Mark V. Lemieux and Sandra L. Lemieux

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UNITED STATES BANKRUPTCY COURT
FOR THE
DISTRICT OF MASSACHUSETTS

Ca La na de eee a ae eo a a a

In re

MARK V. LEMIEUX and Chapter 13

SANDRA M. LEMIEUX, Case No. 05-30217-JNF
Debtors

RRR REE REE

MEMORANDUM

I. INTRODUCTION

Several matters are before the Court: the Motion of Margaret E. Davis-Mullen,
Trustee of Pastel Realty Trust, for Relief from the Automatic Stay, and the Opposition to
the Motion filed by the Debtors, Mark and Sandra Lemieux (the “Debtors”);' and the
Objection of Margaret E. Davis-Mullen, Trustee of Pastel Realty Trust, to Debtors’ Chapter
13 Plan, and the Debtors’ Opposition to the Objection. The Court heard the matters on June
15, 2006 and took them under advisement. Among the issues presented is one of first
impression, namely whether the Debtors’ proposed Chapter 13 plan which provides for
periodic plan payments to Margaret E. Davis-Mullen, Trustee of Pastel Realty Trust
(“Davis-Mullen”) is unconfirmable because it violates the provisions of 11 U.S.C. §
1325(a)(5)(B)(iii)(), which requires payments in equal monthly amounts, if the debtor

proposes to distribute property to a secured creditor in the form of periodic payments.

* Davis-Mullen filed a “Notice of 30 Day Waiver of Hearing” with respect to the
requirements of 11 U.S.C. § 362(e) on May 23, 2006.

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AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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Il. FACTUAL BACKGROUND

The Debtors filed a voluntary Chapter 13 petition on December 14, 2005. As
represented in open court, the Debtors are divorced and Mrs. Lemieux lives at 35 Irving
Drive, Walpole, Massachusetts (the “ property”) with the couple’s four children.

On January 19, 2006, the Debtors filed their Schedules and Statement of Financial
Affairs. On Schedule A-Real Property, the Debtors listed an ownership interest in the
property which they valued at $420,000 pursuant to a “recent appraisal.” On Schedule D-
Creditors Holding Secured Claims, the Debtors listed creditors with claims against the
property, including Countrywide Loan, the holder of a first mortgage in the sum of
$220,000, and “William Mullen, Atlantic Title, as the holder of second and third mortgages
in the sums of $42,000 and $35,000, respectively.’ On Schedule E-Creditors Holding
Unsecured Priority Claims, the Debtors listed the Commonwealth of Massachusetts as the
holder of a claim arising from non-payment of meals taxes associated with Arbed Sports
Pub, Inc., which they estimated at $15,000, and, on Schedule F-Creditors Holding
Unsecured Nonpriority Claims, the Debtors listed credit card and miscellaneous other debt
lolaling $35,866.

The Debtors filed a Chapter 13 plan on January 19, 2006 to which Davis-Mullen and

the Chapter 13 Trustee objected. On March 30, 2006, the Court sustained Davis-Mullen’s

* On Schedule B, the Debtors disclosed unliquidated claims arising from a
“possible negligence suit” against William Mullen. The Debtors do not dispute that
Davis-Mullen is the legitimate holder by way of assignments of valid mortgages
encumbering the Walpole property.

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Objection to their first plan and ordered the Debtors to file an amended plan. On May 12,
2006, the Debtors filed a First Amended Pre-Confirmation Plan. Four days later, Davis-
Mullen file her Motion for Relief from the Automatic Stay.

The Debtors propose a 36 month plan with monthly plan payments of $1,081. They
intend to pay their first mortgage directly and to pay Davis-Mullen’s mortgages, including
arrears, in the sums of $62,147 and $41,772, as well as a tax claim owed to the
Massachusetts Department of Revenue and an administrative expense claim owed to their
attorney. Their income is insufficient to permit the payment of a dividend to the holders
of unsecured debt. They explain how they intend to implement their plan as follows:

Debtors to pay $1,081 per month for 35 months = $37,835 and a
balloon payment of $95,853 on or about the 36" month. This balloon
payment will come from a refinancing for $95,853 above the first mortgage

(less any contribution made by William Capone towards the third mortgage -

he is the actual borrower on the third mortgage), towards the third

mortgage. This contribution expected to be no less than $18,000.

