In re McGrath

625 B.R. 774

IN RE: Sandra Joyce MCGRATH and Dale Allen Rogers, Debtors.

Case No. 20-11513-ta13

United States Bankruptcy Court, D. New Mexico.

Signed December 23, 2020

Mark Daniel John Regazzi, Mark D. Regazzi, Albuquerque, NM, for Debtor.

OPINION

Hon. David T. Thuma, United States Bankruptcy Judge

Before the Court is a bank's motion for relief from stay so it can complete the foreclosure sale of Debtors' house. The bank argues a number of grounds in support of the motion, including that Debtors' lack standing to object; lack of adequate protection; other "cause," including the inability to confirm a plan; lack of equity/not necessary to a reorganization; and that this case is part of a scheme to hinder or delay the bank. After a trial on the merits, the Court finds that the stay motion should be denied, subject to the condition set out below.

1. Facts.¹

The Court finds:

Debtors live in Capulin, New Mexico, an unincorporated hamlet in the northeast corner of the state. Mr. Rogers works on a nearby ranch; Ms. McGrath stays home and cares for her young nephews. The family lives in a 1996 Fleetwood mobile home on a residential lot, both of which they own (together, the "House").

In 2010, Debtors borrowed $44,372.04 at 7.75% interest from InBank. The loan was secured by a first mortgage on the House. Debtors were required to make 59 payments of $417.66, followed by a "balloon" payment of about $35,220.05. In March 2014, Debtors and the bank renewed the loan, increasing the principal to $55,949.77 and extending the balloon payment date until March 2019. The House was appraised in 2014, presumably in conjunction with the loan modification, for $74,000.

Debtors are raising two young nephews, born in 2015 and 2018. The younger boy was exposed to methamphetamine in utero.² Both are special needs children and require a lot of care and attention. Debtors are seeking to adopt the boys and have made improvements to the House to accommodate them. The older boy attends special needs classes at a school in a nearby town.

Debtors made their monthly payments on the bank loan but could not make the balloon payment in March 2019. For reasons not in the record, the bank declined to renew the loan. In June 2019 the bank brought a foreclosure action. The state court entered a default judgment on September 23, 2019, for $63,329.48, plus post-judgment interest at 19.75%,³ and ordered the House sold at a foreclosure sale.

Debtors filed a chapter 13 case on October 28, 2019, shortly before the scheduled foreclosure sale. The case was dismissed in June 2020 because Debtors did not file an operating report or produce two state tax returns as ordered by the Court. Debtors filed this chapter 13 case on July 29, 2020. By then Debtors owed the bank $82,577.43.

The House is insured through a policy bought by the bank. It is not clear whether the policy insures Debtor's ownership interest in the House or only the bank's mortgagee interest.

Debtors filed a plan on July 29, 2020, proposing monthly payments of $925 for 36 months. They are current on their plan payments.

The automatic stay terminated in this case on August 28, 2020, as to Debtors, but not with respect to estate property, including the House. The bank filed the stay relief motion on October 8, 2020.

There is conflicting and unreliable evidence about the value of the House on the petition date, ranging from $45,000 to $110,000. There is no evidence, however, that the House is declining in value.

2. Standing.

The bank argues that because the stay was terminated as to Debtors, they lack standing to object to the stay relief motion. This weak argument fails. The Court discussed principles of standing in In re Flying Star Cafes, Inc. , 568 B.R. 129, 133-34 (Bankr. D.N.M. 2017). They can be summarized as follows:

• Article III standing. Article III restricts federal court adjudication to actual cases or controversies. State of Utah v. Babbitt , 137 F.3d 1193, 1201 (10th Cir. 1998). To satisfy Article III's standing requirements, a plaintiff must show an injury in fact, causation, and redressability. Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc. , 528 U.S. 167, 180–81, 120 S.Ct. 693, 145 L.Ed.2d 610 (2000), citing Lujan v. Defenders of Wildlife , 504 U.S. 555, 560–61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992).

