Thomas M. Lynch, United States Bankruptcy Judge.
The Debtors seek to hold CitiMortgage, Inc. in civil contempt for violating their discharge and the terms of their confirmed and completed Chapter 13 plan when the creditor re-recorded an improperly recorded pre-petition mortgage in the correct county and commenced a state court complaint to foreclose on that mortgage. For the reasons set forth below, the Debtors' Petition For Rule To Show Cause Against CitiMortgage For Violation of 11 U.S.C. § 524 And For Other Relief (ECF No. 77) is DENIED.
The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. The Debtors seek to interpret and enforce the discharge issued by this Court and the confirmation order entered by this Court confirming the Debtors' Chapter 13 Plan, including resolving issues as to the extent of the discharge and the validity of liens and claims treated by the plan. Adjudication is therefore a matter arising under the Bankruptcy Code, a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (K), (L) and (O), and as such this Court has constitutional and jurisdictional authority to enter a final order. Although the bankruptcy case closed after the Debtors completed their Chapter 13 Plan and the Chapter 13 Trustee filed a final report, the Court "has continuing authority to enforce its orders after a case has been closed." In re Rockford Prods. Corp., 741 F.3d 730, 732 (7th Cir. 2013) (citing Travelers Indem. Co. v. Bailey, 557 U.S. 137, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009)). The power of a bankruptcy court to enforce its own injunctions through civil contempt includes enforcement of the discharge injunction. Cox v. Zale Del., Inc., 239 F.3d 910, 917 (7th Cir. 2001).
FINDINGS OF FACT AND PROCEDURAL BACKGROUND
In considering the Motion for Rule to Show Cause, this Court has considered the evidence and the argument presented by the parties at trial and in their pleadings. Based on the record before it the Court makes the following findings of fact.
The Debtors filed their voluntary Chapter 13 petition on September 29, 2011. They scheduled CitiMortgage as a creditor in their initial filings, but listed its claim as unsecured. The Debtors listed a debt to "Beneficial" of $33,635 as the only claim secured by an interest in their residence. HSBC Mortgage Services, Inc. filed a proof of claim on February 24, 2012 as servicer on behalf of Beneficial Financial I Inc., successor by merger to Beneficial Illinois Inc., asserting a secured claim of $33,541.98. (Claim No, 20-1.) HSBC/Beneficial's proof of claim attached a copy of a mortgage in the Debtors' interest in their residence that was dated December 26, 2007. That mortgage indicated that it was recorded with the McHenry County Recorder on January 9, 2008. No one objected to HSBC / Beneficial's proof of claim.
The Debtors listed CitiMortgage, Inc. as the holder of a general unsecured claim in their Schedule F. The Turners described the CitiMortgage claim to involve an unliquidated, contingent debt of $183,844 for an "Unrecorded Loan 5/18/06" in connection with their residence. Notice of the bankruptcy and the meeting of creditors was sent to CitiMortgage by the Bankruptcy Noticing Center by electronic transmission on October 1, 2011. (BNC Certificate of Service, ECF No. 9 (showing a service date of October 2, 2011)).
On March 30, 2012, the Court confirmed the Debtors' second amended Chapter 13 plan. (ECF No. 41.) The Debtors used the Northern District of Illinois' model Chapter 13 plan as the template for their second amended plan. The Turners' plan, as modified by the confirmation order, provides for the Debtors to make sixty monthly payments increasing in steps from $1,620 to $2,816.43 until all allowed claims are paid in full. Section C of the confirmed plan identifies the pre-petition claims that the Debtors are to pay directly: "Beneficial" at $454.00 per month, and two other secured claims, each of which were scheduled as secured by the Debtors' 401(k) retirement plans. CitiMortgage is not mentioned by name in Section C or under Section E's provisions for payment of secured claims through disbursements by the Chapter 13 Trustee, or anywhere in the confirmed plan.
Adopting the standard terms of the model plan, Section B.3 of the confirmed plan states:
(ECF No. 34 (emphasis added).) Section G of the confirmed plan, the section of the model plan which indicates any special terms modifying the model plan, states that "[n]o payment shall be made on any unsecured claim that is not timely filed." (Id.) Finally, the confirmation order entered on March 20, 2012, provides in pertinent part that "[a]ll property of the estate, as specified by 11 U.S.C. §§ 541 and 1306, will continue to be property of the estate following confirmation, unless (1) the plan provides for surrender of the property, or (2) the property is sold pursuant to the plan or court order." (Order Confirming Plan, ECF No. 41.)
