In re Espanol

509 B.R. 422

In re Jose M. ESPANOL, and Luz E. Espanol, Debtors.

No. 13–21318 (ASD).

United States Bankruptcy Court, D. Connecticut.

Signed April 22, 2014.

Ellery E. Plotkin, Stamford, CT, for Debtors.

CONSOLIDATED MEMORANDUM AND ORDER (I) DENYING CONFIRMATION OF DEBTORS' FIRST AMENDED CHAPTER 13 PLAN, (II) OVERRULING DEBTORS' OBJECTION TO CLAIM NUMBER 8, AND (III) DENYING WELLS FARGO BANK'S MOTION FOR SUMMARY JUDGMENT

ALBERT S. DABROWSKI, Chief Judge.

I. INTRODUCTION

The present matter calls upon the Court to determine whether a “due on sale clause” ¹ in a mortgage covering the Debtors' principal residence triggered by a pre-petition default can be modified pursuant to a Chapter 13 Plan. In this bankruptcy case that issue is presented in a somewhat convoluted fashion through the Debtors' request for confirmation of their First Amended Chapter 13 Plan, a related Debtors' Objection to Claim, and in a Motion for Summary Judgment filed by the mortgagee.

For the reasons discussed hereinafter, confirmation of the Debtors' First Amended Chapter 13 Plan shall be denied, the Objection to Claim overruled, and the Motion for Summary Judgment denied.

II. PROCEDURAL BACKGROUND

On June 27, 2013, the Debtors, Jose M. and Luz E. Espanol (hereinafter, the “Debtors”) commenced the instant bankruptcy case through the filing of a petition under Chapter 13 of the United States Bankruptcy Code. On August 14, 2013, the Debtors filed their First Amended Chapter 13 Plan (hereinafter, the “Plan”), ECF No. 22.² In relevant part, the Plan calls for the Debtors to make monthly payments of $1,300.00 for 60 months, with the vast majority of the payments intended to be applied to the described $64,708.50 ³ arrearage on a mortgage on the Debtors' residence located at 93 Lewis Hill Road, Coventry, Connecticut (hereinafter, the “Property”) held by Wells Fargo Bank, N.A., successor by merger to Wells Fargo Bank Southwest, N.A., f/k/a Wachovia Mortgage, FSB, f/k/a World Savings Bank, FSB (hereinafter, the “Movant” or “Wells Fargo”).

On September 6, 2013, Wells Fargo filed an Objection to the Debtors' Chapter 13 Plan (hereinafter, the “Objection to Confirmation”), ECF No. 32, objecting to confirmation of the Plan on three grounds, only one of which is necessary to the Court's consideration and determination of the matter presently before the Court. In its Objection to Confirmation Wells Fargo argues that Bankruptcy Code § 1325(a)(1), together with § 1322(b)(2), bar confirmation of a debtor's plan where, as here, the Debtors are seeking to modify its rights as the holder of a mortgage secured only by a security interest in real property that is the Debtors' principal residence. The modification the Debtors are seeking is to bar Wells Fargo from enforcing its rights under a “due on sale clause.”

In response to the Objection to Confirmation, on October 23, 2014, the Debtors filed Debtors' Response to Well Fargo Bank, NA's Objection to the Debtors' Chapter 13 Plan, ECF No. 76 (hereinafter, the “Debtors' Response”). In relevant part, the Debtors assert that they had not defaulted on the “due on sale clause” because the language of the mortgage made it conditional, not automatic; because Wells Fargo failed to give notice of acceleration as required by the mortgage prior to asserting a default; and that Wells Fargo waived its right to claim a default under the “due on sale clause” because it waited too long to do so.

On October 25, 2013, the parties entered into a Pretrial Order which set a trial date of February 4, 2014 for the Court's consideration of confirmation of the Plan but also agreed upon a deadline for Wells Fargo to file a motion for summary judgment. Thereafter the Debtors filed the Objection to Proof of Claim Number 8 (hereinafter, the “Claim Objection”), see fn.3, supra, to which Wells Fargo responded by filing its Response to Debtors' Objection to Claim No. 8 (hereinafter, the “Claim Objection Response”), ECF No. 86. In its Claim Objection, the Debtors restated their argument that the “due on sale clause” is unenforceable as to the Debtors and that they are entitled to cure the default on the mortgage by paying the arrears on the mortgage through and over the life of the Plan.

