Mendoza, Matter of, TEMPLE-INLAND

• Decision Date: 12 May 1997
• Docket Number: TEMPLE-INLAND,No. 95-40859,95-40859
• Citation: 111 F.3d 1264
• Parties: , 37 Collier Bankr.Cas.2d 1691, 11 Tex.Bankr.Ct.Rep. 186 In the Matter of Josephine M. MENDOZA, also known as Josie Mendoza, Debtor. Josephine M. MENDOZA, also known as Josie Mendoza, Appellant, v.MORTGAGE CORPORATION, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1264

111 F.3d 1264

65 USLW 2745, 37 Collier Bankr.Cas.2d 1691,

11 Tex.Bankr.Ct.Rep. 186

In the Matter of Josephine M. MENDOZA, also known as Josie

Mendoza, Debtor.

Josephine M. MENDOZA, also known as Josie Mendoza, Appellant, v. TEMPLE-INLAND MORTGAGE CORPORATION, Appellee.

No. 95-40859.

United States Court of Appeals, Fifth Circuit.

May 12, 1997.

James Thomas McMillen, Corpus Christi, TX, for Appellant.

David Lee Rosenberg, William Scott Pesota, Waggner & Pesota, Houston, TX, for Appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before SMITH and PARKER, Circuit Judges, and JUSTICE ^*, District Judge.

ROBERT M. PARKER, Circuit Judge:

The Appellant, Josephine M. Mendoza ("Mendoza"), appeals an order of the bankruptcy court which required her to make post-petition mortgage payments which were in arrears directly to Temple-Inland Mortgage Corporation ("Temple") rather than modifying her Chapter 13 Plan to allow her to make the past due postpetition mortgage payments through the Chapter 13 Trustee, and by including a "drop dead" clause in its order. The district court affirmed. Finding that the bankruptcy court erred, we reverse and remand.

FACTUAL HISTORY

Josephine Mendoza filed a voluntary petition for bankruptcy under Chapter 13 of the Bankruptcy Code on October 5, 1994. Among Mendoza's liabilities was a debt of $3,276.94 owed to Temple secured by a mortgage on her home and fixtures (a range and hood). Mendoza's home was worth approximately $45,000. Mendoza's Chapter 13 Plan of Reorganization provided for the payment of the current mortgage, the prepetition arrearage on the mortgage, and the Trustee's fee on a monthly basis to be disbursed by the Trustee. Under Mendoza's Plan, she would pay off Temple completely. On January 9, 1995, the Bankruptcy Court confirmed Mendoza's Plan which provided for thirty-nine (39) monthly Plan payments.

Soon after Mendoza filed her petition for bankruptcy, she lost her job, suffered an illness, and thus was unable to make payments for two months (December 1994 and January 1995) under her proposed Plan resulting Within one month of confirmation of Mendoza's Plan, Temple filed a motion for relief from stay under Bankruptcy Code § 362(d)(1) apparently seeking to have Mendoza make payments on the postpetition arrearage directly to Temple rather than through the Trustee. ¹ On March 7, 1995, Mendoza filed her motion to modify Chapter 13 Plan to include the postpetition arrearage on her home mortgage in the Plan, to extend the number of Plan payments from 39 to 43 monthly payments which would allow her to pay off the arrearage, and to continue to make her Plan payments through the Trustee rather than directly to Temple.

in a postpetition arrearage on her mortgage. Since then, Mendoza has been able to make her monthly payments as prescribed by the Plan.

On March 20, 1995, the bankruptcy court held a hearing on Temple's motion for relief from stay. During the hearing, the bankruptcy court emphasized that it had no authority to modify Mendoza's Plan to include the postpetition arrearage, but instead indicated that it would grant the relief Temple had requested. On March 29, Mendoza filed a motion to reconsider whether the Plan could be modified to include the payment of the postpetition arrearage. Thereafter, on April 13, the bankruptcy court entered an "Order Conditionally Modifying Stays" requiring Mendoza to make payments on the postpetition arrearage directly to Temple over a six-month period, and included a "drop dead" clause which Temple had requested. The district court affirmed the decision of the bankruptcy court on September 29, 1995. This appeal followed.

On appeal, Mendoza asserts that the bankruptcy court abused its discretion by refusing to modify her Chapter 13 Plan to allow her to make the postpetition mortgage payments which were in arrears through the Chapter 13 Trustee and instead requiring her to make the postpetition mortgage payments directly to Temple, and the court further erred by including the "drop dead" clause.

