Chapter 7 Trustee's objection to exemption of debtor's interest in deceased husband's annuity is overruled; Amending schedules was proper; Debtor's oral testimony did not run afoul of "best evidence" rule in examining the paper trail:
In re: LECLAIR, 2011 Bankr. LEXIS 4209 (Bankr. D. Mass. 11/2/11).
PROCEDURAL: Chapter 7 Trustee objected to the debtor’s claimed exemption in an annuity. The parties disputed whether the debtor had deposited the funds used to purchase the annuity into an IRA within five years of her bankruptcy filing. Court overruled the Trustee’s objection.
DISCUSSION: In their joint pretrial memorandum, filed in connection with the evidentiary hearing, the parties framed the issue to be decided as "whether Betty LeClair's exemption pursuant to M.G.L. c. 235 § 34A for the John Hancock Annuity is limited to 7% of her income for the five years prior to June 24, 2010, the day she filed her bankruptcy petition." On the eve of the evidentiary hearing, Ms. LeClair filed a motion to amend schedules B and C along with the proposed amended schedules in which she listed the annuity as fully exempt pursuant to Mass. Gen. Laws ch. 235 § 34A. The trustee opposed the motion as untimely and prejudicial. Under Fed. R. Bankr. P. 1009 and MLBR 1009-1 schedules "may be amended as a matter of course at any time before the case is closed" with a motion to amend being required after the time for objecting to exemptions has expired. Ms.LeClair has complied with these rules.
At issue is whether Ms. LeClair's annuity is exempt under Mass. Gen. Laws ch. 235, § 34A which provides in relevant part: The right or interest of any person in an annuity, pension, profit sharing or other retirement plan subject to the federal Employee Retirement Income Security Act of 1974 . . . shall be exempt from the operation of any law relating to insolvency and shall not be attached or taken on execution or other process to satisfy any debt or liability of such person . . . . The exemption in this section for plans maintained by an individual, whether or not self-employed, shall not apply to sums deposited, determined without regard to deposits pursuant to a rollover or transfer except to the extent protection under this section would be limited in the absence of a rollover or transfer, in said plans during the five year period preceding the individual's declaration of bankruptcy or entry of judgment in excess of 7 per cent of the total income of such individual for such period. The trustee does not dispute that the funds used to purchase Ms. LeClair's annuity came directly to John Hancock from her IRA at Citi Smith Barney. Rather, he alleges that the funds used to purchase the annuity were deposited into the IRA within five years of the debtor's bankruptcy filing and thus, according to the limitations set forth in the statute, Ms. LeClair's exemption is limited to $1913.66 which is 7% of her earned income for that period.
The five year period relevant here runs from June 25, 2005 through June 24, 2010. The trustee points out that while Ms. LeClair was able to produce account statements showing no contributions to the IRA between November 30, 2005 and July 15, 2008 when the annuity was purchased, she could produce no records for the period from June 25, 2005 through November 29, 2005. The trustee argues this creates an inference that Ms. LeClair deposited funds into the IRA during this five month period or, at the very least, establishes Ms. LeClair's failure to carry her burden of proof that she made no contributions to her IRA during this period. While Ms. LeClair testified that she never made a contribution to the IRA at any time, the trustee objected to the admissibility of Ms. LeClair's testimony based on the so-called "best evidence rule." Fed. R. Evid. 1002. The trustee misperceives the rule. Ms. LeClair's testimony was not elicited to prove the contents of a writing; she was testifying to a particular fact known to her, namely the history of the IRA she inherited from her first husband. "[A]s the advisory committee note makes clear, Rule 1002 applies not when a piece of evidence sought to be introduced has been somewhere recorded in writing but when it is that written record itself that the party seeks to prove." "No evidentiary rule . . . prohibits a witness from testifying to a fact simply because the fact can be supported by written documentation." Despite its nickname, the rule does not require that a writing be deemed better evidence than oral testimony or that when written evidence exists, it must be presented instead of oral testimony. The absence of a paper trail to establish that no contributions to the IRA occurred between June and November 2005 does not render Ms. LeClair's own testimony on this point inadmissible. I find Ms. LeClair's testimony that she never deposited any funds into the IRA she inherited from her late husband admissible, credible and unrebutted. I conclude, therefore, that the entire amount of her John Hancock annuity is exempt under Mass. Gen. Laws ch. 235, § 34A. Based on the foregoing, the trustee's objection to the debtor Betty LeClair's exemption of the John Hancock annuity is overruled.
DISCUSSION: In their joint pretrial memorandum, filed in connection with the evidentiary hearing, the parties framed the issue to be decided as "whether Betty LeClair's exemption pursuant to M.G.L. c. 235 § 34A for the John Hancock Annuity is limited to 7% of her income for the five years prior to June 24, 2010, the day she filed her bankruptcy petition." On the eve of the evidentiary hearing, Ms. LeClair filed a motion to amend schedules B and C along with the proposed amended schedules in which she listed the annuity as fully exempt pursuant to Mass. Gen. Laws ch. 235 § 34A. The trustee opposed the motion as untimely and prejudicial. Under Fed. R. Bankr. P. 1009 and MLBR 1009-1 schedules "may be amended as a matter of course at any time before the case is closed" with a motion to amend being required after the time for objecting to exemptions has expired. Ms.LeClair has complied with these rules.
