In re Schnupp
| Decision Date | 09 September 1986 |
| Docket Number | Bankruptcy No. 86 B 02413. |
| Citation | 64 BR 763 |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re Tony SCHNUPP and Evelyn M. Schnupp, Debtors. |
Tyler G. Neptune, Jr., Thomas G. McCracken, P.C., Geneva, Ill., for movant Bankers Life Co.
Leonard M. Groupe, Groupe & Katz, Chicago, Ill., for debtors.
This cause comes upon the motion of BANKERS LIFE COMPANY ("Mortgagee") to modify the automatic stay. This Court heretofore ordered the stay to remain in effect until the final ruling thereon. For the reasons set forth below, the motion is now denied.
On October 22, 1985, after Debtors had fallen one year behind in their mortgage payments, Mortgagee sued debtors in the Circuit Court of Kane County, Illinois. The Complaint sought foreclosure of a mortgage on Debtors' home located at 117 Del Rio, Carpentersville, Illinois. That court entered Judgment of Foreclosure on January 9, 1986. A Sheriff's Sale was set for June 25, 1986.
On February 20, 1986, Debtors filed their Petition for Relief under Chapter 13 which invoked the automatic stay and prevented the sale from proceeding. On April 17, 1986, this Court confirmed the Debtors' Chapter 13 plan which proposed that Debtors would pay $546.00 to the Trustee over 31 months while making current payments outside the plan directly to Mortgagee.
On April 10, 1986, Mortgagee filed a motion to modify the stay. On May 8, 1986, this Court conducted a hearing on that motion at which it heard testimony from the Debtors. The Debtors proposed to pay their mortgage arrearages through the plan and to maintain current payments outside the plan. The Mortgagee rejected the Debtors' proposal and refused all payments tendered thereunder. Those refused payments have been escrowed pending this ruling. Relying on Judge Eisen's ruling in In re Jenkins, 14 B.R. 748 (Bankr.N.D.Ill.1981), the Mortgagee asserted that the mortgage became due immediately upon entry of a Judgment of Foreclosure, and thus there was no longer a mortgage in existence under which arrearages could be cured. From the debtor's uncontested evidence the Court finds the property to be worth about $58,000. From the judgment of foreclosure, it appears that Debtors owed the Mortgagee $54,315.77 as of January 9, 1986, plus interest at the rate of 9% per annum thereafter. Debtors therefore have a small equity in the premises. That equity, when considered along with their willingness and ability to cure the arrearage in reasonable time and pay current mortgage payments, would afford adequate protection to the mortgagee.
The question before this Court is whether, following mortgage acceleration and entry of Foreclosure Judgment but before foreclosure sale, a Chapter 13 debtor can still cure mortgage arrearages and reinstate the mortgage pursuant to 11 U.S.C. § 1322(b).
Many bankruptcy courts are in substantial disagreement over when a debtor can cure mortgage defaults that occurred prior to the filing of a Chapter 13 petition. See First Investor Company v. Custer, 18 B.R. 842, 845 (Bankr.S.D.Ohio 1982) (); In re Allen, 17 B.R. 119, 121 (Bankr.N.D. Ohio 1981) (); Matter of Skelly, 38 B.R. 1000, 1003 (D.Del.1984) ().
It is generally accepted, however, that where mortgagor has defaulted but the mortgagee has not yet accelerated the outstanding debt, the mortgagor can cure the default through a Chapter 13 plan. See In re Pearson, 10 B.R. 189 (Bankr.E.D.N.Y. 1981). Courts are also largely in agreement that after a foreclosure sale, Chapter 13 affords a debtor no relief. See Matter of Tynan, 773 F.2d 177 (7th Cir.1983); In re Gwinn, 34 B.R. 936 (Bankr.S.D.Ohio 1983); In re Hardin, 16 B.R. 810 (Bankr.N. D.Tex.1982); In re Mueller, 18 B.R. 851 (Bankr.W.D.Ark.1982). But see In re Kokkinis, 22 B.R. 353 (Bankr.N.D.Ill.1982); Thompson v. Great Lakes Federal Savings & Loan Association, 17 B.R. 748 (Bankr.W.D.Mich.1982).
