Matter of Brunson
| Decision Date | 28 January 1988 |
| Docket Number | Bankruptcy No. 87-04353. |
| Citation | 87 BR 304 |
| Parties | In the Matter of John BRUNSON, Debtor. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
David Paul Daniels, Camden, N.J., for debtor.
William M.E. Powers, III, Medford, N.J., for Citicorp Homeowners Services, Inc.
Debtor's chapter 13 plan is challenged at confirmation by the objections of Citicorp Homeowners Services, Inc. The issues presented include whether the bankruptcy court has subject matter jurisdiction to hear the case, whether the debtor may satisfy a judgment of foreclosure through a chapter 13 plan, and whether a plan that proposes a balloon payment during the last month of the plan can pass the feasibility test of 11 U.S.C. § 1325(a)(6).
Debtor filed his chapter 13 petition on July 17, 1987. The petition reflects arrearages of $14,673.92 under the mortgage held by Citicorp Homeowners Services, Inc and a tax debt of $700. No unsecured creditors are listed. Debtor's residence is valued at $70,000. A judgment of foreclosure was entered against the property on April 27, 1987, declaring a total sum of $71,105.88 due to Citicorp.
The first plan submitted by debtor envisioned the curing of arrearages and the reinstatement of the mortgage between debtor and Citicorp. Following the decision of the Third Circuit in In the Matter of Roach, 824 F.2d 1370 (3d Cir.1987), rendered on July 31, 1987, debtor's plan was amended to provide for payment of the judgment of foreclosure in full through the plan.
Citicorp first contends that the entry of a foreclosure judgment in state court prior to the filing of a chapter 13 petition deprives the bankruptcy court of the subject matter jurisdiction to administer the foreclosed property as part of the debtor's estate. This argument must be rejected.
Jurisdiction to hear Title 11 cases is vested in the federal district court. 28 U.S.C. § 1334. Under 28 U.S.C. § 1334(d), the district court has exclusive jurisdiction of all of the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate.
The bankruptcy court, as a unit of the district court under 28 U.S.C. § 151, hears those proceedings that district courts refer to it. 28 U.S.C. § 157(a). See In re Meyertech Corp., 831 F.2d 410 (3d Cir.1987). By Standing Order, the District Court for the District of New Jersey has referred all bankruptcy cases and proceedings to the bankruptcy judges for this district.
The question becomes whether property which has been the subject of the entry of a foreclosure judgment in state court prior to the filing of a chapter 13 petition continues to be "property of the estate" under 28 U.S.C. § 1334(d). Under 11 U.S.C. § 541(a)(1), the bankruptcy estate created at the commencement of a case under Title 11 is comprised of "all legal or equitable interest of the debtor in property as of the commencement of the case." The provision is expansive in its scope, as noted by the United States Supreme Court in United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). See also In re Cynthia Ward, 837 F.2d 124 (3d Cir.1988).
Upon the commencement of the case, a debtor retains the property rights that existed under state law at the time of filing. Under New Jersey law, a final judgment of foreclosure "declares a sum certain immediately due and commits the proceeds of the sale of specific property to its satisfaction." In the Matter of Roach, supra, at 1378, citing Eisen v. Kostakos, 116 N.J.Super. 358, 282 A.2d 421 (App.Div.1971) and Central Penn National Bank v. Stone-bridge Ltd., 185 N.J.Super. 289, 448 A.2d 498 (Ch.Div.1982). Debtor retains legal title to the property until the completion of the process of sheriff sale, expiration of the redemption period and transfer of the deed to the successful bidder. Through an "equity of redemption" stemming from New Jersey common law, debtor retains the opportunity to satisfy the judgment in full, and may redeem the foreclosed property even after sheriff sale by payment in full of the obligation. Following sheriff's sale, redemption is available within the 10 day period fixed by New Jersey Court Rule 4:65-5 for objections to the sale and until an order confirming the sale if objections to the sale are filed. Hardyston National Bank v. Tartamella, 56 N.J. 508, 513, 267 A.2d 495 (1970).
In this case, under New Jersey state law, at the commencement of the bankruptcy case, following the entry of a judgment of foreclosure against the property in question, debtor retained legal title to the property, the opportunity to redeem the foreclosed property by payment in full of the judgment, and actual possession. I conclude that the foreclosed property remained property of the estate under Section 541 and was therefore subject to the jurisdictional reach of the district court, and the bankruptcy court by reference, under 28 U.S.C. § 1334(d).
