In re William Darryl Martin And Paula Parson Martin, 10–8127113.

• Decision Date: 26 January 2011
• Docket Number: No. 10–8127113.,10–8127113.
• Citation: 444 B.R. 538
• Parties: In re William Darryl MARTIN and Paula Parson Martin, Debtors.
• Court: U.S. Bankruptcy Court — Middle District of North Carolina

444 B.R. 538

In re William Darryl MARTIN and Paula Parson Martin, Debtors.

No. 10–8127113.

United States Bankruptcy Court, M.D. North Carolina,Durham Division.

Jan. 26, 2011.

John T. Orcutt, Raleigh, NC, Attorney for Debtors.Richard M. Hutson, II, Durham, NC, Trustee.

ORDER AND OPINION DENYING CONFIRMATION OF PLAN

CATHARENE R. ARON, Bankruptcy Judge.

THIS MATTER came before the Court on December 2, 2010, after due and proper notice, for a hearing on the Debtors' proposed Chapter 13 plan. Edward C. Boltz appeared at the hearing on behalf of the Debtors and Benjamin Lovell appeared on behalf of the Chapter 13 Trustee. Having considered the proposed plan, the evidence offered at the hearing, and other matters of record, the Court makes the following findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure:

BACKGROUND FACTS

The Debtors filed a petition for relief under Chapter 13 of the Bankruptcy Code on July 20, 2010 (the “Petition Date”). The male Debtor is the Chief Water Plant Operator for the Orange County Water and Sewer Authority and the female Debtor is unemployed. The Debtors have two dependent children, a son age 10 and another son age 24. According to their B22C, the Debtors have below-median income in the amount of $4,288.00 per month.

On their Schedule A, the Debtors listed an interest in one parcel of real property. The real property, the Debtors' primary residence, consists of a mobile home and lot located at 325 Kimberly Lane, Siler City, North Carolina (the “real property”). The current value of the Debtors' interest in the property is listed at $62,052.60, and the property is listed as subject to a secured claim in the amount of $132,429.97.

Colonial Savings (“Colonial”) filed a proof of claim in the amount of $134,391.64 on August 23, 2010. The proof of claim indicates that Colonial's claim is secured by a deed of trust on the Debtors' real property. The deed of trust and accompanying adjustable rate note were attached to Colonial's proof of claim. The note asserts the principal balance of the loan was $144,728.00, to be repaid over a term of 30 years at a rate of $861.81 per month with an adjustable interest rate to begin at 4.5%. In addition, the proof of claim asserts a pre-petition arrearage of $2,527.17.

On September 8, 2010, the Debtors filed a notice of proposed Chapter 13 plan providing for monthly payments to the Chapter 13 Trustee in the amount of $1,392.00 for 36 months. The proposed plan submits that, because the claim of Colonial is secured by a deed of trust on the real property and the Debtors' interest in an escrow account for payment of taxes and insurance, the anti-modification provisions of 11 U.S.C. § 1322(b)(2) do not apply to the claim of Colonial. As such, the proposed plan provides as follows:

The Debtors propose that the mortgage with Colonial shall be modified to re-amortize the $62,052.60 fair market value of the real property over a term of 108 months, from November of 2010 to October of 2019, at a permanently fixed interest rate of three and one-half percent (3.5%) per annum. The Debtors propose principal and interest payments of $668.59 for the remaining term of the modified loan. Colonial is entitled to escrow payments of $193.22 per month; therefore, Colonial shall be allowed a long-term continuing debt through the plan with payments of $861.81 per month effective September of 2010. The arrearage through August of 2010 is re-amortized into the mortgage loan; therefore, no payments shall be made on the arrearage claim of Colonial.

Failure to file a timely objection to this plan shall constitute acceptance of this plan by Colonial, pursuant to 11 U.S.C. § 1325(a)(5)(A). In the event that Colonial objects to the periodic payments extending beyond the length of the plan, the Debtors shall distribute, pursuant to 11 U.S.C. § 1325(a)(5)(B)(ii), property to Colonial in the form of a new deed of trust complying with the beforementioned terms. This modification shall be deemed to be in compliance with the requirements of HAMP and the Debtors and Colonial shall be entitled to any allowed distributions from the United States Department of the Treasury under such program.

On September 8, 2010, Notice of the Proposed Plan and Order Confirming Plan and Time for Filing Objections Thereto was transmitted to all parties in interest. The Notice provided that objections to the proposed plan must be filed and served within 28 days of the date of the Notice. The Notice also provided that “There will be no hearing on Confirmation unless a timely objection is filed or a hearing is ordered.”

