The U.S. Court of Appeals for the Eleventh Circuit recently held that a mortgage loan with a post-plan maturity date was not discharged in a Chapter 13 bankruptcy because the plan did not “provide for” the debt and modify the repayment terms of the mortgage.

The Eleventh Circuit also held that the debt was not discharged because discharge would violate 11 U.S.C. § 1322(b)(2)’s anti-modification provision for mortgages secured by the debtor’s principal residence.

A copy of the opinion in Mildred M. Dukes v. Suncoast Credit Union is available at: Link to Opinion.

The debtor had two mortgage loans on her home that mature in 2022. At the time she filed for Chapter 13 bankruptcy, the debtor was current on her payments to the creditor for the two mortgages.

The debtor’s Chapter 13 plan stated that she would make payments directly to the creditor, not through the bankruptcy trustee. The plan did not set repayment terms for the creditor’s mortgages.

When the debtor completed the plan payments, the bankruptcy court discharged “all debts provided for by the plan.” 11 U.S.C. § 1328(a).

The debtor defaulted on her mortgage payments. The creditor foreclosed on the debtor’s home under the second mortgage and sought a personal judgment against the debtor on the first mortgage.

The creditor reopened the bankruptcy and filed an adversary proceeding to declare that the debtor’s personal liability on the first mortgage had not been discharged.

The bankruptcy court and the federal trial court both concluded that the first mortgage was not discharged because it was not “provided for” by the debtor’s bankruptcy plan. Both also ruled that the debt was not discharged because discharge would violate 11 U.S.C. § 1322(b)(2), which prohibits a plan from “modify[ing] the rights of holders of “a claim secured only by a security interest in real property that is the debtor’s principal residence.”

This appeal followed.

The debtor argued that the discharge included the creditor’s first mortgage because the plan mentioned that the mortgage would be paid outside the plan.

The Eleventh Circuit observed that the U.S. Supreme Court had interpreted the term “provided for” in 11 U.S.C. § 1325(a)(5) more narrowly to require that the plan either stipulate to or make a provision for the debt. Rake v. Wade, 508 U.S. 464, 473 (1993).

As you may recall, in Rake, the Supreme Court of the United States acknowledged that plans split the debt into two claims: “the underlying debt and the arrearages.” Id. Each plan that treated the arrearages as a distinct claim to be paid off within the life of the plan “provided for” the debt and the creditor was entitled to interest under section 1325(a)(5). Id.

Applying this rubric, the Eleventh Circuit found that the debtor’s plan did not modify the repayment terms for any portion of the creditor’s mortgage. Consequently, the plan did not “provide for” the debt and the mortgage was not included in the discharge.

The Eleventh Circuit also analyzed the debtor’s plan in the context of Chapter 13.

As you may recall, a Chapter 13 plan cannot unilaterally deprive secured creditors of their rights. To modify a secured creditor’s claim, a plan must meet at least three criteria: (1) the holder of a secured claim must accept the plan; (2) the plan must provide that the secured creditor will receive the full value of the secured claim and will not lose its security interest in the debtor’s property until the claim is paid; or (3) the debtor must surrender the collateral. 11 U.S.C. § 1325(a)(5).

The anti-modification provision in section 1322(b)(2) goes even further and expressly prohibits a plan from modifying “the rights of holders of a claim secured only by a security interest in real property that is the debtor’s principal residence.” 11 U.S.C. § 1322(b)(2).

However, a debtor can cure pre-petition arrears on mortgage debts without violating the anti-modification provision under the exception to section 1322(b)(2) contained in section 1322(b)(5). Nobelman v. Am. Sav. Bank, 508 U.S. 324, 330 (1993).

Section 1322(b)(5) states that a plan may “provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any secured claim on which the last payment is due after the date on which the final payment under the plan is due.” 11 U.S.C. § 1322(b)(5).

Importantly, a long term debt incorporated into the plan under section 1322(b)(5) does not discharge the debt once the debtor completes the plan. 11 U.S.C. § 1328(a)(1).

The Eleventh Circuit explained that because the debtor chose not to address the mortgage in her plan, “[o]bligations handled like this are governed by the preexisting contractual terms, not by any provision of the plan.” The “most obvious” conclusion as the Eleventh Circuit explained was that the mortgage was not “provided for” by the plan and the debt was not discharged by the bankruptcy.

The debtor relied on In re Gregory, 705 F.2d 1118 (9th Cir. 1983), a case decided before Rake, where the Ninth Circuit held that a bankruptcy plan that “provide[d] for -0- payment to unsecured creditors” still discharged the debt. In re Gregory, 705 F.2d 1118, 1120 (9th Cir. 1983).

The Eleventh Circuit distinguished Gregory because the plan in that case stipulated to terms for the unsecured creditor’s debt. It proposed to pay nothing and such treatment put the unsecured creditor on notice that the plan would affect his rights. 705 F.3d at 1122-23.

As the Eleventh Circuit explained, the creditor in this case received no notice that its rights were being modified, and the creditor in Gregory was unsecured and did not have the protection of the anti-modification provision that the creditor did here. Thus, the Eleventh Circuit found Gregory unpersuasive because it addressed materially different facts and circumstances.

The Eleventh Circuit concluded that “the mere reference to a secured creditor’s claim on a debtor’s primary residence” was insufficient to find that the claim was “provided for” by the plan and included in the discharge.

The debtor argued that the creditor consented to the modification of its rights because it had notice of the plan and failed to object.

The Eleventh Circuit easily dispatched the argument “because the plan did not contain any modification that would be objectionable.” In the Eleventh Circuit’s view, the debtor was required to specify as accurately as possible the amounts which she intends to pay the creditors and the debtor will “pay the price if there is any ambiguity” in terms of her plan.

The debtor also argued that the discharge was not a modification because it merely removes in personam liability and the creditor could still foreclose on the property.

The Eleventh Circuit found the debtor’s second argument equally unpersuasive, explaining that removal of the creditor’s right to pursue in personam liability against the debtor would strip the creditor of rights provided by the original loan instruments, including its right to seek a deficiency judgment against the debtor under Florida law. Fla. Stat. § 702.06.

Additionally, the debtor argued that the creditor cannot pursue her in personam for any deficiency because the creditor failed to file a proof of claim for the first mortgage.

As you may recall, if no proof of claim is filed at the outset of bankruptcy, the creditor typically loses its right to repayment and the debt will be discharged under section 1328(a) as “disallowed.” See 11 U.S.C. § 502(b)(9) (disallowing claims that are not “timely filed” except in certain circumstances).

The Eleventh Circuit noted that the debtor raised the issue for the first time on appeal and had waived this argument. Nevertheless, the Eleventh Circuit explained that if it were to consider this issue, the creditor would still prevail on the merits.

A prior panel had recognized that a secured creditor’s lien survives even when it does not file a proof of claim. In re Thomas, 883 F.2d 991, 997 (11th Cir. 1989). The Eleventh Circuit later acknowledged that secured creditor’s rights protected by the anti-modification provision in section 1322(b)(2) included in personam liability. In re Bateman, 331 F.3d 821, 834 fn 12 (11th Cir. 2003).

Thus, the Eleventh Circuit determined that the creditor’s mortgage passed through the bankruptcy unaffected, even though no proof of claim was filed, and the creditor retained its rights to pursue a deficiency judgment against the debtor.

Accordingly, the Eleventh Circuit affirmed the orders of the bankruptcy court and trial court.