Relying on the recent Third Circuit Court of Appeals decision of In the Matter of Roach, supra, Citicorp next contends that a debtor is precluded from satisfying a judgment of foreclosure through a chapter 13 plan. In Roach, the Court noted that beyond the point of the entry of a foreclosure judgment, ". . . there are no substantial federal interests that would justify ignoring property interests created by the judgment of a New Jersey Court", Id. at 1377, and the Court could perceive no reason ". . . why Congress might have felt it necessary or desirable to authorize the extinguishment or suspension of state judgments." Id. at 1378. Again, this argument must be rejected.
In Roach, the "sole relevant issue" presented to the Court was "whether 11 U.S.C. § 1322(b) evidences a congressional intent to authorize cure of a default on a home mortgage after there has been a contractual acceleration of the full mortgage debt, a foreclosure judgment, and a foreclosure sale, so long as the state law redemption period has not expired." Id. at 1371 (emphasis added). Concluding first that Section 1322(b) permits the curing of default following acceleration of the mortgage, which would therefore permit the deacceleration of the mortgage, the Court further concluded that the opportunity to cure defaults under Section 1322(b) expires upon the entry of a judgment of foreclosure. Under New Jersey law, explained the Court, the mortgage is merged into the final judgment of foreclosure and the mortgage contract is extinguished. No contractual relationship exists between the parties, and the mortgagee's rights are those that arise from its judgment. The concept of the "curing" of defaults and reinstatement of the long-term contractual relationship envisioned by Section 1322(b)(5) has no relevance where the contractual relationship has terminated by operation of state law. Following termination, the contract cannot be reinstated.
The significant conceptual distinction in this case is the intent of the debtor to respect the state court judgment received by Citicorp and to satisfy the judgment in full through the plan. There is no attempt to merely cure arrearages and reinstate the contractual relationship between the parties. For the reasons expressed below, I conclude that a debtor may satisfy a judgment of foreclosure in full through a chapter 13 plan.
Initially, it must be highlighted that the primary focus of the chapter 13 opportunity afforded by Congress to debtors to repay allowed claims against them over a period of time is the ability to retain their property1 As the Roach Court recognized, the chapter 13 framework is designed to benefit debtors and creditors alike.
Chapter 13 of the Bankruptcy Code allows an individual bankrupt to reorganize his or her affairs without a liquidation of assets in much the same way as chapter 11 accords that right to businesses. Its purpose "is to enable an individual, under court supervision and protection, to develop and perform under a plan for the repayment of his debts over an extended period" of from three to five years. H.R.Rep. 595, 95th Cong., 1st Sess. 118 (1977), U.S.Code Cong. & Adm. News 1978, pp. 5787, 6079, reprinted in L. King, Collier on Bankruptcy App. 2 (1987) (hereinafter Collier). Congress believed that chapter 13 would benefit debtors by permitting a debtor to "retain his property by agreeing to repay his creditors" and to "avoid the stigma attached to straight bankruptcy," and would benefit creditors because "their losses will be significantly less than if their debtors opt for straight bankruptcy." Id. Accord S.Rep. 989, 95th Cong., 2d Sess. 118 (1978), U.S.Code Cong. & Admin.News 1978, p. 6079, reprinted in Collier App. 3. Id. at 1372.
Chapter 13 has been recognized as the chapter favored by Congress for consumer debtors. Where a debtor is found capable of fulfilling the terms of a chapter 13 repayment agreement, he faces dismissal of his chapter 7 filing under the "substantial abuse" provision of the Bankruptcy Code, 11 U.S.C. § 707(b), In re Grant, 51 B.R. 385 (Bankr.N.D.Ohio 1985). Furthermore, debtors are encouraged to opt for a chapter 13 repayment plan by substantially more liberal nondischargeability provisions. Under a chapter 13 plan, only alimony and support payments are nondischargeable. Compare Section 1328(a)(2) and Section 523(a)(1) through (10) ().
In most instances, the property that is sought to be retained by a chapter 13 debtor is the principal residence of the debtor. The chapter 13 opportunity to retain the residence and to repay claims represents the last resort of most debtors to save their homes. The Standing chapter 13 Trustee for the vicinages of Trenton and Camden in the District of New Jersey noted that of the nearly 7.8 million dollars collected in these vicinages during the fiscal year ending September 30,...
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