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The U.S. Supreme Court’s decision in Coney Island Auto Parts Unlimited, Inc. v. Burton, 223 L. Ed. 2d 438, may provide clarity in an area that has long divided federal courts: whether a party seeking relief from a void judgment under Federal Rule of Civil Procedure 60 must file its motion within a “reasonable time.”
The dispute arose from a 2014 Chapter 11 bankruptcy filed by Vista-Pro Automotives and a related adversary proceeding against Coney Island Auto Parts seeking roughly $50,000 in unpaid invoices. A default judgment was ultimately entered against Coney Island, although questions remained about whether service had been properly effected under the governing rules.
In 2016, the Chapter 11 case was converted to Chapter 7, and the trustee demanded payment from Coney Island based on the previously entered default judgment. This demand appears to have been the first confirmed notice Coney Island had of the judgment.
Despite that notice, Coney Island did not seek relief until 2021—five years later—when federal marshals attempted to seize the $50,000 pursuant to the judgment.
In its motion for relief, Coney Island argued the judgment was void because it had never been properly served. According to the company, the court therefore lacked personal jurisdiction, rendering the judgment void. Because a void judgment cannot be validated by the passage of time, Coney Island contended the one-year limitation for certain Rule 60 motions should not apply.
The bankruptcy court rejected that argument, concluding that the delay between Coney Island’s actual notice of the judgment in 2016 and its motion for relief in 2021 was unreasonable. The United States Court of Appeals for the 6th Circuit affirmed, holding that motions under Rule 60(b)(4) must still be brought within a reasonable time. The appellate decision included a dissent arguing that courts lack authority to enforce void judgments.
Writing for the Court, Justice Samuel A. Alito Jr. emphasized that Rule 60’s timing requirement applies to all motions brought under Rule 60(b), including those seeking relief from a void judgment:
Federal Rule of Civil Procedure 60 permits a court to ‘relieve a party . . . from a final judgment, order, or proceeding,’ and subdivision (b)(4) specifically authorizes relief from a ‘void’ judgment. … Rule 60(c)(1) provides that a ‘motion under Rule 60(b) must be made within a reasonable time.’ Because a motion for relief from an allegedly void judgment is a motion under Rule 60(b), the reasonable-time limit applies.
Coney Island, at 442–43.
The Court did not define what constitutes a “reasonable time.” That omission may stem from the posture of the case: Coney Island did not argue that its motion was timely under the circumstances, but rather that no time limitation should apply at all.
Potential Divergence in Kansas
While the decision may clarify federal practice in some jurisdictions, Kansas courts may take a different approach as it relates to its own statute, K.S.A. §60-260. In the recent decision in MidFirst Bank v. Sipple, 2026 Kan. App. Unpub. LEXIS 110, the Kansas Court of Appeals acknowledged Coney Island but began its analysis by stating: “First, our Kansas caselaw establishes that a ‘reasonable time’ for challenging a void judgment is any time.”
Ultimately, however, the court determined that the defendants’ arguments failed on the merits, making further analysis of the timing issue unnecessary. As a result, the broader implications of the Supreme Court’s ruling for Kansas law remain unsettled.
The Sipple case involved pro se litigants who had repeatedly challenged rulings throughout a foreclosure proceeding dating back to 2022. Given the procedural posture and the nature of the appellants’ arguments, the court appeared to have little need to fully address how Coney Island might affect Kansas precedent.
Looking Ahead
Whether Kansas and other jurisdictions ultimately align with the Supreme Court’s interpretation remains to be seen. The Coney Island decision could become a useful tool in cases involving long-delayed challenges to judgments, particularly in litigation involving pro se parties.
At the same time, the ruling may raise practical concerns in contexts such as junior lien disputes, tax foreclosures, and post-sale title issues where challenges to underlying judgments may surface years later.
For now, the decision underscores the importance of identifying potential service or jurisdictional defects early and consulting local counsel to evaluate the evolving impact of the Supreme Court’s ruling as what is “reasonable” will vary from jurisdiction to jurisdiction.
On November 5, 2025, the United States Bankruptcy Court for the District of Connecticut New Haven Division issued a decision in In re Booker, 25-30902 (AMN), finding acts to obtain possession of real property are not stayed by a debtor’s bankruptcy filing when state law classifies those acts as in rem or quasi in rem.
The debtor was a former owner of the property that was foreclosed upon by the lender. Title to the property vested in the former lender following the final judgment of foreclosure and a summary process action was initiated against the former owners and other occupants to obtain possession of the property. The lender obtained a judgment of possession and an execution for possession was issued. However, prior to the scheduled lockout date, the debtor filed a Chapter 7 bankruptcy petition. The state marshal subsequently canceled the lockout due to the bankruptcy filing.
The lender filed a motion in the bankruptcy court seeking an order confirming the debtor’s bankruptcy filing did not create an automatic stay preventing the lender from proceeding with the execution of possession.
The bankruptcy court found the automatic stay pursuant to 11 U.S.C. §362(a) did not arise upon the filing of the bankruptcy case because the debtor had no interest in the property. The court further held the stay provided in §362(a) did not bar the continued prosecution of the eviction order against the debtor, or any other action by the lender to evict any present or hypothetical future debtor residing in the property.
The bankruptcy court began its analysis by determining the debtor had no legal or equitable interest in the property, as the debtor’s right to possession had been terminated by the summary process judgment. As a result, 11 U.S.C. §362(a)(3), which stays any act to obtain possession of property of the bankruptcy estate, was not applicable and did not create a stay. The court reasoned the property could not be property of the bankruptcy estate when title had already vested in a third party.
The court further opined the stays provided for in 11 U.S.C. §§362(a) (1) and (a)(2), which are applicable to actions against the debtor or property of the estate, were not applicable as to the enforcement of an eviction judgment or ejectment action following a foreclosure as these actions are in rem or quasi in rem proceedings under Connecticut state law.
Connecticut’s summary process proceedings are in rem in nature. "The ultimate issue in a summary process action is the right to possession … and the relief available in summary process actions is possession of the premises." Centrix Management Co., LLC v. Valencia, 145 Conn. App. 682, 691, 76 A.3d 694 (2013). (Emphasis in original). A summary process plaintiff can only seek possession of the premises, and a judgment of possession does not impose any personal liability.
The bankruptcy court held that because the debtor did not have a legal or equitable interest in the property and the lender sought only possession of the property, not payment of a debt, no stay was created under 11 U.S.C. §362(a) that prevented the lender from taking actions to enforce the judgment or execution of possession. In reaching this conclusion, the bankruptcy court relied on the 9th Circuit decision In re Perl, 811 F.3d 1120, 1130 (9th Cir. 2016). In Perl, the 9th Circuit held that a third party who purchased property at a mortgage foreclosure sale in California and who thereafter obtained an unlawful detainer judgment of immediate possession against the debtor before the bankruptcy filing, did not violate the automatic stay by evicting the debtor after the bankruptcy filing. The court reasoned that even though the debtor was physically possessing the property, the debtor "had been divested of all legal and equitable possessory rights that would otherwise be protected by the automatic stay." Id at 1130. The court also found that the sheriff’s lockout did not violate the automatic stay because no legal or equitable interests in the property remained to become part of the bankruptcy estate. Id.
The facts in Booker are substantially similar to those in Perl, and the Connecticut bankruptcy court entered an order that the automatic stay of 11 U.S.C. § 362(a) did not prevent the lender from proceeding with the eviction action.
USFN submitted a formal comment in response to the Middle
District of North Carolina’s proposed Model Chapter 13 Plan § 8.3 and Local
Rule 4001-1(e). The proposed plan and rule if enacted could also expose
mortgage servicers to significant legal risk both within North Carolina and
across the country.
I. Legislative Overreach: A Challenge to Federal Law and
Judicial Authority
At the heart of USFN’s concern is the improper expansion of
local judicial authority. Under Federal Rule of Bankruptcy Procedure 9029,
local courts may only establish rules governing “practice and procedure.”
However, USFN argues that the Middle District’s proposals do much more: They
effectively legislate new substantive rights and obligations for mortgage
creditors, infringing upon the role of Congress and federal regulatory agencies
such as the CFPB.
In support of its position, USFN points to In re
Klemkowski, 664 B.R. 681 (Bankr. D. Md. 2024), in which the court declined
to mandate that servicers provide online account access to debtors in Chapter
13. The court explicitly acknowledged that any requirement of that nature must
come from Congress or a regulatory agency — not the judiciary.
Yet, Section 8.3(d) of the proposed model plan states:
“The Holder shall send to the
Debtor a Periodic Monthly Statement, each month, either by mail or
electronically as requested by the debtor.”
This requirement, USFN notes, directly conflicts with 12
C.F.R. § 1026.41 which grants servicers, not borrowers, the discretion to
determine how periodic statements are delivered. The proposed mandate,
according to USFN, exceeds the scope of permissible rulemaking and violates the
Rules Enabling Act (28 U.S.C. § 2075), which prohibits the judiciary from
modifying substantive rights via rule.
II. Operational Risks and National Impact for Creditors
Mortgage servicers operate on a national scale, often
managing loans in multiple states and districts. The proposed plan and rule
would impose local-specific obligations — such as providing online payment
portals and continuing non-bankruptcy statement formats — that many servicers
are not currently equipped to meet.
Implementing these changes would require extensive and
costly overhauls to servicing systems, which are typically not designed to
reflect individualized bankruptcy requirements across multiple jurisdictions.
Moreover, applying different rules for just one of the 94 federal districts
could inadvertently create systemic risks.
