In re Rivera

599 B.R. 335

IN RE: Robert and Margarita RIVERA, Debtors.

Case No. 2:13-bk-20842-MCW

United States Bankruptcy Court, D. Arizona.

Signed March 28, 2019

Entered March 29, 2019

James R. McDonald, Jr., McDonald Law Office, PLLC, Tempe, AZ, for Debtors.

Russell Brown, Phoenix, AZ, pro se.

Rachel Elizabeth Flinn, Phoenix, AZ, for Trustee.

ORDER DENYING TRUSTEE'S MOTION TO DISMISS BANKRUPTCY CASE DUE TO PLAN DEFAULT

Madeleine C. Wanslee, Bankruptcy Judge

Chapter 13 Trustee Russell Brown ("Trustee Brown") filed a Motion to Dismiss ("Motion") this bankruptcy case under 11 U.S.C. § 1307(c)(6) of the Bankruptcy Code.¹ Even though he has received and disbursed all payments that the plan required that his office receive, Trustee Brown argues that Debtors Robert and Margarita Rivera defaulted on a material term of their confirmed plan by not making all their direct post-petition mortgage payments, rendering them ineligible for a discharge under 11 U.S.C. § 1328(a). The Court concludes that Debtors' failure to pay all their direct post-petition mortgage payments is not a failure to complete all payments required under the plan. Having completed all required plan payments and performed all other obligations under the Code and Rules and there are no indicia of wrongdoing, Debtors are now entitled to their Chapter 13 discharge. Accordingly, the Motion is denied.

This matter is a core proceeding which the Court may hear and determine under 28 U.S.C. § 157(b)(2)(A). The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b) and 157(a) and (b).

I. BACKGROUND

Debtors filed this Chapter 13 case on December 4, 2013. Using the mandatory Arizona Model Form Plan they filed an Amended Chapter 13 Plan on July 18, 2014 that proposed to pay varied amounts per month for 39 months to be distributed to their secured, priority and general unsecured creditors ("Amended Plan"). Dkt. No. 39. Debtors' mortgage lender RoundPoint Mortgage was to be paid pre-petition arrears of $ 15,571.89 on the mortgage on a pro rata basis from payments Debtors made to Trustee Brown. Section (c)(4) of the Amended Plan provided "[u]nless stated below, Debtor is to pay post-petition payments direct to the creditor and pre[-]petition arrearages shall be cured through the Trustee." That same section contains a heading titled "Post-Petition Mortgage Payments" with two alternative boxes from which Debtors may select that read " Debtor will pay direct to creditor; or Included in Plan payment. Trustee will pay creditor." Debtors checked the first box obligating them to make direct payments and stated that their monthly post-petition mortgage payments were $ 851.27.²

The Amended Plan was approved on November 10, 2014 through the Stipulated Order Confirming First Amended Chapter 13 Plan ("Confirmation Order"). Dkt. No. 50. Counsel for RoundPoint Mortgage signed off on the Confirmation Order showing its approval "as to form and content." Section (C)(2) of the Confirmation Order concerned RoundPoint Mortgage's claim secured by real property and stated, "Regular post-petition payments will be made directly by the Debtors to the secured creditor."

Debtors later filed an Amended Modified Chapter 13 Plan on July 28, 2016 ("Amended Modified Plan") again using the mandatory Arizona Model Form Plan. Dkt. No. 62. RoundPoint Mortgage's treatment did not change.

On October 28, 2016, in compliance with Rule 3002.1(f), Trustee Brown filed a Notice of Final Cure Payment for Prepetition Arrears on Mortgage Claim indicating that all pre-petition arrears owing to RoundPoint Mortgage had been paid ("First Cure Notice). Dkt. No. 70. The First Cure Notice supplied a history of payments by Trustee Brown to RoundPoint Mortgage and stated that it was filed to "assist the creditor in reconciling the claim." It also directed RoundPoint Mortgage to file a supplement to its proof of claim indicating its agreement with whether the pre-petition default had been cured and whether the post-petition payments were current, along with an itemized statement of any unpaid amounts.³ RoundPoint Mortgage did not file a response to the First Cure Notice.

The Amended Modified Plan was approved without objection on November 28, 2016 through the Stipulated Order Confirming Amended First Modified Chapter 13 Plan ("Final Confirmation Order"), which, among other things, extended the plan duration to 41 months. Dkt. No. 76. As to RoundPoint Mortgage, Section (C)(2) of the Final Confirmation Order again stated that "Regular post-petition payments will be made directly by the Debtors to the secured creditor."

Trustee Brown filed another Notice of Final Cure Payment for Prepetition Arrears on Mortgage Claim on April 17, 2018 ("Final Cure Notice"). Dkt. No. 81. The Final Cure Notice again supplied a history of payments by Trustee Brown to RoundPoint Mortgage and directed it to file a supplement to its proof of claim indicating its agreement with whether the pre-petition default had been cured and whether the post-petition payments were current, along with an itemized statement of any unpaid amount.