Davis-Mullen objected to the Debtors’ First Amended Pre-Confirmation Plan. In her
pleadings, she disclosed that she holds a mortgage by assignment, dated October 2, 2003.
which secures a note of even date in the original principal amount of $55,000 and which is
payable on October 2, 2006, as well as a $35,313.86 mortgage with the same date and terms
securing a guaranty of a note executed by William Capone. [hat note also matures in
October 2006. Monthly payments under the $55,000 note are $1,774.70.

Davis-Mullen objected “to any repayment beyond the agreed repayment period of
October 2006.” Additionally, she objected to repayment through the Debtors’ plan, as well
as to the amount of the monthly plan payment, which she asserted is less than the amount

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payable under the note secured by the second mortgage.

In her Motion for Relief from the Automatic Stay, Davis-Mullen alleged that the
property is the only collateral securing the mortgages and that the Debtors have made no
payments on the notes and are in default of their obligations under the terms of the loan
documents. She further alleged that the encumbrances on the property total $323,917.86
including sums due under the first mortgage and that she had obtained an appraisal from
R.J. Hadge Appraisal, Inc. According to Davis-Mullen, the Hadge appraisal sets forth a fair
market value of $365,000 as of April 13, 2005. Moreover, she asserted that the property has
a liquidation value of $255,000. In her view, the value of her position is eroding daily due
to the accumulation of interest, attorneys’ fees and other expenses. Moreover, she asserted
that there is no likelihood that the Debtors can reorganize within a reasonable time. In
short, she maintains that she has established cause for relief from stay under 11 U.S.C. §
362(d)(1) and that she has established grounds for relief from stay under 11 U.S.C. §
362(d)(2).

The Debtors objected to Davis-Mullen’s Motion for Relief from the Automatic Stay.
Specifically, they challenged her appraisal as outdated. They also asserted that the valuc
of the property is not eroding because of payments being made to the Chapter 13 trustee
and that a reorganization is in prospect.

Atthe June 15, 2006 hearing, Davis-Mullen advanced the argument that the Debtors’
monthly plan payments were not in equal monthly amounts because of the balloon

payment provision. The Court granted the parties an opportunity to brief the issue of

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whether balloon payments are permissible under 11 U.S.C. § 1325(a)(5)(B)(iii) (1).
III. DISCUSSION

A. Davis-Mullen’s Objection to Confirmation of the First Amended Plan

An analysis of the issues must begin with section 1322(b)(2). That section provides
that “ [s]ubject to subsections (a) and (c), the plan may .. . (2) 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.” 11 U.S.C. § 1322(b)(2).
Notwithstanding subsection 1322(b)(2), however, the Bankruptcy Code provides 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 ... 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). The Debtors do not propose to “cure and maintain” with respect to Davis-
Mullen’s secured claims. Instead, they are proceeding under subsection (c), which creates
an exception to § 1322(b)(2) for short term obligations. It provides:

Notwithstanding subsection (b)(2) and applicable nonbankruptcy law-.. .

(2) in a case in which the last payment on the original payment schedule for

aclaim secured only by a security interest in real property that is the debtor's

principal residence is due before the date on which the final payment under

the plan is due, the plan may provide for the payment of the claim as

modified pursuant to section 1325(a)(5) of this title.

11 U.S.C. §1322(c)(2). Section 1325(a)(5), in turn, provides the following with respect to the

allowable treatment of secured claims:

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(5) with respect to each allowed secured claim provided for by the plan--

(A) the holder of such claim has accepted the plan;
(B)(i) the plan provides that--
(I) the holder of such claim retain the lien
securing such claim until the earlier of--
(aa) the payment of the underlying
debt determined under
nonbankruptcy law; or
(bb) discharge under section 1328; and
(II) if the case under this chapter is dismissed or
converted without completion of the plan, such
lien shall also be retained by such holder to the
extent recognized by applicable nonbankruptcy
law;

(ii) the value, as of the effective date of the plan, of property
to be distributed under the plan on account of such claim is not
less than the allowed amount of such claim; and

(iii) if--

(I) property to be distributed pursuant to this
subsection is in the form of periodic payments,
such payments shall be in equal monthly
amounts; and
(II) the holder of the claim is secured by personal
property, the amount of such payments shall not
be less than an amount sufficient to provide to
the holder of such claim adequate protection
during the period of the plan; or
(C) the debtor surrenders the property securing such claim to
such holder.

