Espinosa Bites Nationstar as Court Orders it to Release its Lien on Chapter 13 Debtor’s Home

Espinosa Bites Nationstar as Court Orders it to Release its Lien on Chapter 13 Debtor’s Home

Before the court is a Motion to Determine Extent and Validity of Lien or in the Alternative Motion to Declare Mortgage Satisfied (“Complaint”) filed by Timikia Leann Smith (“debtor”) on June 20, 2016. Nationstar Mortgage, LLC (“Nationstar”) filed an Answer/Response to Motion to Determine Extent and Validity of Lien or in the Alternative Motion to Declare Mortgage Satisfied (“Answer”) on June 28, 2016. Nationstar subsequently transferred its claim to Rushmore Loan Management Services, LLC (“Creditor”), resulting in the parties filing an Agreed Motion to Substitute Defendant on August 3, 2017. The Agreed Motion to Substitute Defendant recites that BAC Home Loan Servicing (“BAC”) held the debtor’s mortgage when she filed her current Chapter 13 proceeding. Thereafter, BAC transferred its claim to Nationstar in 2014, and Creditor succeeded to both in 2017.

Also before the court is an Objection to Claim (“Objection”) filed by the debtor on July 17, 2015, requesting that BAC’s claim be denied. Nationstar filed a response.

The debtor’s confirmed and completed Chapter 13 plan provided for payment of the principal balance of her mortgage inside the plan. At the conclusion of her plan and at the time of discharge, the debtor believed her mortgage would be paid in full and Creditor’s lien on the property released. In opposition, Creditor argues that it has no obligation to release its mortgage as its filed proof of claim controls regardless of the plan.

This is the debtor’s second bankruptcy. Her treatment of Countrywide Home Lending (“Countrywide”), yet another predecessor in interest to Creditor, in her first case set the stage for the controversy in her current case. Specifically, in her first case (1:04-bk-78313), the Chapter 13 trustee distributed monthly mortgage payments of $439.73 to Countrywide based on a plan confirmed on June 3, 2005. (Ex. 1, at 1.) Countrywide received $24,950.27 over the life of the plan on a listed debt of $34,788.89. (Ex. 1, at 1.) Presumably, and by reference to the proof of claim filed in the debtor’s current case, the $34,788.89 represented principal; unfortunately, the proof of claim filed in the first case was not introduced into evidence. The court dismissed the debtor’s first bankruptcy case on October 20, 2009, because she fell behind on her payments. (Ex. 13, at 2.) Regardless, she made a considerable number of payments to Countrywide in her first bankruptcy over the course of her confirmed, but uncompleted, plan.

The debtor promptly filed her second, and current, Chapter 13 proceeding on November 5, 2009. (Ex. 2, at 1.) When she refiled, her then lawyer, Travis Starr, explained that she could subtract what she had paid in her previous bankruptcy from what she originally borrowed to determine the amount she needed to pay through her new plan. Apparently, her lawyer based his calculations on a claims report from the debtor’s 2004 bankruptcy generated by the Chapter 13 trustee’s office. The total amount paid through the debtor’s first case, $24,950.27, deducted from the total amount of the mortgage claim, $34,788.89, resulted in a balance of $9,838.62. (Ex. 1, at 1.) This calculation and reasoning is patently incorrect if the $34,788.89 figure represented principal and the $24,950.27 figure represented payments against principal and interest. The debtor, however, relied on her lawyer’s advice and believed that by filing a second bankruptcy case and making plan payments to Creditor totaling $9,838.62 that she would pay off her mortgage. The court has no reason to discredit her belief, however misguided.

The debtor’s ill-founded calculation is reflected in her schedules. On her Schedule A, the debtor listed a fifty-percent interest with her husband in a “3BR/1BA Brick home & city lot @ 401 W. Long” valued at $15,000 with a secured claim of $9,838.62, the resulting balance of her lawyer’s calculation. (Ex. 2, at 9.) The debtor also included Countrywide on her Schedule D as a creditor having a claim of $9,838.62 secured by the residence. (Ex. 2.)

