In re Tewell

• Decision Date: 23 October 2006
• Docket Number: No. 06 B 06677.,06 B 06677.
• Citation: 355 B.R. 674
• Parties: In re Charlene M. TEWELL, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

355 B.R. 674

In re Charlene M. TEWELL, Debtor.

No. 06 B 06677.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

October 23, 2006.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Peter C. Bastianen & Gloria C. Tsotsos, Attorneys for Movant.

Brian C. Pedersen, Attorney for Respondent.

Marilyn Marshall, Trustee.

MEMORANDUM OPINION

JOHN H. SQUIRES, Bankruptcy Judge.

This matter comes before the Court on the motion of Greenpoint Mortgage Corporation (the "Creditor") for relief from the automatic stay seeking annulment, or in the alternative, modification of the stay. For the reasons set forth herein, the Court grants the Creditor's motion and modifies the automatic stay to allow the Creditor to proceed with a mortgage foreclosure action in the state court.

I. JURISDICTION AND PROCEDURE

The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a Core proceeding under 28 U.S.C. § 157(b)(2)(G).

II. FACTS AND BACKGROUND

The Creditor holds the first mortgage lien on real property located at 6822 South Kenneth Avenue, Chicago, Illinois (the "Property") by virtue of a note and mortgage agreement dated July 20, 1998, executed by Alex Almaraz ("Almaraz"). The Debtor is not the maker of the note or the mortgagor of the Property. On July 31, 1998, Almaraz executed a quit claim deed which transferred title of the Property to the Debtor, subject to the mortgage. That deed was recorded on February 4, 1999. Almaraz made the transfer to the Debtor notwithstanding a "due-on-sale" clause¹ in both the note and the mortgage, which states as follows: "If all or any part of the Property or any interest in it is sold or transferred ... without Lender's prior written consent, Lender may, at its option, require immediate payment in full of all sums secured by this Security Instrument." It is undisputed that the Creditor did not give its written consent prior to Almaraz transferring the Property to the Debtor. Moreover, the parties do not dispute that the Debtor did not assume the mortgage.

On June 6, 2006, the Creditor filed a mortgage foreclosure action in the state court. Thereafter, on June 8, 2006, the Debtor filed a Chapter 13 bankruptcy petition. In her plan, the Debtor seeks to cure the mortgage default and maintain current payments during the pendency of the case.² The Debtor's plan was confirmed on August 9, 2006.³

Subsequently, on August 29, 2006, the Creditor filed the instant motion. The Creditor seeks relief from the automatic stay of 11 U.S.C. § 362. Specifically, the Creditor contends that the Debtor has no interest in the Property; she does not appear on the note and mortgage; and she does not have the right to cure the arrearage on the mortgage. Further, the Creditor argues that the transfer of ownership to the Debtor violates the due-on-sale clause contained in both the mortgage and note. Finally, the Creditor alleges that the Debtor's plan improperly modifies its rights in violation of 11 U.S.C. § 1322(b)(2). For these reasons, according to the Creditor, the Court should annul or modify the automatic stay pursuant to § 362(d) to allow it to continue its mortgage foreclosure proceedings.

The Debtor maintains that she has made the mortgage payments on the Property since the inception of the loan. She contends, without testimonial or documentary corroborative evidence, that the Creditor knew that she was not the mortgagor but continued to accept payments from her. Although such points have not been articulated in detail or with crystal clarity, the Debtor concludes that laches, estoppel, and waiver apply because the Creditor continued to accept payments from the Debtor for many years prior to the filing of her bankruptcy case.

Both the Creditor and the Debtor waived their rights to an evidentiary hearing and requested that the Court rule on the matter based on the papers submitted.

III. DISCUSSION

The issues before the Court are whether the Debtor, as transferee of Property that is her primary residence, can defeat the due-on-sale clause by curing defaults under the mortgage through her Chapter 13 plan, and whether the Creditor, eight years after the Property was transferred to the Debtor in violation of the due-on-sale clause, can enforce such provision. The Creditor contends that it is entitled to relief from the stay because the Debtor has no interest in the Property and the Debtor does not appear on the note and mortgage.⁴ According to the Creditor, the Debtor does not have the right to cure the arrearage on the mortgage. The Creditor argues that when Almaraz quit-claimed his interest in the Property to the Debtor, this act was in violation of the due-on-sale clause. Further, the Creditor maintains that the plan modifies its rights as a home lender in violation of § 1322(b)(2) and that it is entitled to modification or annulment of the automatic stay under § 362(d) to allow it to proceed with the foreclosure of its mortgage.