11 U.S.C. § 1325(a)(5)(emphasis added).

To the extent that Davis-Mullen objects to the Debtors’ use of 11 U.S.C. §§ 1322(c)
and 1325(a)(5) with respect to her secured claims, the Court overrules her objection.
Because Davis-Mullen’s mortgages are payable in October 2006 within the term of the
Debtors’ proposed plan, the Debtors may modify her secured claims if they satisfy the

requirements of § 1325(a)(5)(B). With respect to her objection based on the Debtors’

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proposed treatment of her secured claims under § 1325(a)(5)(B)(iii) (1), advanced at the June
15'" hearing, the Court sustains her objection.

The Debtors propose to make regular monthly payments through their plan in the
sum of $1,081. While that sum may be sufficient to provide adequate protection to Davis-
Mullen under 11 U.S.C. § 361, the Debtors must make a balloon payment in the sum of
$95,853 to satisfy Davis-Mullen’s secured claims in order to comply with 11 U.S.C. §§
1322(c) and 1325(a)(5) because the notes mature in October of 2006. The difficulty with the
Debtors’ proposed treatment of Davis-Mullen’s secured claims is the requirement that
payments be in equal monthly amounts because they are distributing property to Davis-
Mullen in the form of periodic plan payments. The Debtors’ plan does not contain
provisions for distributions in equal monthly amounts.

The Court finds that the plain meaning of 11 U.S.C. § 1325(a)(5)(B)(iii)(I) precludes
confirmation of the Debtors’ Chapter 13 plan and requires this Court to sustain Davis-
Mullen’ objection. The Court finds support for its decision in In re Wagner, 342 B.R. 766
(Bankr. E.D. Tenn. 2006). In that case, the debtor filed an amended plan in which she
proposed to make bi-weekly plan payments to the trustee of $420.00 for 60 months, plus
the payment of all tax refunds in excess of $1,500.00. Additionally, she proposed to pay the
holder of the mortgage on her real property monthly “maintenance installments” of
$728.00 commencing in March 2006, and continuing for 23 months, witha balloon payment
for the balance due in the 24th month. 342 B.R. at 769. The bankruptcy court refused to

approve the debtor's proposed plan, observing the following:

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[U]nder the Bankruptcy Abuse Prevention and Consumer Protection Act of
2005 (BAPCPA), payments to secured creditors must be in equal amounts.
“The language in amended section 1325(a) of [BAPCPA],... which addresses
the components necessary to confirm a plan, reinforces the importance of
maintaining the creditor’s lien rights. Unlike the previous section 1325, the
new language seems to require that payments made after confirmation be in
equal amounts and keep pace with depreciation during the term of the plan.”
Americredit Fin. Servs., Inc. v. Nichols (In re Nichols), 440 F.3d 850, 857 n. 6
(6th Cir. 2006); see also In re DeSardi, 340 B.R. 790, 804-05 (Bankr. S.D.
Tex.2006) (“The Court understands [§ 1325(a)(5)(B)(iii)(I)] to require
payments to be equal once they begin, and to continue to be equal until they
cease.”). Accordingly, in order to obtain contirmation, the Debtor’s plan
must provide for equal monthly payments to New Falls Corporation over the
life of the plan until the lien claim is satisfied. Such treatment cannot then
allow for a balloon payment in the final month, as proposed by the Debtor.
Accordingly, the Debtor's April 18, 2006 Amended Plan is not confirmable
under § 1325(a)(5)(B).

