Direct Payments to Mortgagee are “Payments under the Plan”

Posted by NCBRC - July 6, 2017

“A chapter 13 debtor’s direct payments to a secured creditor pursuant to a ‘cure and maintain’ plan are ‘payments under the plan’ for purposes of § 1328(a), and a debtor who fails to make such payments is not entitled to a discharge under 11 U.S.C. § 1328(a).” In re Coughlin, No. 11-76202 and In re Sangamaya, No. 12-71109 (Bankr. E.D. N.Y. June 15, 2017).

Coughlin was before the court on the trustee’s motion to vacate the discharge order which was entered after the trustee had filed the Certification of Completed Plan, the Coughlin 3002.1 Notice, and her Final Report and Account, and after the creditor had notified the court that Denis Coughlin was behind on his direct mortgage payments and filed for relief from stay.

The Sangamaya case was before the court on the debtors’ motion to modify which they filed with one week left on their 60-month plan and in which they sought to surrender the property after they defaulted on their direct payments to the mortgagee.

The court began with the threshold question of whether payments on a debt made outside the plan are “payments under the plan” within the meaning of section 1328(a). The court found guidance in Rake v. Wade, 508 U.S. 464 (1993), where the Supreme Court interpreted section 1328(a)’s provision that a court shall grant discharge to a debtor who has made all payments under the plan to the extent that the payments are for debts “provided for by the plan.” The Rake Court found that a debt is “provided for” when the plan “makes provision for,” “deals with,” or “refers to,” the debt. A debt that the debtor has opted to “cure and maintain” under section 1322 (b)(5) is “provided for under the plan.” The Coughlin court agreed with post-Rake courts such as Kessler v. Wilson (In re Kessler), 655 F. App’x 242, 243 (5th Cir. 2016), that have applied similar reasoning to the phrase “payments under the plan” to include payments made directly by the debtor to the creditor on an allowed claim.

Citing cases such as Ransom v. FIA Card Servs., N.A., 562 U.S. 61 (2011), the court found that because a debtor’s plan payments are based on income less expenses, where a debtor deducts certain expenses from that calculation but fails to make the payments that justify the expense, the debtor is “essentially claiming a deduction to which [he] is not entitled.” The court thus concluded that mortgage payments paid directly by the debtor to the mortgagee in a cure and maintain plan are “payments under the plan” which must be completed before the debtor is entitled to discharge under section 1328(a).

Having reached this conclusion, the court turned to its effect on the unique facts of both of the cases before it. In determining whether it should vacate the discharge order entered in Coughlin, the court found it should not. Discharge may be vacated where it was obtained through fraud, and the requesting party did not know of the fraud until after the discharge was granted, or under Rule 60(b)(1) where the discharge order was a result of “mistake, inadvertence, surprise, or excusable neglect.” The court found that, as Mr. Coughlin had not made any false representation as to his plan payments, the justification for vacating its discharge order under section 1328(e) was not present.

Furthermore, the court rejected the trustee’s argument that the discharge fell under Rule 60(b)(1) because the order was issued while a motion for relief from stay was pending. The court reasoned that, prior to the discharge order, the law regarding whether payments made directly to creditors are “payments under the plan,” had not been resolved, nor was the issue of whether discharge may be granted after a creditor has filed a notice under Rule 3002.1(g) that the debtor is behind on payments. Therefore, the court did not make a clerical error or mistake of law in granting discharge. As in United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010), the need for finality in judgments supported a finding that Mr. Coughlin’s discharge order should not be vacated.

In Sangamaya, the issue was whether the debtors should be permitted in the final week of their plan to modify and surrender their property under section 1329(a) after they failed to make their direct payments to the mortgagee. Because the motion was made prior to the expiration of the applicable commitment period, otherwise complied with the requirements for modification, and was not subject to objection by the trustee, the court granted the motion.

CoughlinSangamaya Bankr. ED NY opinion June 2017

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