USFN references the CFPB’s 2024 enforcement action against
VyStar Credit Union, where inadequate technical systems and mismanagement of
borrower communications led to significant regulatory penalties. The lesson,
according to USFN, is clear: When system demands exceed operational capacity,
borrower harm and regulatory exposure follow.
While the model plan includes a sentence intended to shield
creditors from liability in attempting to comply, USFN argues this protection
is too limited and fails to cover the broader risks, especially for servicers
operating outside the Middle District.
III. Lack of Uniformity and National Conflict
Article I, Section 8 of the U.S. Constitution gives Congress
the exclusive power to establish “uniform Laws on the subject of Bankruptcies.”
USFN warns that by enacting these provisions through a local rule and plan, the
Middle District undermines this constitutional principle.
Furthermore, inconsistencies between the proposed plan
language and the local rules create confusion. For example:
Section
8.3 applies specifically to mortgage claims in Chapter 13, while Local
Rule 4001-1(e) appears to extend requirements to all secured claims in all
bankruptcy chapters, including automobile loans.
The
local rule mandates online access and statement delivery “in the same
manner as existed prepetition,” whereas the model plan merely requires
“online access to make payments.”
The
rule mandates delivery of non-bankruptcy customer statements, while the
plan seems to reference periodic statements under TILA, which may not
apply to all loan types (e.g., open-end credit lines like HELOCs).
This framework, USFN argues, not only complicates compliance
but also increases the risk of unintended violations of federal law,
particularly for national banks and servicers.
IV. The Need for a Deliberate, Collaborative Process
USFN emphasized that major changes to bankruptcy processes
should be made through a deliberative legislative or national rulemaking
process, not by a local rule or plan. Historically, significant reforms — like
those to national plan forms or the Bankruptcy Code — undergo years of
stakeholder consultation, public comments, and congressional or Supreme Court
approval.
In contrast, the Middle District’s proposed changes
represent a fundamental departure from established practices without adequate
time for industry input or adjustment. This rapid implementation risks not only
legal invalidity but also significant disruption to national servicing
standards.
Conclusion and Call for Revisions
In its conclusion, USFN respectfully urged the Court and the
Rulemaking Committee of the Middle District of North Carolina to revisit and
revise Model Plan § 8.3 and Local Rule 4001-1(e). It called for a framework
that aligns with existing federal law, preserves the constitutional separation
of powers, and reflects the operational realities of mortgage servicers.
USFN encouraged ongoing dialogue to ensure that bankruptcy
procedures remain fair, practical, and legally compliant.
On April 1, 2025, the Bankruptcy Court for the District of
Kansas Chief Bankruptcy Judge Dale L. Somers reaffirmed most creditor counsel’s
understanding of Bankruptcy Rule 3002.1 in In
re McGruder, 2025 Bankr. LEXIS 771 (Bankr. D. KS April 1, 2025), finding that
Rule 3002.1 does not apply to secured creditor’s in a Chapter 13 case if the debtor’s
plan fails to provide for contractual installment payments.
The opinion is of note because the debtor’s counsel argued
that Bankruptcy Rule 3002.1 should be applicable because a portion of the equal
monthly amount paid to the creditor pursuant to the Chapter 13 Plan included a monthly
payment toward principal and interest identical to the amount in the note.
In this case, the basis of creditor’s claim was a note in
the principal amount of $100,000.00 to be paid in monthly principal and
interest payments in the amount of $599.55 at 6% interest and a final balloon
payment to be paid upon the note’s maturity, which was originally August 15,
2017, and then extended to December 15, 2017.
Debtor’s Chapter 13 Plan filed contemporaneously with the
case filing sought to pay in full the creditor’s lien against the debtor’s
principal residence. The Chapter 13 Plan was confirmed providing for payments
to the creditor in equal monthly amounts of $988.00 for the entirety of the
Chapter 13 Plan, and a unique plan provision stated that the remainder of the
lien would be paid in full through a refinance of the indebtedness upon plan
completion.
Debtor’s original Chapter 13 Plan was then confirmed without
objection.
Later, the creditor filed a Motion for Relief based upon the
debtor’s failure to pay the post-petition taxes and assessments against the
property. Creditor and debtor resolved the basis for the Motion for Relief in an
Agreed Order. The Order provided for an increase in the monthly amount paid to creditor,
increasing from $988.00 to $1,300.00 per month. The $1,300.00 monthly amount
consisted of: $599.55 paid toward principal and interest, $303.00 paid toward
ongoing property taxes, and $397.45 toward the post-petition escrow deficiency
with the funds later being applied toward principal and interest after the post-petition
escrow deficiency was cured.
Creditor’s Motion for Relief was subsequently denied three
days after the entry of the Agreed Order.
Two years later the debtor obtained a pay-off quote from creditor
during an attempt to refinance the property.The pay-off quote from the creditor included post-petition creditor
attorney’s fees of over $20,000.00.
Debtor then filed a Motion for Determination of Post-Petition
Mortgage Fees, Expenses, and Charges pursuant to 3002.1 seeking to disallow the
post-petition attorney’s fees included in the creditor’s payoff as Bankruptcy
Rule 3002.1 Notices of Post-petition Fees, Expenses and Charges had not been
filed in the case and a majority of the fees were incurred over 180 days prior.
The debtor also argued that the total amount of the creditor’s attorney fees was
unreasonable.
In debtor’s brief in support of the Motion, debtor’s counsel
argued that Bankruptcy Rule 3002.1 should apply based upon the fact that the
Agreed Order Confirming the debtor’s Amended Chapter 13 Plan provided that a
portion of the monthly amount paid to creditor explicitly included a $599.55
payment toward principal and interest. As the $599.55 in the Order was
identical to the ongoing principal and interest payment in the original note,
the debtor asserted that the payment was in fact a contractual installment payment as referenced in Bankruptcy Rule
3002.1.
The Order, designated as an Opinion due to the novel
argument, includes a robust analysis of Bankruptcy Rule 3002.1 and the term contractual installment payments. As
neither the Bankruptcy Code nor Bankruptcy Rule 3002.1 defines contractual installment payments, the court
turned to the Advisory Committee Notes from the 2016 amendment to Bankruptcy
Rule 3002.1 which provide:
" If… a secured
creditor's claim is otherwise modified by the confirmed plan, the secured
creditor is said to have lost the ‘benefit of its original contract negotiated
with the debtor’ as the confirmed plan, pursuant to § 1327(a), becomes the
modified contract between the debtor and creditor, and the plan payments to the
creditor are not contractual installment payments as the original contract is
no longer adhered to.”
12-13
The court determined that the Chapter 13 Plan created “a
separate and distinct payment arrangement than the one contemplated by the
underlying contract,” even though the $1,300.00 monthly amount to be paid to creditor
did include $599.55 toward principal and interest identical to the principal
and interest amount included in the original note.Consequently, Bankruptcy Rule 3002.1 did not
apply.
Although, the conclusion of the court may not be a surprise
to USFN readers familiar with Bankruptcy Rule 3002.1, it reinforces the court’s
reading of the term “contractual installment payments” in spite of debtor’s
counsel’s attempted argument.
The court declined to address the reasonableness of creditor’s
attorney fees and set the matter for a future status hearing.
A recent change to the
search parameters of the Public Access to Court Electronics Records (PACER)
service has introduced substantial challenges for law firms nationwide. Any law
firm engaged in the practice of mortgage default services, post-foreclosure
possession litigation, or any other default-servicing litigation has, no doubt,
felt the ripple effect in significant, excessive time and resource expenditures
of this, relatively, minimal change.
The PACER service
provides electronic access to federal court records. This includes individuals
who have filed for bankruptcy in their respective state districts from the
moment the case is filed. Timely and accurate bankruptcy searches are of the
utmost importance in the world of default servicing. These searches should be
performed multiple times throughout the life of the file because actions taken
against an individual in an active bankruptcy can lead to severe consequences
for the law firm as well as the mortgage servicer and/or lender.
When an individual (or
joint couple) files a Chapter 13 bankruptcy petition, an automatic stay is invoked
which halts most collection actions against the debtor or the debtor’s property
under 11 U.S.C. § 362. If a borrower files bankruptcy before the date of a
foreclosure sale, all foreclosure proceedings must cease, which gives the
borrower an opportunity to cure arrears in mortgage payments. If a foreclosure
sale takes place while the borrower is in an active bankruptcy, the
consequences for violating the automatic stay can be severe, including monetary
sanctions, punitive damages, and rescission of the foreclosure sale.
In order to avoid being
placed in this precarious situation, law firms will search PACER for active
bankruptcies at multiple stages of the foreclosure proceedings. At a minimum,
bankruptcy searches are conducted prior to the date of first publication, prior
to the date of foreclosure sale, and on the morning of the date of foreclosure
sale, which is especially important if a debtor or their attorney does not
inform the law firm that the bankruptcy has been filed. A search of the
national case locator previously required the debtor’s Social Security number
or the debtor’s name, respectively, in order to locate a relevant case.
As of December 8, 2024,
PACER initiated a system update requiring both a Social Security number and a
last name. A search of a debtor’s Social Security number with an unknown or
different last name will not reveal a bankruptcy case in the search results. The
additional, mandatory requirement of a debtor’s last name at the time of filing
in a national case locator search undermines the confidence in accurate
searches. This is because changes in a debtor’s personal life between the date
of the mortgage and the date of foreclosure proceedings have the potential to
complicate search parameters. In short, Social Security numbers never change,
but surnames can and do often change. Marriage and divorce are the obvious reasons
for changes in surnames, but even a misplaced hyphen in a search will yield incomplete
search results.
