In re Hanley

575 B.R. 207

IN RE: Brian T. and Anahi E. HANLEY, Debtors.

Case No. 8–11–76700–REG

United States Bankruptcy Court, E.D. New York.

Signed August 11, 2017

Entered August 14, 2017

Richard S. Feinsilver, Carle Place, NY, for Debtors.

Michael J. Macco, Islandia, NY, for Trustee.

MEMORANDUM DECISION

Robert E. Grossman, United States Bankruptcy Judge

The issues before the Court derive from three motions filed near the end of Brian and Anahi Hanleys' ("Hanleys" or "Debtors") chapter 13 bankruptcy case. The Debtors confirmed their Fourth Amended Chapter 13 Plan ("Plan") more than 60 months ago and made all of their Plan payments directly to the chapter 13 trustee ("Trustee"). However, like an increasing number of debtors, the Hanleys failed to remain current on their post-petition mortgage payments (made directly to the mortgagee) during the five-year plan period. Although this default was identified by their mortgagee in a document filed with the Court pursuant to Rule 3002.1 of the Federal Rules of Bankruptcy Procedure ("3002.1 Response") after the expiration of the 60–month plan term, the Debtors' post-petition mortgage defaults began long before the Plan term expired.

As this and other courts have held, a debtor's failure to make post-petition mortgage payments directly to a mortgagee constitutes a default of the plan. See In re Coughlin , 568 B.R. 461, 463 (Bankr. E.D.N.Y. 2017). Upon receipt of the 3002.1 Response, the Trustee made a motion to dismiss and close the Hanleys' case without granting a discharge ("Motion to Dismiss"). In response, the Debtors propose to cure the acknowledged default by asking the Court to approve a loan modification with the mortgagee which would wrap up the post-petition arrears into a modified 40–year mortgage note ("Loan Modification Motion"). The Debtors additionally request that the Court strike the 3002.1 Response, which identifies their default, on the basis that the proposed loan modification would cure those defaults retroactively ("Motion to Strike").

The issue presented in this case is whether a chapter 13 debtor may cure an acknowledged default in his or her confirmed chapter 13 plan through a loan modification approved after the expiration of the 60^th month. The Court finds that while debtors may be able to cure a default in post-petition mortgage payments, the cure must be accomplished by a consensual loan modification approved by the court, or through a modification of the debtor's chapter 13 plan pursuant to 11 U.S.C. § 1329, and either of these options must be approved by the Court prior to the expiration of the chapter 13 plan term .

While it might seem inequitable or draconian to deny the Hanleys their discharge after making Plan payments to the Trustee for five years, the equitable powers of the Court cannot override the statute or the specific provisions of a confirmed chapter 13 plan. In their confirmed Plan, the Hanleys promised to make not only their plan payments to the Trustee but also their post-petition mortgage payments directly to the mortgagee. In exchange, the Hanleys intended to avail themselves of the benefits of the Bankruptcy Code and the chapter 13 discharge. However, the Hanleys failed to uphold their end of the bargain by failing to comply with the stated terms of the confirmed Plan. Because the Hanleys failed to obtain court approval of a consensual loan modification or seek modification of their confirmed Plan before the expiration of the 60^th month, they are unable to cure the plan defaults.

Therefore, the Court will grant the Motion to Dismiss, deny the Loan Modification Motion, and deny the Motion to Strike.

FACTS AND PROCEDURAL HISORY

The Debtors filed a chapter 13 petition on September 21, 2011. The Debtors' Fourth Amended Plan ("the Plan") was confirmed on February 17, 2012. In addition to providing for monthly plan payments ranging from $300 to $615 for 60 months, the Plan also states that:

DEBTORS ARE TO REMIT ALL POST PETITION MORTGAGE PAYMENTS ON FIRST MORTGAGE TO BAC HOME LOANS OUTSIDE THE PLAN.

(Dkt. 37) (emphasis in original).

The Debtors' schedules reflect that they had approximately $116,000 in unsecured debt on the filing date, largely credit cards, and the Plan proposes to pay unsecured creditors not less than 2%. The Plan further contemplates avoiding a second mortgage lien encumbering the Debtors' primary residence. The Debtors commenced an adversary proceeding in September of 2011, and default judgement was subsequently entered against Bank of America Home Loans deeming the second mortgage claim to be allowed as a non-priority general unsecured claim, and providing that the second mortgage lien would be voided upon the issuance of a chapter 13 discharge. (Adv. Proc. No. 11–9398 ).¹

