Chapter 13 Bankruptcy: A Matter of Definition
Editor’s Note: This story originally appeared in the edition DS News.
The term “provided” has been a long-standing concept in the context of Chapter 13 bankruptcy, especially when it comes to mortgage arrears. In fact, there have rarely been cases of appellate courts that fully analyze its significance. However, on December 6, 2018, the Court of Appeal of the Eleventh Circuit of Dukes v. Suncoast Credit Union (In re dukes), 909 F.3d 1306 (11th Cir. 2018), a case of first impression, ultimately gave meaning to the term “intended” in Article 1328 (a) of the Bankruptcy Code.
On February 18, 2009, Mildred Dukes filed for Chapter 13 bankruptcy. In her plan, she stated that no money would be paid to Suncoast Credit Union (the holder of a first mortgage on her residence principal) and that any amount paid would be paid directly to Suncoast and not through the trustee in bankruptcy. Suncoast did not oppose the plan and the court issued an order upholding the plan in May 2010.
Dukes made all of his required payments to the trustee and, in the end, the bankruptcy court issued a discharge pursuant to 11 USC §1328 (a). During the interim, Dukes breached her obligation to Suncoast and Suncoast subsequently seized and sought an insufficiency judgment against her. In 2014, Suncoast decided to reopen the bankruptcy and seek to determine whether Dukes’ personal liability had been discharged or not. The bankruptcy court found that Suncoast’s mortgage was not “provided for” by the plan because it had been paid out and, therefore, had not been released. Dukes appealed to the district court, which upheld the bankruptcy court’s decision. Dukes finally appealed to the Eleventh Circuit.
The small print
In determining the meaning of “intended”, the Eleventh Circuit relied on a previous decision of the Supreme Court, in Rake vs. Wade, 508 US 464, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993), in which the Supreme Court determined that “[t]The most natural reading of the expression “to provide[e] for by the plan ”consists in“ foreseeing ”or“ stipulating for ”something in a plan. The Eleventh Circuit concluded that the debtor’s plan, by stating that Suncoast would be paid out, did not provide for a refund and, therefore, did not “factor in” Suncoast.
The Eleventh Circuit rejected the debtor’s broad interpretation of Rake, in which the debtor argued that a mere reference to the mortgage was sufficient for the plan to “provide for” it. In doing so, the Eleventh Circuit found that Rake represents the proposition that a claim is “funded” when the plan provides the conditions that will govern the reimbursement of the claim.
In Mayflower Capital Company v. Huyck (In re Huyck) 252 BR 509, 515 (Bankr. D. Colo. 2000), the Colorado District Bankruptcy Court found that a Chapter 13 plan that provided for outstanding mortgage payments to be made outside the plan while the arrears were settled within the plan did not release the debtor’s obligation on outstanding contractual payments since such payments were not “scheduled”.
Likewise, the Bankruptcy Court for the Eastern District of North Carolina reached the same conclusion on the basis of similar facts in In the hunt, No. 14-02212-5 DMW, WL 128048 (Bankr. EDNC January 7, 2015).
Likewise, the District Court for the Southern District of Florida found that by stating that the mortgage would be “paid directly”, the plan did not provide for the mortgage and that it was not subject to the release. [Bank of America, N.A. v. Dominguez (In re Dominguez) No. 1:12-CV-24074—RSR (S.D. Fla. Sept 24, 2013)].
However, the only case which lends any support to the debtor’s argument is outside the ninth circuit. [Matter of Gregory, 705 F.2d 1118 (9th Cir. 1983)]. In Gregory, which preceded Rake, the Ninth Circuit found that the Chapter 13 plan specifically stipulated that it would not pay any dollars to unsecured creditors actually “expected” for that debt in order to subject it to release. By distinguishing Gregory, the eleventh circuit found that, unlike the plan proposed by Mildred Dukes, the plan of Gregory stipulated conditions for unsecured creditors (ie offered to pay zero dollars). Compare that with Dukes’ plan which stipulated that the loan would be paid directly and externally.
As is often the case, when a debtor offers to reduce (i.e. assess) a loan within the plan, either the Chapter 13 plan, the confirmation order, or be treated outside the plan. In either case, the loan is disengaged and the debtor is responsible for paying taxes and insurance.
It’s no surprise that debtors often fail to pay taxes and insurance when due and the lender or manager is forced to advance them in order to protect their collateral. The question boils down to whether these escrow advances are “intended” and subject to discharge under Section 1325 (a)? A reading of Dukes suggests otherwise.
Based on this, it is imperative that steps be taken prior to registering a lien release or mortgage satisfaction in order to recover any escrow advances made on behalf of the debtor. While the following provides a few examples of how to do this, it is important to consult with an experienced bankruptcy advisor, as each jurisdiction has different requirements. In other words, what is right in one jurisdiction may not be right in the other.
If the jurisdiction follows federal bankruptcy rules, it is recommended that you file a post-petition fee notice. For example, the Fed. R. Bankr. P. 3002.1 (c) provides in part “the holder of the claim shall file and serve on the debtor, the debtor’s lawyer and the trustee a notice detailing all costs, expenses or charges (1) incurred in connection with the claim. claim after filing the bankruptcy case, and (2) that the holder claims to be recoverable against the debtor or against the principal residence of the debtor ”(emphasis added). So even if the cramdown is not a primary residence [which is typically not unless the anti-modification provision of §1322(c)(2) applies], the amount disbursed is recoverable against the debtor since it is not “provisioned” and therefore not subject to the discharge.
Another option to consider is to file a petition to force the amended plan into escrow. The argument here is that escrow advances should be treated as an administrative expense in accordance with §503 (b). In fact, this article defines administrative expenses to include “the actual and necessary costs and expenses of preserving the estate”.
Other options to consider are the filing of a request for a waiver of stay (due to a lack of adequate protection) as well as a request for dismissal in accordance with Article 1307 (c). It may also be advisable to file a request for a determination of non-discharge. This will result in a comfort order stating that said amounts (i.e. escrow disbursements) are not paid. This will provide a shield for any potential action for violation of the discharge injunction on the road.
Accordingly, it is imperative that steps be taken to recover the sequestered advances prior to the satisfaction of the mortgage or the release of the registered lien. In addition, based on a reading of the Dukes the case, as well as the other cases cited therein, it appears that other jurisdictions have reached the same result regarding the language “provided for” in §1328 (a). We hope this will continue to remain the majority opinion and provide creditors with a means to recover blocked advances.