In re Session

• Decision Date: 20 May 1991
• Docket Number: Bankruptcy No. 89-62810.
• Citation: 128 BR 147
• Parties: In re Jessie SESSION and Shirley Session, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Texas

128 B.R. 147 (1991)

In re Jessie SESSION and Shirley Session, Debtors.

Bankruptcy No. 89-62810.

United States Bankruptcy Court, E.D. Texas, Tyler Division.

May 20, 1991.

COPYRIGHT MATERIAL OMITTED

Rodney S. Scott, Longview, Tex., for Jessie and Shirley Session, debtors.

Paul H. Sanderford, Gandy, Michener, Swindle, Whitaker & Pratt, Fort Worth, Tex., for Chemical Financial Corp.

OPINION

DONALD R. SHARP, Bankruptcy Judge.

This matter came on for Confirmation of Debtors' Chapter 13 Plan pursuant to a regularly scheduled hearing on January 16, 1991, in Tyler, Texas. Chemical Financial Corporation objected to the confirmation on the grounds explained below. This opinion constitutes findings of fact and conclusions of law in accordance with Bankruptcy Rule of Procedure 7052 and disposes of all the issues presented to the Court.

FACTUAL BACKGROUND

The facts of this case are not materially disputed. Chemical Financial Corporation, hereinafter known as ("Creditor"), is the holder of a perfected security interest in Jessie and Shirley Sessions', hereinafter known as ("Debtors"), 1986 Magnahome, mobile home. The consumer credit contract securing Creditor's interest in the Debtors' mobile home was executed on July 15, 1986, in the principal amount of $30,037.00 at 13.5% interest. The terms of the contract called for 180 monthly payments each in an amount of $389.97.

Throughout 1989 Debtors experienced difficulty in making their monthly payments to Creditor. Subsequently, on December 28, 1989, Debtors filed for relief under Chapter 13 of the Bankruptcy Code. Creditor subsequently filed a motion to lift the automatic stay pursuant to 11 U.S.C. § 362. The Court, after due consideration, denied Creditor's Motion to Lift Stay, but upon joint request of the parties, utilized the appraisal testimony of the expert witnesses to hold that Debtors' mobile home had a fair market value of $13,500.00.

On August 27, 1990, Debtors filed a Chapter 13 Plan of Reorganization which in pertinent part proposes to pay the $13,500.00 secured value of Creditor's claim over the remaining 11 years of the consumer credit contract at the pre-petition contract rate of 13.5% interest. However, Debtors propose to reamortize the $13,500.00 value of the mobile home over 11 years, thereby reducing the monthly contract payment from $389.97 to $196.83. Furthermore, Debtors propose to either waive or treat as unsecured for purposes of plan distribution the $1,559.88 in contract arrearages. Creditor's Objection to Confirmation of Debtors' Plan argues that Debtors' proposals are impermissible under the dictates of the Bankruptcy Code.

DISCUSSION OF LAW

The first issue for consideration before this Court concerns whether Debtors may modify the amortization schedule of a reduced secured claim so as to pay that claim over the remaining term of the original contract. The second issue raised by Debtors concerns whether Debtors are required to cure contract arrearages through their Plan and if so, whether Debtors may allocate those arrearages to the unsecured portion of the original claim. Necessary to the Court's consideration of these proposals is an examination of 11 U.S.C. § 506

(a) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under § 553 of this Title, is a secured claim to the extent of the value of such creditor\'s interest in the estate\'s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor\'s interest or the amount so subject to setoff is less than the amount of such claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor\'s interest;

and 11 U.S.C. § 1322

(b) Subject to sub-sections (a) and (c) of this section, the plan may —

(2) Modify the rights of holders of secured claims, other than a claim 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;

(3) Provide for the curing or waiving or any default;

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(5) Notwithstanding paragraph (2) of this sub-section, 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; . . .

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(c) The plan may not provide for payments over a period that is longer than three years, unless the court, for cause, approves a longer period, but the court may not approve a period that is longer than five years.

