November 12, 1998, 1998.WNY.0000141<http://www.versuslaw.com>
The opinion of the court was delivered by: KAPLAN
An interesting question, perhaps of first impression, is raised here. May a person who has inherited mortgaged real estate that is his home, file a Chapter 13 petition and Chapter 13 Plan to redeem the real estate over the objection of the mortgagee, even though the mortgagee obtained a judgment of foreclosure and sale before the real estate was deeded to that person by the executor of the decedent's estate and before the filing of the Chapter 13 petition? This Court answers the question in the negative and holds that Chapter 13 may not be used to force a mortgagee to accept installment payments of the redemption amount at least where, as here, the debtor and the mortgagee are not in privity of contract. It is only in the Chapter 13 case of the mortgagor that the contract rights between the mortgagor and the mortgagee may be modified. Those rights may not be modified in the Chapter 13 case of the mortgagor's successor-in-interest.
In 1995, Thomas Parks, Sr. passed away, having preserved a Last Will and Testament in which he left everything he owned, including his house, to his son and his daughter. The will did not make a specific bequest of the house, but rather empowered the executor, which was the son, to either sell the home or not, as he saw fit.
The son, Thomas Parks, Jr., lived in the home and wanted to keep it. But at the time of his father's death, his father's mortgage indebtedness was in default, his own finances were not sufficiently stable to work matters out with the existing mortgagee, and various efforts that he undertook to obtain financing from other sources (i.e. financing that would permit him to pay off the pre-existing mortgage as well as to pay his sister the value of her half interest in the real estate) had failed. In the meantime further defaults had occurred both in payments of monthly installments and payment of real property taxes.
Thomas Parks, Jr. continued his efforts to try to save the home after the pre-existing mortgagee commenced foreclosure proceedings in 1996. He was named, as executor, a party defendant, as was his sister. After the entry of a judgment of foreclosure and sale, a foreclosure sale was publicized. All other efforts having failed, Thomas Parks, Jr., as executor of his father's will, deeded the real estate to himself and his sister. Later that same day, he filed for Chapter 13 relief.
The Debtor now proposes a Chapter 13 plan by which he, with the financial assistance of others, proposes to pay off the total amount of mortgage indebtedness, including interest, foreclosure costs, collection costs, attorneys fees, etc. within the life of a four or five year repayment plan.
Thus, the Debtor is not suggesting that he may reinstate the terms of his father's mortgage on the property just as his father could do (under 11 U.S.C. § 1322(c)(5)) if he were the Chapter 13 Debtor here. Rather, his proposal is to pay off this encumbrance upon the property which he and his sister now own, which is an in rem liability only (since he was not an obligor on his father's mortgage), in full over the life of the plan.
Assuming for the sake of argument that he and his sister have validly acquired their father's right of redemption under New York mortgage law,
he simply wishes to exercise that right of redemption by payment, over the life of the plan, of the present value of the full amount of the mortgagee's claim. Of course, the Debtor also proposes the continuation of the mortgagee's lien, the maintenance of insurance, and other normal elements of "adequate protection" of the mortgage lien.
The mortgagee challenges the feasibility of the plan. And it seeks lift of the automatic stay under 11 U.S.C. § 362(d) arguing that the Debtor did not acquire any valid legal interest when he, as executor, deeded the property to himself and his sister long after (1) the commencement of the foreclosure proceeding, (2) the filing of a lis pendens, and (3) the entry of a judgment of foreclosure and sale. Rather, the mortgagee asserts, any legal interest of the Debtor in the property is a "self-created sham designed to delay" the mortgagee and is designed to "provide the Debtor with continued cost-free living without the Debtor ever having personal liability on the Mortgage and Note." The mortgagee further argues that pursuant to the terms of the mortgage, the property could not be transferred without the consent of the mortgagee, and such consent had never been sought or given. Additionally, the mortgagee argues that pursuant to the express terms of the Mortgage and Note, the Debtor could not stay the foreclosure by a "bogus transfer of the subject property which transfer in and of itself is yet another default under the terms of the Mortgage and Note," and that the Debtor cannot, by transferring the subject property to himself, "become the mortgagor."
The mortgagee further asserts that the Debtor "expects this Court to ignore the fact that Debtor is not an obligor on the instant Mortgage and Note and [to] require [the mortgagee] to create a mortgagee-mortgagor relationship with the Debtor who is unemployed and has no visible means of support." Finally, it argues that there is no equity in the property and that "cause" exists for the lift of stay, in light of many allegations of fact made by the mortgagee in its motion and supporting papers.
First, it should be observed that by virtue of 11 U.S.C. § 102(2), there can be no doubt about the fact that the absence of an obligor-obligee relationship here is not dispositive: A claim only against property of a debtor is nonetheless a "creditor" claim under the Code. Now, as noted above, the Court will assume, without deciding, that as heirs and now purportedly as record owners of the property, the Debtor and his sister would have a right under the laws of the State of New York to exercise an equity of redemption of the property prior to the foreclosure sale, just as their father could have done.
The Debtor makes no argument that under state law, an equity of redemption may be exercised by a payment over a period of years regardless of the non-acquiescence of the mortgagee. Consequently, his plan could be premised only on some provision of the Bankruptcy Code. The only portion of the Code that could possibly serve as the predicate for this Debtor's proposal is 11 U.S.C. § 1322(b), (c), or (e), which provide what a Chapter 13 plan "may" do. Because this Chapter 13 petition was filed after the entry of judgment of foreclosure and sale, but before the actual foreclosure sale, one's attention is immediately called to § 1322(c) which replaced the prior subsection in 1994. The amended provision states, in pertinent part, that "a default with respect to, or that gave rise to, a lien on the Debtor's principal residence may be cured . . . until such residence is sold at a foreclosure sale that is conducted in accordance with applicable non-bankruptcy law." 11 U.S.C. § 1322(c)(1) (Supp. 1998). Even before the enactment of that provision, it was established under N.Y. state law that a homeowner's rights to the land are not completely extinguished by the entry of a judgment of foreclosure and sale, but rather sufficient rights exist up to the point of foreclosure sale to permit complete relief under Chapter 13. See DiPierro v. Taddeo (In re Taddeo), 685 F.2d 24, 28-29 (2d Cir. 1982). Therefore, assuming arguendo that the Debtor stands in his father's shoes, the fact that a judgment of foreclosure and sale was entered before the filing of this Chapter 13 petition does not, of itself, end the inquiry into this Debtor's rights.
Next we will examine § 1322(b)(3) and (5). Section 1322(b)(3) permits a plan to "provide for the curing or waiving of any default," and (b)(5) contains an exception to the prohibition against modification of mortgages on principal residences, stating that the plan may "provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due." Subsection (b)(3) thus provides for the curing or waiving of any default, and subsection (5) permits, in essence, the de-acceleration of any long-term ...