IN RE SCOTTO-DICLEMENTE No. 11-28230(MBK).
459 B.R. 558 (2011)
In re Luigi SCOTTO-DICLEMENTE, Debtor.
United States Bankruptcy Court, D. New Jersey.
November 18, 2011.
Jacqueline Rocci, Esq. , Metuchen, NJ, for Debtor.
Elizabeth K. Holdren, Esq. , Hill Wallack LLP, Princeton, NJ, for Creditor, Amboy Bank F/K/A Amboy National Banks.
MICHAEL B. KAPLAN, Bankruptcy Judge.
This matter comes before the Court upon the motion (the "Motion") of Amboy Bank F/K/A Amboy National Banks (the "Creditor" or "Amboy") to dismiss Luigi Scotto-DiClemente's (the "Debtor") Chapter 13 case. The Court has reviewed the pleadings submitted and heard oral argument on October 11, 2011. For the reasons which follow, the Court finds that the Debtor is not entitled to be a debtor under Chapter 13 and therefore grants Amboy's Motion.
II. PROCEDURAL HISTORY/FACTS
On December 15, 2003, the Debtor executed and delivered a Note to Amboy in the principal amount of $180,000. As security for the loan, and in connection with the Note, on December 15, 2003, the Debtor executed and delivered to Amboy a mortgage (the "First Mortgage") on the Debtor's primary residence located at 23 Snyder Ave., Keansburg New Jersey (the "Property"). The First Mortgage was subsequently recorded with the Clerk of the Monmouth County on February 11, 2004. The Debtor defaulted on the First Mortgage by failing to pay the August 2009 monthly installment and each payment due thereafter.
On April 27, 2005, the Debtor executed and delivered a Choice Equity Line of Credit to Amboy, in the principal amount of $75,000 (the "Equity Line"). As security for the Equity Line, on April 27, 2005, the Debtor executed and delivered to Amboy
On October 9, 2008, A & T, Inc., d/b/a Romer's Restaurant & Pizza ("Romer's") executed and delivered to Amboy an Installment Note, in the principal amount of $363,279.57. In connection with the Installment Note, on October 9, 2008, the Debtor executed and delivered to Amboy a General and Continuing Guarantee. In connection with this Installment Note, the Debtor executed and delivered a third mortgage (the "Third Mortgage") to Amboy on the Property, which was recorded with the Clerk of Monmouth County on October 29, 2008. The Debtor defaulted under his Guarantee in connection with the Third Mortgage by failing to pay the August 2009 monthly installment and each payment due thereafter.
On August 19, 2010, the Debtor filed a Chapter 7 Bankruptcy Petition with the United States Bankruptcy Court for the District of New Jersey under Case No. 10-35480. On December 10, 2010, the Debtor received a Chapter 7 Discharge. The Debtor filed the within Chapter 13 petition 6 months later on June 14, 2011, under Case No. 11-28230. The Debtor is ineligible to receive a discharge in the pending case. The Debtor's schedules reflect that the Property is subject to Amboy's First, Second, and Third Mortgages. The only other secured creditor listed on the Debtor's schedules is Credit Acceptance, with respect to a 2002 Jeep Liberty. The Debtor's Chapter 13 Plan treats Credit Acceptance as unaffected, and Debtor's Schedule D indicates that the Debtor pledges to continue to make regular payments to Credit Acceptance outside of the Plan. The Debtor also lists two unsecured creditors with claims totaling $1,482.00. The Plan proposes to cure the arrears owed to Amboy on the First Mortgage and strip off the Second and Third Mortgages, paying a pro rata distribution from any remaining funds to unsecured creditors.
Amboy filed the within motion to dismiss the Debtor's Chapter 13 case for cause, originally returnable for September 27, 2011. Oral Argument was heard on October 11, 2011, and the Court reserved its decision.
The Court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984, referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), (B), (K), and (O). Venue is proper in this Court pursuant to 28 U.S.C. § 1408. The following constitutes the Court's findings of fact and conclusions of law as required by Fed. R. Bankr.P. 7052.
