Under section 1325(a)(5), a Chapter 13 plan cannot provide for different treatment of two vehicles that were purchased at different times with loans from the same creditor where both lending agreements included cross-collateralization clauses securing each loan by both vehicles. Barragan-Flores v. Evolve Federal Credit Union, No. 18-50420 (5th Cir. Jan 14, 2021). [Read more…] about Two Vehicles Securing One Claim Must Receive Identical Treatment in Ch 13 Plan
No Amortization of Tax Refund in W.D. Texas
In an opinion that reads like a father chastising his ungrateful children, the District Court for the Western District of Texas scolded the debtors for their proposed treatment of anticipated tax refunds and required them to adhere to the District Plan under which they could retain up to $2,000 of their refunds, but must turn over to the Trustee any amount remaining as disposable income. Vega v. Viegelahn, No. 18-796 and Diaz v. Viegelahn, No. 18-798 (W.D. Tex. Sept. 19, 2019) (consolidated for argument and decision).
Contrary to the District Plan structure, the debtors in this case sought to amortize their tax refunds as income over one year. Upon objection by the trustee, the debtors ultimately amended their plans to conform to the District Plan. They then appealed the Bankruptcy Court’s order of confirmation arguing that the District Plan’s treatment of the tax refunds violated various provisions of the Bankruptcy Code, the Local Rules and the Official Forms. [Read more…] about No Amortization of Tax Refund in W.D. Texas
Adoption Assistance Payments Excluded from Current Monthly Income
The debtors’ Adoption Assistance payments were “benefits received under the Social Security Act” and were therefore excluded from the calculation of their current monthly income. In re Isaacs, No. 18-1651 (Bankr. M.D. Pa. Aug. 26, 2019).
The above-median debtors proposed a 21% plan and the trustee objected to confirmation on the basis that they were not paying all their projected disposable income into the plan as required under section 1325(b)(1)(B). The dispute centered around the nature of the $2,325/month in benefits the debtors received under the Adoption Assistance and Child Welfare Act of 1980 (the Act). The debtors maintained that those benefits should be excluded from the calculation of current monthly income because they were benefits received under the Social Security Act (SSA). The Act was established under Title IV-E of the Social Security Act (SSA), under which the federal government created a fund to provide benefits to the states to assist families adopting special needs children. The monthly benefits the debtors received were not entirely made up of federal funds, however, but were comprised of 51.82% federal funding, 38.54% state funding, and 9.64% county funding. The trustee argued that the funds were not social security benefits under the definition found in section 101(10A)(B) of the Bankruptcy Code.
[Read more…] about Adoption Assistance Payments Excluded from Current Monthly IncomeDirect Payments to Creditor Are Not “Under the Plan” for Discharge Purposes
Adopting the minority view, the Bankruptcy Court for the D.C. Circuit found that the Chapter 13 debtor’s direct payments to a residential lienholder were not provided for under the plan and, therefore, her failure to make all the payments did not preclude entry of discharge. In re Drabo, No. 1:15-bk-653 (Bankr. D. D.C. May 10, 2019) (unpublished).
Ms. Drabo’s plan provided that she would pay her pre-petition arrears and make regular mortgage payments outside the plan until the debt was paid off—an event scheduled to occur five years after the completion of her plan. After she completed all plan payments, she moved for discharge under section 1328(a), but the lender, Ameritas Life Insurance, objected, complaining that Ms. Drabo had failed to keep up with the direct payments under the lending agreement.
[Read more…] about Direct Payments to Creditor Are Not “Under the Plan” for Discharge PurposesBankruptcy Court Discusses Novel Argument Contesting Cram Down of Totally Unsecured Mortgage
In 2004 the Debtors purchased their home with a $209,000.00 purchase money deed of trust held by Bayview Loan Servicing (Bayview). In 2006 the Debtors obtained a second mortgage from Madison Management Services (Madison). In 2017, the Debtors and Bayview entered into a loan modification agreement that provided for a new principal balance of $257,566.94.
