Bankruptcy Newsletter

Plans Could Include Optional Provisions Approved by Judges
The inclusion in debtors' confirmed Chapter 13 plans of "the Addendum," a local form containing optional Chapter 13 plan provisions that had been approved by the district's bankruptcy judges and that imposed various post-confirmation reporting and other duties on mortgage creditors, violated neither RESPA nor the Bankruptcy Code's antimodification provision, the Ninth Circuit's Bankruptcy Appellate Panel ruled.

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The inclusion in the debtors' confirmed Chapter 13 plans of "the Addendum," a local form containing optional Chapter 13 plan provisions that had been approved by the bankruptcy judges of the Central District of California and that imposed various post-confirmation reporting and other duties on mortgage creditors, violated neither the Real Estate Settlement Procedures Act (RESPA) nor the Bankruptcy Code's antimodification provision, the Ninth Circuit's Bankruptcy Appellate Panel (BAP) has ruled.

In four separate Chapter 13 cases, creditors holding mortgages on the debtors' primary residences objected to confirmation of proposed plans incorporating provisions contained in "the Addendum." In three of the cases, the bankruptcy judges issued a joint memorandum of opinion generally overruling the objections, except for the objections to one subsection of the Addendum which required that mortgage creditors provide advance notice to debtors before filing a stay relief motion, and directing the debtors to file amended plans. The plans, as amended, eventually were confirmed. In the fourth case, the bankruptcy court came to similar conclusions and made similar rulings, and that debtor's amended plan also was confirmed. The mortgage creditors appealed. Because the facts in each case were undisputed and common legal issues were raised, the BAP ordered that the appeals be jointly briefed and argued.

Relying on comments made in connection with proceedings in another Chapter 13 case by the chairperson of the ad hoc committee that apparently crafted the Addendum, the BAP explained that the Addendum was designed and adopted in response to two needs: overcoming the reluctance of secured creditors to communicate with debtors in Chapter 13, and preventing secured creditors from assessing additional fees and costs against Chapter 13 debtors at the conclusion of cases that had not been communicated to the debtors or approved by a bankruptcy court. Although the committee originally proposed that the Addendum would be mandatory in all Chapter 13 plans, the district's board of judges rejected that proposal, and the committee ultimately proposed a non-binding, optional form, the propriety of which could be determined on a case-by-case basis.

The Addendum was approved by a majority vote of the district's bankruptcy judges and was implemented via a local form, Local Form 3015-1.1A. The Addendum contains numerous provisions, some of which were not contained in the plans in these cases and others of which were included in the plans but were not challenged by the mortgage creditors. Among the provisions implicated in the appeals were A2, which generally requires that, if a mortgage creditor provided monthly statements to a debtor prepetition, it must continue that practice postpetition, and such statements must contain specified information concerning postpetition payments to be made outside the plan; A4, which governs what is required of a mortgage creditor if, prepetition, it provided a debtor with "coupon books" or similar preprinted evidence of payments due; A5, which requires a mortgage creditor to provide certain loan information to a debtor upon the debtor's reasonable written request; A6, which requires a mortgage creditor to provide certain fee- or charge-related information to a debtor, a debtor's attorney, and/or a Chapter 13 trustee at least quarterly and upon reasonable written request; B3, which sets forth a debtor's remedies in the event a mortgage creditor fails to comply with the Addendum; and B4, which governs what is to occur if a mortgage creditor's regular billing system can provide a statement that substantially, but not fully, complies with the Addendum.

After determining that it had jurisdiction over the appeals, the BAP addressed, and rejected, the mortgage creditors' contention that RESPA, 12 U.S.C.A. § 2601 et seq., preempts the field of regulations concerning information required to be provided to consumers in real estate transactions, such that the imposition of additional reporting requirements in a Chapter 13 plan is prohibited. The creditors' argument was not supported by the plain language of RESPA, the BAP found, nor was it the clear intent of Congress in enacting RESPA that Chapter 13 debtors be prohibited from proposing enhanced mortgage account reports in their plans.

Congress intended that RESPA be viewed as a remedial consumer protection statute promoting the full and timely exchange of information between mortgage creditors and borrowers. This congressional intent did not conflict, but instead was consistent, with the rationale expressed in the joint memorandum for approving the inclusion of Addendum provisions in the debtors' plans, namely, to address the increasing problem of lenders springing undisclosed and sometimes questionable postpetition fees on debtors. The Addendum sought to address Chapter 13 issues that were neither addressed nor remedied by RESPA's reporting provisions.

Moreover, the plain language of RESPA shows that it does not "occupy the field" of mortgage creditor reports to debtors to the exclusion of other law. RESPA requires, for example, that where state law provides greater protection to consumers regarding mortgages on their principal residence, state law prevails. Other federal laws, including the Truth in Lending Act (TILA), 15 U.S.C.A. § 1601 et seq., and Regulation Z, which was enacted pursuant to TILA, impose "greater, potentially more intrusive and administratively burdensome reporting requirements on mortgage creditors than does RESPA," the BAP observed. "RESPA provides a floor, a minimum set of disclosures required of mortgage creditors to borrowers." Nothing in the statute indicates that the reporting duties it imposes on creditors were intended to exclude other laws or regulations.

Because use of the Addendum provisions was optional, the BAP summarily rejected the creditors' argument that inclusion of the challenged provisions violated the separation-of-powers doctrine.