Because CitiMortgage and several other creditors either did not file claims or had their claims disallowed, the Debtors were able to complete their plan sooner than expected, in 15 months, paying a total of $24,729.23 into the plan through the Chapter 13 Trustee. On January 29, 2013, the Chapter 13 Trustee filed a notice of completion of plan payments and the discharge order was entered on February 5, 2013. (ECF No. 99.) CitiMortgage has stipulated that it received a copy of the discharge order.
The Chapter 13 Trustee filed her final report on April 4, 2013, showing that she had distributed $23,495.15, the full amount of allowed general unsecured claims, to general unsecured creditors. She also reported distributing $1,234.08 in administrative expenses. (Chapter 13 Final Report & Account, ECF No. 74.) While the Debtors indicated in their initial bankruptcy schedules that CitiMortgage held a $183,844.00 unsecured claim, the final report noted that its claim was not allowed because it
On August 29, 2013, CitiMortgage, through its attorneys at Codilis & Associates, sent a demand letter by U.S. Mail to the Debtors threatening to institute foreclosure proceedings against the Bretons Drive property under the 2006 mortgage. The letter states that the attorneys are "attempting to collect the debt that you owe the present creditor," identifying the "name of the creditor to whom the debt is owed [as] CitiMortgage, Inc." (Id.) It further asserts that as "of the date of this letter, you owe $216,073.09" and that "Federal law gives you thirty (30) days after you receive this letter to dispute the validity of the debt or any part of it [or] our firm will assume that it is valid." The August demand letter made no reference to the Debtors' discharge. Nor did it suggest that the law firm was not attempting to collect the debt as a personal liability of the Debtors.
The Debtors' attorney responded to the demand letter on February 5, 2014 by asserting that the Debtors had received a bankruptcy discharge. (Debtors' Ex. 6.) The letter went on to state that CitiMortgage, Inc. had been properly scheduled and notified of the bankruptcy case, and alleged that CitiMortgage was violating the discharge injunction by attempting to collect a discharged debt. The letter closed by asserting that the Debtors "dispute the validity of your ability to foreclose on" the Debtors' residence because no "mortgage had been properly perfected against the [residence] prior to the filing of the Chapter 13 Petition."
On December 11, 2013, First American Title Insurance Company, which had apparently issued a title insurance policy in favor of CitiMortgage or its predecessor, re-recorded the May 2006 mortgage. Ms. Amy Belair, claims counsel for First American Title, later testified that she prepared and filed the recording document with the McHenry County Recorder. She further testified that she had personal knowledge of the Debtors' file, and acknowledged that the Turners had received a Chapter 13 discharge at the time she recorded the mortgage. Ms. Belair indicated that she had consulted with other attorneys in her office prior to re-recording, and that she caused the mortgage to be re-recorded because it had been improperly recorded initially. She explained that the title company was concerned that without further action the mortgage could lose priority, potentially giving rise to a claim under the title insurance policy. Explaining further, she stated that from her review of several cases before recording the mortgage, she concluded that a mortgage lien is not destroyed by a bankruptcy discharge. Finally, she testified that it was common practice for a title company to file a mortgage as an agent on behalf of the insured lender.
Later that year, the Codilis firm together with another law office, Andrew Szocka, PC, filed a complaint on behalf of Citi-Mortgage against the Debtors, Harry Semrow and Beneficial Financial I Inc. to foreclose the May 2006 mortgage on the Debtors' residence. The complaint sought to foreclose the mortgage or, to the extent the mortgage was ineffective, to impose an equitable lien or mortgage and to foreclose.
The Debtors moved to reopen their bankruptcy case to present their motion for entry of a rule to show cause against CitiMortgage. The case was reopened, the matter briefed and an evidentiary hearing was conducted at which the Debtor Sharon Turner, the claims counsel for First American Title, and the assistant vice president of bankruptcy for CitiMortgage, all testified.
As an initial matter, although the acts that the Debtors contend violated the discharge or plan were committed by a number of parties, including lawyers at Codilis & Associates and Andrew Szocka, PC, and employees of First American Title Insurance Company, the Debtors only bring their motion for rule to show cause against CitiMortgage. CitiMortgage does not contest that it is the proper party or that the attorneys and the title company were acting with its knowledge as its agents and within the scope of such agency.
Although Unperfected. CitiMortgage Had a Lien Under Illinois Law
"Property interests are created and defined by state law." Butner v. U.S., 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). The Debtors' residence is located in Illinois, and the CitiMortgage mortgage states that the instrument "shall be governed by federal law and the law of the jurisdiction in which the Property is located." These facts are not in dispute and, therefore, Illinois law applies in determining the nature of CitiMortgage's interest in the property at least as of the petition date. See, e.g., id. (unless Bankruptcy law or another federal interest requires a different result the property interest should be analyzed under state law).
