Debtor and Trustee Making Duplicate Mortgage Payments

Posted by NCBRC - June 3, 2020

Where both the debtor and the trustee paid down the debtor’s mortgage and arrearage, the court did not err in finding that the resulting overpayment should go to the trustee. White v. Regions Bank, No. 19-130 (E.D. Tenn. Feb. 24, 2020).

The debtor’s original chapter 13 plan provided for him to make mortgage payments outside the plan. After he fell behind on those payments, he modified his plan to provide for mortgage and mortgage arrearages to be paid through the plan. The debtor completed his plan, the trustee filed her final report, and the bankruptcy court entered an order of discharge on November 15, 2017. Soon thereafter it came to light that the trustee had failed to pay the mortgage arrearage. Citing F.R.C.P. 60(b) and her own error, the trustee withdrew her notice of final payment and moved to reopen to administer additional assets. The case continued under the plan with the trustee making payments toward the mortgage and arrearage.

At the same time, however, the bank sent collection letters to the debtor demanding payment of the mortgage and arrearage. The debtor, therefore, resumed his payments outside the plan. As a result, with both the debtor and the trustee paying mortgage and arrearage, the bank found itself with excess money on his hands. It sought instruction from the court as to where to refund the overpayment. In an order dated April 18, 2019, the bankruptcy court withdrew its earlier order of discharge and ordered the bank to submit the overpayment to the trustee for application to the remaining balance on the arrearage with any excess going to the debtor. The debtor appealed.

In the district court, the debtor argued that the bankruptcy court lacked the authority to withdraw its first discharge order. F.R.C.P. 60(b) permits a court to withdraw an order in the event of an error, but requires that the action be taken upon a motion made “no more than a year after entry of the judgment or order.” The court found that even though the bankruptcy court did not specify that its November, 2017, discharge order was withdrawn until it issued its order of April 18, 2019, the actual withdrawal of the discharge order took place in December, 2017, when it granted the trustee’s motion to withdraw her final report and reopen the case. Therefore, the bankruptcy court’s action was timely and effective.

The debtor next argued that the bank should have been ordered to remit the overpayment to him with interest. The district court disagreed finding that the debtor failed to point to any authority to support his argument. The court went on to find that while the bankruptcy court could have ordered the bank to return the overpayment to the debtor, it did not err in electing to order the funds be returned to the trustee. The court found that, as a practical matter, it was more efficient for the bank to remit the funds to the trustee who could then apply them to the arrearage and give any excess to the debtor.

The court affirmed. The debtor has filed an appeal to the Sixth Circuit, No. 20-5355.

White ED Tenn Feb 2020



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