By Randall S. McHugh, Esq.[1]

Bendett & McHugh, P.C. *

USFN Member (CT, MA, ME, NH, RI, VT)

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 Materne Case 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 then turned to whether a 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 (1^st 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.

By Brian H. Liebo, Esq.

 Liebo, Weingarden, Dobie & Barbee, PLLP

USFN Member (MN)

Current Minnesota law requires that mortgage servicers provide a rapid response to a borrower’s request for reinstatement figures—just three (3) days. The applicable statute, Minnesota Statutes § 580.30, specifically requires that mortgage servicers “shall inform” borrowers of the mortgage reinstatement amount within three days of receipt of the request.  This obligation may be triggered as late as three days before the sheriff’s sale date.

This quick, three-day turnaround requirement obviously poses difficulties for mortgage servicers with loans in active foreclosure.  Property preservation teams, escrow teams, as well as the servicers’ attorneys may all need to coordinate to produce a reinstatement quote at any given time.  If reinstatement figures cannot be provided within those few days, foreclosure delays will inevitably occur.  If a foreclosure is completed and the reinstatement statute is not fully complied with, the entire foreclosure could be declared void as Minnesota is a strict-compliance state for foreclosures.

This could lead to a frustrating scenario if a sheriff’s sale is scheduled for a Monday morning, and the borrower submits a reinstatement quote request the Friday night before that foreclosure sale.  Normally, this situation will require the servicer to delay the foreclosure.

A servicer unable to provide a timely reinstatement quote would have the option to postpone the sheriff’s sale to allow additional time to provide the figures.  Minnesota has no restriction on the number and length of sale postponements by the mortgagee.  Postponing the sale still involves a delay though.  Also, importantly, there is a real risk that the servicer could miss the borrower’s last-minute reinstatement request.  If the servicer proceeds with the sheriff’s sale unaware that a timely reinstatement quote was requested, the foreclosure could be successfully challenged.

A close review of the Minnesota reinstatement statute yields an effective and efficient strategy to avoid these potential issues and delays.   The statute only requires that a servicer be proactive.  Specifically, Section 580.30 provides that a sheriff’s sale cannot be invalidated under the statute if the mortgage reinstatement amount was mailed by first class mail to the mortgagor at least three days prior to the date of the completed sheriff's sale.

As a result, a mortgage servicer can avoid foreclosure delays around reinstatement requests by simply mailing reinstatement quotes to borrowers—unilaterally.  Mortgage servicers should therefore consider automatically mailing to Minnesota borrowers reinstatement quotes at least three days before all sheriff’s sales to take advantage of this safe-harbor language.  A standard practice could be to mail out quotes seven to 14 days before all sheriff’s sales in Minnesota.  All such quotes should also be effective “for 7 days or until the foreclosure sale, whichever occurs first” to further comply with the statute.

By mailing out reinstatement quotes without waiting for possible, surprise requests, a mortgage servicer will be less likely to be taken off guard and will be able to avoid unnecessary delays—even if the borrower makes multiple requests later.

Copyright @2022

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