Thereafter, on January 2, 2014, Wells Fargo filed a Motion for Summary Judgment, ECF No. 89,⁴ a Memorandum of Law in Support of Wells Fargo's Motion for Summary Judgment, ECF No. 89–2 (hereinafter, “Memorandum of Law”), Wells Fargo's Local Rule 56(a)1 Statement (hereinafter, the “Rule 56(a)(1) Statement”), ECF No. 89–3,⁵ and an Appendix, ECF No. 89–4 (with, inter alia, Declaration of Clifford Esher, attached). As a consequence, a First Amended Pretrial Order was entered by agreement of the parties giving the Debtors' until February 13, 2014 to respond to the Motion for Summary Judgment. Notwithstanding this agreement the Debtors have not done so. ⁶

The Court, having considered the Debtors' Amended Plan, the Objection to Confirmation and the Debtors' Response, the Claim Objection and Claim Objection Response, and the Motion for Summary Judgment (pursuant to Fed.R.Civ.P. 56, ⁷ made applicable to this proceeding by Fed. R. Bank. P. 7056), as well as the files and records of the case, is positioned to rule at this time on each of the outstanding matters, all of which are dependent upon the Court's determination as to whether the Debtors defaulted or violated a “due on sale clause” and, if so, whether it can be waived through confirmation of their Plan.

III. FACTUAL BACKGROUND

The Court's recitation of the background of this case and facts related to the Plan, the Claim Objection and the Motion for Summary Judgment as set forth hereinafter are substantially derived from the Movant's Rule 56(a)1 Statement in which Wells Fargo has set forth a concise statement of each material fact as to which it contends there is no genuine issue. Each statement of fact in the Rule 56(a)1 Statement is supported by a citation to an affidavit and documentary evidence represented as admissible at trial.

As noted, the Debtors have neither filed a response to the Motion for Summary Judgment nor a Rule 56(a)2 Statement.⁸ Nevertheless, the Court has taken into account in making its findings of fact the material assertions contained in the Rule 56(a)2 Statement, and all of the relevant pleadings of record, including, inter alia, the Debtors' Amended Plan, the Debtors' Response to the Objection to Confirmation and their Claim Objection.

1. The Debtors' property was conveyed to them as joint tenants on January 5, 1989.

2. On May 4, 1999, the Debtors quit-claimed an undivided 1% interest in the Property to themselves, and their son, Moises Espanol (hereinafter, “Moises”), and unto the survivor of them, and unto the heirs and assigns of the survivor of them.

3. On May 21, 1999, Debtors quit-claimed the balance of their interest in the Property to Moises.

4. On May 24, 1999, Moises signed an “Adjustable Rate Mortgage Note” with World Savings Bank, FSB (hereinafter, the “Note”), in which he promised to pay to “World Savings Bank, a Federal Savings Bank, ... Its Successors and/or Assignees, or anyone to whom this Note is transferred” the Principal sum of $154,000.00, plus interest, in installments as set forth in the Note.

5. To secure the obligation to pay the Note, on May 24, 1999, Moises entered into an open-end mortgage (hereinafter, the “Mortgage”) in favor of “World Savings Bank, A Federal Savings Bank ..., Its Successors or Assignees....”

6. The Mortgage was duly recorded in the official public records of the Coventry land records.

7. The Mortgage contains in paragraph 26, terms providing for acceleration of payment upon the conveyance of the Property, commonly referred to as a “due-on-sale clause” providing in pertinent part:

Acceleration of Payment of Sums Secured. Lender may, at its option, require immediate payment in full of all Sums Secured by this Security Instrument if all or any part of the Property, or if any right in the Property, is sold or transferred without Lender's prior written permission....

If Lender exercises the option to require immediate payment in full Lender will give me notice of acceleration. If I fail to pay all sums Secured by this Security Instrument immediately, Lender may then or thereafter invoke any remedies permitted by this Security Instrument without further notice to or demand on me.

8. Paragraph 10 of the Mortgage provides a “no future waiver” clause as follows:

Even if Lender does not exercise or enforce any of its rights under this Security Instrument or under the law, Lender will still have all of those rights and may exercise and enforce them in the future.

9. On June 14, 1999, Moises quit claimed all of his right, title and interest in the Property to the Debtors.⁹

10. On December 5, 2012, in World Savings Bank, FSB v. Espanol, Moises, et al,

Case No. TTD–CV–08–5002455 (hereinafter, the “Foreclosure Proceeding”), the Connecticut Superior Court for the Judicial District of Tolland at Rockville entered a Judgment of Foreclosure by Sale against Moises and the Debtors and set a sale date of March 9, 2013 for the Property. The debt was found to be $201,755.97, the fair market value $255,000, the appraiser's fee $640, the title search fee $225, and the attorney's fees $8,500.

11. In the Foreclosure Proceeding, filed because monthly mortgage payments were not being made, the Superior Court found that the Debtors “do not have standing to be heard and do not have standing to contest the debt.”

IV. DISCUSSION

A. Whether the “Due on Sale Clause” is Subject to Modification or Remains Enforceable.

It is transparently obvious that the Debtors, on May 21, 1999, transferred the Property to Moises for the purpose of allowing him to obtain a mortgage on the Property for which it can reasonably be surmised, the Debtors were ineligible. That is established by the time line set forth above, whereby within a period of little more than one month, the...