BY PATRICK HRUBY, ESQ.

BROCK & SCOTT, PLLC^∗

USFN MEMBER (AL, CT, FL, GA, KY, MA, MD, ME, MI, NC, NH, NJ, OH, PA, RI, SC, TN, VA, VT)

               Recently, the 11^th Circuit Court of Appeals heard an appeal from a bankruptcy court that required the 11^th Circuit to determine, in the context of a confirmed plan that addressed a claim secured by the debtor’s primary residence, whether antimodification or finality controls. In Mortgage Corporation of the South v. Bozeman (In re Bozeman), 57 F.4^th 895 (11th Cir. 2023), the 11^th Circuit appeared to depart from existing U.S. Supreme Court precedent, explained below, by holding that “when the two clash in the scenario this case presents… [w]e declare the antimodification provision the winner.”

               The secured creditor in this case held a mortgage secured by debtor’s principal residence, which as of the petition date had a principal balance of approximately $17,000 and approximately $6,800 in arrears. The creditor filed a proof of claim that only included the arrears but failed to account for the total amount outstanding on the loan. Debtor’s plan proposed to pay 58 payments of $454.00 per month, which would pay the creditor $26,332.00 over the life of the plan. However, debtor’s plan indicated that it was a full-payment plan, instead of a cure-and-maintain plan, which would cause creditor’s claim to be satisfied once the debtor made all the payments under the plan.

               The creditor did not object to the plan. It also failed to amend its claim to match the plan treatment. Ultimately, the bankruptcy court confirmed debtor’s plan as filed. After 16 months, the trustee filed a Notice of Final Cure Payment, which stated that because the debtor paid $6,817.42 (the proof of claim amount) to the trustee under the plan, she had no remaining payments due under the full-payment plan. The creditor objected based on debtor’s failure to make any payments on the remaining balance due under the loan in the amount of approximately $15,000.00, but instead only cured the arrears listed in the claim.

               Subsequently, the debtor filed a motion to release creditor’s lien on the property, arguing that by paying the claim in full she satisfied the lien. The creditor objected and advanced several arguments against the debtor’s attempt to have its lien satisfied. Most notably, it argued that the plan was unlawful upon filing, as the debtor impermissibly modified its claim on the debtor’s principal residence in violation of 11 U.S.C. § 1332(b)(2), also known as the antimodification provision.

               The debtor responded raising several arguments including that the creditor was barred from challenging the confirmation, even if improper, based on United Student Aid Funds, Inc. v. Espinosa, 130 S.Ct. 1367 (2010). In Espinosa, the debtor sought to modify his student loan through his plan instead of filing an adversary proceeding, as required, and proving “undue hardship.” The debtor’s plan was ultimately confirmed without objection, and upon plan completion, the court discharged the accrued interest on the debtor’s student loan. Years later, the student loan creditor sought to set aside the order confirming the plan as void, pursuant to Fed. R. Civ. P. 60(b)(4). The Supreme Court held that the confirmation order was not void simply because it was erroneous, and that R. 60(b)(4) was not a substitute for a timely appeal. Generally, Espinosa has since been broadly cited for the proposition that a confirmed plan is res judicata and cannot be collaterally attacked once the order is final.

               In Bozeman, the trial bankruptcy court granted the debtor’s motion to deem creditor’s lien satisfied. Creditor appealed that ruling to the district court, which affirmed the bankruptcy court's decision. Creditor then proceeded to appeal to the 11^th Circuit, which reversed and remanded for the following reasons.

               The 11^th Circuit explained that the antimodification provision in § 1322(b)(2) states that a debtor may not modify the rights of a claim secured only by a security interest in the debtor’s primary residence, subject to certain exceptions – none of which applied in this case. The court clarified that the Bankruptcy Code does not define “rights,” but under Alabama law (the controlling state law in this matter) the lien could not be satisfied until all outstanding indebtedness was paid, or no other obligations were outstanding under the mortgage.

               As such, the 11th Circuit, relying in large part on its own precedent established in Universal Am. Mortgage Co. v. Bateman (In re Bateman), 331 F.3d 821 (11th Cir. 2003), found it was required to declare that it was an impermissible modification of the homestead mortgage to find that the lien was satisfied without the creditor receiving payment in full on its loan. The bankruptcy court’s order satisfying the lien did just that; it impermissibly modified the homestead mortgage and gave no effect to the antimodification provision. The court further explained the additional precedent states that “a lien on a mortgage survives the … res judicata effect of a confirmed plan.” The fact that the debtor listed the claim in her plan as a “full-payment” treatment did not change that.

               Next, the court turned to what may be the biggest question, whether Espinosa abrogated the 11th Circuit’s prior precedent in Bateman. As noted above, Espinosa would likely require that the plan give res judicata effect, and the bankruptcy court’s order satisfying creditor’s lien would not be able to be challenged, as it was based on debtor’s compliance with her confirmed plan.

               The court stated that “Espinosa has no bearing on the release of a lien after a confirmed plan erroneously modifies a homestead-mortgagee’s rights.” As such, it listed five reasons why Espinosa did not abrogate Bateman. First, the 11th Circuit stated that the Supreme Court expressly limited Espinosa’s “holding to collateral challenges to confirmed Chapter 13 plans under … [Rule] 60(b)(4),” a procedure different than Bateman and the present case. That procedural difference was the court’s second reason.

               Third, the 11th Circuit explained that a “fair reading” of Espinosa demonstrated that the Supreme Court was focused on a “void” judgment under Rule 60(b)(4); and that even though the bankruptcy court’s confirmation in that case was erroneous, it was not “void.” Next, the court found that under Bateman, even though the debtor’s treatment in the confirmed plan violated the antimodification provision, there was still res judicata effect under § 1327, and the creditor there was bound by the confirmed plan. However, the 11^th Circuit distinguished Espinosa as only adjudicating the scope of 60(b)(4).  Based on that, the court noted that Espinosa and Bateman were “at peace with each other.”

               Finally, the court explained that it subsequently reaffirmed the holding in Bateman, regarding enforcing the antimodification provision even if a plan were erroneously confirmed, in Dukes v. Suncoast Credit Union (In re Dukes), 909 F.3d 1306 (11th Cir. 2018). Because Dukes was decided after Espinosa, the court explained that it was bound by Dukes due to the prior-precedent rule.

               Finding that there was no res judicata effect on the confirmation order’s full-payment treatment, the court examined the relationship of the antimodification provision and the confirmed plan. Acknowledging the importance of finality and the preclusive effect of a confirmed plan under § 1327, the court stated that even though the debtor’s plan should not have been confirmed, it was, and therefore is valid and enforceable. It explained that the creditor took no action relating to confirmation but, the court explained, that inaction does not change the fact that secured liens on real property that fall under the antimodification provision survive bankruptcy. Accordingly, while the debtor received a discharge and was no longer personally liable, the creditor maintained its in rem rights under state law relating to the property.  As the court explained, “[w]hile the finality provision confirms that it is too late to alter the Plan, it’s not too late for MCS to invoke the Code’s special protection for homestead mortgagees.”

               Bozeman may not be binding law in other Circuits, but for secured creditors with loans in the 11th Circuit, it provides an extra layer of protection for many mortgage loans. Of course, a key takeaway here is that even with the apparent safety net that the antimodification provision provides, acting timely, including properly reviewing plans and filing correct proofs of claim is important. The creditor here was forced to file two costly appeals to fix something that it could have likely prevented.

Copyright @2023 

USFNews - Feb. 8

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