A. Motions to Modify or Annul the Automatic Stay

The automatic stay under 11 U.S.C. § 362(a) was enacted "`to prevent certain creditors from gaining a preference for their claims against the debtor; to forestall the depletion of the debtor's assets due to legal costs in defending proceedings against it; and, in general, to avoid interference with the orderly liquidation or rehabilitation of the debtor.'" In re Pleasant, 320 B.R. 889, 893 (Bankr.N.D.Ill.2004) (quoting In re Rexene Prod. Co., 141 B.R. 574, 576 (Bankr.D.Del.1992)). Section 362(d) of the Bankruptcy Code provides for relief from the automatic stay and states in pertinent part as follows:

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay —

(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;

(2) with respect to a stay of an act against property under subsection (a) of this section, if —

(A) the debtor does not have an equity in such property; and

(B) such property is not necessary to an effective reorganization[.]

11 U.S.C. § 362(d).

Thus, § 362(d) provides two grounds under which relief from the automatic stay may be granted. In re Jackson, No. 98 B 15483, 1999 WL 703093, at *3 (Bankr.N.D.Ill. Sept.9, 1999) (citing In re 8th St. Vill. Ltd. P'ship, 88 B.R. 853, 855 (Bankr.N.D.Ill.), aff'd, 94 B.R. 993 (N.D.Ill.1988)). The first ground is cause, including lack of adequate protection. 11 U.S.C. § 362(d)(1). "Cause" has not been clearly defined and is determined on a case-by-case basis. In re Fernstrom Storage & Van Co., 938 F.2d 731, 735 (7th Cir.1991). The second ground is that the debtor does not have equity in the property and the property is unnecessary to an efficacious reorganization. 11 U.S.C. § 362(d)(2). The first ground is the one applicable here: whether the Creditor can assert its rights under the due-on-sale clause as "cause" for relief from the stay under § 362(d)(1).

As the party requesting relief from the stay, the Creditor only bears the burden on the issue of the Debtor's equity in the Property. See 11 U.S.C. § 362(g)(1). See also Fed. Nat'l Mortgage Ass'n v. Dacon Bolingbrook Assocs. Ltd. P'ship, 153 B.R. 204, 208 (N.D.Ill.1993); In re Standfield, 152 B.R. 528, 534 (Bankr.N.D.Ill. 1993). The Debtor, opposing such relief, has the burden of proof on all other issues. See 11 U.S.C. § 362(g)(2). See also Fed. Nat'l Mortgage, 153 B.R. at 208; Standfield, 152 B.R. at 534. The decision to modify or otherwise annul the automatic stay pursuant to § 362(d) is committed to the sound discretion of the bankruptcy court. In re C & S Grain Co., 47 F.3d 233, 238 (7th Cir.1995); In re Boomgarden, 780 F.2d 657, 660 (7th Cir.1985); Holtkamp v. Littlefield (In re Holtkamp), 669 F.2d 505, 507 (7th Cir.1982).

The Creditor asserts an unavoided mortgage lien in the Property and seeks to have the automatic stay modified or annulled so that it can continue with foreclosure proceedings in the state court. As a creditor seeking to modify or annul the stay, the Creditor has the burden of showing the existence, the validity, and the perfection of its secured claim against the Property. See In re S. Ill. Railcar Co., 301 B.R. 305, 309 (Bankr.S.D.Ill.2002). State law determines whether a valid security interest exists in property. See Butner v. United States, 440 U.S. 48, 54-57, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (finding that the existence, nature, and extent of a security interest in property is governed by state law); see also In re Martin Grinding & Mach. Works, Inc., 793 F.2d 592, 594 (7th Cir.1986) (citing Butner.) The parties do not dispute that Illinois law governs in this matter. Moreover, the parties do not dispute that the Creditor has a valid mortgage lien against the Property by virtue of the note and mortgage.

B. Due-on-Sale Clauses

The Bankruptcy Code is silent on the subject of due-on-sale clauses. Thus, under Butner, the Court must turn to state law, which in this matter is Illinois. The Illinois Supreme Court has expressly held that due-on-sale provisions are valid per se. Abdul-Karim v. First Fed. Say. & Loan Ass'n of Champaign, 101 Ill.2d 400, 78 Ill.Dec. 369, 462 N.E.2d 488, 490 (1984); Provident Fed. Say. & Loan, Assn v. Realty Ctr., Ltd., 97 Ill.2d 187, 73 Ill.Dec. 389, 454 N.E.2d 249, 251 (1983); Baker v. Loves Park Say. & Loan Ass'n, 61 Ill.2d 119, 333 N.E.2d 1, 4 (1975); see also Cagan v. Intervest Midwest Real Estate Corp., 774 F.Supp. 1089, 1093-94 (N.D.Ill. 1991) (recognizing that that due-on-sale clauses are valid under Illinois law). Moreover, due-on-sale clauses are a "fundamental aspect of a mortgagee's rights...." In re Allen, 300 B.R. 105, 119 (Bankr.D.D.C.2003).

There is a split of ...