While a search of the
national PACER case locator requires both a Social Security number and a last
name, a PACER search of each state’s respective districts still only requires a
Social Security number. Therefore, in order to safely determine if a debtor is
in bankruptcy, a national PACER search should be followed by searches in each
district of the state in which the subject property rests. If the file
indicates that the debtor may have ties to another state, one should err on the
side of caution and search each district in said additional state(s) as well.
Needless to say, these
compulsory searches require extensive additional resources. Hours of extraneous
time searching for potential bankruptcies detract from revenue-generating
operations and cost mortgage servicers thousands in additional legal fees. Furthermore,
this update to the PACER national case locator greatly enhances the potential
for adversarial proceedings against creditors that should, otherwise, be
completely avoidable.
While conversations
between the law firm of McPhail Sanchez, LLC and administrative staff at the PACER
Development Branch have shown that the solution is not as simple as a flip of
the switch, it does appear that at the time of writing, the PACER Development
Branch is taking measures to restore the previous search capabilities of the national
case locator but with additional security features.
As of March 10, 2025,
an update from PACER indicates that beginning April 13, 2025, users will again be
able to search the national database by Social Security Number without the need
for a last name, although the search will now use CAPTCHA technology as an
added security measure.
In the interim,
multiple searches of the various PACER districts will be required to avoid the
potential risk for costly fallout from these changes.
After this article was submitted for publication, the servicer
appealed the bankruptcy court’s decision. Stay tuned for the outcome of the
appeal and further developments in this case.
A recent
decision from the U.S. Bankruptcy Court for the District of Maryland sheds
light on a significant issue for mortgage servicers and bankruptcy
practitioners: whether denying a debtor access to an online payment portal
after a bankruptcy filing violates the automatic stay under 11 U.S.C. § 362.
The ruling emphasizes the potential legal risks for servicers when discontinuing
certain payment methods for borrowers who file bankruptcy cases.
In re
Klemkowski, Bankr. D. Md. Case No. 22-10257-MMH (October 30, 2024), 2024 WL
4625644, a Chapter 13 debtor sought to compel her mortgage servicer, CitiMortgage,
Inc., and its agent, Cenlar FSB, to restore her access to an online portal used
to make mortgage payments. Prior to filing for bankruptcy, the debtor had
relied on the portal to make her payments. However, once she filed her
petition, the servicer blocked her access, citing its policy of restricting
portal use for borrowers in bankruptcy. The debtor argued that this change
created unnecessary barriers, increasing the likelihood of payment delays and
defaults. The debtor argued that this caused her to miss payments and required
her to defend a motion for relief from stay after falling behind. Meanwhile, the
servicer claimed the restriction was necessary for compliance with bankruptcy
protocols.
The
bankruptcy court ruled that the servicer’s action violated the automatic stay.
The court reasoned that access to the online portal was part of the debtor’s
contractual relationship with the servicer before bankruptcy, based on the
debtor’s right to use the online portal under the servicer’s Online Access
Agreement. This right, as a prepetition contractual interest, became part of
the bankruptcy estate under § 541(a). By unilaterally restricting access to the
portal, the servicer effectively altered the debtor’s rights, thereby
exercising control over estate property in violation of § 362(a)(3).
The
servicer defended its policy by asserting that its systems were unable to
differentiate between borrowers in bankruptcy and those who were not, making it
“impossible” to allow portal access without risking errors or violations of the
automatic stay. However, the court found this explanation insufficient,
describing it as a business decision rather than a legitimate technical
limitation. The court noted that the servicer’s witness, while professional and
knowledgeable about internal procedures, was not a technical expert and did not
provide evidence that these claimed limitations could not be fixed within the
servicer’s system.
The court
also highlighted the practical impact of the restriction on the debtor. Without
portal access, the debtor faced considerable challenges in making timely
payments. She testified about difficulties with alternative methods, including
long delays when making phone payments, issues with mail reliability, the fact
that she had no car, and limited access to branch offices. These barriers, the
court noted, increased the risk of default under her Chapter 13 plan,
potentially undermining her ability to complete the bankruptcy process
successfully.
Judge
Harner emphasized that bankruptcy is designed to give debtors a fair chance to
rehabilitate their finances, not to create new hurdles that could jeopardize
their repayment plans. The court noted that the servicer’s actions were
contrary to the broader goals of bankruptcy law, which aim to make it
easier—not harder—for debtors to comply with their obligations.
Although
the court determined that the servicer’s actions violated the automatic stay,
it did not award monetary damages. The debtor had not provided sufficient
evidence to support a claim for damages under § 362(k). Notably, the debtor did
not present the issue to the court as a stay violation, but under a motion to
compel access to the online portal. The court noted that a case with different
facts may warrant an award of damages under § 362(k).
The court
explained that even though monetary damages were not warranted, the automatic
stay issue remained. Namely, the servicer’s actions to effectively terminate
the Online Access Agreement violated the automatic stay and were void ab
initio. The court explained that “the primary way to abate this violation
is for the Servicer to restore the status quo and the Debtor’s rights under the
Online Access Agreement[,]” but could not determine whether that remedy was
proper or available. Accordingly, the court is allowing the parties to offer
further briefing on those issues.
While this
decision may not gain traction outside of the District of Maryland, it highlights
the need for mortgage servicers to carefully evaluate how their policies align
with bankruptcy law. Many servicers restrict online payment access for
borrowers in bankruptcy, which could result in those servicers inadvertently violating
the automatic stay. The author intends to write on the outcome of the
additional briefing and the court’s final ruling. In the meantime, servicers
may want to consider reviewing their procedures to ensure that borrowers’
rights under prepetition contracts are protected during bankruptcy and reach
out to their bankruptcy counsel to discuss.
Florida
attorneys who handle litigated matters, including mortgage foreclosures and
related actions, should be very familiar with Florida’s fee-shifting statute,
Fla. Stat. § 57.105(7). That statute provides, in pertinent part:
If a contract contains a provision
allowing attorney’s fees to a party when he or she is required to take any
action to enforce the contract, the court may also allow reasonable attorney’s
fees to the other party when that party prevails in any action, whether as a
plaintiff or defendant, with respect to the contract.
In
mortgage-related cases, several Florida state courts and federal courts
applying Florida law have awarded the prevailing defendant attorney’s fees in various
scenarios. The Florida Supreme Court recently awarded fees to the defendant in
a mortgage foreclosure case where the creditor failed to prove standing on the
day the suit was filed. Page v. Deutsche Bank Tr. Co. Americas, 308 So.
3d 953, 960 (Fla. 2020). The United States District Court for the Middle
District of Florida affirmed the bankruptcy court, which awarded a prevailing
defendant attorney’s fees for successfully defending a motion to dismiss the
debtor’s bankruptcy case. In re Nabavi, 514 B.R. 895 (M.D. Fla. 2014).
In
another example, the United States District Court for the Southern District of
Florida awarded fees to a prevailing defendant for various claims relating to a
mortgage loan modification, including breach of contract, fraudulent
misrepresentation, and negligent misrepresentation, among others. Dorval v.
Nationstar Mortgage LLC, No. 17-23193-CIV, 2021 WL 2210980 (S.D. Fla. Apr.
26, 2021).
In
July, the United States Bankruptcy Court for the Southern District of Florida
was presented with a question of first impression, “whether Fla. Stat. §
57.105(7) applies in an adversary proceeding brought solely under 11 U.S.C. §
727(a) for denial of discharge.” Valley Nat’l Bank v. Gleiber (In re
Gleiber), --- B.R. ---, 2023 WL 5529650 (Bankr. S.D. Fla. 2023). Valley
National Bank (“Valley”) held several loans on which the debtor, defendant
Michael A. Gleiber (“debtor”), gave personal guarantees. After debtor’s Chapter
11 case converted to a Chapter 7 case, Valley filed a complaint objecting to debtor’s
discharge. Id. at *1. The debtor filed an answer and affirmative
defenses in which he made a demand for fees and costs under Fla. Stat. §
57.105(7). Id.
The
bankruptcy court granted summary judgment in favor of the debtor. Id. Subsequently,
the debtor filed a motion for fees. Id.
Ultimately,
the bankruptcy court awarded fees under Fla. Stat. § 57.105(7) to the debtor as
the prevailing party. In doing so, it reviewed the guarantees and the language
of the statute. Each guaranty contained a section titled “Attorneys’ Fees;
Expenses,” which stated:
Guarantor agrees to pay upon demand
all of Lender’s costs and expenses, including Lender’s reasonable attorneys’
fees and Lender’s legal expenses, incurred in connection with the enforcement
of this Guaranty. Lender may hire or pay someone else to help enforce this
Guaranty, and Guarantor shall pay the costs and expenses of such enforcement.
Costs and expenses include Lender’s reasonable attorneys’ fees and legal
expenses whether or not there is a lawsuit, including reasonable attorneys’ fees
and legal expenses for bankruptcy proceedings…
Id. The
court explained the guarantees permitted Valley to unilaterally recover fees
and expenses from the debtor “incurred in connection with the [guarantees].”
The court further noted the complaint was an attempt to enforce the guarantees.
Also, it did not matter that the complaint, if successful, would benefit other
creditors. Finally, the court explained it did not matter that Valley did not
seek fees in its complaint, because it could have under the guarantees. Id.
As such, the Court found the first prong of § 57.105(7) was satisfied. Id.
at *2.
