At the risk of oversimplification, the Eleventh Circuit held that a final, enforceable order confirming a chapter 13 plan could not be enforced to the extent that the plan violated Section 1322(b)(2) by impermissibly modifying the mortgage on the debtor’s principal residence.
In her January 10 opinion, Circuit Judge Robin S. Rosenbaum declined to follow United Student Aid Funds Inc. v. Espinosa, 559 U.S. 260 (2010), where the Supreme Court held that a chapter 13 plan must be enforced even though it improperly discharged a student loan. Judge Rosenbaum appeared to interpret Espinosa as applicable only when a final, confirmed plan has been attacked under Federal Rule 60(b)(4).
Although it was “too late” for the mortgage lender “to alter the Plan,” Judge Rosenbaum said it was “not too late for [the lender] to invoke the Code’s special protection for homestead mortgagees.”
This writer reads the Eleventh Circuit’s opinion to mean that the lender could mount a successful collateral attack on one of the provisions in the plan, although the plan was final, enforceable and could not be altered.
The opinion seems based on the idea that the anti-modification clause in Section 1322(b)(2) is one of the preeminent provisions in chapter 13 that cannot be overcome by an erroneous but final order confirming a plan. Granted, anti-modification is central to chapter 13, but the erroneous discharge of debt that the Supreme Court upheld in Espinosa is the single-most important form of relief sought by a debtor.
This writer has two questions: (1) Will any other circuits follow the Eleventh; and (2) how many other terms in confirmed plans (chapter 11 included) can be set aside belatedly by using the Eleventh Circuit’s logic?
One thing is for sure: Counsel in the Eleventh Circuit will not use Rule 60(b)(4) in the future to cover their tracks when they forget to object to confirmation. This rule is applicable in bankruptcy cases through Bankruptcy Rule 9023.
Facts in the Eleventh Circuit
Just like with Espinosa, the case in the Eleventh Circuit was replete with mistakes, principally by the secured lender. In Espinosa, the student loan lender neglected to object to the chapter 13 plan that discharged a student loan without the required showing of “undue hardship.”
In the Eleventh Circuit case, the debtor took down a $14,000, nine-year mortgage on her home at 19.7% interest. The next year, the debtor filed a chapter 13 petition. The mortgage lender filed a secured proof of claim stating that the debt was some $6,800, the arrears on the mortgage. The claim did not include the principal balance of the loan.
The debtor filed a chapter 13 plan acknowledging that the mortgage debt was more than $17,000. The 58-month plan earmarked about $450 a month to be paid to the lender through the trustee, or about $26,000 in total. The debtor’s monthly payment to the trustee for all claims was about $500, including the lender’s $450. The plan called for lenders to retain their liens until the completion of all plan payments.
The mortgage lender did not object to the plan, nor did the lender file a corrected proof of claim.
About two years after confirmation, the chapter 13 trustee filed a notice that the cure payments of $6,800 had been paid in full and that the entire mortgage debt had been satisfied. The debtor filed a motion asking the court, in substance, to require the lender to deliver a satisfaction of the mortgage.
The lender objected, contending that the debtor had paid nothing toward the balance due on the mortgage of about $15,000. The lender also asked the court to modify the automatic stay.
The bankruptcy court granted the debtor’s motion to deem the mortgage as having been satisfied. The district court affirmed. The lender appealed to the circuit.
The Primacy of Section 1322(b)
Section 1322(b)(2) says that a chapter 13 plan may not modify a mortgage “secured only” by the debtor’s principal residence.
Judge Rosenbaum spent the better part of her 39-page opinion justifying the (obvious) conclusion that the “Plan unlawfully purported to modify [the lender’s] rights as a homestead mortgagee.” She found three instances in Section 1322 where Congress “expressly or implicitly protected from modification the rights of homestead-mortgage lenders.”
From the Supreme Court, Judge Rosenbaum found support primarily in Nobelman v. Am. Savs. Bank, 508 U.S. 324 (1993), where the Court barred a chapter 13 debtor from bifurcating a secured lender’s claim when the collateral was worth less than the debt. Like the Supreme Court, she focused on the language in Section 1322(b)(2) that prohibits modifying the lender’s “rights” rather than the lender’s “claims” alone.
