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Evans v. Stackhouse

United States District Court, E.D. Virginia, Newport News Division

January 13, 2017

MARLENE DENISE EVANS, Appellant,
v.
R. CLINTON STACKHOUSE, JR., Trustee, Appellee.

          OPINION AND ORDER AFFIRMING DECISION OF THE BANKRUPTCY COURT

          ROBERT G. DOUMAR UNITED STATES DISTRICT JUDGE.

         This matter comes before the Court on Marlene Dcnise Evans' ("Appellant" or "Debtor') appeal from the United States Bankruptcy Court for the Eastern District of Virginia's March 7. 2016 Order Granting Trustee's Amended Motion to Approve Motion to Convert or Dismiss. Bankruptcy Case No. 10-51101-SCS (hereinafter "Bankruptcy Proceedings"), ECF No. 86. For the reasons set forth below, this Court AFFIRMS the decision of the Bankruptcy Court.

         I. PROCEDURAL BACKGROUND

         Appellant filed her Voluntary Petition ("Petition") for adjustment of her debts under Chapter 13 of the Bankruptcy Code on June 11, 2010, and her Chapter 13 Plan on June 16, 2010, Bankruptcy Proceedings, ECF Nos. 1, 6. On November 29, 2010. the Bankruptcy Court confirmed her plan. Bankruptcy Proceedings, ECF No. 12.

         On March 1, 2011. Appellant filed an Amended/Modified Chapter 13 Plan. Bankruptcy Proceedings. ECF No. 23, that was rejected by the Bankruptcy Court on April 21, 2011, Bankruptcy Proceedings, ECF No. 26. Appellant filed a Second Amended Plan on March 10, 2011, Bankruptcy Proceedings, ECF No. 31. which the Bankruptcy Court approved on May 17, 2011, Bankruptcy Proceedings, ECF No. 40. On August 5. 2014. the Bankruptcy Court further approved a loan modification agreement that altered the original contract between Appellant and her lender, CitiFinancial, Inc. ("Lender"). Bankruptcy Proceedings, ECF No. 55. On September 24, 2014, Appellant filed a Third Amended Plan to accommodate the terms of the loan modification, Bankruptcy Proceedings, ECF Nos. 58, 59; on November 14, 2014, the Bankruptcy Court approved the Third Amended Plan, Bankruptcy Proceedings, ECF No. 60.

         On August 26, 2015, R. Clinton Stackhouse, Jr. ("Appellee" or "Trustee") filed a Notice of Final Cure Payment pursuant to Fed. R. Bank. P. 3002.1(f).[1] Bankruptcy Proceedings, ECF No. 63. On September 16, 2015, the Lender filed a Response to Notice of Final Cure Payment stating that the Lender agreed that the Trustee had paid the arrearage claim in full and that Appellant was past due on her direct payments. See infra pp. 4-5. See also ECF No. 2-1, at 7. On October 15, 2015, the Trustee filed a Motion to Close Case without Entry of Discharge. Bankruptcy Proceedings, ECF No. 64. On December 11, 2015, the Bankruptcy Court held a hearing on the Motion and issued an Opinion finding that the Appellant was not entitled to a discharge because she had not completed all payments under the Chapter 13 plan but ordering the Trustee to file an Amended Motion moving for conversion or dismissal, rather than closure without discharge. In re Evans. 543 B.R. 213, 235 (Bankr. E.D. Va. 2016). The Trustee then filed an Amended Motion to Convert or Dismiss, Bankruptcy Proceedings, ECF No. 79, which the Bankruptcy Court granted on March 7, 2016, Bankruptcy Proceedings, ECF No. 86. This appeal followed. ECF No. 1.

         II. STANDARD OF REVIEW

         This Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a). The Bankruptcy Court's application of the law is reviewed de novo. However, the Bankruptcy Court's findings of fact will not be set aside unless they are clearly erroneous. In re Biondo. 180 F.3d 126, 134 (4th Cir. 1999). "A finding is 'clearly erroneous' when[, ] although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer City. 470 U.S. 564, 573 (1985) (internal citations quotations omitted). "This standard plainly does not entitle a reviewing court to reverse the finding of the trier of fact simply because it is convinced that it would have tried the case differently." Id.

