Reverse Mortgage May Be Modified

A reverse mortgage payable upon the pre-petition death of the borrower was modifiable under section 1322(c). In re Michaud, No. 14-23406 (Bankr. S.D. Fla. March 29, 2016).

Julie Lisana Michaud sought to strip down the reverse mortgagee’s (James B. Nutter & Company) interest in her principal residence to its value at the time of her chapter 13 petition. The reverse mortgage agreement was entered into by Ms. Michaud’s husband who died prior to her bankruptcy filing. By the terms of the reverse mortgage, the debt became due and owing upon the death of Mr. Michaud. The agreement further stated that the full debt “if not paid earlier, is due and payable on May 29, 2095.”

Section 1322(c) provides an exception to the anti-modification provision of section 1322(b) in the case of a debt secured by the debtor’s residence when the final payment comes due during the life of the chapter 13 plan. The issue was whether the final payment became due when Mr. Michaud died, as argued by Ms. Michaud, or on May 29, 2095, as argued by Nutter.

The court rejected Nutter’s due date based on common sense, the terms of the lending agreement, and federal regulations. On the common sense front, the court found the 2095 due date to be meaningless as the mortgagor was certain to die before then. It would therefore be absurd to treat that date as the date upon which the last payment was due for purposes of applying section 1322(c). Also, by the terms of the agreement, the death of the mortgagor accelerates the due date without regard to date listed in the agreement. Finally, federal regulations, provide that reverse mortgages become “due and payable” when “(i) The consumer dies; (ii) The dwelling is transferred; (iii) the consumer ceases to occupy the dwelling as a principal dwelling.” 12 C.F.R. §226.33.

The court was not persuaded by Nutter’s “slippery slope” argument that debtors could use the ruling to their advantage when the debtor has caused the acceleration by his or her own default such as by failure to maintain insurance on the property. The death of the mortgagor is a predicted event that forms the basis of a reverse mortgage. Debtor default would be a different circumstance which would not trigger the application of section 1322(c).

The court granted Ms. Michaud’s motion to value for a secured claim in the amount of $45,500 plus interest, and an unsecured claim of $67,096.75.

Michaud Bankr SD Fla March 2016