At issue is whether Ms. LeClair's annuity is exempt under Mass. Gen. Laws ch. 235, § 34A which provides in relevant part: The right or interest of any person in an annuity, pension, profit sharing or other retirement plan subject to the federal Employee Retirement Income Security Act of 1974 . . . shall be exempt from the operation of any law relating to insolvency and shall not be attached or taken on execution or other process to satisfy any debt or liability of such person . . . . The exemption in this section for plans maintained by an individual, whether or not self-employed, shall not apply to sums deposited, determined without regard to deposits pursuant to a rollover or transfer except to the extent protection under this section would be limited in the absence of a rollover or transfer, in said plans during the five year period preceding the individual's declaration of bankruptcy or entry of judgment in excess of 7 per cent of the total income of such individual for such period. The trustee does not dispute that the funds used to purchase Ms. LeClair's annuity came directly to John Hancock from her IRA at Citi Smith Barney. Rather, he alleges that the funds used to purchase the annuity were deposited into the IRA within five years of the debtor's bankruptcy filing and thus, according to the limitations set forth in the statute, Ms. LeClair's exemption is limited to $1913.66 which is 7% of her earned income for that period.
The five year period relevant here runs from June 25, 2005 through June 24, 2010. The trustee points out that while Ms. LeClair was able to produce account statements showing no contributions to the IRA between November 30, 2005 and July 15, 2008 when the annuity was purchased, she could produce no records for the period from June 25, 2005 through November 29, 2005. The trustee argues this creates an inference that Ms. LeClair deposited funds into the IRA during this five month period or, at the very least, establishes Ms. LeClair's failure to carry her burden of proof that she made no contributions to her IRA during this period. While Ms. LeClair testified that she never made a contribution to the IRA at any time, the trustee objected to the admissibility of Ms. LeClair's testimony based on the so-called "best evidence rule." Fed. R. Evid. 1002. The trustee misperceives the rule. Ms. LeClair's testimony was not elicited to prove the contents of a writing; she was testifying to a particular fact known to her, namely the history of the IRA she inherited from her first husband. "[A]s the advisory committee note makes clear, Rule 1002 applies not when a piece of evidence sought to be introduced has been somewhere recorded in writing but when it is that written record itself that the party seeks to prove." "No evidentiary rule . . . prohibits a witness from testifying to a fact simply because the fact can be supported by written documentation." Despite its nickname, the rule does not require that a writing be deemed better evidence than oral testimony or that when written evidence exists, it must be presented instead of oral testimony. The absence of a paper trail to establish that no contributions to the IRA occurred between June and November 2005 does not render Ms. LeClair's own testimony on this point inadmissible. I find Ms. LeClair's testimony that she never deposited any funds into the IRA she inherited from her late husband admissible, credible and unrebutted. I conclude, therefore, that the entire amount of her John Hancock annuity is exempt under Mass. Gen. Laws ch. 235, § 34A. Based on the foregoing, the trustee's objection to the debtor Betty LeClair's exemption of the John Hancock annuity is overruled.
Court undertakes thorough analysis of proofs and burdens for confirmation of Chapter 11 liquidating plan and conversion to Chapter 7, denying conversion and confirming the plan over the objection of one dissenting unsecured creditor;
Court also addresses separately classifying the dissenting creditor due to pending litigation against the creditor:
IN RE: HERMANOS TORRES PEREZ, INC., 2011 Bankr. LEXIS 4527 (Bankr. D.P.R. 11/21/11).
PROCEDURAL HISTORY: Debtor filed Chapter 11, being a family-owned corporation which purchased and sold petroleum and petroleum products before ceasing operations. Debtor also owns several real properties, which it leases together with the gas stations located on them. After initially seeking to reorganize, debtor filed a plan of liquidation. Pending before the court is the confirmation of the liquidation plan and an objection to confirmation filed by a single creditor (a former petroleum supplier, owed $3,943,273 in unsecured debt which the Debtor disputes as to amount owed and seeks offsets) who also seeks to convert the case to Chapter 7. Peerless' motion to convert and objection to confirmation involve many of the same issues, in essence requiring a determination of whether the estate should be liquidated by the debtor under chapter 11 or by a trustee under chapter 7. Court found the DEBtor sustained its burden for confirmation of the liquidating plan. Having denied Peerless' motion to convert, the court addressed the confirmation of the liquidation plan. Peerless was the only creditor objecting to confirmation. It argues that the plan is not in the best interests of all creditors, is unfeasible, was not proposed in good faith, and is not "fair and equitable" to impaired classes.
According to the liquidation analysis included in the second amended disclosure statement, a hypothetical chapter 7 liquidation would yield an estimated 7% dividend on unsecured claims. Under the liquidation plan, the debtor expects to distribute at least 9.998% to the general unsecured creditors—including any amount ultimately owed to Peerless—on or before 24 months.
In order for a plan to be feasible under section 1129(a)(11), it must offer a reasonable assurance of success,but it need not guarantee success. Based on the evidence presented at the hearing and the testimony of debtor's accountant, the court finds debtor's liquidation plan to be feasible.
Creditor argues that debtor's liquidation plan was proposed in bad faith based on the fact that the plan assigns Creditor to its own class rather than including it with the general unsecured creditors. At the outset, while Peerless asserts that its claim will not be paid under the plan, the plan explicitly provides for such payment, stating that "[a]ny final allowed amounts owed to Peerless will be paid under Class 6, once the claim is liquidated." As to Peerless' argument that it should be classified with the other general unsecured creditors, the court first emphasizes that the placement of Peerless in Class 8 does not impact the amount it will be paid under the liquidation plan. Moreover, debtors are afforded broad discretion in classifying claims, as courts focus on whether a debtor has "good business reasons" for the placement of a creditor in a particular class. In this case, debtor justifies its classification of Peerless based on the fact that debtor initiated an adversary proceeding against Peerless seeking damages in excess of any amounts claimed by Peerless, and that any allowed amounts owed to Peerless are guaranteed in part with payment bonds by Tower Bonding Co. and MAPFRE, as well as a guarantee from BPPR that was executed pre-petition. In the In re Multiut Corp. case, the court found the fact that debtor was engaged in litigation with several claimants to be a "good business reason for their separate classification ... [as] [s]uccess against those parties could, in effect, eliminate payment on their claims." Based on this reasoning, the court finds that debtor had a good business reason for separating Peerless from the other unsecured creditors, and thus that Peerless' classification was not made in bad faith.