The Debtors first argue that because the mortgage in favor of CitiMortgage was recorded in the wrong county CitiMortgage had no lien at all. Illinois law does not support that argument.
The Illinois Conveyances Act states that:
765 ILL. COMP. STAT. 5/30 (emphasis added). While the statute is clear that a mortgage must be recorded to be effective against creditors and purchasers without notice, it is equally clear that it is effective against those with notice. Most notably, an unrecorded mortgage is valid as between the mortgagor and mortgagee — the mortgagor being neither a creditor nor a subsequent purchaser. Harms v. Sprague, 105 Ill.2d 215, 224-25, 85 Ill.Dec. 331, 473 N.E.2d 930 (Ill. 1984).
The court in Arnold sustained the debtor's objection to the creditor's proof of claim and overruled the creditor's objection to confirmation pursuant to Section 1322(b)(2). While Arnold suggests that the rights of the holder of an unperfected mortgage in Illinois are so limited that for purposes of Section 1322(b)(2) the holder does not constitute a "holder of secured claims," that interpretation has no bearing here. As discussed below, the confirmed plan in this case did not modify the rights of CitiMortgage.
The Debtor also cites a decision of the Illinois appellate court, Farmers State Bank v. Neese, 281 Ill.App.3d 98, 216 Ill.Dec. 474, 665 N.E.2d 534, 538 (1996), a case also discussed in Arnold. The court in that case concluded that under the Illinois Mortgage Foreclosure Law, "a mortgage is a lien only from the time [it] is recorded" to find that a creditor bank "did not even have a lien at the time the IRS filed notice." Farmers State Bank v. Neese, 281 Ill.App.3d 98, 216 Ill.Dec. 474, 665 N.E.2d 534, 538 (1996) (quoting 735 ILL. COMP. STAT. 5/15-1301). However, Neese dealt primarily with the priority of a tax lien under the Federal Tax Lien Act, 26 U.S.C. § 6322, and, therefore, analyzed the issue primarily under federal rather than state law. 216 Ill.Dec. 474, 665 N.E.2d at 537 ("Federal law controls in determining the priority of IRS liens."). The issue before the appellate court was not whether the mortgage
The Illinois Mortgage Foreclosure Law speaks in terms of creating, not invalidating, a lien: "from the time a mortgage is recorded it shall be a lien upon the real estate that is the subject of the mortgage for all monies advanced or applied or other obligations secured in accordance with the terms of the mortgage or as authorized by law." 735 ILL. COMP. STAT. 5/15*1301. Thus, even if Neese can be said to conclude that an unrecorded mortgage does not create a lien under the Illinois Mortgage Foreclosure Law or constitute a "lien" as used in that statute,
Where as here statutory interpretation is a question of state law, "our role is to predict how the Illinois Supreme Court would decide the question." In re Crane, 742 F.3d 702, 707-08 (7th Cir.
CitiMortgage's Lien Was Not Terminated by the Discharge or by the Plan
A discharge in bankruptcy does not terminate a valid lien. Long v. Bullard, 117 U.S. 617, 6 S.Ct. 917, 29 L.Ed. 1004 (1886). Instead, 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." Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) (finding that the in rem rights of a creditor whose debt had been discharged in a prior Chapter 7 proceeding constitute a "claim" that is subject to inclusion in a Chapter 13 plan). The rule of Long v. Bullard is codified in Section 524(a) of the Bankruptcy Code, whereby the discharge voids judgments but only to the extent they are "a determination of the personal liability of the debtor with respect to" a dischargeable debt. 11 U.S.C. § 524(a)(1); Johnson v. Home State Bank, 501 U.S. at 83, 111 S.Ct. 2150 ("Codifying the rule of Long v. Bullard ... the Code provides that a creditor's right to foreclose on the mortgage survives or passes through the bankruptcy."). Similarly, the discharge operates as an injunction against efforts to collect a dischargeable debt but only "as a personal liability of the debtor." 11 U.S.C. § 524(a)(2).
