Opinion ID: 739923
Heading Depth: 2
Heading Rank: 1

Heading: Plan Modification & Direct Payment

Text: 10 The issue we first address on appeal raises a question of law: whether the bankruptcy court has the authority to modify a Chapter 13 plan to allow a debtor to include postpetition arrearages with respect to a secured claim on the debtor's home in her Chapter 13 Plan. 2 The bankruptcy court refused to modify Mendoza's Chapter 13 Plan to include postpetition arrearages on her home mortgage based on the belief that it did not have the authority to modify her Plan to include postpetition mortgage payments in arrears in a Chapter 13 plan. The bankruptcy court stated that since such arrearage payments were not provided for in the Bankruptcy Code, it was without authority to make the requested modification. The bankruptcy court also ordered Mendoza to make direct payment of the postpetition mortgage arrearage and each of her monthly mortgage payments beginning with the May 1995 installment. 11 Mendoza primarily argues that the bankruptcy court erred by concluding that it did not have the capacity to modify a plan of reorganization to provide for the payment of postpetition mortgage payments in arrears, and by requiring her to make direct payments to Temple. Mendoza asserts that there is authority to allow plan modification to include postpetition arrearage in the debtor's Chapter 13 plan. See In re Stafford, 123 B.R. 415 (N.D.Ala.1991). Additionally, Mendoza contends that all payments must be made under a plan of reorganization, based on a narrow reading of § 1326(c), and that the Chapter 13 trustee is charged with disbursing all monies to creditors. Similarly, Mendoza argues that arrearage payments should be distributed by the trustee based on § 1326(c). See, e.g., In re Reid, 179 B.R. 504, 507 (E.D.Tex.1995), aff'd, 77 F.3d 473 (5th Cir.1995) (stating that the general rule requires that debts provided for in a Chapter 13 plan be paid through the trustee). 12 Temple contends that pursuant to Bankruptcy Code section 1322(b)(2), a Chapter 13 plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's residence.... Temple relies on the other than language of § 1322(b)(2) and the United States Supreme Court's decision in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) as precluding modification of Mendoza's Plan to include the post-petition arrearages. 3 13 However, Nobelman precludes modification of the mortgagee's rights which are reflected in the relevant mortgage instrument[ ].... Nobelman, 508 U.S. at 329, 113 S.Ct. at 2110 (emphasis added). These rights may include, for example: (1) the right to repayment of the principal in monthly installments over a fixed term at a specified interest rate, (2) the right to retain the lien until the debt is paid off, (3) the right to accelerate the loan upon default and to proceed to foreclosure and recover any resulting deficiency. Id. We find Temple's reliance on Nobelman misplaced under the facts of this case. In the case sub judice, Mendoza is not attempting to modify the rights of the mortgagee (Temple), but instead, solely seeks to modify her Chapter 13 Plan to include the post-petition mortgage arrearage while observing the bargained for terms of her mortgage. There is a distinction between modifying the rights of a mortgagee where the debtor proposes to pay his mortgage at an interest rate lower than that provided for in the mortgage, and modifying a plan of reorganization to include postpetition mortgage payments which are in arrears. Accordingly, Temple's rights as a mortgagee and its security interest are not considered modified under our reading of Nobelman. 14 Although we have not decided the question of whether a bankruptcy court may modify a confirmed plan of reorganization to include postpetition mortgage payments in arrears, we note there is a split of authority as to whether a debtor may cure such defaults through modification. 4 Though not controlling, we find the analysis of the Eleventh Circuit's decision in In re Hoggle, 12 F.3d 1008 (11th Cir.1994) to be better reasoned and persuasive in holding that a Chapter 13 Plan may be modified to cure postpetition defaults through a plan of reorganization. 