Valente v. Savings Bank of Rockville
| Decision Date | 12 October 1983 |
| Docket Number | Civ. No. H-83-177. |
| Citation | 34 BR 362 |
| Parties | Frank J. VALENTE, III, and Annette M. Valente, d/b/a Tri-City Cleaners, d/b/a Valet Maintenance, Appellants, v. The SAVINGS BANK OF ROCKVILLE, Appellee. |
| Court | U.S. Bankruptcy Court — District of Connecticut |
Richard Leibert, Hartford, Conn., for appellants.
Charles A. Maglieri, Pigeon & Gnutti, Stafford Springs, Conn., for appellee.
RULING ON APPEAL FROM BANKRUPTCY COURT
The appellant debtors, Frank J. Valente, III and Annette M. Valente, doing business as Tri-City Cleaners and also as Valet Maintenance, ("debtors" or "the Valentes") appeal from an order of the United States Bankruptcy Court, District of Connecticut (Krechevsky, B.J.) sustaining the objection of appellee The Savings Bank of Rockville ("the bank") to the confirmation of debtors' Chapter 11 plan. The Bankruptcy Court held that after a mortgage debt has been "merged" into a final state court judgment of foreclosure, the Bankruptcy Code does not allow a debtor to cure a default and reinstate the mortgage. The Bankruptcy Court further held that the bank's claim was "impaired" under § 1124(2) of Chapter 11. This Court finds that (1) a Connecticut judgment of foreclosure by sale is not sufficiently final to invoke the "merger doctrine" until judicial confirmation thereof, (2) even if the merger doctrine were properly invoked, the curing provisions of § 1123(a)(5)(G) of Chapter 11 provide a debtor, who has any legal or equitable interest remaining in real property, the opportunity to present its proposed plan to cure, and (3) if the Bankruptcy Court finds from the totality of the equities that said plan cures a defaulted claim, said claim is "not impaired" under § 1124(2). The Court reverses the decision of the Bankruptcy Court and remands the debtors' plan to said Court for consideration on the merits, in a manner not inconsistent with this Court's findings.
On October 12, 1973, the Valentes secured a debt owed the bank, by granting it a first mortgage on their home together with the dry cleaning establishment ("property"), located at 95 Anderson Road in Tolland, Connecticut. The principal amount of the mortgage was $30,000. In June, 1980, the Valentes defaulted on their monthly payments. The bank accelerated the mortgage debt and on October 28, 1980, commenced a foreclosure action in the Connecticut Superior Court. On March 31, 1981, the state court entered a judgment of strict foreclosure totalling $31,377.49 against the debtors and set September 1, 1981 as the "law day." On April 27, 1981, on the debtors' motion, the state court reopened the judgment of strict foreclosure, ordered a foreclosure by sale and established September 19, 1981 as the sale date. On August 12, 1981, the debtors filed a Chapter 13 petition. This action automatically stayed the execution of the judicial sale. The debtors' Chapter 13 plan sought to cure the default by paying arrearages and to de-accelerate the mortgage. The bank objected to confirmation of the plan. On November 30, 1981, the Bankruptcy Court sustained the bank's objection and denied confirmation of the plan. Subsequently, the debtors voluntarily dismissed their Chapter 13 petition.
On January 28, 1982, the Valentes filed the Chapter 11 petition that is currently on appeal to this Court. Article 2.2 of their amended plan of reorganization classifies the bank's claim as "not impaired" and seeks to cure the default by paying both "existing arrearages and additional compensation for damages incurred by said creditor as a result of its reasonable reliance on its contractual rights or applicable state law over a twelve-month period in monthly installments and also "its regular monthly mortgage payment." The bank objected to both the characterization of its claim as "not impaired" and to the confirmation of the plan. On December 16, 1982, the Bankruptcy Court sustained the bank's objections, holding that a "debtor cannot use the Bankruptcy Code to undo a final and valid state court judgment of foreclosure in the format of curing a default."
A. A Connecticut Judgment of Foreclosure by Sale is Not Sufficiently Final to Warrant the Merger of a Mortgage Debt into Said Judgment.
The decision of the Bankruptcy Court takes the position that state law, specifically the "merger doctrine," governs cure and de-acceleration cases in this district. This doctrine would establish that, "once a foreclosure action has gone to judgment, the mortgage is merged into the judgment, leaving the mortgagor with only the right to redeem by payment of the entire debt." In the Matter of Frank J. Valente, III, 34 B.R. 804, (Bkrtcy.D. Conn.1982). It further declares that once a mortgage has "merged into a final judgment of foreclosure, it is no longer susceptible to cure of default and de-acceleration" through bankruptcy proceedings. Id. The rationale behind the merger doctrine is that final state court judgments should not be disturbed by bankruptcy proceeding without explicit Congressional authorization and that such authorization does not exist in either Chapter 11 or Chapter 13. Id., at 7-8. This Court finds that such Congressional authorization does exist, at least in Chapter 11, (See §§ B and C, Discussion of Law, supra) and also finds that a Connecticut state judgment foreclosure by sale is not final until the sale is ratified by the court.