The court then considered whether the debtor had the
right to legal fees under § 57.105(7). To make that decision, the court explained
it needed to determine whether the adversary proceeding was an “action … with
respect to the [guarantees]” and whether the debtor prevailed in the adversary
proceeding. Id.
The court noted that the Florida
Supreme Court construes the phrase “action with respect to the contract”
broadly. Id. (citing Ham v. Portfolio Recovery Assocs., 308 So.3d
942, 948 (Fla. 2020)). Here, Valley needed to prevail in the adversary
proceeding to be able to enforce its rights to liquidate and collect its claims;
and it was required to file the adversary proceeding to reserve its rights to
do so. Id. The court characterized the relief sought as having “a clear
and direct relationship to those guarantees” and, as such, was an “action with
respect to the contract” under the statute. Id.
Next, the court had to determine
whether debtor was the prevailing party in the adversary proceeding. Finding
that he was, the court explained that debtor was active in the litigation
against the summary judgment motion and that it ruled in debtor’s favor on
summary judgment. Id. Valley raised an issue that it could not have
known at the time it filed the complaint that it would not have succeeded in
denying debtor’s discharge under 11 U.S.C. § 727(a)(5), and the allowance of
fees would lead to an inequitable result. Id. The court dismissed that
argument because during the litigation, but before debtor’s motion for summary
judgment, the debtor provided the information necessary for Valley to dismiss
the count in the complaint seeking relief under 11 U.S.C. § 727(a)(5), but it
failed to do so, and the debtor was forced to litigate that matter completely. Id.
at *3.
In its conclusion, the court stated
the 11th Circuit Court of Appeals has upheld the award of attorneys’
fees under the fee-shifting statute as to the discharge of a particular debt
under 11 U.S.C. § 523(a). Id. (citing Cadle Co. v. Martinez (In re
Martinez),416 F.3d 1286(11th Cir. 2005)). It further noted
there have been several bankruptcy cases that upheld fees under § 57.105(7) in
adversary proceedings that combined requests for exception to discharge of a particular
debt and denial of discharge as to all debts under 11 U.S.C. § 727(a). Id. Noting
that there were no reported decisions that examined an award of fees based solely
on 11 U.S.C. § 727(a), the court stated it believed the 11th Circuit’s
reasoning in other cases supported its award of fees to the debtor in this
case.
While the facts of this case led to
a “case of first impression,” the existence of § 57.105(7) should be noted by
attorneys and servicers litigating matters in Florida state court and federal
courts applying Florida law. Creditors and servicers should discuss matters
with counsel to ensure there is a reasonable basis for “any action with respect
to the contract” to prevent it from being on the wrong side of Florida’s
fee-shifting statute.
New York’s Foreclosure Abuse Prevention Act (“FAPA”) has
implications well beyond the Engel decision that may impact the language
servicers seek to include in bankruptcy plans and/or orders. Signed into law by
the governor of New York on December 30, 2022, FAPA was initiated to overturn
the decision rendered by the New York Court of Appeals in Freedom Mortgage
Corporation v. Engel, 37 N.Y.3d 1 (2021). The Court in Engel held
that voluntary discontinuance of a foreclosure proceeding constituted
deacceleration of a loan and reset the statute of limitations.
Under FAPA, CRPL §203 was amended to provide that once a
cause of action for foreclosure has accrued, no party may unilaterally waive,
postpone, cancel, toll, revise, or reset the accrual thereof or otherwise purport
to affect a unilateral extension of the statute of limitations period
prescribed by law to commence an action and to interpose the claim unless
prescribed by statute.As such, a party
may not unilaterally change or reset the time at which a cause of action in
foreclosure accrues, nor the time limit for commencement of an action.
CPLR §213(4) was also amended by FAPA to provide that if the statute
of limitations is raised as a defense based upon a claim that the loan was
previously accelerated, a plaintiff is estopped from asserting that the
instrument was not validly accelerated, unless the prior action was dismissed
based on an expressed judicial determination, made upon a timely interposed
defense, that the instrument was not validly accelerated. As such, an
express judicial determination that a loan was not validly accelerated is now
required to proceed with a new action on grounds that the loan was not
previously accelerated.
In Chapter 11 Bankruptcy cases, pursuant to 11 U.S.C.
§1124(2), a debtor may cure debt that was accelerated pre-petition. Although
the Bankruptcy Code does not define “cure,” the courts in the 2nd District have
held that a plan under 11 U.S.C. §1124(2) which provides for the curing of a
default effectuates a “reversal” of the event that triggered the default and
returns the parties to a pre-default status quo. See In Re: Depietto
2021 WL 3287418 (S.D.N.Y), citing In Re: FCC, 208 F.3d 137 (2d Cir.
2000); In Re Next Wave Personal Communications, Inc., 244 B.R.
253 (S.D.N.Y. 2000).
As such, secured creditors should carefully review any plan that
affects a pre-petition accelerated loan, a foreclosure action, or cures a default
under §1124(2). The confirmed plan becomes a new binding contract between the
debtor and secured creditor pursuant to 11 U.S.C. §1141 and will establish the
parties’ rights and obligations. Secured creditors may want to consider having language
included in the Chapter 11 plan and/or confirmation order which provides that
confirmation will be an express judicial termination that the loan is
deaccelerated to avoid any future defense based upon the statute of
limitations.
On June 14, 2023, the U.S. Court of Appeals for the 4th
Circuit confirmed that a Chapter 13 debtor who earns more than the median
income may use their actual mortgage payments when calculating disposable
income available to pay unsecured creditors. The opinion in Bledsoe v. Cook,
70 F.4th 746 (2023) aligns the 4th Circuit with the 6th
and 9th Circuits on this issue.
In 2021, Mr. and Mrs. Cook filed a Chapter 13 Petition in
the U.S. Bankruptcy Court for the Eastern District of North Carolina. In
calculating their disposable income to be paid in their court-approved plan, they
deducted their actual monthly mortgage payment. The trustee objected, arguing
that the National and Local Standards issued by the IRS caps the amount a
debtor may deduct for secured mortgage payments. The Bankruptcy Court overruled
the trustee’s objection and, on the request of the trustee, certified an appeal
directly to the 4th Circuit Court of Appeals under 28 U.S.C. §
158(d)(2)(A).
The 4th Circuit took a “plain language” approach
in affirming the Bankruptcy Court. The Court noted that 11 U.S.C. §
707(b)(2)(A)(iii) allows a debtor to deduct amounts “contractually due to
secured creditors” or “any additional payments to secured creditors necessary
for the debtor . . . to maintain possession of the debtor’s primary residence.”
The Court reasoned that if petitioners were not permitted to deduct their
entire mortgage payment, they may be unable to afford to maintain their primary
residence in direct conflict with the plain language of the Bankruptcy Code. They
rejected the trustee’s argument that actual mortgage payments may only be
deducted upon proof that the amount above the relevant Local Standards is
“reasonable.”The Court disagreed noting
the legislative intent of the Bankruptcy Abuse Prevention and Consumer
Protection Act (BAPCPA) was to curtail bankruptcy court discretion and declined
to restore the discretion Congress sought to remove.
While the holding in this case is fairly simple and its arguments
are straightforward, it will have fairly significant effects on bankruptcy
courts in the Fourth Circuit. Since the inception of BAPCPA in 2005, bankruptcy
courts have split on the proper treatment of mortgage payments in calculating
disposable income under Chapter 13. This ruling will allow debtors with
mortgage payments that exceed the allowances in the Local Standards to create a
more reasonable budget, resulting in an increased likelihood of plan
completion. Mortgage servicers incur significant
costs with repeat filers who fall in and out of bankruptcy as they try to forge
a feasible plan. Hopefully, this opinion will result in fewer repeat filers as
more Chapter 13 Plans are satisfied and seen to their intended conclusions.
Recently,
the Bankruptcy Court for the Northern District of Indiana was faced with the
issue of what happens when a secured creditor fails to file a proof of claim
but remains bound by the terms of a confirmed plan. In the case of In re Matter
of Flores, 649 B.R. 534 (Bankr. N.D. Ind. 2023), the secured creditor,
which held a lien on a motor vehicle, failed to file a proof of claim or object
to the debtor’s plan that proposed to pay the claim in full over the life of
the plan with interest, despite having notice of the bankruptcy case. The
debtor also failed to file a claim on behalf of the secured creditor as
permitted by the Federal Rules of Bankruptcy Procedure Rule 3002.
Several
months after confirmation of the plan, without a filed claim on which to
distribute, the Chapter 13 trustee filed a motion to redirect the funds that
were intended to be distributed to the secured creditor through the plan to the
debtor’s unsecured creditors. That motion was unopposed, and the bankruptcy
court entered an order which provided that the secured creditor would receive
$0.00 distribution from the bankruptcy estate for failure to file a claim.
While that motion was pending, instead of responding, the secured creditor
filed a motion for relief from stay, alleging that it was not adequately
protected because it was not being paid through the plan.
The
bankruptcy court, relying on its precedent from In re Matter of Jones,
555 B.R. 870 (Bankr. N.D. Ind. 2016), denied the motion for relief. Calling the
situation a “self-inflicted wound,” the court explained that there was no cause
to grant relief for lack of adequate protection when the creditor’s failure to
file a proof of claim caused it to not receive payments in the bankruptcy case.
Further, the court explained, adequate protection was a pre-confirmation remedy
that was only meant to be a temporary measure to protect a creditor between the
filing of the petition and confirmation. As such, following plan confirmation,
the grounds for relief are “generally limited to post-confirmation defaults of
the debtor’s plan.”