DISCUSSION

This Court, acting as a second review court, reviews the bankruptcy court's findings of fact under the clearly erroneous standard, but the bankruptcy court's and district court's conclusions of law are reviewed de novo. In re United States Abatement Corp., 79 F.3d 393, 397 (5th Cir.1996). The bankruptcy court's decision to lift the automatic stay is reviewed for an abuse of discretion. See In re Dixie Broadcasting, Inc., 871 F.2d 1023, 1026 (11th Cir.), cert. denied, 493 U.S. 853, 110 S.Ct. 154, 107 L.Ed.2d 112 (1989).

A court may abuse its discretion by erroneously concluding that the law does not afford it the discretion to do something. See Meadowbriar Home for Children, Inc. v. Gunn, 81 F.3d 521, 535 (5th Cir.1996). Similarly, when a court makes a discretionary decision but erroneously believes that the law limits its discretion in a certain way (i.e., an incorrect understanding of the law), then it abuses its discretion. Thus, where a court's exercise of discretion is premised on an erroneous conclusion of the law, that constitutes an abuse of discretion in that the court failed to understand the full bounds of its discretion.

Initially, we consider Mendoza's argument that the district court erred in reviewing the bankruptcy court's order solely for abuse of discretion rather than considering whether its decision was based on a erroneous conclusion of law. Because this Court has not decided the issue of whether modification of a debtor's Chapter 13 plan to include postpetition arrearages is provided for under the Bankruptcy Code, which is a question of law, we find that the district court erred by applying the abuse of discretion standard in its review with respect to this issue.

A. Plan Modification & Direct Payment

The issue we first address on appeal raises a question of law: whether the bankruptcy court has the authority to modify a Chapter 13 plan to allow a debtor to include postpetition arrearages with respect to a secured claim on the debtor's home in her Chapter 13 Mendoza primarily argues that the bankruptcy court erred by concluding that it did not have the capacity to modify a plan of reorganization to provide for the payment of postpetition mortgage payments in arrears, and by requiring her to make direct payments to Temple. Mendoza asserts that there is authority to allow plan modification to include postpetition arrearage in the debtor's Chapter 13 plan. See In re Stafford, 123 B.R. 415 (N.D.Ala.1991). Additionally, Mendoza contends that all payments must be made under a plan of reorganization, based on a narrow reading of § 1326(c), and that the Chapter 13 trustee is charged with disbursing all monies to creditors. Similarly, Mendoza argues that arrearage payments should be distributed by the trustee based on § 1326(c). See, e.g., In re Reid, 179 B.R. 504, 507 (E.D.Tex.1995), aff'd, 77 F.3d 473 (5th Cir.1995) (stating that the general rule requires that debts provided for in a Chapter 13 plan be paid through the trustee).

Plan. ² The bankruptcy court refused to modify Mendoza's Chapter 13 Plan to include postpetition arrearages on her home mortgage based on the belief that it did not have the authority to modify her Plan to include postpetition mortgage payments in arrears in a Chapter 13 plan. The bankruptcy court stated that since such arrearage payments were not "provided for" in the Bankruptcy Code, it was without authority to make the requested modification. The bankruptcy court also ordered Mendoza to make direct payment of the postpetition mortgage arrearage and each of her monthly mortgage payments beginning with the May 1995 installment.

Temple contends that pursuant to Bankruptcy Code section 1322(b)(2), a Chapter 13 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 residence...." Temple relies on the "other than" language of § 1322(b)(2) and the United States Supreme Court's decision in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) as precluding modification of Mendoza's Plan to include the post-petition arrearages. ³

However, Nobelman precludes modification of the mortgagee's "rights" which are "reflected in the relevant mortgage instrument[ ]...." Nobelman, 508 U.S. at 329, 113 S.Ct. at 2110 (emphasis added). These rights may include, for example: (1) the right to repayment of the principal in monthly installments over a fixed term at a specified interest rate, (2) the right to retain the lien until the debt is paid off, (3) the right to accelerate the loan upon default and to proceed to foreclosure and recover any resulting deficiency. Id. We find Temple's reliance on Nobelman misplaced under the facts of this case. In the case sub judice, Mendoza is not attempting to modify the "rights" of the mortgagee (Temple), but instead, solely seeks to modify her Chapter 13 Plan to include the post-petition mortgage arrearage while observing the "bargained for" terms of her mortgage. There is a distinction between modifying the rights of a mortgagee where the debtor proposes to pay his mortgage at an interest rate lower than that provided for in the mortgage, and modifying a plan of reorganization to include postpetition mortgage payments which are in arrears.

Accordingly, Temple's rights as a mortgagee and its security interest are not considered "modified" under our reading of Nobelman.

Although we have not decided the question of whether a bankruptcy court may modify a confirmed plan of reorganization to include postpetition mortgage payments in arrears, we note there is a split of authority as to whether a debtor may cure such defaults through modification. ⁴ Though not controlling, we find the analysis of the Eleventh Circuit's decision in In re Hoggle, 12 F.3d 1008 (11th Cir.1994) to be better...