The Debtors filed a Chapter 13 bankruptcy. Bayview filed a claim indicating total indebtedness of $255,741.64. Madison filed a claim for $141,323.78. The stipulated value of Debtors’ is between $250,000.00 to $254,000.00.
Subsequently, the Debtors filed a motion to avoid the second lien because it was completely unsecured.
Madison countered that its lien was not unsecured. Under Maryland state law, when a mortgage is refinanced to increase the principal balance, the amount of the increased balance is given lien priority as of the date of the loan modification, not the date of the original loan. Therefore, Bayview effectively has two effective dates for its liens. The balance owed at the time of the refinance has priority as of 2004, and another lien (in the amount of the increased balance) with priority as of 2017. Therefore, when calculating whether Madison’s lien is unsecured the court should take Bayview’s first lien (approximately $207,000), then Madison’s lien ($141,323.78), then the balance of Bayview’s increased lien ($48,566.94). Since Madison’s lien is no longer unsecured, its lien is protected by the anti-modification provision in 11 U.S.C. @ 1322(b)(2).
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Fourth Circuit Overturns Anti-Modification Precedent Witt v. United Cos. Lending Corp.
The en banc fourth circuit panel overturned a twenty-two-year-old precedent to join the majority of courts finding that section 1322(c)(2) “authorizes modification of covered homestead mortgage claims, not just payments, including bifurcation of undersecured homestead mortgages into secured and unsecured components.” Hurlburt v. Black, No. 17-2449 (4th Cir. May 24, 2019) (en banc). NACBA and NCBRC participated as amici in support of the debtor.
In Witt v. United Cos. Lending Corp. (In re Witt), 113 F.3d 508 (4th Cir. 1997), the Fourth Circuit held that section 1322(c)(2)’s exception to the anti-modification provision in section 1322(b)(2) was limited to permitting a chapter 13 debtor to extend the final payments on his mortgage over the course of the plan even though the terms of the lending agreement would have those payments due earlier. Thus, the Witt court found that section 1322(c)(2) does not permit a chapter 13 debtor to modify the amount owed on the claim by bifurcating the claim into secured and unsecured portions, but could alter only the timing of payments on that claim.
Here, Larry Hurlburt bought his home from Juliet Black and entered into a purchase agreement under which he would be responsible for regular payments until May, 2014, at which time the remaining principal and interest would come due. Hurlburt defaulted on the final balloon payment of $136,000, and Black initiated foreclosure proceedings. Hurlburt filed for chapter 13 bankruptcy and proposed a plan under which the loan would be bifurcated into secured and unsecured portions with the unsecured portion receiving no payments. The bankruptcy court found that the plan offended the anti-modification provision of section 1322(b) and denied confirmation. Hurlburt v. Black (In re Hurlburt), 572 B.R. 160, 169 (Bankr. E.D.N.C. 2017). The district court affirmed. Hurlburt v. Black (In re Hurlburt), No. 7:17-CV-169-FL (E.D.N.C. Dec. 19, 2017). The Fourth Circuit likewise affirmed. Hurlburt v. Black (In re Hurlburt), 733 Fed. App’x 721 (4th Cir. 2018) (unpublished) (per curiam). That decision was vacated, however, when the circuit court granted Hurlburt’s petition for rehearing en banc in January, 2019.
On rehearing, the circuit court panel took a stroll through relevant statutory provisions. It began with section 1325(a)(5)(B) which allows the debtor to confirm a plan that “provide[s] the creditor with payments, over the life of the plan, that will total the present value of the allowed secured claim. . . ” and which permits the plan to treat any remaining portion of the claim as unsecured. Valuation of the claim into secured and unsecured components is governed by section 506(a)(1). The panel then turned to the effect of the anti-modification provision, section 1322(b)(2), which prohibits modification of a debt secured by the debtor’s residence. Nobelman v. American Savings Bank, 508 U.S. 324 (1993), interpreted the anti-modification provision as preventing cramdown of a partially-secured homestead debt in chapter 13.
