IN RE: JOSEPH WARREN  CONNIE SUE WARREN  CASE NO.  99-61118 ORDER motion to avoid the second mortgage lien

 

UNITED STATES BANKRUPTCY COURT

     EASTERN DISTRICT OF KENTUCKY

      CORBIN

IN RE:

JOSEPH WARREN

CONNIE SUE WARREN                                                            CASE NO.  99-61118

DEBTORS

        ORDER

In accordance with the memorandum opinion this day entered, IT IS HEREBY ORDERED that the debtors’ motion to avoid the second mortgage lien of The Money Store except to the extent of $22,000 is SUSTAINED.

Dated:

By the court –

 

__________________________

JOSEPH M. SCOTT, JR.

U. S. BANKRUPTCY JUDGE

 

 

 

Copies to:

 

Marcia A. Smith, Esq.

Alan J. Ullman, Esq.

Beverly M. Burden, Esq.


        UNITED STATES BANKRUPTCY COURT

     EASTERN DISTRICT OF KENTUCKY

      CORBIN

 

 

IN RE:

 

JOSEPH WARREN

CONNIE SUE WARREN                                                            CASE NO.  99-61118

 

DEBTORS

 

 

  MEMORANDUM OPINION

This case is before the court on motion of the debtors to partially avoid the second mortgage lien of The Money Store (“TMS”) in the debtors’ principle place of residence.  (Document # 16).  TMS objected to the motion (Document # 18), the parties have briefed the issues presented (Documents # 21 & 27), and the matter is submitted for decision (Document # 30).

FINDINGS OF FACT:

On November 15, 1999 the debtors filed a petition in this court for relief under chapter 13 of the U. S. Bankruptcy Code.  On that same date they filed their chapter 13 Plan (Document # 4) and a Certificate of Service of the Plan (Document # 5).  The Certificate of Service indicates TMS was served with a copy of the Plan at the address of its counsel in this case– Lerner, Sampson & Rothfuss of Cincinnati, Ohio– on November 12, 1999, presumably the date the petition was mailed for filing.


TMS is referred to in the Statement of Financial Affairs and three times in Schedules.  The reference in the Statement of Financial Affairs is to a foreclosure suit brought by TMS against the debtors in Pulaski Circuit Court.  The first reference in Schedules is Schedule A (Real Property) as one of two secured creditors on a “House & 1 acre.”  TMS is listed as the second secured creditor with a claim of $23,000 in the property which is valued by the debtors at $60,000.  Kentucky Housing Corp. with a claim of $38,000 is listed as the first.

 The next mention of TMS is in Schedule D (Creditors Holding Secured Claims) as second mortgage holder on “house & 1 acre” with a secured claim in the amount of $22,000 and unsecured in the amount of $1,000.  In that same Schedule, Kentucky Housing Corp. is listed as first mortgage holder with a secured claim of $38,000 in the property which is valued by the debtors at $60,000.  Schedule D offers as “Additional information” regarding the debt to Kentucky Housing Corp. that the debt of $38,000 will be paid outside the Plan and regarding the debt to TMS that the debtors “Will pay debt $22,000 through the plan for 2nd mortgage on home.”

The third mention of TMS is in the statement of intention regarding the debt owed to TMS on “House & 1 acre” which states that $22,000 will be paid through the Plan for the second mortgage.  Kentucky Housing Corp. is to be paid in full in the amount of $38,000 outside  the Plan.[1]

The chapter 13 Plan, also filed on November 15, 1999, provides in Paragraph (5):


     The holder of any allowed secured claim provided for by the plan shall retain a lien securing such claim until the amount for which the claim is allowed as secured is paid in full, 11 U.S.C. 1325(A)(5)(B), 1327(c).  The following secured debts shall be paid in full only to the extent of the value of the collateral as follows, and 8% post-petition interest shall be paid on said debt...THE MONEY STORE, 2ND MORTGAGE ON HOME, (SECURED PORTION), $22,000.

 

Counsel for the debtor certified that a copy of the Plan was mailed on November 12, 1999 to each of the creditors at the addresses shown in the schedules accompanying the Petition.  For TMS that would have been to the address of its counsel in this case, in other words, to Cincinnati, Ohio.

On November 15, 1999 creditors including TMS were given notice of the filing, Meeting of Creditors, and deadlines.  (Document # 6).  Dates given in the Notice included the Meeting of Creditors on December 16, 1999, the deadline of March 15, 2000 for filing a proof of claim, the Confirmation Hearing on February 10, 2000.  Notice was given to TMS at the address of its counsel in this case. 

On December 14, 1999 TMS, with an address in Raleigh, North Carolina, filed a proof of claim as a secured claim in the amount of $31,134.38, including arrearage and other charges in the amount of $4,201.72, on real estate valued at $42,000.  (Claim # 4).  There were no attachments to the claim.  On December 15, 1999 TMS filed an amended proof of claim as a secured claim in the amount of $25,150.65, including arrearage and other charges in the amount of $4,201.72, on real estate valued at $42,000.  (Claim # 5).  The only attachment to the amended proof of claim is a worksheet detailing how TMS arrived at the totals.  Neither Proof of Claim identifies the real property claimed as secured.