The debtor’s Chapter 13 Narrative Statement of Plan, however, incongruously categorized Countrywide’s debt as a long-term debt with regular payments of $439.73 and an arrearage of $9,839.00 (presumably rounding off the $9,838.62 figure) to be paid at a rate of $12.00 per month. (Stip. Facts at ¶ 2; Ex. 3, at 2.) A principal amount was not referenced. Neither party proffered or elicited any testimony explaining why this initial plan treated the purported principal debt of $9,838.62 as an “arrearage” to be paid at $12.00 a month associated with an unspecified “long-term debt” addressed by monthly payments of $439.73.

In response to this treatment, on February 12, 2010, BAC, as the mortgage lien holder, filed its Objection to Plan Prior to Confirmation (“Objection to Confirmation”) objecting to the plan treatment proposed for Countrywide. (Ex. 4.) BAC alleged that its prepared, but apparently unfiled, proof of claim reflected pre-petition arrears of $1,588.81 rather than the $9,839.00 amount provided for in the debtor’s proposed plan. (Stip. Facts at ¶ 3; Ex. 4, at 1.) BAC objected to the plan because the monthly payment of $12.00 to cure the pre-petition arrearage was inadequate to completely cure the arrears over the course of the proposed plan. (Stip. Facts at ¶ 3; Ex. 4.) The objection stated that “[t]he Debtor should be required to amend her Plan to cure those pre-petition arrears cited in BAC Home Loans Servicing, LP’s Secured Proof of Claim ($1,588.81) within sixty (60) months of confirmation of the subject Plan by – accordingly – increasing the maintenance payment to the Chapter 13 Trustee.” (Ex. 4, at 2.)

The debtor filed a plan modification on February 18, 2010, with a notice of opportunity to object. (Ex. 5.) The modification maintained the same plan length, sixty months, but it reduced the monthly plan payment from $575.00 to $450.00. (Ex. 3, at 1; Ex. 5, at 2.) The modification also changed the treatment of existing creditors, including Countrywide:

This creditor’s secured claim shall be paid through the debtor’s plan as a short-term claim that shall not extend beyond the length of the plan. The remaining principal debt of $9,878 shall be paid in full at 0% interest in monthly installments of $197.56. The arrearage claim of $1,588.81 shall be paid in full by monthly installments of $32.00. Creditor shall file a proof of claim showing the principal amount of indebtedness and the pre-petition arrearage.

(Stip. Facts ¶ 4; Ex. 5, at 2-3.) Significantly, Countrywide’s treatment (1) changed categories from a “long term debt” to a “short-term claim”; (2) reflected the $9,839.00 figure as principal instead of as an “arrearage,” a treatment consistent with the debtor’s schedules but not the original plan; (3) introduced a slight and unexplained adjustment of the $9,839 figure to $9,878; and (4) incorporated the $1,588.81 arrearage figure set forth in the Objection to Confirmation. (Ex. 5.) Again, the parties did not produce or elicit any comprehensive explanation for these changes other than the Objection to Confirmation. In addition, the plan required Countrywide to file a proof of claim reflecting the “principal amount of indebtedness and the pre-petition arrearage.” (Ex. 5, at 2-3.) The Chapter 13 trustees in this jurisdiction will not make payments on a claim unless a proof of claim is filed in the case. Countrywide nor BAC filed a proof of claim before confirmation.

In her Complaint, the debtor sought declaratory relief—a finding that her mortgage was satisfied—because she made all of the payments to Creditor required by her plan based on an “agreed” principal balance amount and arrearage figure. (Complaint, June 20, 2016, ECF No. 1, at ¶ 5.) The debtor’s Objection expanded on her argument, alleging that the confirmed Chapter 13 plan is “binding” pursuant to 11 U.S.C. § 1327 and that BAC’s proof of claim was contrary to an agreement reached between the parties and memorialized in the confirmed plan. (Ex. 4.) Creditor generally denied that the plan proposed to pay an agreed principal balance and asserted that the lien remains on the residence even after the debtor receives a discharge.

Neither party suggested that the current controversy is the result of a mistake, either mutual or unilateral. The record is devoid of any allegations of fraud by the parties or on the court. Thus, the issue is whether, in the absence of any subsequent or collateral attack on the validity of a confirmation order, the clear and specific terms of a confirmed plan and commensurate confirmation order govern over a subsequently filed and inconsistent proof of claim. In this instance and based upon the unique facts and circumstances present in this case, the answer is yes.

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