But this case differed from Nobelman in one important respect: the remaining principal and interest on the loan were due in their entirety before the end of the plan period. Therefore, the panel turned to section 1322(c)(2), enacted in the 1994 Bankruptcy Code amendments, which provides in pertinent part: “Notwithstanding subsection (b)(2). . . in a case in which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor’s principal residence is due before the date on which the final payment under the plan is due, the plan may provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title.”
In Witt, the court found the language of section 1322(c)(2) to be ambiguous and, relying on legislative history, interpreted it to permit modification only with respect to “payment of the claim” and not with respect to the claim itself. Therefore, Witt and its progeny found that the anti-modification provision in paragraph (b)(2) applied to claims otherwise covered by section 1322(c)(2). On rehearing, the court rejected that reasoning and, instead, agreed with those courts finding that the natural reading of “payment of the claim as modified” was not limited to modification of the payment schedule, but included modification of the claim itself.
Congress’s introductory phrase, “notwithstanding subsection (b)(2)” suggested to the panel that Congress intended to create an exception to the entire anti-modification provision (which, by beginning with limiting phrase, “subject to subsections (a) and (c),” likewise singles out paragraph (c) for separate treatment), not just one aspect of that provision.
The panel found most persuasive the language in section 1322(c)(2) to the effect that “the plan may provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title.” Where the latter section provides for cramdown, the panel took section 1322(c)(2)’s reference to mean that cramdown likewise is available under that section. The majority concluded that all significant statutory evidence pointed to permitting cramdown of debts that mature prior to the end of the plan period.
Turning to the Witt court’s reliance on the absence of any indication that Congress intended to abrogate Nobelman when it enacted section 1322(c)(2), the panel found that because Nobelman dealt with section 1322(b)(2), the Witt court erred in its reasoning. The panel found that, in enacting 1322(c)(2), Congress carved out an exception to the strictures of section 1322(b) which otherwise remained unaffected. Therefore, this case would not run afoul of Nobelman and Congress had no reason to address any abrogation of Nobelman when it enacted 1322(c). Nor did Congress’s positive reference to First National Fidelity Corp. v. Perry, 945 F.2d 61 (3d Cir. 1991), which applied 1322(c) to alterations to payments on an otherwise unmodified claim, indicate that Congress intended to limit application of section 1322(c) to that narrow situation.
The court thus overturned Witt. It reversed and remanded.
Judges Wilkinson, Keenan and Thacker dissented.
The dissent argued that the court got it right when it decided Witt and interpreted section 1322(c)(2) to permit modification of the payment schedule but not of the claim itself. The dissent was persuaded that Congress would not have completely overridden the anti-modification provision as applied in Nobelman without specific reference to Nobelman and an explicit indication that the new statutory text was that broad in its scope. The dissent argued that the text of section 1322(c)(2) supports the narrower view in that the phrase, “payment of the claim as modified,” must be read as a phrase rather than individual terms. Thus, “payment of the claim” is what is modified, not the “claim” itself. The dissent maintained that, contrary to the majority’s holding, the power to strip down a claim derives from sections 506(a) and 1322(b), not from section 1325(a)(5), therefore Congress’s reference to the latter section could not be seen as an indication that Congress intended to bootstrap cramdown into section 1322(c).
The dissent was particularly troubled by the fact that the panel’s decision would have the practical effect of treating debtors whose mortgage would mature during the course of the plan—even if it was in month fifty-nine of a sixty-month plan—significantly more favorably than the debtor whose mortgage would come due any time after month sixty. In addition, less affluent debtors, whose plans were more likely to be only thirty-six months, would derive even less benefit from the court’s interpretation of section 1322(c). The dissenting judges thought it more likely that Congress intended to help debtors climb out from under balloon payments and acceleration clauses and they expressed concern about the effect of the majority decision on future lenders.
Debtors’ Manufactured Home Was Personal Property Under Iowa Law
The Eighth Circuit found no clear error in the bankruptcy court’s finding that, under Iowa common law, the chapter 13 debtors’ manufactured home was personal property and therefore the debt it secured was not subject to section 1322(b)’s anti-modification provision. The Paddock, LLC v. Bennett, No. 18-2098 (Feb. 28, 2019).