Colonial did not file an objection. On September 13, 2010, the Court entered an Order that a hearing should be held on the proposed plan and set a confirmation hearing for October 21, 2010. The confirmation hearing was continued to December 2, 2010. Colonial did not appear at the confirmation hearing and did not file a written objection.

ISSUE PRESENTED

The primary issue is whether the Debtors' proposed plan complies with the requirements of § 1325 even though the plan proposes to modify the terms of the Debtors' mortgage by decreasing the principal of the original loan, instituting a fixed interest rate that is significantly lower than the Till interest rate in place of the original adjustable interest rate, and re-amortizing any existing arrearage claim over the life of the new modified loan.

DISCUSSION

Section 1325(a)(1) dictates that “[e]xcept as provided in subsection (b), the court shall confirm a plan if the plan complies with the other applicable provisions of this title.” 11 U.S.C. § 1325(a)(1). This language bestows bankruptcy courts with the responsibility of ensuring that all confirmed plans adhere to the requirements of the Bankruptcy Code. See, e.g., In re Nicholes, 184 B.R. 82, 87 (9th Cir. BAP 1995) (“When considering whether or not to confirm a Chapter 13 plan, a bankruptcy court must find that the plan complies with the provisions of Chapter 13 and with other applicable provisions of the Bankruptcy Code.”); In re Walton, 340 B.R. 895, 897 (Bankr.S.D.Ind.2006) (stating that “this Court will not confirm the Plan unless ‘the plan complies with the provisions of this chapter and with other applicable provisions of this title’ ”); In re Lee, No. 00–31113S, 2000 WL 34532244, at *1 (Bankr.E.D.Va. Nov.27, 2000) (holding that “[t]he court has an independent duty to determine whether or not a Chapter 13 plan satisfies the requirements of the law before confirming it”).

Section 1322(b)(2) states that “[t]he plan may 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.” 11 U.S.C. § 1322(b)(2). Furthermore, § 1322(b)(5) allows a debtor, “notwithstanding paragraph (2) of this subsection,” to “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.” 11 U.S.C. § 1322(b)(5). Together, sections 1322(b)(2) and 1322(b)(5) allow a debtor to bifurcate a “secured creditor's claim into secured and unsecured portions if the amount of the claim exceeds the value of the collateral securing the claim.” In re Bradsher, 427 B.R. 386, 388 (Bankr.M.D.N.C.2010). This bifurcation, however, cannot occur if the secured creditor's claim is secured only by real property that is the debtor's principal residence. Id.; § 1322(b)(2).

In In re Bradsher, the Middle District of North Carolina addressed the issue of whether escrow funds that were paid to Wells Fargo, the mortgagee, by the debtor constitute real property as defined in North Carolina. Id. at 389. According to the terms of the deed of trust in Bradsher, monthly payments were to include “principal and interest plus an additional sum to cover the payment of ‘escrow items' consisting of taxes and special assessment, leasehold payments or ground rents, and insurance premiums.” Id. at 388. The court examined the contractual provisions regarding the escrow funds and held that “the Wells Fargo indebtedness is not secured solely by real estate that is the Debtor's principal residence and thus Wells Fargo is outside the protection from modification provided under section 1322(b)(2).” Id. at 391–92. In reaching this conclusion, the court reasoned that “[t]he escrow provisions do not characterize or describe the rights arising from such provisions as being a component of the land described in the deed of trust or as constituting a right or privilege belonging or appertaining to such land.” Id. at 391. As was the case in Bradsher, Colonial's claim in the present case is secured by a deed of trust on the real property and the Debtors' interest in an escrow account. Therefore, the Debtors' proposed plan is correct in asserting that the anti-modification provisions of § 1322(b)(2) do not apply to the claim of Colonial.

Nonetheless, even though the anti-modification provision of § 1322(b)(2) does not apply in cases where the deed of trust is secured by both real property that is a debtor's principal residence and an escrow account, a debtor is not permitted to modify a mortgagee's claim without limitation. More specifically, “[p]ayments with respect to the secured portion of a bifurcated claim can extend beyond the life of the plan, if all provisions of § 1322(b)(5) are complied with.” In re Plourde, 402 B.R. 488, 491 (Bankr.D.N.H.2009) (emphasis in original). Thus, in order for a debtor to make payment on secured and unsecured claims after all scheduled Chapter 13 plan payments have been made, the plan must “provide for the curing of any default within a reasonable time and [provide for the]...