Neither issue nor claim preclusion barred the chapter 13 debtor from modifying a secured claim that the debtor had not challenged in a prior chapter 13 case, according to an August 18 opinion by Bankruptcy Judge Brendan Linehan Shannon of Delaware.
Husband and wife debtors owned a home with a $105,000 first mortgage and a second mortgage for about $50,000. They confirmed a chapter 13 plan, completed their payments, and received a discharge in 2016.
The debtors did not object to the second mortgage claim in the first chapter 13 case. However, the first case did discharge their personal liability on the second mortgage.
The couple filed a second chapter 13 case in 2017, about 17 months after discharge in the first case. The second mortgage lender filed a secured claim for about $50,000 in the second case. The couple filed and obtained interim confirmation of a plan in the second case providing for payments on the $50,000 second mortgage.
As it happened, the second mortgage matured in August 2018, during the course of the second chapter 13 case. In 2020, the debtors evidently recognized that the maturity of the second mortgage gave them additional rights.
So, the debtors filed a motion asking for authority to cram down the second mortgage by bifurcating the claim into a secured claim and an unsecured claim.
Although not mentioned by Judge Shannon, the lender had created a problem for itself by filing a lift-stay motion early in the second case alleging that the home was only worth $110,000. The lender’s valuation seemed to concede that the second mortgage was underwater.
The subordinate lender objected to the cramdown motion. Relying on issue preclusion, claim preclusion and laches, the lender contended that the debtors could not challenge the mortgage in view of the lack of objection in the first bankruptcy.
Judge Shannon sided with the debtor.
Judge Shannon recited the requisites for successful assertions of issue preclusion (or collateral estoppel) and claim preclusion (or res judicata). The former requires that the issue could have been litigated previously, and the latter prohibits litigating the same claim a second time.
In the first case, Section 1322(b) would have precluded bifurcating or cramming down the mortgage because it had not matured during the first case. Judge Shannon therefore said that cramdown was not an issue that was actually litigated or could have been litigated in the prior bankruptcy because the subordinate mortgage had not matured during the first case.
Likewise, the debtors’ original plan in the second chapter 13 case did not raise cramdown. Judge Shannon therefore held that neither issue nor claim preclusion barred cramdown in the second case.
Laches was also not applicable, Judge Shannon said. Laches requires an inexcusable delay causing undue prejudice.
True, there was delay, but the party raising laches must show material evidentiary or economic prejudice.
The lender contended that the passage of time would prejudice its ability to prove the value of the home several years earlier at the time of filing. Judge Shannon disagreed, perhaps remembering that the lender had filed a lift-stay motion with an appraisal pegging the property’s value at $110,000 on the filing date.
Judge Shannon was “confident that the parties will be able to look back and correctly determine the Property’s value.”
Furthermore, the debtors were making payments on the mortgage during the plan. So, the lender was “largely unaffected by the passage of time,” Judge Shannon said.
Judge Shannon rejected the laches defense, finding “no indication of undue or material economic prejudice” during the delay.
On the merits, the debtors also came out on top.
Ordinarily, Section 1322(b)(2) bars a debtor from impairing the mortgage on a residence, but Section 1322(c)(2) allows modification of a lien under Section 1325(a)(5) if the residential mortgage matures before the final plan payment.
Under the “plain language,” Judge Shannon held that the claim may be bifurcated under Sections 1325(b)(5) and 506(a).
Neither issue nor claim preclusion barred the chapter 13 debtor from modifying a secured claim that the debtor had not challenged in a prior chapter 13 case, according to an August 18 opinion by Bankruptcy Judge Brendan Linehan Shannon of Delaware.
Husband and wife debtors owned a home with a $105,000 first mortgage and a second mortgage for about $50,000. They confirmed a chapter 13 plan, completed their payments, and received a discharge in 2016.
The debtors did not object to the second mortgage claim in the first chapter 13 case. However, the first case did discharge their personal liability on the second mortgage.