The BAP also rejected the mortgage creditors' contention that the Addendum's reporting requirements violated the restriction on modification of the mortgage creditors' contractual rights which is set forth in the Bankruptcy Code's antimodification provision. Section § 1322(b)(2) of the Code instructs that 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 principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims[.]"

Although the Code bans modification of secured creditors' "rights," it does not define the term. "Courts that have examined the meaning of modification of rights of mortgage creditors in bankruptcy have held that only a mortgage creditor's rights to payment are protected from modification under § 1322(b)(2)," the BAP explained. The rights protected by the provision "all deal with the terms of payment of, the security for, and the ability to enforce the mortgage loan contracts." Here, nothing in the Addendum limited or modified the mortgage creditors' rights to payments, to make post-confirmation disbursements to protect their security interests, or to charge debtors for post-default services. "More significantly, our own review of the mortgage instruments in all four bankruptcy cases confirms there is no provision that grants the creditors a 'right' to decline to provide accountings and reports to the debtors or a trustee beyond those prescribed by the mortgage contracts, or any sort of bargained for prohibition on modification of duties under the contract," the BAP stated. While the contracts did acknowledge RESPA's reporting duties, such duties were not "rights" protected by § 1322(b)(2)'s antimodification provision. "Even if by some creative route we could transform the mortgage creditors' contractual and statutory duty to provide reports into a 'right' not to have those duties modified, we conclude it is not the sort of right that Congress intended to protect under § 1322(b)(2)."

The BAP found nothing in the case law that compelled the conclusion that the Code's antimodification provision prohibits the imposition of enhanced reporting duties by mortgage lenders. "Indeed, there is ample case law that supports an opposite conclusion," the BAP stated, citing, inter alia, In re Nosek, 544 F.3d 34 (C.A.1-Mass. 2008) (admonishing bankruptcy court for failing to require additional accounting and reporting by creditor and stating that such additional reporting would not have been prohibited by § 1322(b)(2)), In re Watson, 384 B.R. 697 (Bankr.D.Del. 2008) (ruling that plans containing procedures for timely notice of fees and charges under a mortgage do not run afoul of § 1322(b)(2)), In re Anderson, 382 B.R. 496 (Bankr.D.Or. 2008) (ruling that additional notice of changes in escrow accounts was more akin to a procedural requirement to aid Chapter 13 administration than to a modification), and In re Wilson, 321 B.R. 222 (Bankr.N.D.Ill. 2005) (holding that model plan requiring mortgage lender to provide itemized notice of outstanding payment obligations does not modify lender's rights in violation of § 1322(b)(2)).

Finally, the BAP noted, a plan's inclusion of the enhanced reporting requirements is authorized by § 1322(b)(11), the subsection of the Code providing that plans may "include any other appropriate provision not inconsistent with [title 11]." The grant of authority under § 1322(b)(11) "gives debtors considerable discretion to tailor the terms of a plan to their individual circumstances," the BAP explained. Bankruptcy courts have endorsed a broad range of provisions under § 1322(b)(11), including enhanced creditor account reporting requirements. In re Herrera, 2010 WL 144402 (9th Cir.BAP-Cal.).

A Michigan bankruptcy court has found Michigan's bankruptcy-specific exemption statute to be unconstitutional. The statute infringed on Congress's exclusive power to enact bankruptcy laws under the bankruptcy clause. Moreover, the statute did not satisfy the bankruptcy clause's uniformity requirement, in that it prevented a bankruptcy trustee from taking the same property that would have been available to creditors outside of bankruptcy. The bankruptcy court noted further that bankruptcy-specific exemptions could penalize creditors for exercising the right, under the Bankruptcy Code, to file an involuntary case against a debtor, and could be an "extreme disincentive which would effectively hinder creditors' rights." In re Pontius, 2009 WL 5245631 (Bkrtcy.W.D.Mich., Judge Gregg).

A satellite television provider that had a total investment in excess of $250 million in the Chapter 11 debtors' competitor, and which purchased all of the debtors' first lien debt for 100 cents on the dollar after their disclosure statement was filed, did not act in "good faith" in voting to reject the debtors' proposed plan, such that its vote could be designated. The satellite television provider was not acting as a creditor to maximize its recovery under the plan, but with the ulterior purpose of using the recently purchased claims to gain control over the debtors by filing a competing plan, as demonstrated not only by its acknowledgement that its purchase of the claims might not have made economic sense, but by internal memoranda hinting at this ulterior purpose and by the fact that, in also purchasing second lien claims, it was careful to purchase only second lien claims that were not subject to an agreement to support the debtors' proposed plan. In re DBSD North America, Inc., 2009 WL 5088734 (Bkrtcy.S.D.N.Y., Judge Gerber).

The bankruptcy statute providing that the United States Trustee (UST) shall review all materials filed by a Chapter 7 debtor and, no later than 10 days after the date of the first meeting of creditors, file with court a statement as to whether the case will be presumed to be abusive [11 U.S.C.A. § 704(b)(1)] requires the UST to file such a statement within ten days of the conclusion of, and not within ten days of the start of, the first meeting of creditors. Requiring the UST to file such a statement within ten days of the commencement of the meeting, before he had a chance to investigate any inconsistencies or ambiguities in materials filed by the debtors and to resolve underlying factual issues bearing on the issue of abuse, would be contrary to the goals of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to restore integrity in the bankruptcy system and to ensure that the system was fair to both debtors and creditors. A federal district court in California disagreed with a contrary decision out of Kansas. In re Reed, 2009 WL 5227840 (C.D.Cal.).