         III. FACTUAL BACKGROUND

         Both parties stipulate to the facts in this case. ECF Nos. 6, at 3; 7, at 4. See also In re Evans. 543 B.R. at 215. Accordingly, this Court finds no reason to overturn the Bankruptcy Court's findings of fact.

         The facts are as follows. After Appellant filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code, Appellee was appointed Appellant's Chapter 13 trustee on June 12, 2010. As of the filing date and all relevant dates thereafter, Appellant owned her primary residence at 38 Corwin Circle, Hampton, Virginia. Appellant and Lender had entered into a pre-Petition contractual relationship in which Appellant funded the purchase of the residence pursuant to the Deed of Trust and Note ("Note") executed by the Appellant. The Note required, among other provisions, that beginning in January 2007 Appellant would remit 360 monthly payments of $1, 316.56 to the Lender. ECF No. 7, at 6. The Note was secured by a lien on the residence; the property remains subject to the lien and the Appellant remains liable to the Lender under the Note. In re Evans. 543 B.R. at 217.

         As discussed above, Appellant subsequently filed a series of Amended/Modified Plans. See supra pp. 1-2. Of importance to the appeal on hand, on September 26, 2014, Appellant filed a Third Amended Plan, Bankruptcy Proceedings, ECF Nos. 58, 59; on November 14, 2014, the Bankruptcy Court approved the Third Amended Plan, Bankruptcy Proceedings, ECF No. 60.

         Appellant's Third Amended Plan was filed in part to accommodate Appellant's loan modification. On May 2, 2014, Appellant had filed a Motion to Approve Loan Modification After Confirmation. Bankruptcy Proceedings, ECF No. 49. After Appellee consented to the loan modification agreement, the Bankruptcy Court entered an order on August 5, 2014 granting the Motion. Bankruptcy Proceedings, ECF No. 55. The modified loan reduced Appellant's monthly mortgage payments on her Hampton residence from $1, 000 to $665.16; reduced her interest rate from 8.832% to 5.00%; and provided for a loan term of 420 months. The modified loan also brought her account into a current status by re-amortizing her arrears, resulting in a new principal balance of $163.996.34. In re Evans. 543 B.R. at 218-19.

         The Third Amended Plan also provided that Appellant would remit to the Appellee: (1) nine monthly payments of $320.00, followed by (2) 42 monthly payments of $496.00, followed by (3) nine monthly payments of $107.00 ("trustee payments"). The Appellee was to remit the trustee payments, after deducting his commission, to creditors who filed claims for any amounts owed pre-Petition (including amounts owed to the Lender for pre-Petition arrearages). The plan further provided that the Appellant would continue to remit post-Petition monthly payments, as they became due, directly to the Lender pursuant to the terms of the Note ("direct payments"), without modification, except as to any arrears owed to it. Id. at 216-18. See infra p. 10.

         On August 26, 2015, the Appellee issued a Notice of Final Cure Payment, pursuant to Fed. R. Bank. P. 3002.1(f), see supra n. 1, that was sent to the Lender. Bankruptcy Proceedings, ECF No. 64. Appellee paid the arrearage claim-$400.00-owed as of the Petition date to the Lender. On September 16, 2015, the Lender filed a Statement in Response to Notice of Final Cure Payment, confirming its agreement that its claim in the case had been paid in full; however, the Statement further noted that Appellant was past due on direct payments, with a balance of $6, 344.08 as of September 16, 2015. In re Evans. 543 B.R. at 218-19. At hearings before the Bankruptcy Court, Appellant confirmed she remained in arrears on her direct payments on her mortgage and advised she had fallen behind because she had suffered reductions in her income and was supporting displaced relatives who were now residing with her. She further confirmed she owed post-Petition fees to her homeowners' association totaling between $14, 000 and $15, 000. In re Evans. 543 B.R. at 219. See also Bankruptcy Proceedings, ECF No. 69.