Cramdown: Where a plan does not receive the unanimous consent of all impaired creditors, the court may nevertheless confirm the plan via cram down as long as it does not "discriminate unfairly" and is "fair and equitable" to the rejecting, impaired class. 11 U.S.C. § 1129(b)(1). While Peerless does not explicitly argue that the plan discriminates unfairly, to the extent that Peerless' argument that it should be classified with the general unsecured creditors should be construed as such, this objection has already been addressed—and denied—above in the context of good faith. Thus, the court finds that debtor's plan does not discriminate unfairly.
"fair and equitable": The Code states that a plan is "fair and equitable" as to a dissenting class of unsecured creditors—like Peerless—under section 1129 where
According to the liquidation analysis included in the second amended disclosure statement, a hypothetical chapter 7 liquidation would yield an estimated 7% dividend on unsecured claims. Under the liquidation plan, the debtor expects to distribute at least 9.998% to the general unsecured creditors—including any amount ultimately owed to Peerless—on or before 24 months.
In order for a plan to be feasible under section 1129(a)(11), it must offer a reasonable assurance of success,but it need not guarantee success. Based on the evidence presented at the hearing and the testimony of debtor's accountant, the court finds debtor's liquidation plan to be feasible.
Creditor argues that debtor's liquidation plan was proposed in bad faith based on the fact that the plan assigns Creditor to its own class rather than including it with the general unsecured creditors. At the outset, while Peerless asserts that its claim will not be paid under the plan, the plan explicitly provides for such payment, stating that "[a]ny final allowed amounts owed to Peerless will be paid under Class 6, once the claim is liquidated." As to Peerless' argument that it should be classified with the other general unsecured creditors, the court first emphasizes that the placement of Peerless in Class 8 does not impact the amount it will be paid under the liquidation plan. Moreover, debtors are afforded broad discretion in classifying claims, as courts focus on whether a debtor has "good business reasons" for the placement of a creditor in a particular class. In this case, debtor justifies its classification of Peerless based on the fact that debtor initiated an adversary proceeding against Peerless seeking damages in excess of any amounts claimed by Peerless, and that any allowed amounts owed to Peerless are guaranteed in part with payment bonds by Tower Bonding Co. and MAPFRE, as well as a guarantee from BPPR that was executed pre-petition. In the In re Multiut Corp. case, the court found the fact that debtor was engaged in litigation with several claimants to be a "good business reason for their separate classification ... [as] [s]uccess against those parties could, in effect, eliminate payment on their claims." Based on this reasoning, the court finds that debtor had a good business reason for separating Peerless from the other unsecured creditors, and thus that Peerless' classification was not made in bad faith.
Cramdown: Where a plan does not receive the unanimous consent of all impaired creditors, the court may nevertheless confirm the plan via cram down as long as it does not "discriminate unfairly" and is "fair and equitable" to the rejecting, impaired class. 11 U.S.C. § 1129(b)(1). While Peerless does not explicitly argue that the plan discriminates unfairly, to the extent that Peerless' argument that it should be classified with the general unsecured creditors should be construed as such, this objection has already been addressed—and denied—above in the context of good faith. Thus, the court finds that debtor's plan does not discriminate unfairly.
"fair and equitable": The Code states that a plan is "fair and equitable" as to a dissenting class of unsecured creditors—like Peerless—under section 1129 where
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property . . . .
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property . . . .
11 U.S.C. § 1129(b)(2)(B). In this case, the liquidation plan satisfies section 1129(b)(2)(B)(ii), which is typically referred to as the "absolute priority rule." Peerless argues that the plan violates the absolute priority rule because it does not explicitly indicate whether funds collected in excess of the payment terms set out in the plan will be distributed to creditors or retained by the debtor. This argument was mooted Debtor when it supplemented the liquidation plan. Peerless also argues that since debtor will not collect on accounts receivable from the insiders, that this—in effect—would allow the insiders, as junior claimholders, to retain assets at the expense of an objecting class, Peerless. However, as discussed more fully above, Peerless has failed to provide sufficient evidence establishing that debtor will not collect the insider accounts receivable. Thus, Peerless' objection on this basis is denied.
Accordingly, the court finds that the liquidation plan "does not discriminate unfairly" and is "fair and equitable" as to Peerless. In addition, the court makes the same findings as to the other non-accepting, impaired classes. As the court finds that all applicable requirements under section 1129 have been met, the liquidation plan is hereby CONFIRMED over Peerless' objection.
Where creditor provided no evidence of assignment of its claim from the original credit card issuer, Court sustained debtor’s objection to allowance of the claim in the Chapter 13 case:
Accordingly, the court finds that the liquidation plan "does not discriminate unfairly" and is "fair and equitable" as to Peerless. In addition, the court makes the same findings as to the other non-accepting, impaired classes. As the court finds that all applicable requirements under section 1129 have been met, the liquidation plan is hereby CONFIRMED over Peerless' objection.
Where creditor provided no evidence of assignment of its claim from the original credit card issuer, Court sustained debtor’s objection to allowance of the claim in the Chapter 13 case:
In re: GAUTHIER, 2011 Bankr. LEXIS 4546 (Bankr. D. Mass. 11/21/11).