After the Debtors completed their plan payments to the Trustee, on November 4, 2016, the Trustee issued a Notice of Final Cure Mortgage Payment pursuant to Federal Rules of Bankruptcy Procedure Rule 3002.1 ("3002.1 Notice"). Nationstar Mortgage LLC, as assignee of BAC Home Loans² ("Nationstar" or "Bank"), timely responded to the 3002.1 Notice on November 23, 2016. ("3002.1 Response"). The 3002.1 Response acknowledged that the Debtors had cured all pre-petition mortgage arrears, but advised that the Debtors were not current with post-petition mortgage payments consistent with § 1322(b)(5). Id. The 3002.1 Response notes that the Debtors were due for the April 1, 2015 through the November 1, 2016 payments indicating that the Debtors owed $52,319.84 in post-petition mortgage arrears. Id.

The Motions and Parties' Arguments

On December 2, 2016, based upon the 3002.1 Response showing the default in post-petition mortgage payments, the Trustee filed the Motion to Dismiss (Dkt. 58). The Debtors filed opposition on December 19, 2016 arguing that any default in post-petition mortgage payments was cured by a trial loan modification, approved in May 2016, pursuant to which they have been making payments since June 2016 (Dkt. 59). Thus, they argue, the 3002.1 Response showing post-petition defaults was filed in error. The Trustee replied in support of his Motion to Dismiss stating that the Debtors' 60–month Plan had expired,³ and if a trial modification had been entered into the Debtors would have had to modify their Plan. (Dkt. 60). The Trustee also asserted that the Court no longer has jurisdiction to approve a motion to modify the Plan because the 60 months has run. Id. A hearing on the Motion to Dismiss was held on December 22, 2016 at which hearing Debtors' counsel acknowledged the default in post-petition mortgage payments, and argued that the loan modification was intended to cure the default. The hearing was adjourned to permit the Debtors to seek affirmative relief from the Court to cure the default.

First, on December 21, 2016, the Debtors filed the Motion to Strike the 3002.1 Response. (Dkt. 61). In the Motion to Strike, the Debtors argue that they have completed all payments contemplated by the Plan. Id. They argue that they have been remitting payments to Nationstar pursuant to the trial modification, and are awaiting a final determination on a permanent loan modification. Id. The Debtors argue that because of the trial modification, any post-petition defaults were cured and the information that Nationstar remitted in its 3002.1 Response was erroneous. Id. The Debtors request that the Court strike the 3002.1 Response and issue the Debtors a discharge.

Next, on December 29, 2016, the Debtors filed the Loan Modification Motion. (Dkt. 62). In support of the Loan Modification Motion, the Debtors attached a final loan modification approval letter and agreement, dated August 2, 2016, based on a satisfactory trial modification period. ("Approval Letter") (Dkt. 62 Exhibit A). The Approval Letter states that it was to be returned to Nationstar on or before August 12, 2016 with the attached agreement signed by both Debtors. Id. The Loan Modification Motion asks the Court to approve the loan modification nunc pro tunc to August 1, 2016, which they argue would cure the stated default on the post-petition mortgage payments before the expiration of their 60–month Plan. Id.

Nationstar filed an Affirmation in Opposition addressing both the Loan Modification Motion and the Motion to Strike. (Dkt. 65). In its Opposition, Nationstar argues that the proposed loan modification was neither signed nor returned to Nationstar by the August 12, 2016 deadline, and that Nationstar had subsequently declined the modification as of October 14, 2016. (Dkt. 65, Exhibit A). Therefore, Nationstar argues that any payments received after August 12, 2016 were applied to the original loan terms, and not to the proposed modified loan. Id. Nationstar maintains that its submission of the 3002.1 Response was not erroneous and without proof that the Debtors' post-petition mortgage payments were made the Motion to Strike should be denied. Id.

A hearing on the Motion to Strike and the Loan Modification Motion was held on February 15, 2017 and adjourned to February 23, 2017 with the Motion to Dismiss. The motions were further adjourned to April 27, 2017 to allow the parties time to resolve the dispute. Absent any consensual resolution of the issues presented, the Court took the three motions under submission.

DISCUSSION

The Bank does not consent to the relief sought by the Debtors. Nor does the Bank agree that the parties reached a final agreement to modify the mortgage. The Debtors are requesting the Court enter orders that would forgive the acknowledged default of their Plan and force the Bank into a deal they do not agree to. If granted the relief they seek, the Debtors ask the Court to deny the Motion to Dismiss and grant them a discharge of significant unsecured debt.

The record is clear that: under the terms of the confirmed Plan the Debtors are required to make all post-petition mortgage payments directly to the Bank; the Debtors did not obtain Court approval of the alleged loan modification; nor have the...