On December 16, 1999 the Section 341 hearing was conducted.  No creditors were in attendance.  (See Document # 9.)


On February 2, 2000 the chapter 13 trustee filed her Report and Recommendation as to confirmation of the Plan stating that confirmation was recommended and that the claim of TMS would be treated as “Unsecured - Security Agreement not attached; collateral not described.”  (Document # 10).  Service of the Report and Recommendation was made upon TMS at the address given on its Proofs of Claim, in other words, to Raleigh, NC.

On February 15, 2000 an order was entered confirming the Plan.  (Document # 12).  No objection to confirmation of the Plan was filed by TMS, or any other creditor.  No party, including TMS, appealed the court’s order confirming the Plan.

 On February 17, 2000 the debtors filed a proof of claim on behalf of TMS as a secured claim in the amount of $25,150.65 on real estate.  Attached to the claim are copies of a Note and Mortgage dated September 10, 1997 securing property located at 3166 Cabin Hollow Road, Somerset, Kentucky.  (Claim # 8).  On February 18, 2000 the court gave notice to TMS of the filing of a proof of claim on its behalf in the amount of $25,150.65.  (Document # 13). 

Nearly two months passed and on April 10, 2000 TMS filed an amended proof of claim, attaching copies of a Note and Mortgage dated September 10, 1997 securing real estate located at 3166 Cabin Hollow Road, Somerset, Kentucky and a worksheet.  In its Proof of Claim, TMS asserts a secured claim in the total amount of $28,094.10 and values the collateral at $42,000.  Arrearage and other charges included in the claim are in the total amount of $5,615.72.  (Claim # 11).

Two days thereafter, on April 12, 2000, the debtors filed their motion to partially avoid the lien of TMS.

CONCLUSIONS OF LAW:


The issue presented in this case is reminiscent of In re Sanders, 243 B.R. 326 (Bankr. N.D.Ohio 2000).  The creditor and law firm representing the creditor in this case are identical to those in Sanders.  In Sanders TMS attempted to object to the debtor’s proposed chapter 13 Plan by noting its “rejection” of the Plan on its proof of claim.  The court held that objection in such a manner was of no legal consequence, citing Bankruptcy Rule of Procedure 3015(f) which governs the Plan objection process.

The Sanders court further stated 11 U.S.C. 1327(a), which provides that provisions of a confirmed chapter 13 Plan are binding upon the debtor and creditors, bars the relitigation of any issues raised or that could have been raised in Plan confirmation proceedings.  The court concluded with quotation from the Fifth Circuit case Republic Supply v. Shoaf, 815 F2d 1046 (5th Cir. 1987), “Creditors who sleep on their rights through the confirmation process do so at their own peril.”


Turning to the case at hand, as an initial matter this court finds that TMS had notice of the debtors’ proposed treatment of its claim in the Plan and that there is no due process issue despite the claim of TMS it was “sandbagged.”  (Document # 21).  The filing of a proof of claim by TMS on December 14, 1999 evinces TMS was aware of the debtors’ having filed bankruptcy.  Counsel for the debtors certified that one month prior to TMS’ filing its proof of claim she mailed a copy of the Plan to TMS in care of its counsel in this case.  (Document # 5).  In addition, the chapter 13 trustee certified she mailed a copy of her Report and Recommendation to TMS at its address in North Carolina (Document # 10), that occurring some two weeks after the amended proof of claim filed by TMS, which did not include documentation of its secured status or description of the collateral claimed secured, and over two months prior to TMS’ filing substantiated proof of its secured status.  The Report and Recommendation clearly states that the chapter 13 trustee recommends confirmation of the Plan and that the claim of TMS would be treated as unsecured because TMS had not provided either a description of the collateral claimed secured or a copy of its security agreement.  Regardless of the current assertion by TMS that the debtors’ proposed Plan is “not manifestly clear” as to the debtors’ intention to partially avoid its lien, TMS was on notice prior to the confirmation hearing that the trustee viewed its claim for $25,150.65 as totally unsecured.

Certainly this court is aware of the holdings in Nobleman v. American Savings Bank, 508 U.S. 324 (1993), and In re Moncrief, 163 B.R. 492 (Bankr. E.D. Ky. 1993), which stand for the proposition that modification of a secured claim in a chapter 13 Plan is impermissible if there is even one dollar of equity in property which is the debtor’s principal place of residence.  However, in this case the Plan was confirmed without substantiation by TMS of its secured status and without objection by TMS prior to the confirmation hearing.  Further, TMS did not appeal the confirmation order.

TMS is bound by the terms of the confirmed Plan.  Stoll v. Gottlieb, 305 U.S. 165, 170-171, 59 S.Ct. 134, 83 L.Ed. 104 (1938).  The debtors’ motion is sustained.

Dated:

By the court –

 

__________________________

JOSEPH M. SCOTT, JR.

U. S. BANKRUPTCY JUDGE

 

 

Copies to:

 

Marcia A. Smith, Esq.

Alan J. Ullman, Esq.


Beverly M. Burden, Esq.



[1]  The statement of intention filed with Petition and Schedules was by Connie Sue Warren only.  A separate statement by Joseph Warren was filed on November 15, 1999.  (Document # 8).