A. Motion to Dismiss Under 11 U.S.C. § 1307(c) for Cause
1. 11 U.S.C. § 1307(c) Standard
Under 11 U.S.C. § 1307(c), a Chapter 13 petition may be dismissed "for
Amboy contends that the Debtor filed the within Chapter 13 case in bad faith. Specifically, Amboy takes issue with the Debtor's proposal to cure the arrears due to Amboy on the First Mortgage, while striping-off the Second and Third Mortgage liens on the Property. In this regard, Amboy argues that the Debtor's filing of the within case only six months after having received a Chapter 7 discharge to avoid Amboy's Second and Third Mortgages, evidences the Debtor's bad faith. The Third Circuit has recognized that filing a Chapter 13 case in bad faith is sufficient cause for dismissal under § 1307(c). In re Lilley, 91 F.3d 491, 496 (3d Cir.1996); see also In re Roth, 2010 WL 2485951, *1-2, 2010 Bankr.LEXIS 1939, *3-5 (Bankr.D.N.J. June 14, 2010)
As there is no clear definition in the Code as to what constitutes good faith, bankruptcy courts must look at the totality of the circumstances when making such a determination. In re Goddard, 212 B.R. 233, 238 (D.N.J.1997). Factors the court may consider are:
In re Myers, 491 F.3d 120, 125 (3d Cir. 2007) (citing In re Lilley, 91 F.3d at 496). The Court may take other relevant aspects into consideration, as no one factor is controlling. In re Goddard, 212 B.R. 233, 238 (D.N.J.1997). Additionally, actual fraud need not be proven to support a finding of bad faith. In re Dye, 346 B.R. 669, 671
B. "Stripping Off" Liens Under 11 U.S.C. § 1325(a)(5)
1. Lien-Stripping limitations under Chapter 13
In Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991), the Supreme Court held that a mortgage lien for which a debtor previously obtained a discharge of personal liability under a Chapter 7, remains a claim that can be treated under a Chapter 13 plan. Johnson v. Home State Bank, 501 U.S. at 84, 111 S.Ct. 2150. Following the decision in Johnson, the Supreme Court considered in Nobelman v. American Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), whether Code sections 506(a) and 1322(b)(2) granted a Chapter 13 debtor the ability to strip-down partially unsecured residential mortgage liens. See generally Nobelman v. American Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). Under 11 U.S.C. § 1322(b)(2), Chapter 13 debtors have express legislative authority to modify the rights of the holders of consensual mortgage claims. See 11 U.S.C. § 1322(b)(2). In light of this grant of authority, the debtors in Nobelman sought to strip-down a partially secured mortgage lien by utilizing § 506(a) to bifurcate the bank's secured proof of claim, consistent with the collateral's value, and then applying § 1322(b)(2) to void the unsecured portion of the lien. 508 U.S. at 326, 113 S.Ct. 2106. Relying on § 506(a), the debtors' Chapter 13 plan proposed that the debtors would make payments only up to the amount of the secured portion of the mortgage lien pegged to the value of the underlying collateral, with remainder of the bank's claim to be treated as unsecured. Id. The bank and the Chapter 13 trustee objected to the debtors' plan on the basis that the bifurcation of the bank's claim modified the bank's rights in violation of 11 U.S.C. § 1322(b)(2). Id. at 326-27, 113 S.Ct. 2106. The debtors argued that the protection afforded by § 1322(b)(2) applied only to the extent of the mortgagee's secured claim and that the court must first utilize § 506(a) to fix the amount of the mortgagee's secured claim. Nobelman, 508 U.S. at 328, 113 S.Ct. 2106. The debtors asserted that because their plan proposed to pay the "secured" portion of the bank's claim, the plan did not alter the bank's rights as a the holder of the claim and § 1322(b)(2) permitted unconditional modification of the bank's remaining "unsecured claim." Id.
