- 15 FED App. 0006P (6th Cir. August 10, 2015)
- The Bankruptcy Court erred in reducing mortgage balances by the amount the secured lender would have received under Chapter 13 plan had creditor filed proofs of claim. The Secured creditor's liens passed through bankruptcy and completion of the Debtors' plan did not discharge the Debtors' obligation to the Bank. The BAP held there was no legal or equitable basis for reducing the amount of the mortgage by the amount the creditor would have received had it filed a proof of claim. The Court noted that neither the Code nor the bankruptcy rules require secured creditors to file claims. The Court noted that the problem could have been avoided by the Trustee or Debtor filing a proof of claim on behalf of the creditor under Sec. 501 (c) of the Code and Fed. R. Bankr. P. 3004. While the Bank may have waived its right to receive payment under the plan, it did not waive its right to payment of the debt which was not being discharged. Because no payment had been made on the mortgages under the plan, the Debtors exited bankruptcy with their mortgages in default. The Bank still retained the right to collect payment by foreclosing on their collateral. The decision of bankruptcy court was affirmed in part, reversed in part and remanded for entry of judgment for secured creditor.
- Procedural context:
- Subsequent to their Ch. 13 discharge, the Debtors filed an adversary proceeding seeking to determine that the mortgage liens on rental property had been discharged upon completion of the plan because the Bank had failed to file proofs of claim in the case. On cross motions for summary judgment, the Bankruptcy Court held that the mortgage liens were not discharged but that the secured claims should be reduced by the amount that the secured creditor would have received had it filed a proofs of claim. The 6th Circuit BAP affirmed the trial court's holding that the lien survived the Ch. 13 plan but reversed the trial court's holding that reduced the amount of secured creditor's claim.
- The Debtor's Chapter 13 plan provided for the cure of defaults and maintenance on several pieces of real property pursuant to 11 U.S.C. Sec. 1322(b)(5). The Bank, which held mortgages on two of the properties, failed to file a proofs of claim in the case. There were no prepetition arrearages owed to the Bank but both mortgages were in arrears one month at the time of confirmation. The practice of the Bank was to only file proofs of claim if there were prepetition arrearages. The Debtors completed all plan payments but no distribution was made because of the bank's failure to file proofs of claim. Because of no distribution to the Bank, the Debtors plan was completed ahead of schedule and the Debtors received a refund of $9,092.61, due primarily to the mortgage payments that had not been made to the Bank. Prior to termination of the plan, the Debtors sued the Bank seeking to avoid the mortgages on the basis that no proofs of claim had been filed. The Bankruptcy Court held that the Bank's liens survived the Debtors' plan but held that the Bank waived its right to payment under the plan by not filing a proof of claim and that the amount of the mortgage should be reduced by the amount of payments the Bank would have received had it filed a proof of claim. The Bank appealed the decision to the BAP.
- Delk, Opperman and Preston
John Finstad v. James Gord
Summarizing by Bradley Pearce
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