The
court also noted that confirmation of the plan is res judicata and bars
issues that could have been raised prior to confirmation from being raised following
confirmation (i.e., a creditor’s treatment under the plan). The result is
that the confirmation order “bars a secured creditor from seeking relief from
the [automatic stay] absent a post-confirmation default in carrying out the
plan.”
The
Court noted that its conclusion was not a windfall for the debtor as the
secured creditor’s lien remains intact and the debtor will have to address that
lien following completion of the plan. For a claim secured by a motor vehicle,
this is only a mildly comforting result as the collateral will continue to lose
value over the life of the plan. A mortgage creditor may take more solace in
the fact that its lien will survive the bankruptcy case, as property values
generally increase over time, but risks and expenses will still be present.
As
the bankruptcy court succinctly stated, “[n]ot filing a claim has
consequences.” A secured creditor facing a scenario where it does not get paid
over the life of a Chapter 13 plan, which could last up to 60 months, is not
good; especially when it could have been avoided by filing a proof of claim.
The bankruptcy court in this case noted that a secured creditor cannot fail to
participate in the case and expect the debtor to file a claim on its behalf.
Secured creditors questioning whether to file a proof of claim should likely
err on the side of caution; or, at a minimum, contact counsel to discuss.
In February, the United States
Supreme Court held, in the case of Bartenwerfer v. Buckley, 598 U.S., 143 S. Ct. 665 (2023), a faultless business partner could be found liable
for fraud committed by another business partner. As a result of the unanimous
decision, the faultless debtor would be precluded from discharging a
fraudulently obtained debt in bankruptcy.
Kate
Bartenwerfer (“Kate” or “Bartenwerfer”) purchased a house with her future
husband, David Bartenwerfer (“David”), with the intention to renovate and
resell the home. Following the purchase, David took charge of the renovation,
handling nearly all aspects, while Kate was largely uninvolved in the project.
When the couple sold the home, the disclosure statements contained material
misrepresentations that only David knew. The buyer, Kieran Buckley, obtained a
judgment in excess of $200,000 in a California state court against the couple
for breach of contract, negligence, and nondisclosure of material facts. The
judgment provided that Kate and David were jointly liable for the damages.
Following
the judgment, the Bartenwerfers filed for Chapter 7 bankruptcy. Buckley filed a
complaint against the couple, alleging that the judgment debt was
non-dischargeable under 11 U.S.C. §523(a)(2)(A). The Bankruptcy Court conducted
a trial and concluded that neither Kate nor David could discharge the debt. The
Bankruptcy Court noted that David knowingly concealed the defects, but imputed
David’s fraudulent intent to Kate because of their partnership in the ownership
and renovation of the home.
The
Bartenwerfers appealed the decision to the Ninth Circuit Bankruptcy Appellate
Panel, which affirmed the Bankruptcy Court’s decision as to David’s intent but
found that Kate could only be found liable if she knew or had reason to know of
the fraud. Ultimately, the case ended up in the Ninth Circuit Court of Appeals,
where the Court relied on existing Supreme Court precedent in the case of Strang
v. Bradner, 114 U.S. 555, 5 S. Ct. 1038 (1885) and held that a debtor who
is liable for her partner’s fraud cannot discharge such debt in bankruptcy,
even if she was not culpable. The Supreme Court “granted certiorari to resolve
confusion in the lower courts on the meaning of § 523(a)(2)(A).”
At
the Supreme Court, Bartenwerfer made three primary arguments. First, she argued
that § 523(a)(2)(A) was written in the passive voice and that ordinary reading
of that section would infer that the individual had to be culpable in
committing the fraud. The Court dismissed this argument by explaining that Strang
was decided when the fraud exception to discharge applied to acts “of the
bankrupt” but the Court there still found debts of a faultless partner
nondischargeable. The Court noted that the Bankruptcy Act of July 1, 1898, was
changed to remove the “of the bankrupt” language. The Court further explained
that Congress’ choice to use the passive voice eliminated the actor. Similarly,
the Court gave no weight to Kate’s argument that the other subsections of §
523(a)(2) apply to acts committed by the debtor.
Bartenwerfer
also argued that holding a nonculpable partner liable for another’s fraud is
inconsistent with the “fresh start” policy of bankruptcy law. The Court noted
that Section 523 balances competing interests, specifically the rights of a
debtor to receive a discharge against those of a creditor who should receive
full payment on his debt that was obtained by fraud. The Court took that
reasoning one step further and noted that Kate’s liability was based on
California law that “Section 523(a)(2)(A) takes the debt as it finds it, so if
California did not extend liability to honest partners, § 523(a)(2)(A) would
have no role to play.”
The
Supreme Court affirmed the Ninth Circuit’s judgment and held that Bartenwerfer
could not discharge the debt in bankruptcy, which is a harsh result for a
debtor who did not participate in the fraud. However, it may be good news for
creditors who may be able to recover from other parties beyond a fraudulent
actor.
On December 1, 2022, the United States Bankruptcy Court
for the District of South Carolina updated some of the local rules and chambers
guidelines. These recent changes, in large part, seek to protect privacy
information, reduce duplicative filings, standardize procedures throughout
South Carolina for conduit plans, and increase court filing efficiency.
Specifically, the rule regarding the redaction of privacy
information was amended to remove the requirement of including a proposed order
with the motion to redact. Also, organizational changes were made regarding the
location of certain information. Specifically, several rules were amended to
incorporate into the local rules the operating orders dealing with 1) filing
guidelines; 2) procedures for
conduitplans in Chapter 13 cases ;and 3) mortgage payments in conduit cases for
Judges Duncan and Gaspirini only. Lastly, the pre-2017 Notes to the Local
Rules have been removed from the local rules.
Further explanation of the proposed changes and the
updated local rules are found at the links below:
Recently,
the 11th Circuit Court of Appeals heard an appeal from a bankruptcy
court that required the 11th 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.4th 895 (11th
Cir. 2023),the 11th 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 11th
Circuit, which reversed and remanded for the following reasons.
The 11th
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 11th
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
* Denotes firm is a 2022 Award of Excellence Recipient
For
the third time this year, on September 21, the Federal Reserve increased the federal
prime rate by three-quarters of a percent to 6.25%.[1]Further, the Federal Reserve signaled additional
increases are likely until inflation subsides. With each rate increase, an
opportunity arises to seek a higher interest rate in Chapter 11 and Chapter 13
Bankruptcy Plans for secured creditors faced with a potential “cramdown.” This article
will focus on the impact of rate increases on the formula prescribed by In re Till,[2]
addressing risk factors posed by the debtor and/or the collateral itself, and
case strategy for obtaining a higher interest rate in bankruptcy cases as the
Federal Reserve continues to raise the prime rate.
I.The
Till Formula and why Bankruptcy Courts
Rely Upon it?
In the Chapter
11 context, §1129(b)(2)(A)(i)(II) requires a debtor's plan to provide the
secured creditor with “deferred payments” having a "present value" in
the full amount of the creditor's secured claim.[3]The same rationale applies to
secured claims in the Chapter 13 context.[4]See,
11 U.S.C. § 1325(a)(5)(B)(ii).
Given the
applicability of the present value analysis to secured claims under both Chapter
11 and Chapter 13 plans of reorganization, most courts’ interest rate
methodology starts with a review of the Supreme Court's plurality decision in Till
v. SCS Credit Corp., 541 U.S. 465 (2004). In Till, the Supreme Court adopted a two-part “prime-plus” formula for
determining the proper interest rate a debtor should pay on a creditor’s secured
claim that complies with the “cramdown” provisions of the Bankruptcy Code Till v. SCS Credit Corp., 541 U.S. 465,
(2004). The Supreme Court in Till
stated that:
“the
approach begins by looking to the national prime rate, reported daily in the
press, which reflects the financial market's estimate of the amount a
commercial bank should charge a creditworthy commercial borrower to compensate
for the opportunity costs of the loan, the risk of inflation, and the
relatively slight risk of default. Because bankrupt debtors typically pose a
greater risk of nonpayment than solvent commercial borrowers, the approach then
requires a bankruptcy court to adjust the
prime rate accordingly. The appropriate size of that risk adjustment depends,
of course, on such factors as the circumstances of the estate, the nature of
the security, and the duration and feasibility of the reorganization plan.”[5]
In
proposing this method, the Court in Till was motivated primarily by what
it viewed as the method’s simplicity and objectivity.[6]
First, the method minimizes the need for costly evidentiary hearings, as the
prime rate is reported daily, and as “many of the factors relevant to the
[risk] adjustment fall squarely within the bankruptcy court’s area of
expertise.”[7]
Second, the approach varies only in “the state of financial markets, the
circumstances of the bankruptcy estate, and the characteristics of the loan”
instead of inquiring into a particular creditor’s cost of funds or prior
contractual relations with the debtor.[8]Third, while courts often
acknowledge that Till’s infamous Footnote 14 appeared to endorse a
“market rate” approach for Chapter 11s if an “efficient market” for a
loan substantially identical to the cramdown loan exists, courts almost
invariably conclude that such markets are lacking.[9]
Thus,
the prime-plus formula is particularly helpful in Chapter 13 cases, but also in
individual Chapter 11 cases, where the majority of the loans in question are residential,
including 1 to 4 unit properties. A creditor can utilize what evidence is
readily available in the bankruptcy case to help bolster, or further elaborate
on the risk factors to adjust the prime rate upwards to appropriately
compensate a creditor for the risk associated with the debtor’s proposed
Chapter 11 or Chapter 13 Plan of reorganization, serving to minimize costly
experts, or lengthy evidentiary hearings. This is something all parties can
appreciate, given the forum.