The Supreme Court disagreed with the debtors' interpretation of § 1322(b)(2)'s phrase "a claim secured only by a security interest in real property that is the debtor's principal residence," as referring to both the residential mortgage holder's secured and unsecured claim, and instead found that it would be impossible to decrease the amount of the bank's outstanding mortgage principal without modifying its contract rights as to monthly payment amounts, interest rates or any further repayment terms. Id. at 331-32, 113 S.Ct. 2106. For that reason, the Court found that the anti-modification provision in § 1322(b)(2) would protect the bank's rights if there were some value remaining in the debtor's residence to which the subject lien could attach. Id. at 332, 113 S.Ct. 2106. Thus, the Court held that a Chapter 13 debtor may not bifurcate a partially secured mortgage claim secured by solely by the debtor's primary residence and strip-down the lien in a Chapter 13 plan, as the protection afforded by § 1322(b)(2)
2. Lien-Stripping Entirely Unsecured Residential Mortgage Liens in Chapter 13
Under Nobelman, courts must first employ § 506(a) to determine whether a claim is secured or unsecured. The Nobelman Court, however, left unanswered the question of whether § 1322(b)(2) bars a Chapter 13 debtor from stripping-off wholly unsecured consensual mortgage liens secured by the debtor's principal residence under § 506(a). The Third Circuit is among the majority of Circuit Courts which have held that a Chapter 13 plan may modify the rights of a holder of a wholly unsecured mortgage against the debtor's primary residence. McDonald v. Master Fin., Inc. (In re McDonald), 205 F.3d 606, 615 (3d Cir.2000), cert. denied, 531 U.S. 822, 121 S.Ct. 66, 148 L.Ed.2d 31 (2000)
3. Post BAPCPA: Striping-Off Wholly Unsecured Residential under a "Chapter 20"
Under the 2005 BAPCPA amendments, new § 1328(f)(1) prohibits a debtor from obtaining a Chapter 13 discharge if the debtor previously received a discharge filed under Chapter 7, 11 or 12, during the 4 year period preceding the date upon which the order for relief arises in the Chapter 13 case. 11 U.S.C. § 1328(f)(1). BAPCPA also amended 11 U.S.C. § 1325(a)(5) relative to the treatment of secured claims under a Chapter 13 plan. Under § 1325(a)(5), confirmation will not be granted unless each allowed secured claim within the plan satisfies one of three requirements: (1) the holder of the claim accepts the Plan; (2) the debtor surrenders the property securing the claim to the claim holder; or (3) if neither (1) or (2) are satisfied, the debtor must then comply with the "lien retention" provisions of § 1325(a)(5)(B)(i)(I)(aa) or § 1325(a)(5)(B)(i)(I)(bb) to obtain plan confirmation. See 11 U.S.C. § 1325(a)(5)(A), (C),(B)(i)(I)(aa), (B)(i)(I)(bb), & (B)(ii). The "lien retention" provisions require that the holder of an allowed secured claim retain the lien securing such claim until the earlier of (a) payment of the underlying debt determined under non-bankruptcy law or (b) a discharge being granted under § 1328, with the value of payments under the plan to not be less than the allowed amount of such claim. See § 1325(a)(5)(B)(i)(I)(aa), (B)(i)(I)(bb), (B)(ii).
Judging by the number of courts writing on this issue, it is evident across the country
4. Analysis of Lien-Stripping Under §§ 1328(f)(1) and 1325(a)(5)
A debtor's Chapter 7 discharge does not deprive a mortgagee of its right to collect on its debt in rem. 11 U.S.C. § 524(a)(2) ("A discharge . . . operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor"); see also Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) ("[A] bankruptcy discharge extinguishes only one mode of enforcing a claim—namely, an action against the debtor in personam— while leaving intact another—namely, an action against the debtor in rem."); see also Fisette v. Keller (In re Fisette), 455 B.R. 177 (8th Cir. BAP 2011). The issue which surfaces is whether a Chapter 20 debtor, notwithstanding ineligibility for a discharge under § 1328(f)(1), may still seek to modify a mortgagee's lien that remains attached to the debtor's property.
As noted, a number of courts have reasoned that a debtor is restrained from
In saying this, this Court has strained to locate a section in the Bankruptcy Code that expressly conditions a debtor's ability to modify a creditor's wholly unsecured lien under § 1322(b)(2) upon the debtor's eligibility for a discharge under Chapter 13. See, e.g., Tran, 431 B.R. at 235 (the court cited various Bankruptcy Code provisions and surmised that the Code does not "preclude[ ] a debtor that is not eligible for a discharge from filing a [C]hapter 13 case, obtaining confirmation of a [C]hapter 13 plan, and with the exception of the right to a discharge, from enjoying all the rights of a [C]hapter 13 debtor, including the right to strip off liens."); see also, Waterman, 447 B.R. at 328-29 (concluding that the court's analysis in Tran, and similar cases allowing strip offs in no-discharge Chapter 13 cases, to be "persuasive and compelling"). For example, § 1325 does not require eligibility for a discharge as a prerequisite for confirmation of a plan. Tran, 431 B.R. at 235 ("[A]lthough § 1325(a) and (b) sets forth numerous requirements for confirmation of a [C]hapter 13 plan, nothing in § 1325 conditions confirmation on the debtor being eligible for a discharge.").