Creditor has attempted to support its position by citing the recent line of cases following the lead of In re: Hougland, 886 F.2d 1182 (9th Cir.1989) in extending § 506 to long-term debt secured only by real property that is the debtor's principal residence. This Court, as well as two courts at the circuit level have embraced the logic and application of the Hougland analysis. In re: Honett, 116 B.R. 495 (Bkrtcy.E.D. Tex.1990); Wilson v. Commonwealth Mortg. Corp., 895 F.2d 123 (3rd Cir.1990); In re: Hart, 923 F.2d 1410 (10th Cir.1991).¹

The act of bifurcating an allowed claim pursuant to § 506(a) into secured and unsecured portions requires the debtor to address separately in a proposed Chapter 13 Plan treatments for each claim. As to the unsecured portion of the claim a debtor may, pursuant to § 1322(b)(2), modify the rights of the creditor within the Plan. Wilson v. Commonwealth Mortg. Corp., 895 F.2d 123, 128 (3rd Cir.1990); In re: Hart, 923 F.2d 1410, 1415 (10th Cir.1991). This allows the debtor to address the unsecured portion of a creditor's claim without regard to the terms of the contract or mortgage instrument. The parties herein do not disagree that this is the proper analysis as to the unsecured claim. With regard to the secured portion of the Creditor's claim Creditor argues that the Debtor's ability to modify the terms of the contract or mortgage is not so unlimited.

Creditor argues that the permissible treatment of this secured claim is governed by 11 U.S.C. § 1322(b)(2) and this Court's ruling in In re: Honett, 116 B.R. 495, 498 (Bkrtcy.E.D.Tex.1990). The Creditor would require that all relevant payment terms of the debt instrument remain intact save the necessary shortening of the maturity date of the debt due to the § 506(a) reduction in the outstanding principal balance. It is clear that the Creditor's argument on this point must be rejected. The Honett case dealt with a claim secured by a security interest in real estate that was the Debtors' principal residence. The teachings from the Honett case and the line of cases from which it springs are simply not applicable to the instant proceeding.

Although the Creditor's reliance on the principles enunciated in Honett is misplaced, we still must analyze the Plan and the proposals by the Debtors to determine whether the proposed treatment of the secured portion of the claim is proper. After a careful review of Debtors' proposal and relevant case law and statutory authority, this Court is of the opinion that Debtors' proposal is also impermissible.

Recently, in the case of In re: Scott, 121 B.R. 605 (Bkrtcy.E.D.Okl.1990) this issue was addressed. The factual background in Scott is very similar to the factual background of the present case. In Scott, Debtors sought to modify secured claims pursuant to § 1322(b)(2) and provide for their payment over periods exceeding five years. The court in Scott held that debtors may treat secured creditors through their plans in one of two ways. First, if a debtor chose to modify a secured claim, the claim as modified would be required to be liquidated within the confines of the Chapter 13 Plan. The second alternative for a debtor was to cure any default or arrearage through the Plan while simultaneously maintaining regular payments under the mortgage. Debtors' proposal to modify a secured claim and liquidate it throughout a period exceeding the term of the Chapter 13 Plan was impermissible since § 1322(c) requires that Plans may not provide for Chapter 13 payments under any circumstance for a period exceeding five years. This Court is of the opinion that the reasoning of the Scott court is correct. That reasoning and a clear reading of § 1322(c) prohibits Debtors' proposal. The precatory nature of § 1322(b)(2) provides that "the plan may — modify the rights of holders of secured claims . . ." (emphasis added). Concurrently, § 1322(c) provides for a term limitation on the life of a Plan.² Reconciling these two provisions leads to the inescapable conclusion that secured claims as modified must be dealt with within the confines of a Plan. Any provision allowing modified payments to exceed the term of a Plan would in effect result in a de facto Plan exceeding the allowable periods provided in § 1322(c). See also In re: Burke-Evanoff, 116 B.R. 614 (Bkrtcy.S.D.Ohio 1990).

The second issue for consideration by this Court concerns the latitude possessed by Debtors in the treatment of contract or mortgage arrearages. At the time of Plan confirmation, Debtors were in arrears $1,559.88. Debtors propose to treat this arrearage one of two ways. First, Debtors propose to waive the arrearages pursuant to 11 U.S.C. § 1322(b)(3) which provides for the waiving of defaults. Alternatively, Debtors propose that the arrearage be allocated to the unsecured portion of Creditor's claim.

On the other hand, Creditor maintains that not only is Creditor entitled to a cure of the arrearage through Debtors' Chapter 13 Plan pursuant to 11 U.S.C. § 1322(b)(3) or (5) but that said cure is to be in...