Modification

Although the debtor’s confirmed chapter 13 plan included a provision for release of the mortgage lien upon payment of the lender’s claim, the bankruptcy court erred in releasing the lien when the claim was for arrearages only, there remained outstanding principle at the end of the plan, and the mortgagee challenged release of the lien prior to discharge. Mortgage Corp. of the South v. Bozeman, No.21-10987 (11th Cir. Jan. 10, 2023).

The chapter 13 debtor’s bankruptcy schedules listed her mortgage debt as $17,393.04 plus $6,817.42 in arrearages. The mortgagee filed a proof of claim for the arrearages only. Though the life of the debt extended beyond the terms of the plan making it amenable to the “cure and maintain” option, the debtor listed the mortgage claim as “a secured claim paid through the plan.” Another provision guaranteed secured creditors’ retention of their liens until all payments under the plan were completed but provided that “[c]reditors must file a proof of claim to be paid.” The bankruptcy court identified the plan as a “full payment” plan under which the debtor’s entire mortgage debt would be considered paid at the end of completion of the plan payments.

The debtor completed her plan after less three years and after paying only the mortgage arrearage in full. With $15,032.73 remaining on the loan principle, the mortgagee sought to foreclose. The debtor responded with a motion for an order releasing the lien. The bankruptcy court found that the debtor had complied with the terms of her confirmed plan and granted the debtor’s discharge including release of the lien. The district court affirmed. The mortgagee appealed to the Eleventh Circuit.

The circuit court framed the issue as a contest between the anti-modification provision of section 1322(b) and the finality of a confirmation order under section 1327.

The court began with section 1322, observing that because the mortgage extended beyond the life of the plan, the “short -term” exception to the anti-modification provision did not apply. Nor did the debtor’s plan fall into the “cure and maintain” avenue of mortgage provision because the plan specifically contemplated either repayment of the entire mortgage early, or repayment only of the arrearages and release of the remaining debt and lien. The court found that when the bankruptcy court deemed the mortgagee’s claim satisfied and the lien released, it modified the mortgagee’s state-established right to full repayment of the original debt at the agreed upon interest rate.

The court found its decision was controlled by Universal Am. Mortg. Co. v. Bateman (In re Bateman), 331 F.3d 821, 822 (11th Cir. 2003). In that case, the confirmed chapter 13 plan provided for only partial payment of mortgage arrears. The court reasoned that the anti-modification provision prohibited modifications to the mortgagee’s rights and therefore the creditor’s “secured claim for arrearage survived the plan, and the creditor retained its right to full satisfaction of its claim.” The Bateman court stated that, “[a]llowing the confirmed plan to extinguish the mortgagee’s rights would deny the effect of the antimodification provision.”

In this case, the court found the bankruptcy court erred by eliminating the mortgagee’s entire claim and lien upon payment only of the arrearages. “Supreme Court and our precedent require us to conclude that declaring a homestead-mortgagee’s lien satisfied before the debt the lien secures is paid in full constitutes an impermissible modification of the homestead-mortgagee’s rights under the antimodification provision.” Because Nobelman v. Am. Savs. Bank, 508 U.S. 324, 332 (1993) emphasized that the anti-modification provision protects the “rights” rather than “claims” of the creditors, it was irrelevant that the debtor may have treated the mortgage in accordance with the claim as filed by the mortgagee.

The conflict arose out of the conflict between the antimodification provision and the res judicata effect of plan confirmation in section 1327. That section provides: “[t]he provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.”

In United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010), the Supreme Court held that the interest of finality requires that parties be held to the terms of a confirmed plan. In that case the bankruptcy court confirmed a plan which discharged the interest on the debtor’s student loan without fulfilling the requisite showing of undue hardship. The Supreme Court found that where the creditor had notice of the plan terms and did not object, the res judicata effect of plan confirmation outweighed the fact that the plan terms were contrary to other requirements of the Code. This is so even if the plan contains provisions that are impermissible under the Code.

The debtor argued that Espinosa abrogated Bateman.

For five reasons, the court here found that Espinosa had no effect on the release of a lien after a confirmed plan erroneously modified the rights of the lienholder.

First, the court found that Espinosa was expressly limited to challenges brought under Federal Rule of Civil Procedure 60(b)(4), seeking relief from judgment.

Second, the procedural posture of Espinosa differed significantly from Bateman. Espinosa involved a creditor coming back six years after the debt was discharged and ten years after plan confirmation to launch a collateral challenge to the discharge. Bateman, on the other hand, involved a challenge to treatment of a claim after plan confirmation but prior to discharge and was not a collateral attack on the debt that was subject to discharge.

The court here, noted that, like the lender in Bateman, the mortgagee “timely objected to and appealed the bankruptcy court’s decision to release its lien.”

Third, the holding in Espinosa relied on whether a particular judgment was “void,” within the meaning of Rule 60(b)(4). The Supreme Court declined to “expand the universe of judgment errors” that would render an order void under the rule.

Fourth, Bateman was not decided on the basis that the plan was illegally confirmed and therefore, as in the case here, Bateman did not involve a collateral attack on the confirmed plan and was not decided on section 1327 finality.

Finally, the court noted that it had confirmed its holding in Bateman in the post-Espinosa case of Dukes v. Suncoast Credit Union (In re Dukes), 909 F.3d 1306, 1331 (11th Cir. 2018).

The court turned to whether the express terms of the debtor’s plan according to which the bankruptcy court released the mortagee’s lien should have been given effect under the finality rule set forth in section 1327. The court found that, under Bateman, the bankruptcy court should not have released the lien, stating that “even though our cases have recognized the importance of finality, they have also said time and again that secured liens survive bankruptcy proceedings.”

In sum, the court stated: “Although MCS did not timely object to the Plan’s confirmation or appeal the discharge of Bozeman’s debt, MCS did oppose Bozeman’s motion to release its lien, and it timely appealed the bankruptcy court’s order granting her motion. And because releasing MCS’s lien before MCS receives full payment would impermissibly modify MCS’s rights, MCS’s lien must survive the bankruptcy proceeding.”

Bozeman 11th Cir Jan 2023