On May 1, 2018, the creditor filed the response required by Rule 3002.1(g), Response to Trustee's Notice of Final Cure for Prepetition Arrears on Mortgage Claim , agreeing that the pre-petition default was cured, but stating that the post-petition payments due on and after September 1, 2017 were delinquent. Dkt. No. 82. The Response did not attach the required itemized statement of the unpaid amounts.

According to the Trustee's 2018 Annual Status Report , a mortgage default occurring on September 1, 2017 would be approximately 44 months into the bankruptcy case. Dkt. No. 86. The only payment shown on the 2018 Annual Report was $ 6.22 made on October 13, 2017. However, the plan payments were noted as "current" because Trustee Brown's office had received all scheduled payments.

Thereafter, Trustee Brown filed the Motion, which Debtors did not oppose in writing. However, Debtors' counsel appeared at the hearing and argued that the case should not be dismissed because Debtors made all payments to be made through the Trustee. RoundPoint Mortgage did not file any papers or appear at the hearing, despite receiving notice.

At the hearing, Trustee Brown discussed the recent emergence of decisions in other districts granting similar motions and indicated that his goal was to obtain guidance from the Court on this issue.

II. DISCUSSION AND ANALYSIS

A Chapter 13 discharge is intended to be a "discharge of all debts," barring a few enumerated exceptions. 11 U.S.C. § 1328(a). A "long term" mortgage debt treated under § 1322(b)(5) is a statutory exception to discharge. 11 U.S.C. § 1328(c). Bankruptcy proceedings are intended to grant debtors a "fresh start," Grogan v. Garner , 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), and, as a result, the Bankruptcy Code "is to be construed liberally in favor of debtors," In re Devers , 759 F.2d 751, 754 (9th Cir. 1985). Moreover, in that Chapter 13 is the preferred route for personal bankruptcy, "[a] discharge under Chapter 13 ‘is broader than the discharge received in any other chapter.’ " United Student Aid Funds, Inc. v. Espinosa , 559 U.S. 260, 268, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) (quoting 8 COLLIER ON BANKRUPTCY ¶ 1328.01, p. 1328–5 (rev. 15th ed. 2008)).

To receive a discharge under § 1328(a), Debtors must complete all payments under their Plan.⁴ Trustee Brown's Motion asserts that all post-petition mortgage payments, whether paid directly by Debtors or disbursed through the Plan, constitute "payments under the plan." He also contends that if these direct payments are delinquent, Debtors may not be discharge eligible and that the case may be dismissed under Section 1307(c)(6).⁵ In support of his position, Trustee Brown cites to Matter of Kessler , 655 Fed.App'x 242 (5th Cir. 2016) ; In re Thornton , 572 B.R. 738 (W.D. Mo. 2017) ; In re Gonzales , 532 B.R. 828 (Bankr. Colo. 2015) ; In re Heinzle , 511 B.R. 69 (Bankr. W.D. Tex. 2014) ; and In re Russell , 458 B.R. 731 (Bankr. E.D. Va. 2010).⁶

A few months before Trustee Brown filed his Final Cure Notice, Debtors defaulted on their post-petition mortgage obligation. As noted, paragraph (C)(2) of Debtors' Final Confirmation Order provides that "regular post-petition payments will be made directly by the Debtors to the secured creditor." So, the issue is whether by failing to pay these direct payments, Debtors have also failed to complete all payments required under the Plan and are therefore not entitled to a Chapter 13 discharge.

A. "Payments Under The Plan"⁷ Means Payments Made To The Trustee

Several recent cases dealing with the consequences of direct pay defaults in Chapter 13 cases have caused a split in authority. There is no controlling case law on this matter in the Ninth Circuit. Without clear direction on the matter, this Court is free to consider the pros and cons of each approach and to fashion a result that is consistent with the intent of the Bankruptcy Code.

The majority position is that "payments under the plan" refers to any payment made pursuant to a Chapter 13 plan, regardless of whether a debtor makes such payment directly to the creditor or through the trustee. See Simon v. Finley (In re Finley) , No. AP 18-4011, 2018 WL 4172599, at *2 (Bankr. S.D. Ill. Aug. 28, 2018) (referring to the above cited cases relied upon by Trustee Brown as supporting the majority position). Despite the Finley court's holding, it refused to vacate the discharge under the facts of that case, finding that the trustee's complaint was not well taken because he knew that the debtors' statement about having made all payments was "false" in ample time to object to the entry of discharge.

The minority position is found in In re Gibson , 582 B.R. 15 (Bankr. C.D. Ill. 2018) (debtor's direct payments on a nonmodifiable, nondischargeable residential mortgage loan were not "payments under the plan" that had to be completed for debtor to be entitled to discharge). While...