MEMORANDUM AND ORDER ON DEBTOR'S AMENDED OBJECTION TO CLAIM NO. 3 OF FIA CARD SERVICES: Ms. Gauthier listed on Schedule F to her bankruptcy petition an undisputed debt owed to "Bank of America Inquiries" in the amount of $32,661.15 on a credit card account with an account number ending in 3186. On October 25, 2010 FIA Card Services filed its proof of claim in this case, docketed as claim no. 3, asserting an unsecured claim against the debtor in the amount of $35,254.93. FIA attached a "Statement of Accounts" to its proof of claim, on which it stated that FIA was the successor in interest to Bank of America NA on two of Ms. Gauthier's credit card accounts with account numbers ending in 3186 and 8527. The debtor objected to FIA's proof of claim. Subsequently, a Notice of Transfer/Assignment of Claim (Form 210A) was filed to notify the court and interested parties that FIA Card Services had transferred its claim to Portfolio Recovery Associates, LLC. In order to include Portfolio in its claim objection, the debtor filed an amended objection to claim no. 3. Neither Portfolio nor FIA filed a response to the debtor's amended objection. After due notice to Portfolio and FIA, the debtor's claim objection came before me for hearing on June 28, 2011. Neither FIA nor Portfolio appeared at the hearing.
It is the debtor's position that under Massachusetts law FIA has failed to prove ownership of the Bank of America account and thus claim no. 3 should be disallowed under Bankruptcy Code § 502(b)(1) which provides for disallowance of a claim to the extent "such claim is unenforceable . . . under any agreement or applicable law." The debtor cites B-Real, LLC v. Melillo (In re Melillo), 392 B.R. 1 (1st Cir. BAP 2008), and Unifund CCR Partners v. Mendel, No. 06-WAD-05, 2007 WL 1098640 (Mass. App. Div. Apr. 10, 2007), for the proposition that an assignee must provide "sufficient evidence" that it owns the account in question to have an enforceable claim under state law. In previous cases I have overruled objections by debtors to proofs of claim by assignees when the debtors had scheduled as undisputed the very same claims but in the names of the original holders. In those cases the assignee submitted along with its proof of claim some evidence of the assignment, usually a certification by a representative of the assignee sworn to under the pains and penalties of perjury. Here, the Statement of Accounts attached to the proof of claim contains no such certification, nor did FIA or Portfolio come forward to offer any evidence of an assignment in response to the debtor's objection. As observed by the BAP for the First Circuit in In re Melillo, under Massachusetts law "the statute of frauds does not require that the assignment of an unsecured credit card account be evidenced by a writing. Nevertheless, to enforce its claim, an assignee must prove that it owns the account in question. So, for example, if an assignee were to bring a collection complaint against a credit card debtor in state court, in order to survive a motion to dismiss for lack of subject matter jurisdiction, which is the procedural device for challenging a party's standing, the assignee would have to come forward with some evidence that it owned the account upon which the suit was instituted.Where as here the assignees have submitted no evidence whatsoever that Bank of America assigned its claim to FIA Card Services, Court sustains debtor's objection to disallow the entire claim.
It is the debtor's position that under Massachusetts law FIA has failed to prove ownership of the Bank of America account and thus claim no. 3 should be disallowed under Bankruptcy Code § 502(b)(1) which provides for disallowance of a claim to the extent "such claim is unenforceable . . . under any agreement or applicable law." The debtor cites B-Real, LLC v. Melillo (In re Melillo), 392 B.R. 1 (1st Cir. BAP 2008), and Unifund CCR Partners v. Mendel, No. 06-WAD-05, 2007 WL 1098640 (Mass. App. Div. Apr. 10, 2007), for the proposition that an assignee must provide "sufficient evidence" that it owns the account in question to have an enforceable claim under state law. In previous cases I have overruled objections by debtors to proofs of claim by assignees when the debtors had scheduled as undisputed the very same claims but in the names of the original holders. In those cases the assignee submitted along with its proof of claim some evidence of the assignment, usually a certification by a representative of the assignee sworn to under the pains and penalties of perjury. Here, the Statement of Accounts attached to the proof of claim contains no such certification, nor did FIA or Portfolio come forward to offer any evidence of an assignment in response to the debtor's objection. As observed by the BAP for the First Circuit in In re Melillo, under Massachusetts law "the statute of frauds does not require that the assignment of an unsecured credit card account be evidenced by a writing. Nevertheless, to enforce its claim, an assignee must prove that it owns the account in question. So, for example, if an assignee were to bring a collection complaint against a credit card debtor in state court, in order to survive a motion to dismiss for lack of subject matter jurisdiction, which is the procedural device for challenging a party's standing, the assignee would have to come forward with some evidence that it owned the account upon which the suit was instituted.Where as here the assignees have submitted no evidence whatsoever that Bank of America assigned its claim to FIA Card Services, Court sustains debtor's objection to disallow the entire claim.
Debtor denied discharge based on findings of State Court in 93A action,
Debtor collaterally estopped from asserting otherwise:
(In re BALSER), GUNNING v. BALSER, 2011 Bankr. LEXIS 4542 (Bankr. D. Mass. 11/22/11).
The matter before the Court is the "Motion to Vacate and/or Reconsider the Court's Order on the Motion filed by Francis [sic] Gunning to Reconsider Order for Summary Judgment" filed by Gail A. Balser (the "Defendant" or the "Debtor") and the Opposition to that Motion filed by Frances Gunning and Yvonne Gunning (the "Plaintiffs" or the "Gunnings"). The Plaintiffs timely filed a two-count Complaint against the Debtor on September 23, 2010, seeking a determination that a debt arising from the purchase of a condominium unit from Debtor was nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) (Count I), as well as denial of the Debtor's discharge pursuant to 11 U.S.C. § 727(a)(4)(A) (Count II). The parties agreed that the Superior Court conducted a trial on the merits of the Plaintiffs' complaint that included counts stating claims for common law fraud and deceit and Ch. 93A.