         Upon receipt of Appellant's confirmation of the Lender's Statement, Appellee filed the Motion to Close Case without Entry of Discharge, requesting that the Bankruptcy Court close the case without issuance of a discharge because Appellant had not completed all payments under the Chapter 13 plan and therefore was not entitled, pursuant to the terms of 11 U.S.C. § 1328, to a discharge. Bankruptcy Proceedings, ECF Nos. 64, 65. Appellant then filed an opposition to the requested relief, instead arguing that she should receive a discharge because she had made all of her trustee payments and therefore all the payments necessary for a discharge. In re Evans. 543 B.R. at 219. See also Bankruptcy Proceedings, ECF No. 68.The Bankruptcy Court then (1) denied the entry of a discharge after concluding that Appellant had failed to make all of the necessary payments under the Chapter 13 Plan that would qualify her for a discharge and (2) also held that the case could not be closed as requested by the Appellee. The Bankruptcy Court instead ordered Appellee to file an amended motion requesting conversion or dismissal of the case. Appellee then filed the Amended Motion requesting dismissal of the case without discharge, which the Bankruptcy Court granted. Bankruptcy Proceedings, ECF No. 76. This appeal followed. ECF No. 7, at 7-8.

         IV. DISCUSSION

         Presently before this Court on appeal are two questions of law: first, did the Bankruptcy Court correctly find that Appellant was not entitled to a discharge pursuant to 11 U.S.C. § 1328(a) based on her failure to complete the direct payments to the Lender? Second, was dismissal of Appellant's Chapter 13 case pursuant to 11 U.S.C. § 1307 the appropriate remedy? This Court will now consider each of these issues in turn.

         A. Denial of the Discmarge

         1. Legal Standard

         Under the terms of a Chapter 13 plan, a debtor sets forth a proposed plan for repaying obligations owed as of the date of the filing of the bankruptcy case, including a repayment proposal as to any past due amounts owed to a secured lender and any payments that may become due to that lender during the course of the plan term. Once the plan has been confirmed, "the provisions of a confirmed plan bind the debtor and each creditor." 11 U.S.C. § 1327.

         Following the completion of all payments under a confirmed plan, 11' U.S.C. § 1328(a) provides: "[A]s soon as practicable after completion by the debtor of all payments under the plan, ... the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title . . . ." Thus, once a debtor completes all payments under the plan. Section 1328 of the Bankruptcy Code provides for-with a number of exceptions-a Chapter 13 discharge of the debts provided for by the plan.

         One exception to discharge is any debt provided for under 11 U.S.C. § 1322(b)(5). 11 U.S.C. § 1328(a)(1). Under Section 1322(b)(5), certain long-term debts "on which the last payment is due after the date on which the final payment under the plan is due" cannot be discharged (for example, mortgages). The bankruptcy plan may nonetheless "provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending" on any such long-term debts. 11 U.S.C. § 1322(b)(5) (emphasis added). Thus, "[Section] 1322(b)(5) requires that Debtors cure and maintain payments for long term debt. That is, Debtors may cure a pre-petition mortgage delinquency through the plan, but they must do so by staying current on their mortgage." In re Heinzle. 511 B.R. 69, 80 (Bankr.W.D.Tex. 2014). See also In re Kessler. 655 Fed.App'x 242 (5th Cir. 2016).

         Presently at issue is whether the term "all payments under the plan" as found in 11 U.S.C. § 1328(a) encompasses solely the trustee payments (which would qualify Appellant for receipt of a discharge) or also includes direct payments (which would preclude Appellant from receiving a discharge), particularly given that Section 1322(b)(5) makes certain long-term debts-here, the direct payments for Appellant's mortgage to the Lender-non-dischargeable.

         Although the Fourth Circuit has not directly addressed this question, this District has previously noted that:

[S]imply because payments are not being made through the trustee does not mean they are not being made 'under' the plan. If the plan defines payment terms . . . then the payments are being made 'under' the plan regardless of whether the debtor pays the creditor directly or pays through the trustee.