II.Who
Has The Burden of Proof?
In
discussing the “prime-plus” interest rate calculation, the Till Court went on to explain that in starting from a concededly low
estimate and adjusting upward, the evidentiary burden is placed squarely
on the creditors, who are likely to have readier access to any information
absent from the debtor's filing.[10]
Thus, it is up to the creditor to argue how and why the proposed interest rate
should be increased above the prime rate for any additional risks.
III.Determining
the Federal Prime Rate
Fortunately,
ascertaining the federal prime rate for purposes of a bankruptcy proceeding is straightforward
and cost effective as this information is readily available through well-known
public sources, including the internet. As a result, the federal prime rate may
be subject to judicial notice,and is capable of accurate and ready
determination by resort to reliable sources.[11]As of September 21, 2022, the
Federal Prime rate was 6.25%.[12]
The chart below outlines the federal prime rate adjustments since March 2020:
Date of Change
Federal Prime
Rate
3/16/2020
3.25%
3/17/2022
3.50%
5/5/2022
4.00%
6/16/2022
4.75%
7/28/2022
5.50%
9/21/2022
?
Notably,
because the prime rate is readily available, a creditor can quickly review a debtor’s
Chapter 11 or Chapter 13 Plan of reorganization to determine if the cramdown
rate is below the current federal prime rate. If so, the plan is likely
unconfirmable, and a creditor may proceed with a plan objection without a full
analysis of the debtor’s perceived “risk factors.” However, a creditor seeking an interest rate
above the prime rate will need to proceed with the “plus” portion of the Till formula through an examination of
“risk factors.”
IV.Evidence Available
in the Bankruptcy Case to Assist the Risk Factor Analysis
As
discussed above, the burden of proof for adjusting the proposed cramdown rate lies
with the creditor. In other words, once the appropriate prime rate is
determined, the burden falls on the creditor to convince the court risk factors
warrant a rate adjustment above the prime rate. The key is to use the most cost
effective means available to help build up the risk factors and achieve a more
fair and appropriate interest rate for the secured claim. Creditors may utilize
what evidence is already available in the bankruptcy case to avoid the need for
additional expert testimony and attendant costs. So, where can a creditor find
this information?
A.Debtors’ Schedules.
First, a creditor may examine any risks outlined in the Debtor’s Schedules and
Statements. This seems obvious, but it is equally important to understand a debtor’s
bankruptcy schedules and statements are executed under oath and can be treated
as admissions of fact of which a court can also take judicial notice.[13]
As such, the schedules provide useful information with an evidentiary basis
about the debtor, debtor’s operating history, and information to test the
veracity of debtor’s good faith intent and financial projections.
B.Monthly Operating Reports.
Second, monthly operating reports are unique to Chapter 11 Cases, including in
the Subchapter V context. The filing of monthly operating reports are mandatory
pursuant to the Federal Rules of Bankruptcy Procedure, associated with U.S.
Trustee’s guidelines, and are often adopted through local bankruptcy court rules
as well.[14]Operating reports are very helpful in the
risk assessment process because the reports readily allow a creditor and court
to view the actual and historical income and expense information for a
property, including, but not limited to, property taxes, any debt payments,
insurance, homeowners’ association dues, property management fees, and maintenance
and repair costs over the course of the case.
C.Debtor’s Financial Projections.
Third, debtors are often required to provide financial projections in support
of a plan of reorganization, particularly in a Chapter 11, to support how a debtor
will make payments under the plan to prove feasibility, a required element of
plan confirmation.[15]
These projections should, though do not always, provide income and expense information
on a property-by-property basis, in addition to a debtor’s personal income and
expenses, and payments proposed under the plan of reorganization.
The above information is within the “four corners” of the
debtor’s bankruptcy case to provide a creditor with admissible evidence to
support the risk factors below and build on the federal prime rate to appropriately
compensate a creditor for risks under a proposed plan of reorganization.
V.The
Risk Factors and Putting it Altogether
In
addition to the information gathered from the debtor’s bankruptcy filings,
additional risk factors may be evident based on: (i) the history of the debtor;
(ii) the nature of the debtor’s proposed restructuring; or (iii) the collateral
itself. Generally, the appropriate size of the risk adjustment depends upon
such factors as the circumstances of the debtor’s estate, the nature of the
security (collateral), and the duration and feasibility of the proposed
reorganization plan.These factors may
be further refined and/or expanded on by considering: (a) the quality of debtor's management; (b) the commitment
of the debtor's owners; (c) the health and future prospects of the debtor's
business; (d) the quality of the lender's collateral; and (e) the feasibility
and duration of the plan.[16]However, in many ways, these are merely factual refinements within the three
factors initially discussed by the Till Court.
A.The Debtor’s Pre-Bankruptcy History.Generally, information about the debtor or debtor’s
history may not factor heavily in terms of an upward risk adjustment since it
assumes the debtor struggled financially to end up in bankruptcy. However,
there are certain instances where evidence should be referenced to make it more
of a factor or less neutral to the court. A debtor is expected to manage and
perform under the proposed plan of reorganization, after all, so what has gone
on before should not be completely ignored and could serve to test the veracity
or even the good faith of debtor’s proposed plan of reorganization.
For
example, is the debtor a repeat filer, or does the debtor have a history of
filing for bankruptcy protection every few years, or defaulting on previously
confirmed plans? In essence, is there a greater likelihood debtor may drag
creditors through a bankruptcy case seeking the benefits of a modification, but
fail to follow through in completing a plan of reorganization to term or
discharge?Accordingly, the debtor’s pre-petition
history could provide grounds for an upward risk adjustment.
Another
red flag involves a newly formed entity with no operating history or
substantive assets beyond the real property in question versus an ongoing
business with a decent operating history, cash reserves, or other substantive assets.
The former is riskier because the debtor is a self-contained unit with very
limited business prospects absent the real property rental income, and thus, warranting
a risk adjustment upwards in the court’s risk analysis.
Thus,
creditors and the court should not ignore the debtor’s pre-petition history and
debtor’s historical management of the assets as the perspective can provide
some argument for an upward risk adjustment.
B.The
Nature of the Debtor’s Proposed Operations.A creditor should examine the debtor’s plan of reorganization itself, and
how all the assets and income/expense projections will be treated
post-confirmation. In assessing risk, it is important to understand whether the
debtor’s assets have sufficient equity to be liquidated in a time of disruption.
For instance, if the debtor proposes to “cramdown” all loans to the fair market
value of each asset at plan confirmation, thereby creating a portfolio of 100%
loan-to-value debt, how will the debtor handle a downturn post-confirmation? While it is true a debtor may benefit from
cramdowns over time, if there is a disruption shortly after confirmation, a debtor
may find it difficult to refinance or even sell certain real property that is
in default with no equity. An upward market may provide some relief, while a
flat or falling market would obviously pose challenges for the reorganized
debtor. Thus, it is important to examine the risks of the debtor’s proposed
plan of reorganization itself.
Further,
it is crucial to thoroughly review and scrutinize a debtor’s financial projections
and overall substantive cash flow under the plan, including the net cash flow
of each real property asset. Are there substantive cash reserves available after
the payment of administrative claims following confirmation of the plan? Is the
debtor expected to operate at a negative cash flow for any substantive period
post-confirmation, or does it appear any of the real property assets will fail
to generate sufficient net income after expenses? Are there expenses that are
patently missing from the debtor’s projections, or are those expenses overly simplistic?Indeed, while the overall plan may appear
feasible on its face, it may be that certain real property assets are in fact
problematic, requiring debtor to compensate by reallocating funds. In such a
scenario, courts should consider the risks of default as to the subject
property, and other assets as well.This
in turn could lead to a cascading effect in the debtor’s performance under the
plan, particularly where debtor is not able to quickly liquidate or refinance
assets to deal with defaults or disruptions. It is worthwhile to note these
issues for the court based upon evidence already before it, as it serves to
provide a reality check on debtor’s plan projections overall.
C.The Collateral Itself.Arguably, the property itself is one of the
most important factors for the court to consider in assessing risk adjustment
above the federal prime rate. A rental property may be inherently riskier than
a debtor’s residence, which makes sense because in a time of distress or
disruption, a debtor is more likely to use income from other sources, including
the rental property, to pay the mortgage on a home than the rental property obligations.
Similarly, a debtor will be less likely to dip into personal net income to
cover the expenses for that rental property when there is a disruption in the
rental income stream, thereby shifting the expenses and risk to the creditor. Some
of this risk may be mitigated depending upon the type of rental property in
question. For example, a 1 to 4 unit property with multiple tenants may fare
better in terms of handling income disruptions due to a vacancy, unlike a
single-family residence with only one tenant. At the same time, multi-unit
properties can be more costly given common area expenses and maintenance, so
thorough verification of expense information is very important.
In
addition, the occupancy status and vacancy rate of the property should be
examined as risk factors. Will the real property be occupied and generate
rental income by the effective date of the plan?If not, debtor would invariably have to
either forgo meeting such projected expenses post-confirmation for a period,
thereby creating a deficit, or pull funds from elsewhere to cover any
shortfall, which may make debtor’s ability to perform under the plan generally,
or other real property obligations, more precarious.
Similarly,
creditors should scrutinize the specific property projections against
historical income and expense information in the monthly operating reports or
schedules to ensure all regular and ongoing expenses are considered, along with
a sufficient cushion for disruptions, vacancy and/or repairs for the property.