• Prudential Standing. Prudential standing "embodies judicially self-imposed limits on the exercise of federal jurisdiction." The Wilderness Soc. v. Kane County, Utah , 632 F.3d 1162, 1168 (10th Cir. 2011). The prudential standing doctrine encompasses various limitations, including "the general prohibition on a litigant's raising another person's legal rights." Id., quoting Allen v. Wright, 468 U.S. 737, 751, 104 S.Ct. 3315, 82 L.Ed.2d 556 (1984). "[T]he plaintiff generally must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties." Id., quoting Warth v. Seldin, 422 U.S. 490, 499, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975). Prudential standing is an issue of subject matter jurisdiction. Wilderness Soc., 632 F.3d at 1168 ; Deutsche bank Nat. Trust Co. v. F.D.I.C. , 717 F.3d 189, 194 n.4 (D.C. Cir. 2013) (prudential standing is threshold jurisdictional concept).

• Statutory Standing. Sometimes the right to bring a cause of action is conferred by statute. In those cases, prudential standing concepts, which are judgemade, take a back seat. See, e.g.,Lexmark Intern. Inc. v. Static Control Components, Inc. , 572 U.S. 118, 134 S.Ct. 1377, 188 L.Ed.2d 392 (2014) ("we do not ask whether in our judgment Congress should have authorized [plaintiff's] suit, but whether Congress in fact did so.") (emphasis in original).

Applying these principles, Debtors clearly have standing to resist the bank's stay motion. There is an actual case or controversy. They are asserting their own rights, i.e., the right to try to keep the House. The House is necessary to their reorganization (see below). Debtors' standing is not prohibited by any statute. While the trustee clearly has standing also, there is no question that Debtors are the parties most affected by the outcome of the bank's stay motion.

3. Lack of Adequate Protection (§ 362(d)(1)).⁴

A secured creditor

lacks adequate protection if the value of its collateral is declining as a result of the stay. It must, therefore, prove this decline in value—or the threat of a decline [e.g., the failure to maintain property insurance or keep the property in a good repair]—in order to establish a prima facie case.

In re Elmira Litho , Inc. , 174 B.R. 892, 902 (Bankr. S.D.N.Y. 1994) (citing cases).

There is no evidence that the House is declining in value. Ms. McGrath testified that the House's value is increasing, due to Debtors' ongoing efforts to maintain and improve it. The bank's witness opined that the House had a low value, but not that its value had declined postpetition.

The uncontradicted evidence is that Debtors are not insuring the House. Normally that would be a significant problem, since providing insurance is a typical and important obligation of a residential mortgagor. Here, however, the loan has matured and the loan documents have been superseded by the foreclosure judgement. Debtors' duty to provide insurance to the bank therefore has been extinguished.

The Court concludes that the bank did not present a prima facie case for relief under § 362(d)(1).

4. Other "Cause" (§ 362(d)(1)).

A. Lack of Good Faith.

The bank asks for stay relief based on Debtors' alleged lack of good faith, citing § 362(c)(3)(C). This argument has no merit; the subsection deals with the Court's ability to extend the stay on a second filing, not a creditor's right to relief from the stay. In any event, the Court finds that Debtors filed this case in good faith.

B. Inability to Confirm a Plan. Relying on § 1322(b)(2), the bank argues that Debtors cannot confirm a plan that allows Debtors to keep the House, so stay relief is appropriate. Section 1322(b)(2) provides:

(b) Subject to subsections (a) and (c) of this section, the plan may—

...

(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims[.]

The bank's argument overlooks § 1322(c), which states:

(c) Notwithstanding subsection (b)(2) and applicable nonbankruptcy law—

...

(2) in a case in which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor's principal residence is due before the date on which the final payment under the plan is due, the plan may provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title.

Finally, Section 1325(a) provides in part that the court shall confirm a plan if:

(5) with respect to each allowed secured claim provided for by the plan—

...

(B)(i) the plan provides that—

(I) the holder of such claim retain the lien securing such claim until the earlier of—

(aa) the payment of the underlying debt...; or

(bb) discharge...; and

(II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained...;

(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and

(iii) if—

(I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts ...

Together, the sections provide an exception to the general rule that chapter 13 debtors cannot modify the terms of a residential mortgage. The exception only applies, however, if the mortgage matures before the end of the plan term. That is the case here.

The bank construes § 1325(a) to require equal periodic payments under the plan sufficient to pay its...