Debtor May Not Modify to Surrender Residence after 60 Month Plan Complete

Posted by NCBRC - June 7, 2019

Debtors were precluded from modifying their plan to surrender their residence where the surrender was a “payment” under the plan and was beyond the sixty-month plan period. Derham-Burk v. Mrdutt (In re Mrdutt), No. 17-1256 (B.A.P. 9th Cir. May 6, 2019).

When chapter 13 debtors, Christina and David Mrdutt, filed their bankruptcy petition, Wells Fargo held two liens on their residence. The first lien was under-secured and the second wholly unsecured. The Mrdutts were also almost $65,000 in arrears on their mortgage. They proposed a plan providing for curing their mortgage arrearage either after loan modification or as proposed in a later plan modification. In the meantime, the Mrdutts agreed to maintain direct mortgage payments to Wells Fargo outside the plan.

The bankruptcy court confirmed their plan while their request to modify the primary mortgage was still pending with Wells Fargo. The Mrdutts made all 60 of their plan payments, but failed to maintain necessary direct payments to Wells Fargo. Ms. Mrdutt died of cancer during the bankruptcy, and Wells Fargo, being Wells Fargo, refused to discuss loan modification with Mr. Mrdutt because only Ms Mrdutt’s name was on the loan. Wells Fargo never approved a loan modification, and the mortgage arrears were not cured either through the plan or outside it.

The trustee moved to close the case without discharge because the Mrdutts failed to deal with the mortgage arrears and mortgage payments. Seven months after making the final plan payment, Mr. Mrdutt sought to modify the plan to surrender the property. The bankruptcy court found the motion was timely and allowed the modification.

On the trustee’s appeal, the bankruptcy appellate panel for the Ninth Circuit addressed whether the motion to modify, filed after payment of the final plan contribution, was timely under section 1329(a). That section provides that the bankruptcy court may modify a plan “[a]t any time after confirmation of the plan, but before the completion of payments under such plan[.]” The trustee argued that the “completion of payments” contemplated by section 1329(a) does not include payments made outside the plan.

The panel found that when a plan provides for direct payments outside the plan, those payments are “payments under such plan.” The panel extrapolated from the majority of court decisions finding that the language in section 1328(a), entitling a debtor to discharge upon completion of “all payments under the plan” and releasing the debtor from all debts “provided for by the plan,” is not limited to debts paid through the trustee. In the modification context, the panel found that a debtor who has made all payments to the trustee but not all direct payments to the creditor provided for in the plan, has not completed all “payments under such plan” and is therefore not precluded from modifying the plan under section 1329(a).

The panel further noted that even if it adopted the trustee’s narrower reading of section 1329(a), it would find that the Mrdutts did not make all payments under the plan because the plan provided for payment of the arrearages in some amount either after loan modification or plan modification. Even though that amount was never quantified, the plan contemplated payments to the trustee to cover that arrearage.

Having found the motion to modify timely, the panel went on to address the actual proposed modification under section 1329(c). In this analysis, Mr. Mrdutt did not fare so well. The panel found that surrender of the residence was a “payment” and that payments beyond sixty months were prohibited by sections 1322(d), 1325(b)(4), and 1329(c). Section 1329(c) specifically prohibits plan modifications that would include payments beyond the sixty-month plan period. The panel also questioned whether such modification would be appropriate in this case notwithstanding the time constraint. Here, the Mrdutts plan made no payments to unsecured creditors and the $100,000 in payments that should have been made outside the plan were never paid. The panel found this to suggest a lack of good faith.

In conclusion, the panel expressed sympathy about the sad facts of Mr. Mrdutt’s situation and the unhelpfulness of Wells Fargo’s approach to the case, but reversed nonetheless.

Mrdutt BAP 9th May 2019


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