In support of its position, Amboy cites to § 1325(a)(5) which states in relevant part that a Chapter 13 plan will be confirmed if:
11 U.S.C. § 1325(a)(5). Yet, this argument ignores that § 1325(a)(5)(B)(i)(I)(bb) does not apply to wholly unsecured liens attached to the debtor's principal residence. Hill, 440 B.R. at 183 ("Section 1325(a)(5) has no applicability to unsecured claims . . ."); see also Fisette, 455 B.R. 177.
To summarize, Congress has yet to prohibit expressly a debtor in a nondischargeable Chapter 13 case from stripping-off a wholly unsecured junior lien under § 506 of the Code. As stated by the Tran Court:
Tran, 431 B.R. at 235. As such, this Court is persuaded by the analysis in Tran, Hill, Gloster, and Fisette, which held that the Supreme Court's decision in Johnson, and applicable rules of statutory construction, accord a Chapter 13 debtor a right to avoid a wholly unsecured junior lien under these circumstances.
In the case at bar, the plain language of § 1325(a)(5) compels this court to find that such relief is available to the Debtor, if undertaken in good faith. The Debtor's Chapter 7 case discharged his in personam liability to Amboy Bank for the three mortgage obligations. However, the Chapter 7 discharge does not deprive Amboy of its right to pursue its in rem claims. The Supreme Court in Johnson clarified this point by stating that the phrase "claim against the debtor," under § 102(2), includes a claim against property of the debtor.
Looking to § 506(a) to determine whether Amboy's in rem claims are secured or unsecured, the Court finds that Amboy holds two junior liens that are wholly unsecured and subject to avoidance. The Debtor's schedules reveal that the Debtor's
For the reasons explained, this Court joins those courts which permit lien stripping in a Chapter 20 scenario, as long as the Chapter 13 case is filed in good faith and the plan is completed to fruition. However, this case requires additional scrutiny into the Debtor's good faith, and whether the amount of in rem claims place the Debtor above the dollar amount limitations included in 11 U.S.C. § 109(e).
5. Good Faith Under § 1325(a)(3)
This Court acknowledges that lien-stripping in a Chapter 20 case imbues a benefit upon the debtor that is not normally provided under the Code. Accordingly, this Court agrees with Judge Winfield's assessment in Gloster, that it is not sufficient for a Chapter 20 debtor to simply file his Chapter 13 case with the anticipation that there will be no objection to his plan. Therefore, this Court likewise requires a debtor to establish, by way of either testimony or an affidavit, the circumstances that prompted the filing of the Chapter 13 petition (in other words, why the Debtor did not file initially a Chapter 13 case and seek to modify the subject liens thereunder), so as to judge whether the effort was undertaken in good faith.
Under § 1325(a)(3), the Court has an independent duty to review the issue of good faith. In re Hill, 440 B.R. 176, 184-85 (Bankr.S.D.Cal.2010). "(B)ankruptcy courts have the authority—indeed, the obligation—to direct a debtor to conform his plan to the requirements of [the Bankruptcy Code]." Hill, 440 B.R. at 184 (citing United Student Aid Funds, Inc. v. Espinosa, ___ U.S. ___, 130 S.Ct. 1367, 1381, 176 L.Ed.2d 158 (U.S.2010); see also In re Warren, 89 B.R. 87, 90 (9th Cir.BAP1988)). In addition to the seven factors previously listed under Lilley, courts have considered whether (1) "the debtor[ ] . . . [has] a need for bankruptcy other than lien avoidance; (2) whether [the] debtor[ ] acted equitably in proposing the plan; (3) whether [the] debtor[ ] . . . [is] devoting . . . [his] income to the plan; and (4) whether the debtor[ ] used serial filings to avoid paying their creditors." Okosisi, 451 B.R. at 102-04. In Tran, the court found that the debtor attempted to "unfairly manipulate the Bankruptcy Code to skirt the Supreme Court's holding in Dewsnup"
On August 19, 2010, the Debtor filed a Chapter 7 case and received a discharge on December 10, 2010. Six months later on June 14, 2011, the Debtor filed the within Chapter 13 case. In addition to listing the Property as encumbered
While the Debtor's certification and Chapter 13 Plan do not indicate any substantial change in circumstances, the Court finds that the Debtor's proposed treatment of the First Mortgage under the plan—to cure the $38,588.06 in arrears due and owing from August 25, 2009 through June 14, 2011—constitutes a meritorious reorganizational purpose for filing a Chapter 13. The Court is cognizant that the Debtor's income has actually decreased from $3,033.33 per month, to $2,000.00 per month, since the Chapter 7 discharge. In an attempt to address the Plan's feasibility, the Debtor includes the following in his current Schedule I as additional income: "Fiancée's Contribution & Child Support" in the amount of $2,428.00 and "Child Support" in the amount of $584.80. The fact that third party sources of income exceed the Debtor's contribution by approximately $1,000.00 certainly raises an issue of feasibility and the specter of bad faith. Nevertheless, the Court is not prepared to dismiss the Debtor's efforts on this basis alone. Rather, the Court will examine the totality of the circumstances surrounding the Chapter 13 filing.