If the debtor’s current projections only consider the mortgage payment, taxes,
and insurance, with little to no net income, this is largely a red flag, and suggests
the debtor’s projections are far too simplistic and will not be able to handle
any disruptions. This is certainly a notable risk adjustment.
A
less common example that would give rise to an upward risk adjustment, but an
important one, is whether the property or collateral requires repairs before it can become habitable and
generate income to meet the debtor’s proposed expenses under a plan. If the debtor’s
financial projections do not allow for, or anticipate how those repairs will be
made, and/or when the repairs would be completed, then any chance of the debtor
being able to meet those projections by the effective date is likely illusory,
at best, given funds from elsewhere under the plan would need to be utilized.
Accordingly,
while the burden of proof to establish cause for a rate adjustment falls on
creditors, many reorganizations present ample evidence and perceived risk
factors to justify a higher interest rate above the federal prime rate.
VI.Final
Outlook: The Increasing Federal Prime Rate Should Be Utilized To Compensate for
Risk and Provide Creditors with Leverage
As
the Federal Reserve continues to raise the base prime rate, creditors seeking a
higher cramdown interest rate should closely monitor for upcoming rate
increases. It may be wise to postpone any stipulated agreement regarding the
appropriate market rate until closer to the confirmation date if the Federal
Reserve has signaled an intent to raise rates in the near future. Further, each rate increase presents a
creditor with increased leverage in plan negotiations and an opportunity to
negotiate more favorable plan terms.
Further, by utilizing the risk factors
discussed above, and the information readily available to the court in the debtor’s
bankruptcy case, creditors may bring these risks to the court’s attention
easily and thereby present an opportunity to obtain a 1- to 3-point increase
above the federal prime rate to compensate the creditor more appropriately for
the anticipated risks. For example, if
the prime rate is currently at 6.25%, it is possible for a creditor to obtain a
rate of 6.50% to 10.50% by utilizing evidence that is already before the court.
In addition to compensating for risk under a debtor’s
plan, there is a secondary benefit.If
the court agrees with a creditor’s analysis, then a debtor must rework the
proposed financial projections at the adjusted interest rate. If this occurs, a
debtor may conclude retention of the collateral provides more of a burden than a
financial benefit, which may result in the court blocking confirmation, or a stipulated
surrender of the collateral.At the very
least, it makes the debtor more amenable to a creditor’s preferred stipulated claim
treatment terms. Likewise, a debtor may be forced to convert or dismiss a case
if the appropriate interest rate adversely affects the feasibility of the
proposed plan. Again, higher interest rates result in increased creditor
leverage. Something most creditors prefer, particularly in the Chapter 11
context.
Thus, by using trending increases to the federal prime rate
to recalculate the Till formula, and
by utilizing the evidence within the debtor’s bankruptcy case to support upward
rate adjustments due to perceived risk factors, creditors can obtain more
favorable loan terms under the debtor’s proposed plan of reorganization, or
block a cramdown or reorganization altogether.
[9]See, In re Texas Grand Prairie
Hotel Realty, L.L.C.,
supra, 710 F.3rd at 334 (collecting cases).
[10]See, In re Till, supra, at 479, 124
S.Ct. 1951.
[11]See, Fed. Rule Evid. 201(b); Levan v. Capital Cities/ABC, Inc. 190
F.3d 1230 (11th Cir. 1999)(prime interest rate on February 14, 1989 as provided
by the Federal Reserve Board).
[13]See, Fed.R.Civ.P 36(a); FRBP 9017;
FRE 201(b), (d); In re Baromeli, 303
B.R. 254 (Bankr. D. Conn 2004) (Bankruptcy schedules that debtor had signed
under oath constituted admissions usable against him in nondischargablity
proceedings for purposes of assessing whether financial statement submitted in
connection with loan less than one year before filing was materially false); In re Rolland, 317 B.R. 402 (Bankr. C.D.
Cal 2004) (Even when bankruptcy schedules are amended the old schedules are
subject to consideration by the court as evidentiary admissions).
During the COVID-19 pandemic, the federal government passed the Coronavirus
Aid, Relief, and Economic Security Act (CARES Act) and the Consolidated
Appropriations Act of 2021 (CAA) to address financial distress caused by the resulting
economic slowdown. Both acts contained provisions addressing the bankruptcy
process and nonpayment by debtors, including new alternatives to address delinquent
mortgage payments. By March of 2022, the CARES Act and CAA had sunset. Loss mitigation
programs from lenders have filled in the absence created by these two expiring
laws. One loss mitigation alternative that has seen increased usage for Federal
Housing Administration (FHA) loans is the COVID-19 forbearance coupled with a COVID-19
Recovery Standalone Partial Claim.
At the outset of the COVID-19 pandemic,
the secretary of the Department of Health and Human Services declared a Public Health
Emergency (PHE) in late January 2020, pursuant to the Public Health Service
Act. A PHE lasts for 90 days and must be renewed to remain in effect. The PHE
for COVID-19 has been renewed several times including most recently in Mid-July
2022 and is currently scheduled to expire in October 2022. The end of the PHE
is important for FHA loans as it effects the length of COVID-19 loss mitigation
programs including forbearances.
Borrowers,
who are delinquent on their mortgages due to a COVID-19 related reason, can seek
mortgage payment relief through a temporary suspension or reduction of monthly
mortgage payments. This temporary suspension or reduction of payments is known
as a forbearance. An initial forbearance period, entered into after October
2021, may be up to six months. A borrower can request an additional six months for
a total of 12 months of forbearance. No extension period may extend beyond six
months after the end of the PHE or September 30, 2022, whichever is later. After
the forbearance period, the borrower can be reviewed for COVID-19 Recovery Options,
including the partial claim to address unpaid forbearance payments.
For borrowers in a forbearance who are
owners and occupants of the property and can resume making their current mortgage
payment at the end of the forbearance period, but cannot afford to pay missed
payments, a partial claim could be the best resolution. It allows the mortgage
default deficiency to be placed in a zero-interest, subordinate lien against
the subject property with no added fees. The terms of the partial claim indicate
the mortgaged amount does not require repayment until the borrower makes the last
payment on the primary mortgage, refinances the loan, or sells the property; whichever
occurs first. Also, the COVID-19 Recovery Standalone Partial Claim is limited
to 25% of the borrower’s unpaid principal balance. The borrower enters into a partial
claim by executing a new promissory note and mortgage to the secretary of
Housing and Urban Development for the amount of the mortgage delinquency. The
FHA is part of the U.S. Department of Housing and Urban Development (HUD),
which is the reason the partial claim is payable to HUD. The partial claim is
not made payable to the present holder of the note and mortgage.
As
a servicer or attorney who represents mortgage lenders, there are issues to
consider if a debtor in a Chapter 13 Bankruptcy enters into a partial claim. The
debtor is entering into a new loan with a new entity, so the partial claim will
have to be approved by the court as the debtor is engaged in borrowing. This
approval would be accomplished by a motion and order to approve the partial claim
and a possible hearing.These motions
have been set for hearings either by opposition from the bankruptcy trustee or
the court to determine the effect on the bankruptcy as the loan would be
brought current under the terms of the partial claim. The partial claim does not
require payment until the loan ends, which is regularly after the bankruptcy concluded,
and, thus, would not require payments by the trustee or debtor. For FHA loans, a
mortgage forbearance coupled with a COVID-19 Recovery Standalone Partial Claim will
be an available possibility to address mortgage delinquencies for the
foreseeable future.
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* Law firm is a 2021 USFN Award of Excellence recipient
A Massachusetts
Bankruptcy Court (Panos, J.), on April 7, 2022, sustained objections to two
sale plans in two different bankruptcy cases where the objections were pending
this decision for over two years.See In re MaterneCase No. 20-40027-CJP, and In re Gnaman,Case No. 19-40930-CJP.The court was able to address the
objections in the two cases with a single 44-page memorandum of decision. (See 2022 WL
1102452).While both plans
proposed to sell the principal residences of the debtors at some unknown point
during the plan, one debtor’s plan proposed to pay the secured creditor its
regular contractual payments directly to the creditor during the term of the
plan, while the other debtor’s plan proposed to make monthly “adequate
protection payments” to the trustee that were substantially less than the
contractual payments and even less than the monthly required escrow for taxes
and insurance.
The creditors’ objections
raised issues of feasibility and good faith, as well as the apparent violation
of 11 U.S.C. §1325(a)(5)(B)(iii)(I),
which requires periodic payments made to pay the claim in full be paid in equal
monthly amounts.In the case of the
“adequate protection” plan, the creditor also objected to the impermissible
modification of its rights prohibited by 11 U.S.C. §1322(b)(2).The
debtors, on the other hand, argued that the plans were confirmable as they
complied with §1322(b)(8),
which allows claims to be paid from property of the estate or property of the
debtor – i.e., from the sale of the residence - and (b)(11), which allows
debtors to include in their plan anything that is not inconsistent with the
bankruptcy code. Additionally, in the
case of the “adequate protection” plan, the debtor insisted it was not a cure
plan and, therefore, §1322(b)(5) – the typical “cure and maintain”
plan requirement – did not apply.Instead, both debtors maintained they were paying the claims in full
under §1325(a)(5)(B),
and since they had proposed to pay the claims in full there was no modification
of the creditors’ rights prohibited by §1322(b)(2).The debtor with the adequate protection plan
also argued the reduced monthly payment did not alter the contractual payment
amount, but instead “delayed” a portion of the payment until the property was
sold, and the creditor was going to be paid in full pursuant to the loan
documents.