The Court's decision to grant the Plaintiffs' Motion for Summary Judgment is supported by the record of proceedings in the state court and the principles of issue preclusion or collateral estoppel. In its decision, the Bristol County Superior Court found the following with reference to the Plaintiffs' claims under Mass. Gen. Laws ch. 93A, §§ 2, 9 and 940 Code Mass. Regs. 3.16: She [Attorney Balser] was also aware that having a dry basement was extremely important to the Gunnings in connection with their purchase of this premises and she intentionally misled them into believing that there had never been a water problem in Unit 14 and that the basement was dry. Her actions were made to induce the Gunnings to purchase the premises and the Gunnings reasonably relied upon her representations in purchasing the same resulting in the harm which they have experienced. In the case at bar, Balser's conduct went beyond that of mere silence and nondisclosure and rose to the level of active misrepresentation. Where a defendant willfully makes a false representation with intent to deceive, the defendant is not relieved from liability because of the victim's lack of diligence.
Creditor was entitled to foreclose where notice was proper and properly assigned its position, a
Creditor was entitled to foreclose where notice was proper and properly assigned its position, a
post-Ibanez case; Creditor’s motion to dismiss under 12(b)(6) granted as to all of Debtor’s claims:
JUAREZ v. U.S. BANK NATIONAL ASSOCIATION, 2011 U.S. Dist. LEXIS 128087 (D. Mass. 11/4/11).
OVERVIEW: Plaintiff failed to state a claim that defendants had violated Mass. Gen. Laws ch. 244, § 14. Even if she never received the required notice, the affidavit stated that defendants mailed the notice to her and as such was sufficient to satisfy § 14; the assignment did not have to be recorded prior to execution of a notice of sale or foreclosure sale; she did not have standing to challenge an assignment under an agreement to which she was not a party or of which she was not a third-party beneficiary; and the bank did not have to hold the note in addition to the mortgage.
OUTCOME: The court granted defendants' motion to dismiss.
OVERVIEW: Plaintiff failed to state a claim that defendants had violated Mass. Gen. Laws ch. 244, § 14. Even if she never received the required notice, the affidavit stated that defendants mailed the notice to her and as such was sufficient to satisfy § 14; the assignment did not have to be recorded prior to execution of a notice of sale or foreclosure sale; she did not have standing to challenge an assignment under an agreement to which she was not a party or of which she was not a third-party beneficiary; and the bank did not have to hold the note in addition to the mortgage.
OUTCOME: The court granted defendants' motion to dismiss.
Bankruptcy court determines “hybrid” plans are not a Chapter 13 option,
Declining g to follow In re McGregor the Court concluding that § 1322(b)(5) does not permit the payment of a modified secured claim over a period longer than the term of the plan;
First Circuit has not yet decided the issue with a split of authority:
In re MARIA V. PIRES, 2011 Bankr. LEXIS 4259 (Bankr. D. Mass. 11/7/11).
PROCEDURAL POSTURE: Objectors, two secured creditors holding mortgages on property of a Chapter 13 debtor, opposed confirmation of her proposed plan on the ground that the plan's treatment of their secured claims was improper for various reasons including that it was a "hybrid" plan that was prohibited by 11 U.S.C.S. § 1322 and that even if hybrid plans were permitted, the plan proposed herein nonetheless did not satisfy the criteria for same in In re McGregor.
OVERVIEW: Objectors held mortgages on two multi-family properties owned by debtor. Debtor had obtained orders declaring the value of each such property, and both were found to be less than the balance on the mortgage it secured, with the result that each was modifiable per § 1322(b)(2). The plan at issue bifurcated both claims into secured and unsecured amounts, provided for the trustee to pay prepetition arrearages, and provided for debtor to directly pay the balance of the secured claim to the mortgagee over the remaining term of the original mortgage. Based on the hybrid treatment, objectors argued that § 1322(b)(5) did not authorize the modification of a secured claim in this manner. The court agreed. It stated that § 1322(b)(5), like § 1322(b)(2), was subject to the requirement in § 1322(d) that plan payments be completed in no more than five years and that the construction of § 1322(b)(5) on which hybrid plans were premised would in effect provide an “end-run” around the anti-modification provisions by permitting as to "a claim secured only by a security interest in real property that is the debtor's principal residence" precisely what § 1322(b)(2) expressly prohibited: modification.
OUTCOME: The court sustained the objections to confirmation.
OVERVIEW: Objectors held mortgages on two multi-family properties owned by debtor. Debtor had obtained orders declaring the value of each such property, and both were found to be less than the balance on the mortgage it secured, with the result that each was modifiable per § 1322(b)(2). The plan at issue bifurcated both claims into secured and unsecured amounts, provided for the trustee to pay prepetition arrearages, and provided for debtor to directly pay the balance of the secured claim to the mortgagee over the remaining term of the original mortgage. Based on the hybrid treatment, objectors argued that § 1322(b)(5) did not authorize the modification of a secured claim in this manner. The court agreed. It stated that § 1322(b)(5), like § 1322(b)(2), was subject to the requirement in § 1322(d) that plan payments be completed in no more than five years and that the construction of § 1322(b)(5) on which hybrid plans were premised would in effect provide an “end-run” around the anti-modification provisions by permitting as to "a claim secured only by a security interest in real property that is the debtor's principal residence" precisely what § 1322(b)(2) expressly prohibited: modification.
OUTCOME: The court sustained the objections to confirmation.