The Bankruptcy Court's reliance upon the merger doctrine is premised on two cases (in addition to its own earlier, Chapter 13 this case): In re Maiorino, 15 B.R. 254 (Bkrtcy.D.Conn.1981), appeal dismissed because judgment not final, sub nom Maiorino v. Branford Savings Bank, 691 F.2d 89 (2d Cir.1982), and In re Canady, 9 B.R. 428, 7 B.C.D. 749 (Bkrtcy.D.Conn.1981). As the court in Maiorino quoted Canady's language verbatim on this point, (See Maiorino, supra, 15 B.R. at 256-57) the burden for establishing the merger theory as precedential doctrine in such cure and deacceleration cases for the District of Connecticut ultimately rests upon Canady.
In Canady, Bankruptcy Judge Schwartzberg, of the Southern District of New York, sitting by designation in Connecticut, asserted without citing either Connecticut case law or statutes, that in Connecticut, on the day the judgment of foreclosure is entered, a mortgage merges into the judgment, and is thereby "laid to final rest." Canady, supra, at 429-30.
It is clear that a Connecticut judgment of foreclosure by sale is not sufficiently final so as to merge a mortgage irrevocably into itself.1 The Court must necessarily analyze the nature of a Connecticut judgment of foreclosure by sale, to examine its essential legal characteristics.
The United States Supreme Court has authorized such an examination by the Bankruptcy Court to scrutinize "merged" claims, so as "to determine the essential nature of the liability for purposes of proof and allowance," Pepper v. Litton, 308 U.S. 295, 306, 60 S.Ct. 238, 245, 84 L.Ed. 281 (1939), and to implement broad federal policies of bankruptcy law. Chicago Board of Trade v. Johnson, 264 U.S. 1, 10, 44 S.Ct. 232, 234, 68 L.Ed. 533 (1924). The ability to analyze state court judgments is particularly vital in cases involving cure and de-acceleration of residential and business mortgages. Mechanical recitation of the merger theory should not become a talismanic formula, before which the rights of debtors to preserve their homes and livelihoods shrivel and disappear.
Examining the so-called "final" judgments of foreclosure by sale in Connecticut, the Court finds them anything but final. As the Bankruptcy Court of this district has stated, "Connecticut decisional law indicates that a judicial sale under the Connecticut foreclosure by sale statute becomes complete and creates legal rights and obligations among the parties when it is confirmed and ratified by the court." Matter of Loubier, 6 B.R. 298, 302 (Bkrtcy.D. Conn.1980). Furthermore, the fact that sanctions are imposed after court ratification, underscores the "finality with which confirmation of a foreclosure sale allocates legal rights and obligations under Connecticut law." Id. One commentator, remarking upon this fact, called the Connecticut judgment of foreclosure by sale "interlocutory in nature." Caron, Connecticut Foreclosures, at 68, 108 (1981).
Certainly, a mortgage cannot be "laid to final rest" by "merging" into a judgment which is not final. Indeed, no merger could possibly take place until the judicial sale does become final, i.e., upon court ratification thereof. Thus, even if this Court were to follow state law and the merger doctrine, a debtor subjected to a Connecticut judgment of foreclosure by sale, could invoke the Bankruptcy Code's curative provisions until the sale was ratified without upsetting a final state court judgment.2
B. Where the Federal Bankruptcy Code Allows Cure, the Code Affords a Debtor the Opportunity to Attempt Cure of a Default After a State Court Foreclosure Judgment As Long As the Debtor Retains a Viable Interest in the Property Foreclosed Upon.
The Court does not rest its decision completely upon state law. The Constitution of the United States has empowered Congress to establish "uniform laws on the Subject of Bankruptcies throughout the United States." U.S. Const., Art. I, § 8, cl. 4. To the extent that Congress has acted in pursuance of this grant of authority, its laws are supreme to those of the states. Id., at Art. VI., cl. 2. Bankruptcy provisions allowing the opportunity to cure accelerated debts are no exception to the general rule of the Supremacy Clause. As one court has aptly stated, "federal law . . . overrides state law concerning acceleration because of the supreme constitutional power of Congress to enact bankruptcy laws." In re Hardin, 16 B.R. 810, 813 (Bkrtcy.N.D. Tex.1982). Because the opportunity to cure a default, secured by federal bankruptcy law and designed to protect "the...
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