When the bankruptcy filing comes after acceleration but before foreclosure sale, courts have taken various positions: (1) that de-acceleration and reinstatement of the mortgage is unavailable once the mortgagee has accelerated regardless whether mortgagee has obtained a judgment (see e.g., In re Soderlund, 18 B.R. 12 (S.D.Ohio 1981)); (2) that de-acceleration is unavailable once the mortgagee has obtained a state court judgment on the note (see e.g., Matter of Skelly, 38 B.R. 1000 (D.Del. 1984)); and (3) that de-acceleration and reinstitution of the mortgage are possible even after the mortgagee has obtained a judgment on the accelerated mortgage note (see e.g., In re Gwinn, 34 B.R. 936 (Bankr. S.D.Ohio 1983)).
In the instant case, the Mortgagee urges this Court to adopt the position that de-acceleration is unavailable to a debtor once the mortgagee of Illinois property has obtained a state court judgment on the note. The Seventh Circuit in Matter of Clark 738 F.2d 869 (7th Cir.1984) held that de-acceleration is available after foreclosure judgment as to Wisconsin property. The Mortgagee, relying on In re Jenkins, 14 B.R. 748 (Bankr.N.D.Ill.1981), argues that Illinois is a "title theory" state and therefore the mortgage merged into the Illinois foreclosure judgment in this case. See also First Financial Savings and Loan v. Winkler, 29 B.R. 771 (N.D.Ill.1983). Therefore, Mortgagee reasons that there is now no debt in existence which can be cured through a Chapter 13 plan.
Under the "title theory" of mortgages, the creation of a mortgage is a transfer of title to mortgagee; therefore upon default and foreclosure, the mortgage merges into the foreclosure judgment and there remains no debt to be cured. In Re Young, 22 B.R. 620, 622 (J. Hertz, Bankr. N.D.Ill.1982).
Illinois has often been referred to as a "title theory" state, see In re Crawford, 2 B.R. 589, 594 (Bankr.N.D.Ill.1980). Both Chief Judge Eisen of this Bankruptcy Court and Judge Shadur of our District Court have pointed out that mortgages merge into foreclosure judgments. They conclude from that there remains no debt default to be cured in bankruptcy. See Jenkins and First Financial supra.
However, the Illinois Supreme Court has long held that the execution of a mortgage only creates a lien on the property. Kling v. Ghilarducci, 3 Ill.2d 454, 455, 121 N.E.2d 752 (1954). Title and the right to possession are retained by the mortgagor through the foreclosure process and only terminate upon expiration of the redemption period following foreclosure sale. Lightcap v. Bradley, 186 Ill. 510, 58 N.E. 221 (1900).
In Kling, supra, the Illinois Supreme Court held that title and right to possession are retained by the mortgagor through the foreclosure process and only terminate upon expiration of the redemption period following foreclosure. A recent Illinois Supreme Court decision reaffirmed the Kling finding that the execution of a mortgage creates a mere lien on real estate but no transfer of title. Harms v. Sprague, 85 Ill.Dec. 331, 334-45, 105 Ill.2d 215, 473 N.E.2d 930, 933-34 (1984). See also Mutual Life Insurance Company of New York v. Chambers, 88 Ill.App.3d 952, 43 Ill.Dec. 829, 410 N.E.2d 962 (1st Dist.1980).
Under Illinois law, therefore, a mortgagee has only a lien on the mortgaged property even after a judgment of foreclosure is entered. Title does not pass until after the redemption period expires following foreclosure sale. Even though the mortgage as a security instrument is said to be merged into the foreclosure decree, 27 Illinois Law and Practice ("I.L.P.") Mortgages § 419, it does not follow from Illinois law that following the foreclosure decree there is no debt default to be cured in bankruptcy. There remains under Illinois law an accelerated debt computed by the judgment that can be paid before foreclosure sale and even after sale until the end of the redemption period when title finally passes.
Thus, despite the entry of foreclosure judgment in state court, Debtors here still had title in their property at the time they filed their Chapter 13 petition.
Section 1322(b) governs the content of any Chapter 13 plan that proposes to cure a mortgage default as to debtor's residence. It provides in pertinent part that the plan may:
Thus, § 1322(b)(5) indicates, notwithstanding § 1322(b)(2), that debtor can cure default within a reasonable time and maintain mortgage payments provided the last mortgage payment is due after the final payment under the plan. See 5 Collier on Bankruptcy ¶ 1322.01, at 1322-11 (15th Ed.1981). That statutory language, however, does not specify whether § 1322(b)(5) can be used to cure the debtor's default once the debt is accelerated and brought to judgment prior to the filing of the debtor's Chapter 13 petition.
In a case decided under Wisconsin law, the Seventh Circuit has interpreted § 1322(b)(5) as...
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