Nor does Section 522(c) of the Bankruptcy Code, which protects a debtor's interest in exempt property, usually affect a valid lien. Subject to certain limited exceptions, including dismissal of the case, Section 522(c) provides that property exempted under the Bankruptcy Code "is not liable during or after the case" for any pre-petition debt. 11 U.S.C. § 522(c). However, this protection does not apply to "a debt secured by a lien" unless the lien has been avoided under Sections 522(f), 522(g), 544, 545, 547, 548, 549 or 724(a), is void under Section 506(d) or is a tax lien for which notice has not been properly filed. 11 U.S.C. § 522(c)(2). There can be no dispute that CitiMortgage's unperfected mortgage lien was never avoided under
Neither did the vesting provisions of the Bankruptcy Code terminate Citi-Mortgage's lien. The clear language of the plan and confirmation order make it clear that those provisions are not applicable here. Section 1327 of the Bankruptcy Code provides that except "as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor" and except as otherwise provided in the plan or confirmation order such vesting "is free and clear of any claim or interest of any creditor provided for by the plan." 11 U.S.C. § 1327. In addressing the substantially similar language in Section 1141(c), the Seventh Circuit has held that, at least "for secured creditors who file claims for which provision is made in the plan of reorganization" and unless the plan expressly preserves their liens, such creditors' liens are extinguished upon confirmation of the plan by the vesting of the property in the debtor free and clear of their interests. In re Penrod, 50 F.3d 459, 462-63 (7th Cir. 1995). But see In re Brisco, 502 B.R. 212, 217-19 (Bankr. N.D. Ill. 2013) (suggesting that Section 1141(c)'s use of the term "property dealt with by the plan" requires a different standard of creditor participation than Section 1327(c)'s claim or interest "provided for by the plan"). But here the confirmation order expressly provides that all property of the estate "will continue to be property of the estate following confirmation" unless the plan provides for surrender of the property or it is sold pursuant to the plan or court order. It is undisputed that the property at issue here was not surrendered or sold pursuant to the plan. Accordingly, Section 1327's provision for vesting free and clear does not apply.
Instead, the Debtors argue that Paragraph B.3 of their confirmed plan had the effect of terminating CitiMortgage's lien. Paragraph B.3, which is a standard
(Debtors' Ex. 2, Plan ¶ B.3, ECF No. 34 (emphasis added).)
In interpreting plans of reorganization in the context of Chapter 11 cases, the Seventh Circuit has stated that "[p]rinciples of contract law apply to interpreting a plan of reorganization." In re Airadigm Communications, Inc., 616 F.3d 642, 664 (7th Cir. 2010). This is because in Chapter 11 a "confirmed plan of reorganization is in effect a contract between the parties and the terms of the plan describe their rights and obligations." Id. See also Ernst & Young LLP v. Baker O'Neal Holdings, Inc., 304 F.3d 753, 755 (7th Cir. 2002). But it is far from clear that a Chapter 13 plan is as analogous to a contract as is a Chapter 11 plan. Unlike in Chapter 11, creditors in Chapter 13 are not entitled to vote on a plan. See 11 U.S.C. § 1126. Also, in Chapter 13 only the debtor may file a plan. 11 U.S.C. § 1321. Therefore, other than the right to object on certain specified bases in the Bankruptcy Code, a Chapter 13 plan is a rather one-sided affair. In contrast, creditors may file a plan of reorganization in Chapter 11 after a certain period elapses. Nor is it clear that a debtor's subjective intent is particularly relevant to the interpretation of a standard provision of a model plan adopted by the judges of this court. See LR 3015-1. See also In re Wilson, 321 B.R. 222, 225 (Bankr. N.D. Ill. 2005) (noting that the model plan's "language was crafted with input from both creditor and debtor attorneys practicing in Chapter 13 cases in this district"). Thus, the mere fact that the Debtor believed that Section B.3 of the plan would terminate CitiMortgage's lien and intended it to do so does not make it so. In any event, even under basic contract principles, intent means not merely subjective intent of the contracting parties, but rather "the scope and purpose of the document as manifest by the language used." Airadigm, 616 F.3d at 664. Courts "will not bend the language of a contract to create an ambiguity when none exists, but neither will we follow a literal interpretation when [to do so] would lead to an unreasonable or absurd result." Id. at 664 (quoting Chi. Bd. of Options Exch. v. Conn. Gen. Life Ins. Co., 713 F.2d 254, 258 (7th Cir. 1983)).
The Turners argue that Paragraph B.3 of this confirmed plan is intended to terminate all liens on all property of the estate upon discharge other than mortgages specifically mentioned and treated in Section C or Paragraph E.2, whether the creditors' claims are mentioned or provided for in the plan or not and whether there is legitimate authority to terminate those liens or not. However, when taken in the context of the other provisions and the structure of the model plan, it is clear that Paragraph B.3 is not intended to terminate liens securing claims not provided for in the plan. Instead, the provision works in concert with Paragraph B.3.2 of the Plan to strip off secured claims that are fully undersecured and in concert with Paragraph B.3.1 in adjudicating the amount and interest due on allowed claims secured by property of the estate.