In re Russell. 458 B.R. 731, 739 (Bankr. E.D. Va. 2010) (citations omitted). The Bankruptcy Court for the Western District of Virginia has also noted that direct payments "are nonetheless payments 'under the Plan' in the sense that they are dealt with by the Plan . . . ." In re Hankins. 62 B.R. 831, 835 (Bankr. W.D. Va. 1986).

         A number of other district courts have also concluded that direct payments to a creditor are deemed payments under the plan if they are made pursuant to the provisions or terms of a plan, or are "dealt with" by a plan. In re Hovt-Kieckhaben. 546 B.R. 868, 871 (Bankr. D. Colo. 2016). See also In re Kessler. 2015 WL 4726794, at *2 (Bankr. N.D. Tex. June 9, 2015); In re Perez. 339 B.R. 385, 390 n. 4 (Bankr. S. D. Tex. 2006). This, in turn, begs the question: what does it mean for a Chapter 13 plan to "define" or "deal with" direct payments?

         Of the circuit courts, only the Fifth Circuit has more precisely addressed this issue, holding that post-petition mortgage payments, whether direct or trustee payments, are paid "under the plan" when the plan also provides for the curing of pre-petition arrears on the debt. In re Foster. 670 F.2d 478, 486, 488-89 (5th Cir. 1982). The Fifth Circuit explained that "a plan cannot provide that the current portion of a mortgage claim will be made 'outside the plan' . . . when the arrearages on the mortgage claim are being cured under [Section] 1322(b)(5)." Id. at 488-89. The Fifth Circuit further noted:

Section 1322(b)(5) provides for the curing of any default, then, only when the plan also provides for the maintenance of the current mortgage payments while the case is pending. Conversely, where a fully secured mortgage claim is not treated under the provisions of Section 1322(b)(5), or any other provision of Chapter 13, payments on that claim need not be made under the plan.

Id. Thus, although a Chapter 13 plan does not necessarily need to provide for curing of default on long-term debts under Section 1322(b)(5), if a plan does, the plan must also provide for maintenance of post-petition payments. As the payments that will go toward the curing of pre- petition arrears and the payments that will go toward post-petition maintenance concern the same claim, both types of payments-regardless of who the recipients of the payments are-will fall "under the plan." As the Fifth Circuit emphasized: "[W]e find no warrant in the Bankruptcy Code for labelling part of the treatment of a claim 'outside the plan' and part of it 'under the plan' where the entire treatment is that which has been made available to the debtor through the provisions of Chapter 13." Id. at 493. See also In re Heinzle. 511 B.R. at 80 ("[R]egardless how a plan is written, post-petition mortgage payments are payments made pursuant to the plan and the failure to maintain [direct] payments will result in dismissal, conversion, or denial of discharge.").

         More recently, In re Kessler. 2015 WL 4726794, at *2 considered a claim made by Chapter 13 debtors similar to the one made by Appellant: that because the debtors had made all their trustee payments curing their pre-petition arrears, but had failed to complete all direct payments, the debtors were entitled to a Section 1328 discharge. In denying the discharge, the Bankruptcy Court for the Northern District of Texas applied the reasoning of In re Foster to conclude that "post-petition payments of a mortgage debt, a long-term debt, whether paid direct or through the trustee, are treated as paid under the plan when the plan also provides for the curing of pre-petition arrears on the debt." Id. The Fifth Circuit affirmed the decision, noting that In re Foster broadly decided that "post-petition payments of [Section] 1322(b)(5) debts fall under the plan when pre-petition defaults are also provided for in the plan"; accordingly, because the debtors' Chapter 13 plan "included terms for curing their pre-petition mortgage arrears and provided for maintenance of post-petition payments, " yet the debtors "failed to complete post-petition mortgage payments that [fell] under the plan, " the debtors "[did] not qualify for discharge under the plain terms of § 1328(a), which instructs a court to grant discharge only after completion of all payments under the plan." In re Kessler. 655 Fed.App'x at 244.

         2. Parties' Arguments

         Appellant sets forth three central arguments as to why direct payments do not constitute payments "under the plan" and, accordingly, why Appellant is entitled to a discharge. In response, Appellee sets forth a number of arguments supporting the proposition that payments "under the plan" include the direct payments, and because of ...


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