Discussion: The chapter 13 debtor seeks confirmation of a plan that, by virtue of its treatment of the secured claims of two mortgagees, is a variant of the "hybrid plan" first sanctioned in this district in In re McGregor, 172 B.R. 718 (Bankr. D. Mass. 1994). Most notably, it would bifurcate the mortgagees' claims and, with authority that it would have the court find in 11 U.S.C. § 1322(b)(5), pay the secured portions over a period longer than the five-year duration of the plan. The mortgagees oppose confirmation, arguing first that McGregor was wrongly decided—i.e., that Chapter 13 does not permit hybrid plans—and, in the alternative, that this particular hybrid plan fails even under McGregor and its progeny. For the reasons set forth below, the Court agrees with the mortgagees that § 1322(b)(5) does not authorize the payment of a modified secured claim over a period longer than the term of the plan, and therefore that hybrid plans are not a valid option in Chapter 13.
The plan calls for the Debtor to make payments of $1,003.00 per month for 60 months to the chapter 13 trustee. With these funds, the trustee would pay the arrearage portions of the claims of BNY Mellon and U.S. Bank, two priority tax claims totaling $2,334.58, an administrative claim for Debtor's counsel's fee of $2,000.00, the chapter 13 trustee's fee, and a one percent dividend on nonpriority unsecured claims. The Debtor estimates that nonpriority unsecured claims will total $193,700.00, $192,000 of which would be comprised of the unsecured portions of the claims of BNY Mellon
BNY Mellon and U.S. Bank.
The plan would bifurcate the claims of BNY Mellon and U.S. Bank into secured and unsecured claims. With respect to the unsecured portions, each mortgagee would be paid a one percent dividend through the trustee. With respect to the secured portions, each mortgagee would receive two separate streams of payments. First, as indicated above, each mortgagee would receive payments through the trustee that, in total, would equal the amount of its prepetition arrearage. Second, each would receive equal monthly payments directly from the Debtor. These payments would pay the balance of each mortgagee's secured claim—that is, its secured claim minus its arrearage—over a period equal to the remaining term of its mortgage loan with interest at 4 percent per annum. Therefore, the monthly payments from the Debtor to each mortgagee would be in the amount necessary to amortize the balance of the mortgagee's secured claim at 4 percent per annum over the remaining term of the mortgagee's loan. This formula does and is intended to reduce the Debtor's monthly payments to each mortgagee to amounts that are less than the monthly payments required by the mortgagee's respective promissory notes.
The plan does not specify the amount of the monthly payment that the Debtor would make directly to each mortgagee. Rather it provides formulae by which the Debtor attempts to indicate how these amounts might be determined. The mortgagees take the position that there is no middle or hybrid option, that § 1322(b)(5) is not an alternate source of authority for modifying a secured claim. In response, the Debtor simply cites McGregor and its progeny. See In re McGregor, 172 B.R. 718 (Bankr. D. Mass. 1994); In re Brown, 175 B.R. 129 (Bankr. D. Mass. 1994); In re Murphy, 175 B.R. 134 (Bankr. D. Mass. 1994); FNMA v. Ferreira (In re Ferreira), 223 B.R. 258 (D. R.I. 1998); In re Kheng, 202 B.R. 538 (Bankr. D. R.I. 1996); and In re Veliz, 2009 Bankr. LEXIS 3505, 2009 WL 3418638 (Bankr. D. R.I. 2009); In re Plourde, 402 B. R. 488 (Bankr. D. N.H. 2009).
Second, and in the alternative, both mortgagees argue that even under McGregor, the present plan fails because it does not propose to "maintain" the payments payable to the mortgagees. Here they rely on McGregor itself for the proposition that in order to qualify for the hybrid option, a plan must comply with § 1322(b)(5)'s requirement of "maintenance of payments," which McGregor states means payment in accordance with the debtor's obligations under the promissory note and mortgage. The present plan would modify those payments and therefore cannot be justified under§ 1322(b)(5). The Debtor responds that § 1322(b)(5) does not say what is meant by "maintenance of payments," and that the Court should confirm the plan as long as payments are maintained that pay the secured claim with interest at a rate that satisfies the standard established by the Supreme Court in Till v. SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004) and implicitly 11 U.S.C. § 1325(a)(5)(B)(ii), which Till explicates. Maintenance of payment, she contends, does not mean or require maintenance of the payments required by the mortgage loan.
Third, the mortgagees fault the plan for reducing the portion of the secured claim that the debtor must pay by the entire amount of the arrearage instead of just the part thereof that constitutes repayment of principal. In allocating the other components of the arrearage (interest, late charges, and other fees) to the secured claim, the Debtor is proposing a treatment of the mortgagees' claims that does not comport with those authorities that sanction hybrid plans and have addressed this issue.
The plan would bifurcate the claims of BNY Mellon and U.S. Bank into secured and unsecured claims. With respect to the unsecured portions, each mortgagee would be paid a one percent dividend through the trustee. With respect to the secured portions, each mortgagee would receive two separate streams of payments. First, as indicated above, each mortgagee would receive payments through the trustee that, in total, would equal the amount of its prepetition arrearage. Second, each would receive equal monthly payments directly from the Debtor. These payments would pay the balance of each mortgagee's secured claim—that is, its secured claim minus its arrearage—over a period equal to the remaining term of its mortgage loan with interest at 4 percent per annum. Therefore, the monthly payments from the Debtor to each mortgagee would be in the amount necessary to amortize the balance of the mortgagee's secured claim at 4 percent per annum over the remaining term of the mortgagee's loan. This formula does and is intended to reduce the Debtor's monthly payments to each mortgagee to amounts that are less than the monthly payments required by the mortgagee's respective promissory notes.