An allowed claim of a creditor that is secured by a lien on property of the estate "is a secured claim to the extent of the value of such creditor's interest in the
Sections 1322(b)(2) and Section 1325(a)(5) together permit a Chapter 13 plan to terminate a security interest upon discharge so long as the creditor receives at least as much as the value of the collateral securing that interest with interest at an appropriate rate through the plan.
The Model Chapter 13 Plan implements the debtor's power through a plan to terminate liens not supported by any equity in collateral and to cure, maintain and
Paragraph B.3 of the plan provision at issue in this case effectuates the treatment of secured claims provided for and specifically listed in Paragraphs E.3.1 and E.3.2 and, if applicable, in special terms provided in Paragraph G. If not for the termination of liens at discharge under Paragraph B.3, then claims listed in Paragraph E.3.2 would be treated as unsecured only during the term of the plan and any remaining unpaid amount after completion of the plan would effectively become secured again despite the discharge. The same would be true with respect to Paragraph E.3.1. If the debtor proposed repayment of a secured claim only at a lower "cramdown interest rate" rather than at the contract rate, see Till v. SCS Credit Corp., 541 U.S. 465, 477, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004), then without Paragraph B.3, the difference in total indebtedness could remain as a secured claim against the property post-discharge.
A 2004 bankruptcy decision involving the pre-BAPCPA iteration of the Chapter 13 model plan, In re Swanson, is instructive regarding the intent and purpose for Paragraph B.3. 312 B.R. 153 (Bankr. N.D. Ill. 2004). Prior to the 2005 BAPCPA amendments, Paragraph B.3 of the model plan provided:
On facts close to those presented here, the court in Swanson found that Paragraph B.3 of the model plan did not terminate the lien of a creditor
Nor is the result different under the current Model Chapter 13 Plan than it was under the pre-BAPCPA version. The changes in Paragraph B.3 were made to incorporate changes made by BAPCPA to Section 1325(a)(5) of the Bankruptcy Code, and those amendments were intended to increase the protection of secured creditors' lien rights, not diminish them. The current version of Paragraph B.3 tracks the changes made to Section 1325(a)(5) by BAPCPA to add the temporal requirement that the lien be retained until the earlier of discharge or payment of the full underlying debt. See, e.g., In re Erdmann, 446 B.R. 861, 867 (Bankr. N.D. Ill. 2011) (Paragraph B.3 of the Model Chapter 13 Plan "simply puts the requirements of section 1325(a)(5) into every plan" unless amended "through the use of special terms in Section G."). As the bankruptcy court explained in In re Lilly, "[t]he new language added by BAPCPA clarifies that the plan must permit the lien to be retained until the earlier of payment of the debt determined under nonbankruptcy law or a discharge under Section 1328" and "overrules
The Debtors' interpretation of Paragraph B.3 of the model plan is also inconsistent with statements made by the Seventh Circuit in its recent Chapter 13 decision, In re Pajian, 785 F.3d 1161 (7th Cir. 2015). In Pajian, the court ruled that a secured creditor "must file a proof of claim in order to participate in Chapter 13 plan distributions." 785 F.3d at 1163. The court, however, noted that this result would not be unduly harsh because "a secured creditor who fails to do so can still enforce its lien through a foreclosure action, even after the debtor receives a discharge." Id. The court also found support for this conclusion in a proposed amendment to the Bankruptcy Rules that would "make explicit that a secured creditor's failure to file a proof of claim does not void the creditor's lien." 785 F.3d at 1165. But under the Debtor's interpretation of Paragraph B.3 of the model plan, the opposite would be true. Under
Thus, the Court must conclude that the Debtor's confirmed plan did not terminate CitiMortgage's mortgage lien on the McHenry, Illinois property. Therefore, the steps taken by CitiMortgage solely to enforce that lien did not violate the Debtors' discharge. 11 U.S.C. § 524(a)(2).
In the argument and hearing on the motion, the parties addressed exclusively whether the recording of the mortgage in McHenry County and commencement of the foreclosure action in 22
For the foregoing reasons, the Debtors' Motion for Rule to Show Cause Against CitiMortgage for Violation of 11 U.S.C. § 524 and for Other Relief is DENIED as to all issues except whether the requests for relief in Counts II and IV of the respondent's state court complaint seeking costs or fees incurred involve intentional, willful acts in violation of the discharge injunction entered in this bankruptcy case. The parties will be permitted to supplement the record and their argument before the Court separately rules on the remaining issue. A separate order will be entered consistent with this Memorandum Opinion.