United States District Court, E.D. Virginia, Alexandria Division
Appeal from BKNO. 17-10180-KHK in the United States
Bankruptcy Court for the Eastern District of Virginia
M. Brinkema United States District Judge
the Court heard oral argument from the parties on appellant
Barbara Murphy Brown's ("Brown" or
"appellant") appeal of the bankruptcy court's
dismissal of her Chapter 13 proceeding, the dismissal was
affirmed. Brown has appealed that oral ruling. This
Memorandum Opinion more fully explains the basis for the
Chapter 13 proceeding at issue was not Brown's first, and
to understand the bankruptcy court's decision, the
history of Brown's proceedings is necessary.
First Bankruptcy Case
by counsel, Brown filed a previous Chapter 13 petition on
June 11, 2015 in the United States Bankruptcy Court for the
Eastern District of Virginia. See Murphy Brown v.
Gorman, No. 1:15-cv-01265, 2016 WL 3702974, at *1 (E.D.
Va. July 7, 2016). In her initial Schedule A disclosure of
real property Brown listed an ownership interest with her
husband, Jeffery L. Brown, as tenants by the entirety in her
residence on Barbara Lane in Fairfax, Virginia ("the
property"), which she valued at $900, 000, and against
which she reported a secured debt of $1.2 million.
Id. Brown's Schedule D disclosure of secured
creditors listed the $1.2 million debt as owed to HSBC
Mortgage ("HSBC"); however, that debt was marked as
"contingent" and "disputed." Id.
In Section 5 A of the proposed Plan, Brown proposed to cure
what she listed as the estimated amount owed to HSBC, $162,
000, for mortgage arrearage, although in Section 6A she
sought rejection of HSBCs claim on the ground that it was
based on an executory contract and in Section 7B she sought
avoidance of HSBCs security interest in the property on the
ground that she had rescinded the mortgage loan under the
Truth in Lending Act ("TILA"). Id. Brown
proposed making a $3, 000 monthly payment to the Trustee
"as a show of good-faith, " with the condition that
it should be disbursed only "after the resolution of the
debtor's adversary proceeding yet to be filed."
Id. That $3, 000 bore little relation to the actual
monthly mortgage payment required by the Note, which as of
June 2015 was apparently $7, 514.40 per month. Id.
the initial meeting of creditors, the Trustee filed a Motion
to Dismiss with Prejudice and an Amended Objection to
Confirmation of the Plan, primarily arguing that Brown was
not eligible for relief under Chapter 13 because her secured
debt exceeded the $1, 149, 525 limit set under 11 U.S.C.
§ 109(e). Id. The Trustee further contended
that Brown's Chapter 13 petition was not filed in good
faith, as evidenced by the Plan's failure to assert a
credible means of reorganizing Brown's finances,
supporting the inference that her sole intent was to use the
automatic stay to prevent foreclosure proceedings while she
and her non-debtor husband challenged the validity of the
mortgage note. Id.
September 2, 2015, after the Motion to Dismiss was filed,
Brown amended her Schedules A and D by reducing HSBC's
secured mortgage claim to $1, 078, 513.03, which she
continued to describe as "contingent, "
"unliquidated, " and "disputed."
Id. at 2. The new lower principal balance appeared
to be based on Brown's misreading of a Notice of Payment
Change filed by HSBC on July 20, 2015, which reflected what
the principal balance would have been had Brown and her
husband adhered to their contractually required mortgage
payments up to the date of the Notice. Id. The
evidence in the record demonstrated that Brown's
description of this reduced amount of the secured mortgage
claim was not offered in good faith, as her bankruptcy
counsel had received correspondence from HSBC's counsel
more than a month before Brown filed her Chapter 13 petition
advising that the payoff on Brown's mortgage loan was
actually $1, 528, 038.81 as of April 7, 2015. That amount
consisted of a $1, 232, 745.11 principal balance on the
mortgage, $215, 773.93 in accrued interest, $67, 371.46 in
escrow advances, and other fees and penalties. Id.
September 3, 2015, the bankruptcy court held an evidentiary
hearing on the motion to dismiss in which Brown admitted that
she and her husband took out a mortgage in the amount of $1,
265, 000 from HSBC on June 27, 2008 and signed a
corresponding promissory Note. Id. She and her
husband made the required monthly payments for 21 months, but
ceased making payments in March 2010 when they sent notice to
HSBC that they were rescinding the loan. Even though the
Browns did not pay any of the remaining loan balance, Brown
asserted that the notice of rescission meant that they did
not "owe a dime." Id. In response to the
bankruptcy court's questioning, Brown confirmed that she
had no assets in her bank accounts and that neither she nor
her husband were able to raise over a million dollars within
the next two months, which the bankruptcy court deemed to be
the outer limit of the reasonable time in which a borrower
must tender a rescission payment. Id.
bankruptcy court ruled orally at the conclusion of the
hearing that Brown must be in a position to refund
the unpaid balance of the mortgage loan to the lender for a
rescission to be effective because a rescission returns the
parties to the same position they were in ab initio.
Id. Accordingly, the bankruptcy court found that
Brown's attempted rescission was not effective because
she had not shown the ability to repay the loan, and she
remained obligated on the Note. Id. Moreover, the
court found that the mortgage arrearage plus accrued interest
combined with the unpaid principal balance of the Note placed
the amount of secured debt above the statutory limit for
Chapter 13 proceedings. Id. Lastly, the bankruptcy
court found that Brown did not file her Chapter 13 petition
in good faith as her sole purpose in filing was to postpone
the collection rights of the mortgage lender. Id. In
light of these findings, the bankruptcy court granted the
Trustee's Motion to Dismiss and ordered Brown's
Chapter 13 case dismissed without prejudice. See In re
Brown, 538 B.R. 714, 721 (Bankr. E.D. Va. 2015).
pro se. Brown appealed that decision, arguing that
the bankruptcy court erred in finding that she had not filed
her Chapter 13 petition in good faith and in concluding that
the amount of the secured debt exceeded the statutory debt
limit of $1, 149, 525.00, thereby rendering Brown ineligible
for relief under Chapter 13. Murphy Brown. 2016 WL
3702974, at *2.
full briefing by the parties, this Court affirmed the
bankruptcy court's order, finding that:
• "The bankruptcy court did not err in finding that
Brown never effectively rescinded the loan because she
ignored her tender obligation to restore the lender to the
same position it was in before the transaction."
Id. at 3.
• "[T]he bankruptcy court accurately calculated the
principal balance due as of April 1, 2010 as $1, 217, 394.45
based on the original loan amount of $1, 265, 000, which was
a 30-year note with a prime interest rate plus a margin of
2.25%, and applying the payments that had been made.
Id. In addition, the bankruptcy court properly
calculated interest accrued on the loan from March 1, 2010
through the petition date as $141, 500 based on the minimal
rate of 2.25%. Id. In light of these findings, even
excluding consideration of accrued interest, late fees and
penalties called for in the Note, the principal ...