Benjamin and Teresia Bennett purchased a manufactured home from Paddock, and placed it on a lot owned by Paddock under a 990-year lease. In their chapter 13 bankruptcy, the Bennetts proposed to bifurcate the debt secured by the manufactured home into secured and unsecured portions under section 506(a)(1). Paddock objected arguing that the home was real property and the interest was subject to the anti-modification provision of section 1322(b). The bankruptcy court found that, under Iowa law, the home was personal property and confirmed the plan. In re Bennett, 2017 WL 1417221 (Bankr. N.D. Iowa Apr. 20, 2017). The Bankruptcy Appellate Panel affirmed. In re Bennett, 584 B.R. 15 (B.A.P. 8th Cir. 2018).
On appeal, the Eighth Circuit Court found that the bankruptcy court correctly applied Iowa law which provides that a fixture may be deemed real property when: “(1) it is actually annexed to the realty, or to something appurtenant thereto; (2) it is put to the same use as the realty with which it is connected; and (3) the party making the annexation intends to make a permanent accession to the freehold.” Applying these considerations, the court looked at the evidence to determine whether the bankruptcy court committed clear error in its findings of fact.
At the confirmation hearing, the parties introduced contradictory evidence as to the physical permanence of the home’s placement on the lot. Although Paddock produced testimony that the home was placed on a permanent, embedded cement foundation, the bankruptcy court credited the Bennetts’ contrary testimony that the home was placed on piers and blocks that were not deeply embedded. In fact, the Bennetts testified that one of the pier pads repeatedly sank into the ground requiring them to raise the pad to level the home. The bankruptcy court was also persuaded that the home was not a permanent accession to the freehold by the fact that the Bennetts leased the land where it was located and, even though the lease described the home as a permanent structure, it included provisions for moving it. The circuit court found no clear error in the bankruptcy court’s resolution of the factual disputes and affirmed the decisions below.
In dissent, Judge Beam argued that the bankruptcy court erred in disregarding the “uncontroverted” evidence that the home was placed on an embedded cement foundation and could not be moved without the use of a professional home mover. This conclusion was supported, according to the dissent, by Iowa law which requires that manufactured homes be placed on cement foundations. The dissent further disagreed with the bankruptcy court’s reliance on the fact that the land where the home was placed was subject to a lease. The dissent argued that the 990-year lease was, in fact, a transfer in fee simple “subject to a condition subsequent.”
District Court Certifies Appeal of 100% Plan Language Restricting Right to Modify
In Brown v. Viegelahn, No.18-282 the District Court for the Western District of Texas, on its motion, certified an appeal to the Fifth Circuit to resolve a dispute among lower courts concerning the so-called Molina language in which a Chapter 13 debtor paying less than his entire disposable income to his 100% plan, is required to agree that he will not later modify the plan to pay less than 100% to unsecured creditors. (appeal certified, Jan. 22, 2019). [Read more…] about District Court Certifies Appeal of 100% Plan Language Restricting Right to Modify
Court Exceeded Power with Plan Provision Re: After-Acquired Property
A bankruptcy court lacks the power to require a chapter 13 debtor to include a plan provision pledging to pay into the plan the cash equivalent of any non-cash property obtained post-confirmation. Roseberry v. U.S. Trustee, No. 18-1039 (S.D. Ill. Dec. 18, 2018). [Read more…] about Court Exceeded Power with Plan Provision Re: After-Acquired Property
City of Chicago v. Moore, Nos. 17-3663, 17-3664 (7th Cir.)
Type: Amicus
Date: May 21, 2018
Description: Whether court may confirm plan in which property does not re-vest in debtor. Whether the bankruptcy court erred, in multiple cases, in denying the city’s motion for allowance and payment of administrative expense claim based on traffic tickets issued after debtor’s Chapter 13 petition was filed.
Result: Pending