The plan does not specify the amount of the monthly payment that the Debtor would make directly to each mortgagee. Rather it provides formulae by which the Debtor attempts to indicate how these amounts might be determined. The mortgagees take the position that there is no middle or hybrid option, that § 1322(b)(5) is not an alternate source of authority for modifying a secured claim. In response, the Debtor simply cites McGregor and its progeny. See In re McGregor, 172 B.R. 718 (Bankr. D. Mass. 1994); In re Brown, 175 B.R. 129 (Bankr. D. Mass. 1994); In re Murphy, 175 B.R. 134 (Bankr. D. Mass. 1994); FNMA v. Ferreira (In re Ferreira), 223 B.R. 258 (D. R.I. 1998); In re Kheng, 202 B.R. 538 (Bankr. D. R.I. 1996); and In re Veliz, 2009 Bankr. LEXIS 3505, 2009 WL 3418638 (Bankr. D. R.I. 2009); In re Plourde, 402 B. R. 488 (Bankr. D. N.H. 2009).
Second, and in the alternative, both mortgagees argue that even under McGregor, the present plan fails because it does not propose to "maintain" the payments payable to the mortgagees. Here they rely on McGregor itself for the proposition that in order to qualify for the hybrid option, a plan must comply with § 1322(b)(5)'s requirement of "maintenance of payments," which McGregor states means payment in accordance with the debtor's obligations under the promissory note and mortgage. The present plan would modify those payments and therefore cannot be justified under§ 1322(b)(5). The Debtor responds that § 1322(b)(5) does not say what is meant by "maintenance of payments," and that the Court should confirm the plan as long as payments are maintained that pay the secured claim with interest at a rate that satisfies the standard established by the Supreme Court in Till v. SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004) and implicitly 11 U.S.C. § 1325(a)(5)(B)(ii), which Till explicates. Maintenance of payment, she contends, does not mean or require maintenance of the payments required by the mortgage loan.
Third, the mortgagees fault the plan for reducing the portion of the secured claim that the debtor must pay by the entire amount of the arrearage instead of just the part thereof that constitutes repayment of principal. In allocating the other components of the arrearage (interest, late charges, and other fees) to the secured claim, the Debtor is proposing a treatment of the mortgagees' claims that does not comport with those authorities that sanction hybrid plans and have addressed this issue.
This case presents two issues: whether a hybrid plan is a valid option under chapter 13 of the Bankruptcy Code; and, if so, whether either of two features of this hybrid plan—its modification of the contractually-required stream of payments to the mortgagee and its treatment of the entire arrearage as secured debt—nonetheless prevents its confirmation. I begin by addressing the first and note that, although the issue has been addressed often among bankruptcy courts in this circuit, there is no binding authority on the issue in this circuit. In the only circuit-level case on the issue, the Ninth Circuit Court of Appeals ruled against the hybrid option. In re Enewally, 368 F.3d 1165 (9th Cir. 2004) (a debtor may not use § 506(a) in combination with § 1322(b)(5) to reduce the secured claim and repay it over a period longer than the plan term). The most thorough treatment of the issue I find in In re Koper, 284 B.R. 747 (Bankr. D. Conn. 2002).
Chapter 13 offers two distinct and well-established options for treatment of secured claims, especially mortgage loans. The first is known colloquially as a "cure and maintain plan" for its adherence to 11 U.S.C. § 1322(b)(5). It is available as to any secured claim on which the last payment is due after the final payment on the plan. Under this option, the debtor may cure the prepetition arrearage on its mortgage loan but otherwise leave unimpaired the payment rights of the mortgagee, such that payments under the mortgage loan are maintained during the term of the plan. Upon completion of the plan, the prepetition default is deemed cured, and the relationship between the parties is governed entirely by the promissory note and mortgage without modification. Payments under the mortgage loan then continue in the ordinary course, not because the plan so dictates but because the contractual rights between the parties are, except in one limited respect, left unimpaired. The rights of the mortgagee are affected by the plan only in this one respect: that notwithstanding the contractual terms between the parties, the debtor is permitted to cure the prepetition arrearage through the plan. This option is expressly authorized by § 1322(b)(5), which states that the plan may . . . notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.
11 U.S.C. § 1322(b)(5).
The second option is known as the "modification" or "lien stripping" option and is permitted by 11 U.S.C. § 1322(b)(2) but only as to secured claims other than those "secured only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)(2). Under a plan of this kind, the debtor modifies the rights of the secured creditor more extensively by (i) bifurcating that claim into secured and unsecured claims in accordance with 11 U.S.C. § 506(a), (ii) paying the unsecured claim a dividend, usually less than 100 percent, through the trustee over the duration of the plan, which may not exceed five years, (iii) providing that the secured creditor retains the lien securing its secured claim until the earlier of entry of discharge or payment in full of the underlying debt as determined under nonbankruptcy law, as required by 11 U.S.C. § 1325(a)(5)(B)(i), and (iv) paying the secured claim—also through the trustee and within the term of the plan—with a stream of equal monthly payments whose value, as of the effective date of the plan, is not less than the allowed amount of the secured claim, as required by 11 U.S.C. § 1325(a)(5)(B)(ii) and (iii)(I). For two reasons, this option is seldom used: § 1322(d) requires payment of the secured claim in full within a period of not more than five years, and few chapter 13 debtors can afford the payments required to accomplish this; and § 1322(b)(2) makes this option inapplicable to claims secured only by a security interest in real property that is the debtor's principal residence.
