by In a consolidated opinion, the Bankruptcy Court for the District of Massachusetts held that the “equal payment provision of § 1325(a)(5)(B)(iii) is best read to prohibit confirmation of a sale plan, over the objection of a secured creditor holding a mortgage of a principal residence, that contemplates periodic payments followed by a lump-sum payment.” In re Materne, No. 20-40027, and In re Gnaman, No. 19-40930 (Bankr. D. Mass. April 7, 2022).
Mr. Gnaman’s residence was valued at $553,655.00 and he claimed the $500,000 state homestead exemption. The mortgagee, Wilmington, filed a claim for $411,417.95, including prepetition arrears of $206,561.84. In his chapter 13 plan, Mr. Gnaman proposed to maintain the mortgage payments outside the plan, sell the property at some unspecified time during the 60-month course of the plan, and pay the arrearage and the remaining amount of the mortgage out of sale proceeds.
Mr. Materne’s property was valued at $1,320,000.00 at the time of his petition and he claimed the $500,000 homestead exemption. Bank of America held two mortgages on the property. It claimed $889,187.51, including prepetition arrears of $243,367.33 on the first mortgage and $82,463.70, including prepetition arrears of $8,373.42 on the second mortgage. Like Mr. Gnaman, Mr. Materne proposed to pay the arrearages through a sale of the property at some unspecified point during the 36-month plan. Mr. Materne also proposed to make “adequate protection” payments directly to BofA during the plan which would be less than the contractual monthly payments provided for in the mortgage agreements.
Both mortgagees objected to the plans arguing that the proposed treatment of their claims violated sections 1325(a) and 1322(b)(5) of the Bankruptcy Code.
The court “waded into” the “muddy waters” that is the post-BAPCPA Bankruptcy Code, beginning with section 1325(a) which provides that a court must confirm a plan that meets the requirements of that section. Because the creditors did not agree to the debtors’ treatment of their claims, section 1325(a)(5)(A) did not apply. Likewise, neither debtor opted to surrender the collateral under section 1325(a)(5)(C). Therefore, the court looked to whether the debtors’ proposed plans fulfilled the requirements of section 1325(a)(5)(B). That section provides for three conditions for confirmation over the objection of a creditor.
The court found the first two conditions met because the creditors would retain the collateral, (B)(i), and would receive the full amount of the debt, (B)(ii).
The court turned to application of section 1325(a)(5)(B)(iii) which provides that “if—(I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts.” The court noted that balloon payments have been dealt with in a variety of inconsistent ways under this provision. The court observed that if the post-sale payments contemplated by the plans are considered the final of a series of periodic equal payments otherwise provided for in the plans, they would necessarily be unequal to the previous payments and would not comply with this section.
Without clear guidance from the statutory text, Congress, or consensus among courts, the court here turned to statutory context for direction. It began with section 1322 which lists optional and mandatory components of plans. Section 1322(b)(8) provides that a debtor may provide for payment of all or part of a claim with property of the debtor or of the estate. However, section 1322(b)(2) prohibits modification of a residential mortgage except to the extent that a debtor may cure arrears through the plan while maintaining contractual payments at the same time. Section 1322(b)(3), provides generally that a plan may provide for curing a default, and section 1322(b)(5), is an exception to the anti-modification provision and allows for curing a default and maintaining payments on a claim for which the last payment is due after the final plan payment is due. The court acknowledged that paragraph (b)(3) could be read to apply to mortgages that extended beyond the term of the plan but which the debtor proposed to pay off on an accelerated bases during the plan.
In either case, the court found the only modification permitted by the Code is that of “cure and maintain” which is subject to the “equal monthly payments” requirement of section 1325(a)(5)(B)(iii)(I). The court found that paragraph (b)(3) would come into play only if the secured claim is for a debt that matures prior to plan completion. Longer-term debts, such as those in this case, would be covered by paragraph (b)(5). The court found that section 1322(b)(2) was intended by Congress to prevent the delay and uncertainty inherent in “sale plans” such as the ones at issue. “[T]o interpret § 1322 and § 1325(b) to allow confirmation of a plan that provides for an indefinite cure period within the plan term would essentially read the anti-modification provision and other parameters established under § 1322(b) out of the Code.”
The court concluded that under either section 1322(b)(3) or (5) the plan must provide for cure within a reasonable time and periodic post-petition mortgage payments to avoid an impermissible modification. This assumes, however, that the “plan does not provide for full payment of the secured claim from proceeds of a sale on the effective date of a plan or within a reasonable time thereafter.”
The court next found that a mortgage which the debtor continues to pay outside the plan while curing arrearages within the plan, is “provided for in the plan,” for purposes of sections 1325 and 1322 and makes satisfaction of the “equal monthly payments” requirement of section 1325(a)(5)(B)(iii) necessary to confirmation. The court noted that “both the Materne plan and the Gnaman plan propose to make periodic payments (although ‘in’ the plan in the case of Materne and directly by Gnaman) and cure with a lump sum payment that will also pay the secured claim in full.”
The court observed that in the non-bankruptcy context, a mortgagor would be permitted to sell the property at any time and repay the balance of the mortgage with the proceeds. It further observed: “It is difficult to conceive that Congress would have intended to prohibit confirmation of a plan that proposed to maintain contractual mortgage payments, cure arrears, and pay off the full amount of the secured claim in a reasonable period of time upon the sale of a property in which the mortgagee enjoys an equity cushion where the debtor demonstrates a good faith reason for delaying the sale.” Yet, the majority of courts have read section 1325(a)(5)(B)(iii) to prohibit that very thing, in part because of the inherent cumbersome nature of having to prove reasonableness of time and a debtor’s good faith.
Recognizing that confirming plans with balloon payments has practical appeal, the court ultimately came down on the side of the majority view as harmonizing most closely with the statutory text and found that balloon payments violate the equal monthly payment requirement of section 1325(a)(5)(B)(iii)(I).
Nonetheless, the court went on to describe a scenario under which the almost identical plans would have passed statutory muster. The court explained that the debtors’ plans could have been confirmed under sections 1322(b)(8) and 1325(a)(5) as providing for payments of a secured claims in full had they presented the court with concrete plans for the sale of the properties.
The court stated: “Should either debtor elect to propose a non-consensual plan that provides for cure and payment of allowed claims secured by long-term mortgages through a sale of residential property that does not satisfy the cure and maintain option provided by § 1322(b)(5) or the cure and ‘no modification’ option contemplated by § 1322(b)(5) and (c)(1), the statutory path to confirmation could be through § 1322(b)(8) and § 1325(a)(5). These provisions may permit confirmation of a non-consensual plan that provides for a secured claim to be paid in full through a sale that is in prospect at the time of or at a reasonable time after confirmation, with or without payments prior to the sale, subject to all other confirmation requirements such as feasibility and good faith.”
With respect to Mr. Gnaman’s plan, the court found that while he proposed to cure and maintain in accordance with section 1322, his proposed balloon payment at an unspecified time violated the equal monthly payment provision of section 1325. With respect to Mr. Materne, the court found his proposal to pay “adequate protection” that was less than the contractual amount to maintain the mortgages, was an impermissible modification under section 1322(b)(2). Also, like Mr. Gnaman’s plan, Mr. Materne’s plan violated the equal payment provision.
The court sustained the objections of both creditors.