342 B.R. at 772 (footnote omitted).

The Debtors rely upon In re Davis, 343 B.R. 326 (Bankr. M.D. Fla. 2006), for the

proposition that there is no requirement that payments be in equal monthly amounts and
that balloon payments are permissible. That case, however, is distinguishable because the
debtor was relying upon § 1322(b)(5) to cure and maintain payments on her mortgage on
which the last payment was due after the date on which the final plan payment was due.

The court in Davis concluded:

Based upon the historical analysis of the interplay between Section 1322(b)(5)
and Section 1325(a)(5) (under which Section 1325(a)(5)(B)(ii1) falls), the Court
finds that equal monthly payments are not required as the claim at issue is
one in which arrears on long term debt are being cured. Thus, Creditor’s claim
falls outside the ambit of requirements contained under Section 1325(a)(5).
As the Court has found Section 1325(a)(5)(B)(iii) to be inapplicable, there is
no need for the Court to reach a determination as to the parameters of what
qualifies as “equal monthly payments.”

342 B.R. at 328 (emphasis supplied). Cf In re Gillis, 333 B.R. 1 (Bankr. D. Mass. 2005).

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This Court notes that the cases cited by the court in Wagner involved personal
property. That distinction does not alter the outcome in this case, however, because §
1325(a)(5) governs claims secured by both real and personal property. Moreover, the Court
rejects the Debtors’ argument that this Court should construe the language used in §
1325(a)(5)(B) (iii)(I) to pertain to personal property only, and not real property, because of
the explicit reference to personal property in § 1325(a)(5)(B)(iii)(II).

To obtain confirmation of a plan, a debtor must provide, pursuant to §
1325(a)(5)(B)(i) and (ii), that the secured creditor retain its lien and that the value of
property to be distributed under the plan on account of the secured claim is not less that
the allowed amount of the claim. Section 1325(a)(5)(B)(iii) sets forth the required treatment
for allowed secured claims beginning with the word “if” followed by subsections (1) and
(I) reproduced above. The word “if” precedes both subsection (I) and (II), which are thus
independent of one another. Section 1325(a)(5)(B)(iii)(I) applies to real property,
particularly as it is conceivable, for example, that a Chapter 13 debtor might have a
mortgage on real property but not a lien or other encumbrance on personal property,
while both subsections (1) and (II) apply to claims secured by personalty.

As stated in 8 Collier on Bankruptcy 41325.06[3][b][ii][A] at 1325-39 (15" ed. revised
2005), § 1325(a)(5)(B)(iii)(1) “refers to the distributions to the holder of the allowed secured
claim and not to the debtor’s plan payments.” According to Collier, “[t]here does not seem
to be any requirement that the equal monthly amounts extend throughout the plan,” and

it “ does not preclude a plan providing fora single payment.” Id. Although those precepts

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may hold true, the Debtors have not tested them in this case. Rather, they have proposed
a plan with unequal periodic payments that cannot be confirmed because of the plain
language of the statute.

B. The Motion for Relief from the Automatic Stay

Pursuant to 11 U.S.C. § 362(g), Davis-Mullen has the burden of proof on the Debtors’
equity in their Walpole property. She attached an opinion of value in the sum of $365,000
based onan appraisal conducted in April of 2005. The Debtors maintain that their property
is worth $420,000, a difference of $55,000. They valued the property based upon “a recent
appraisal.” They listed that value in their Schedules filed on January 19, 2006 and in their
Chapter 13 plan filed on May 12, 2006. Accordingly, a dispute exists as to the value of the
property and, concomitantly, the extent to which Davis-Mullen may be adequately
protected by an equity cushion and the need for, and amount of, adequate protection
payments.

Ill. CONCLUSION

In view of the foregoing, the Court shall enter an order sustaining Davis-Mullen’s
objection to the Debtors’ First Amended Pre-Confirmation Chapter 13 Plan and scheduling
an evidentiary hearing on the Motion for Relief from the Automatic Stay.

the Court,

Joan N. Feerfe ey
; J United States Bankruptcy Juc
"

Dated: August/ (, 2006
cc: Gary W. Cruickshank, Esq., John Ullian, Esq., Chapter 13 Trustee

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