15 In Hoggle, the debtors filed for bankruptcy under Chapter 13 of the Bankruptcy Code and were past due on their mortgage payments. The debtors' plan, pursuant to § 1322(b)(5), included a provision to cure the past due payments. The bankruptcy court confirmed the debtors' plan, after which the debtors failed to make their required payment. The bankruptcy court, in denying the secured creditor's motion to lift stay, modified the debtors' Chapter 13 plan to provide for the cure of the postconfirmation arrearages. The Eleventh Circuit held that the bankruptcy court had the authority to modify a confirmed Chapter 13 plan to allow the debtor to cure by including the postconfirmation arrearages in the debtors' modified Chapter 13 plan. Id. at 1009. The Hoggle court concluded that § 1322(b)(5) expressly authorized a plan of reorganization to provide for the curing of any default with the postconfirmation arrearages to be paid under a modified plan, notwithstanding § 1322(b)(2)'s anti-modification language. Id. at 1010. The court's focus on the plain meaning of § 1322(b)(5), the legislative history and intent, and Chapter 13's overall policy of affording flexible repayment plans, compelled the conclusion that §§ 1322(b)(5) permits cure of any default whether occurring prior to the filing of the petition or subsequent to confirmation of the plan. Id. 16 Conversely, however, several courts have held that § 1322(b)(5) precludes a debtor from modifying a Chapter 13 plan to include an arrearage. See In re Nicholson, 70 B.R. 398 (Bankr.D.Colo.1987). In Nicholson, the bankruptcy court asserted that § 1322(b)(2) & (5) do not allow a Chapter 13 plan to modify the rights of a creditor holding a claim secured only by a mortgage on the debtor's principal residence except to cure prepetition defaults within a reasonable time. Nicholson, 70 B.R. at 401 (emphasis added). Although the Nicholson court states that § 1322(b)(2) & (5) expressly provide that only prepetition mortgages may be cured in a plan, we find that neither section distinguishes expressly or otherwise between prepetition and postpetition arrearages. Accordingly, we do not follow this constricted reading of § 1322(b)(2) & (5). 17 Thus, turning to the case sub judice, we are compelled to hold, as has our sister circuit, that pursuant to § 1322(b)(5), bankruptcy courts are empowered to modify a debtor's plan to include postpetition arrearages arising from a secured loan, such as a mortgage. Therefore, the bankruptcy court in this case erred as a matter of law by holding that it did not have the authority to modify Mendoza's Plan. 18 We conclude that, under a plain meaning reading of § 1322(b)(5), the legislative intent, and the underlying policy of Chapter 13, these grounds mandate the conclusion that a debtor's plan may be modified to include postpetition mortgage payments in arrears. Moreover, the Bankruptcy Reform Act of 1994 amended § 1322(c) to provide that a default with respect to ... the debtor's principal residence may be cured ... and that the plan may provide for the payment of the claim as modified.... 11 U.S.C. § 1322(c) (emphasis added). Although this new subsection is not effective to the case before the Court as the Act does not apply to cases filed before October 22, 1994, the amendment is illustrative of Congress' intention to provide homeowners with continuing rights to cure defaults and preserve their primary asset. However, to preserve the Bankruptcy Code's balance of protections, we further conclude that the modification must comply with the requirements of § 1322(b)(5) and that the bankruptcy court should inquire whether the proposed modification comports with § 1322(b)(5)'s requirement that such a cure be effected within a reasonable time and simultaneously maintain current payments on any long term secured loan. See Hoggle, 12 F.3d at 1012. 19 Finally, we hold that the bankruptcy court's decision whether to modify a Chapter 13 plan of reorganization is to be reviewed under the abuse of discretion standard. See In re Witkowski, 16 F.3d 739, 746 (7th Cir.1994). 20 Regarding whether the bankruptcy court erred in ordering Mendoza to make her mortgage payments (those in arrears and coming due starting May 1995) directly to Temple instead of through the Trustee, we find Mendoza's argument to be unpersuasive. This court previously held in In re Foster, 670 F.2d 478 (5th Cir.1982) that although § 1326(c) states the general rule that payments are to be made through the trustee, Chapter 13 permits the debtor to act as the disbursing agent and to make payments to a creditor directly. Id. at 486. Further, we determined that the provisions of Chapter 13 make it clear that the designation of the debtor as [the] disbursing agent is very much a matter left to the considered discretion of the bankruptcy court. Id. Although some courts have drawn a distinction between direct payment of current mortgage payments and arrearage payments, see, e.g., In re Aberegg, 961 F.2d 1307, 1310 n. 3 (7th Cir.1992), we believe that the bankruptcy court is in the better position to ascertain whether or not the debtor is capable of acting as a disbursing agent and make direct payments of either current mortgage payments or arrearage payments. The only limitation is that the bankruptcy court in making this determination must determine whether the debtor will be able to make those payments and ... comply with the plan. Id. Therefore, we recommend that the bankruptcy court carefully consider its ruling that Mendoza make direct payments to Temple in light of her past problems.