Enter the hybrid option, which is employed to circumvent the modification option's five-year limitation on payment of the secured claim. A hybrid plan is so-called because it is a modification plan that borrows features of the cure and maintain plan in an attempt to justify, under § 1322(b)(5), payment of the modified secured claim over a period longer than the term of the plan. In structure, a hybrid plan, like the present plan, (i) modifies the rights of a secured creditor by bifurcating its claim into secured and unsecured claims in accordance with 11 U.S.C. § 506(a), (ii) pays the unsecured claim a dividend—again, usually less than 100 percent—through the trustee over the duration of the plan, (iii) provides that the secured creditor retains the lien securing its secured claim until the payment in full of only the secured claim, (vi) cures the secured creditor's prepetition arrearage by payments through the trustee during the term of the plan, and (v) pays the secured claim (or at least so much of it as is not paid by curing the arrearage) directly and over a period longer than the duration of the plan by maintaining the payments required by the prepetition agreement between the debtor and secured creditor until and only until those payments, in the aggregate, fully amortize the secured claim in accordance with 11 U.S.C. § 1325(a)(5)(B)(ii).
The cases that have sanctioned hybrid plans have uniformly construed § 1322(b)(5) as permitting maintenance of payments on the secured claim alone and as authorizing such payment to continue not only during the term of the plan but also thereafter until the total of such payments gives the creditor its due for the secured portion of its claim. Under this reading, § 1322(b)(5) authorizes more than maintenance of payments on an unimpaired claim; it authorizes modification of the claim. Proponents of this view find support in § 1322(b)(5) itself, where it states that "the plan may . . . provide for the . . . maintenance of payments while the case is pending on any . . . secured claim." 11 U.S.C. § 1322(b)(5) (emphasis added). Under § 506(a), a "secured claim" is not merely the claim that is secured but that claim "to the extent of the value of such creditor's interest in the estate's interest such property [i.e., the property of the estate that is subject to the creditor's lien]." 11 U.S.C. § 506(a).
Second, § 1322(b)(5), no less than § 1322(b)(2), is subject to the requirement in § 1322(d) that payments on the plan be completed in no more than five years. 11 U.S.C. § 1322(d)(1) and (2) (both providing that a plan may not provide for payments over a period that is longer than five years). Court concludes that § 1322(b)(5) does not permit the payment of a modified secured claim over a period longer than the term of the plan. A separate order will enter denying confirmation.
The second option is known as the "modification" or "lien stripping" option and is permitted by 11 U.S.C. § 1322(b)(2) but only as to secured claims other than those "secured only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)(2). Under a plan of this kind, the debtor modifies the rights of the secured creditor more extensively by (i) bifurcating that claim into secured and unsecured claims in accordance with 11 U.S.C. § 506(a), (ii) paying the unsecured claim a dividend, usually less than 100 percent, through the trustee over the duration of the plan, which may not exceed five years, (iii) providing that the secured creditor retains the lien securing its secured claim until the earlier of entry of discharge or payment in full of the underlying debt as determined under nonbankruptcy law, as required by 11 U.S.C. § 1325(a)(5)(B)(i), and (iv) paying the secured claim—also through the trustee and within the term of the plan—with a stream of equal monthly payments whose value, as of the effective date of the plan, is not less than the allowed amount of the secured claim, as required by 11 U.S.C. § 1325(a)(5)(B)(ii) and (iii)(I). For two reasons, this option is seldom used: § 1322(d) requires payment of the secured claim in full within a period of not more than five years, and few chapter 13 debtors can afford the payments required to accomplish this; and § 1322(b)(2) makes this option inapplicable to claims secured only by a security interest in real property that is the debtor's principal residence.
Enter the hybrid option, which is employed to circumvent the modification option's five-year limitation on payment of the secured claim. A hybrid plan is so-called because it is a modification plan that borrows features of the cure and maintain plan in an attempt to justify, under § 1322(b)(5), payment of the modified secured claim over a period longer than the term of the plan. In structure, a hybrid plan, like the present plan, (i) modifies the rights of a secured creditor by bifurcating its claim into secured and unsecured claims in accordance with 11 U.S.C. § 506(a), (ii) pays the unsecured claim a dividend—again, usually less than 100 percent—through the trustee over the duration of the plan, (iii) provides that the secured creditor retains the lien securing its secured claim until the payment in full of only the secured claim, (vi) cures the secured creditor's prepetition arrearage by payments through the trustee during the term of the plan, and (v) pays the secured claim (or at least so much of it as is not paid by curing the arrearage) directly and over a period longer than the duration of the plan by maintaining the payments required by the prepetition agreement between the debtor and secured creditor until and only until those payments, in the aggregate, fully amortize the secured claim in accordance with 11 U.S.C. § 1325(a)(5)(B)(ii).
The cases that have sanctioned hybrid plans have uniformly construed § 1322(b)(5) as permitting maintenance of payments on the secured claim alone and as authorizing such payment to continue not only during the term of the plan but also thereafter until the total of such payments gives the creditor its due for the secured portion of its claim. Under this reading, § 1322(b)(5) authorizes more than maintenance of payments on an unimpaired claim; it authorizes modification of the claim. Proponents of this view find support in § 1322(b)(5) itself, where it states that "the plan may . . . provide for the . . . maintenance of payments while the case is pending on any . . . secured claim." 11 U.S.C. § 1322(b)(5) (emphasis added). Under § 506(a), a "secured claim" is not merely the claim that is secured but that claim "to the extent of the value of such creditor's interest in the estate's interest such property [i.e., the property of the estate that is subject to the creditor's lien]." 11 U.S.C. § 506(a).
Second, § 1322(b)(5), no less than § 1322(b)(2), is subject to the requirement in § 1322(d) that payments on the plan be completed in no more than five years. 11 U.S.C. § 1322(d)(1) and (2) (both providing that a plan may not provide for payments over a period that is longer than five years). Court concludes that § 1322(b)(5) does not permit the payment of a modified secured claim over a period longer than the term of the plan. A separate order will enter denying confirmation.
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