”). To determine the “reasonable compensation” of a chapter 13 debtor's attorney, the court must consider certain specified factors. § 330(a)(3)(A–F) (which includes the lodestar analysis).

Therefore, the debtor's attorney must obtain a court order establishing the fee award before, or at the time, a chapter 13 plan is confirmed so the attorney, the debtor, the chapter 13 trustee, all creditors, and the court know what amount shall be first or concurrently be paid under § 1326(b)(1). In this district, chapter 13 debtor's attorneys' fees are normally approved in connection with the confirmation hearing, with the amount of the fee award stated in the confirmation order.

This process is consistent with the law of this circuit that requires a bankruptcy court to use the lodestar method to determine attorneys' fees. Boddy v. United States Bankruptcy Court (In re Boddy), 950 F.2d 334 (6th Cir.1991). In Boddy, the bankruptcy court utilized a so-called “normal and customary” standard and only awarded a chapter 13 debtors' attorney $300, which was included in the confirmation order. At the time of the award, the bankruptcy court had a practice that limited the maximum chapter 13 fee to $650. The Sixth Circuit reversed because the bankruptcy court “did not engage in the lodestar analysis” and “[n]o effort was made to determine a reasonable hourly rate for the particular attorney handling the case and then multiply that rate by the reasonable hours worked on the case.” Boddy, 950 F.2d at 337. However, the Sixth Circuit stated that a bankruptcy court, in its discretion, may consider other factors such as “the typical compensation that is adequate for attorney's fees in Chapter 13 cases,” the “difficulty of the issues, the special skills of counsel, the results obtained, and whether the fee awarded is commensurate with fees for similar professional services in non-bankruptcy cases in the local area.” Boddy, 950 F.2d at 338. “At a minimum, however, the...