In ruling on the
plan objections, the court considered the pertinent code provisions and
relevant case law.The court also noted
that the burden was on the debtor to prove that each of the statutory criteria
for confirmation was met.See Austin v. Bankowski, 519 B.R. 559 (D.
Mass 2014).
Application of §§1322(b)
and 1325(a)(5).The court reviewed
both these code sections to determine if the plans were consistent with §1322(b)
and compliant with §1325(a)(5).The court noted that the debtor could confirm a plan over a creditor’s
objection without having to surrender the property as long as the debtor’s plan
complied with §§1325(a)(5)(B)(i)
–(iii), which requires that (i) the holder of the claim retain the lien until
the earlier of payment or discharge; (ii) that the value as of the effective
date of the plan, of the property distributed under the plan to pay the claim
be not less than the allowed amount of the claim; and (iii) if the property distributed under the plan
pursuant to this section is in the form of periodic payments, such payments
shall be in equal monthly amounts.(Emphasis added).In determining
compliance with this last provision, the court noted some courts had held that
a balloon payment was not equal and, therefore, such plan could not be
confirmed absent consent from the creditor.However, some courts have held that such a balloon payment happens once,
so it is not periodic, thus §1325(a)(5)(B)(iii) is not violated
by such plan.The court took stock in §1322(b)(8),
which seems to expressly allow the sale of the real estate to pay the secured
creditor’s claim.Notwithstanding §1322(b)(8),
the court noted since both these properties were the debtors’ principal
residences, §1322(b)(2)
prevented the modification of the rights of the creditor.See also Nobelman v. American Sav. Bank, 508 U.S.
324, 329-330 (1993), in which the U.S. Supreme Court held that
the rights of a secured creditor, whose claim is secured solely by the debtor’s
principal residence, cannot be modified.While the term “rights” is not defined in the code, the U.S. Supreme Court
has held state law determines the rights of a mortgagee whose claim is secured
by an estate asset. See Butner v. United
States, 440 U.S. 48, 54–55 (1979).
The bankruptcy court
determined that paying less than the monthly mortgage payment was a
modification of the creditor’s rights because the loan documents require
monthly payments of a certain amount.Additionally, proposing a plan that provided an indefinite cure period
was an impermissible modification as the anti-modification provision in §1322(b)(2)
is intended to prohibit the delay and uncertainty associated with sale plans
that have no definitive date for when the sale will occur.Instead, the court held that the appropriate
provision to cure the arrears on long-term mortgage debt secured by the
debtor’s principal residence is §1322(b)(5), which requires a cure
within a reasonable time while making the full contractual mortgage payment
when due.
§1325(a)(5)(B)(iii) and Sale Plans.The court thenturned to whethera
plan could provide for a lump sum cure and payoff where the plan also provides
for periodic payments on the claim.In
deciding the issue, the court held the plans had to satisfy the equal payment
requirement of §1325(a)(5)(B)(iii)
and noted the majority of courts have held that a balloon payment does not
satisfy this code section.Thus, a plan
proposing a lump sum cure with periodic payments until the balloon payment is
made is not confirmable. The First
Circuit BAP has also followed this majority ruling.See In
re Hamilton, 401 B.R. 539 (1st Cir. BAP 2009).The court did note that the minority did not
see an issue with the balloon payment as long as the periodic payments leading
up to the balloon payment were made in equal monthly installments.See e.g. In
re Cochran, 555 B.R. 892 (Bankr. M.D. Ga 2016).
The court acknowledged
§§1322(b)(8)
and 1325(a)(5) could be used to confirm a sale plan where a creditor’s claim is
to be paid in full from a sale that is in prospect at the time of confirmation
or at a reasonable time thereafter. Nonetheless, the Court determined the equal
payment provision of §1325(a)(5)(B)(iii) prohibits confirmation of a
sale plan, over the objection of a creditor whose claim is secured by the debtor’s
principal residence, that proposes periodic payments followed by a lump sum
payment.
While there was
some discussion as to whether the plans could be confirmed under §1322(b)(8)
and §1325(a)(5),
the court still found the plans had to be proposed in good faith and ultimately
denied confirmation of the plans as being violative of §1322(b)(2)’s
anti-modification provision in the case of the “adequate protection” plan and that
both plans violated §1325(a)(5)(B)(iii)’s equal payment provision which
did not provide for a specific sale process that would pay the allowed secured
claims at, or within a reasonable time after, confirmation.
Although the court
reached the right conclusion, it took time to get there, and the adequate
protection payments totaling $47,089.87 made to, and held by, the trustee until
confirmation will now be returned to the debtors by the trustee pursuant to §1326(a)(2).Hopefully, this decision will help other
courts quickly determine sale plans such as these on their face are not
confirmable, especially when, as here, the debtors did nothing to market either
property.
USFN Member (AL, CA, CT, FL, GA, IL, KY, MS, NV, NJ, NY,
OH, OR, TC, WA)
The United States Bankruptcy Court for the District of
Connecticut in the Chapter 7 case of In re Elaine M. Cole (Case#
21-21071) held on April 15, 2022, that Connecticut’s Amended Homestead
Exemption applies retroactively, thus allowing a Chapter 7 debtor to claim the
increased $250,000.00 exemption against claims that arose prior to the
effective date of the change in the statute.
Introduction:
Under Connecticut state law, a debtor may claim a homestead
exemption in property that is owner occupied and used as a primary
residence.See Conn. Gen. Stat.
§52-352a(5)On July 12, 2021, Governor
Ned Lamont signed Public Act 21-161 (“Act”) into law that amended Connecticut’s
homestead exemption by repealing the prior version of the statute, renumbering
its provisions, and increasing the exemption from $75,000.00 to $250,000.00
effective October 1, 2021.See Conn.
Gen. Stat. §52-352(b)(21) (“Amended Homestead Exemption”).
Factual Background:
On November 22, 2021, Elaine M. Cole (“debtor”) filed a
petition under Chapter 7 (Case# 21-21071) wherein the debtor claimed the
Amended Homestead Exemption of $250,000.00 on her claimed residential property
located in Mystic, CT (“Property”).On December
2, 2021, by further amendment on December 27, 2021, the Chapter 7 trustee filed
an objection to the debtor’s homestead exemption claiming that although the
Chapter 7 case was filed after the amendment of the homestead exemption, the debtor
was ineligible to claim the increased exemption because the debtor’s unsecured
creditor claims arose prior to the effective date in the change of the statute.The trustee further claimed that the property
was not the debtor’s residence at the time of the Chapter 7 filing.Lastly, the trustee argued applying the
Amended Homestead Exemption would violate the United States Constitution,
Article 1 §10 (the Contracts Clause).
Court’s Analysis and Ruling:
The court first turned to whether the p0roperty was the debtor’s
residence at the time of her Chapter 7 filing because if the answer was yes,
then the trustee’s objection to the debtor’s Amended Homestead Exemption must
be sustained which ends the court’s inquiry.If the answer is no, then the court must determine whether the Amended
Homestead Exemption applies retroactively.
After conducting an analysis of the facts and testimony
surrounding the residential status of the property at the time of the debtor’s
petition filing, the court found the trustee had failed to satisfy his burden
in demonstrating the debtor’s property was not the residence of the debtor at
the time of her petition filing. With
that affirmative answer, the court then proceeded to determine whether the
Amended Homestead Exemption applied retroactively, thus enabling the debtor the
benefit of the increased exemption.
In its second analysis, the court conducted an in-depth
review and analysis of Connecticut’s original 1993 enactment of the homestead
exemption (“Original Homestead Exemption”) against the Amended Homestead
Exemption.The court noted that while the
1993 Act that passed the Original Homestead Exemption expressly provided within
Clause 3 of that statute, “This act shall take effective October 1, 1993, and
shall be applicable to any lien for any obligation or claim arising on or after
that date,” the court noted the Amended Homestead Exemption made no clause reference
to its applicability. The court further cited David v. Forman Sch., 54
Conn. APP. 841, 853-54 (1999) (citing State v. Magnano, 204 Conn. 259,
284 (1987) “Whether to apply a statute retroactively or prospectively depends
on the intent of the legislature in enacting the statute.” The court further cited
several Connecticut decisions surrounding the applicability of the Original
Homestead Exemption. Ultimately, the court stated that unlike the original Act
that enacted the Original Homestead Exemption, which expressly limited its
applicability “to any lien for any obligation or claim arising on or after [its
effective] date,” the 2021 Amended Homestead Exemption contained no clause addressing
whether it applies to pre-enactment debts. The court stated it would refrain
from reading an anti-retroactivity provision into the 2021 Act given there was
no clear expression of legislative intent to the contrary.
Lastly, in response to the trustee’s argument that applying
the Amended Homestead Exemption would violate the United States Constitution,
Article 1 §10 (the Contracts Clause), the court further stated that the Amended
Homestead Exemption “while allegedly modifying the expectations of the parties,
does not substantially interfere with the parties’ reasonable expectations
under a contract……and does no more to the parties’ expectations than if the debtor
took a second mortgage out on the property, thereby significantly reducing the
amount of equity available to creditors.”
The decision in this case arguably impairs the rights of
those creditors who held liens prior to the enactment of the Amended Homestead
Exemption.Those creditors would have
assumed they were entitled to any equity over and above the existing $75,000.00
homestead exemption only to now realize that they are only entitled to any
equity over and above the new $250,000.00 exemption.
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