Nothing in the record before the Court suggests that the Debtor filed the within case solely to strip-off Amboy's Second and Third Mortgage Liens. At the time of filing his first bankruptcy case, the Debtor did not qualify for relief under Chapter 13: the Debtor listed the value of the Property at $200,000.00, precluding modification of Amboy's Second Mortgage Lien because there was sufficient equity above Amboy's First Mortgage. The $266,350.00 in unsecured non priority claims, together with the unknown IRS and the New Jersey Division of Taxation unsecured priority claims and the remaining unsecured claims of Amboy (on the Second and Third Mortgages after application of § 506(a)), would have made the Debtor statutorily ineligible to file a Chapter 13 case under § 109(e) of the Code.
The Court takes no issue with a debtor filing a "no discharge" Chapter 13 with a proper reorganization purpose (e.g., curing mortgage arrears) and then also taking advantage of the Code's permitted tools to strip-off a wholly unsecured junior mortgage lien. What the Court cannot abide are "no discharge" Chapter 13 cases which are filed solely to avoid liens or which undertake to cure recently "fabricated"
C. Debtor Exceeds Jurisdictional Limits Under 11 U.S.C. § 109(e)
While the Court finds that the Debtor's Chapter 13 petition was filed in good faith, the Court nonetheless must dismiss the Debtor's case for failure to satisfy the requisite qualifications for eligibility as a debtor under a Chapter 13 case. Section 109(e) states, in pertinent part, that:
11 U.S.C. § 109(e). Debtor contends that the debt ceilings of § 109(e) are not implicated since he received a Chapter 7 discharge of his in personam liabilities and thus the unsecured obligations owing Amboy are nonexistent. This argument sidesteps the issue facing the Court as to the treatment of the in rem claims for purposes of § 109(e). Section 109(e) offers only two alternative classifications for debt: secured debt or unsecured debt (assuming such debt is noncontingent and liquidated). Neither alternative lends the Debtor much comfort towards confirmation of a plan. As discussed, if the in rem claims were regarded as secured, the "lien retention" provisions of § 1325(a)(5) bar the proposed "strip-off" of Amboy's liens. On the other hand, if the in rem claims are treated as unsecured, the Debtor must overcome § 109(e) restraints.
Amboy's amended proof of claim in the current case reflects a total secured claim in the amount of $761,380.80, with arrears totaling $540,854.97 as of the petition date. The breakdown of the $761,380.80 is as follows: (1) $191,447.64 due in connection with Amboy's First Mortgage; (2) $86,095.87 due with on Amboy's Second Mortgage; (3) $478,141.87 due with respect to Amboy's Third Mortgage, in addition to pre-petition legal fees and costs in the amount of $5,695.42.
Section 109(e) speaks in terms of "debts" which is defined under 11 U.S.C. § 101(12) as "liability on a claim." 11 U.S.C. § 101(5) defines "claim" to mean:
11 U.S.C. § 101(5)(A) & (B). As discussed above, the U.S. Supreme Court in Johnson, supra, reaffirmed that the undischarged
The Court finds sufficient grounds to dismiss the Debtor's Chapter 13 case for cause under 11 U.S.C. § 1307(c). While the within case was filed in good faith, the Debtor does not qualify for relief under Chapter 13, having unsecured debts that exceed the limits set forth under 11 U.S.C. § 109(e). Accordingly, the Court hereby Grants Amboy's Motion and the within case will be dismissed.
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