Among Eleventh Circuit precedent, Judge Rosenbaum followed Universal Am. Mortg. Co. v. Bateman (In re Bateman), 331 F.3d 821 (11th Cir. 2003). Decided before Espinosa, Bateman held that a confirmed plan could not discharge the debtor from all of the arrears owed on a mortgage, in view of the anti-modification rule in Section 1322(b)(2).
“So while it’s true” that the lender’s claim sought only $6,800, Judge Rosenbaum said that “nothing about that claim . . . changed the fact that [the lender] was entitled under the terms of the mortgage and Alabama law to receive full payment on the balance of its loan.”
Bateman Survived Espinosa
While it may be true that the plan should have paid the principal amount of the mortgage, it’s a fact that the lender didn’t object and that the confirmation order was final. The debtor argued that Espinosa controlled and effectively overruled Bateman.
Indeed, Judge Rosenbaum cited Section 1327(a) and conceded that the plan was final, even though it did not comply with the Bankruptcy Code and “should not have been confirmed.” The plan, she said, “retains preclusive effect and is therefore valid and enforceable.”
Judge Rosenbaum said that the lender should have objected to the plan and should have filed a corrected proof of claim.
However, Judge Rosenbaum gave five reasons why Espinosa did not apply and did not abrogate Bateman. Most prominently, she said that Espinosa was decided under Federal Rule 60(b)(4) and therefore “has no bearing on the release of a lien after a confirmed plan erroneously modifies a homestead-mortgagee’s rights.” In the case on appeal, the lender was not contending that the confirmation order was void under Rule 60(b)(4).
Judge Rosenbaum said that Bateman arose “in a significantly different procedural posture.” Factually, she said that the lender in the case on appeal had not brought the challenge “years after the fact,” compared to Espinosa.
To this writer, the Eleventh Circuit seems to have held that Espinosa’s bar to a collateral attack on a final order only applies if the attack was under Rule 60(b)(4).
The Holding
Here’s the noteworthy holding in Judge Rosenbaum’s opinion:
[The lender’s] errors do not change the fact that the Code still affords special protections to homestead-mortgage holders’ rights. So even though our cases have recognized the importance of finality, they have also said time and again that secured liens survive bankruptcy proceedings. [Citations omitted.]
Here’s the second-most noteworthy statement of the holding:
While the finality provision confirms that it is too late to alter the Plan, it is not too late for [the lender] to invoke the Code’s special protection for homestead mortgagees.
Judge Rosenbaum held that the mortgage survived the debtor’s bankruptcy, allowing the lender to collect the full mortgage balance, because the “Plan could not legally modify those rights.”
Because the lender did not object on appeal to the discharge granted by the bankruptcy court, Judge Rosenbaum said in a footnote that the appeals court would not “disturb that decision.” The footnote seems to mean that the debtor will have no personal liability on the mortgage, although the lender can enforce the mortgage against the home.
At the risk of oversimplification, the Eleventh Circuit held that a final, enforceable order confirming a chapter 13 plan could not be enforced to the extent that the plan violated Section 1322(b)(2) by impermissibly modifying the mortgage on the debtor’s principal residence.
In her January 10 opinion, Circuit Judge Robin S. Rosenbaum declined to follow United Student Aid Funds Inc. v. Espinosa, 559 U.S. 260 (2010), where the Supreme Court held that a chapter 13 plan must be enforced even though it improperly discharged a student loan. Judge Rosenbaum appeared to interpret Espinosa as applicable only when a final, confirmed plan has been attacked under Federal Rule 60(b)(4).
Although it was “too late” for the mortgage lender “to alter the Plan,” Judge Rosenbaum said it was “not too late for [the lender] to invoke the Code’s special protection for homestead mortgagees.”
This writer reads the Eleventh Circuit’s opinion to mean that the lender could mount a successful collateral attack on one of the provisions in the plan, although the plan was final, enforceable and could not be altered.