On December 6, 2018, the Eleventh Circuit Court of Appeals decided a case of first impression in Dukes v. Suncoast Credit Union. The issue before the Court was whether a chapter 13 plan’s reference to a claim as being paid outside the plan was “provided for” by the plan and thereby included in the discharge. The Eleventh Circuit concluded it was not discharged. This is excellent news for servicers.
The case involved a chapter 13 plan that stated that Suncoast Credit Union’s claim would be “treated outside”. The chapter 13 trustee did not make any payments toward the claim and the debtor received a discharge. Subsequently, the Credit Union foreclosed and sought a deficiency judgment against the debtor. The debtor reopened the bankruptcy case with the intent of obtaining an order stating that the debt was discharged. The bankruptcy court found it was not discharged and the debtor appealed to the district court which sided with the bankruptcy court.
The Eleventh Circuit explored the meaning of “provided for” as stated in §1328(a) and ultimately concluded that merely mentioning that the mortgage would be paid outside the bankruptcy, did not “provide for” the mortgage within the context of the chapter 13 plan. Thus, claims wholly governed by the original loan instruments rather than the terms of the bankruptcy plan are not “provided for” in the sense Chapter 13 contemplates. In other words, absent a provision in the plan providing for payment of the claim, the claim is not “provided for” and does not survive the discharge.
IMPACT ON SERVICERS
The most common scenario is the cramdown situation. Often times, a loan is valued inside the plan and either the plan or valuation order is silent as to the treatment of taxes and insurance. In this situation, the loan is de-escrowed and the taxes and insurance are not included in the chapter 13 plan. Thus, they are not “provided for”. This means that any amounts disbursed by the servicer during the course of the bankruptcy are not discharged and the servicer is free to seek recoupment from the debtor. However, the caveat being that any recoupment must occur prior to a lien release being recorded. Therefore, it is imperative that counsel by contacted prior to recording the lien release in order to advise on how to recoup any outstanding disbursements.
Determination of Final Cure
Another scenario this may arise is when either the debtor or trustee seeks a Determination of Final Cure under Rule 3002.1(h).
For instance, Padgett Law Group (“PLG”) recently handled a case on behalf of a client whereby the debtor was seeking an order stating that the entire loan had been paid and was discharged. In that case, the debtor’s chapter 13 plan did not provide for the full claim amount. Rather, it provided for adequate protection payments in the hopes of the debtor obtaining a loan modification that never occurred. The plan did not provide for the arrears or regular ongoing payments.
Relying on the bankruptcy court’s opinion in this case, PLG opposed the debtor and obtained a favorable order stating that the claim survived the discharge and the debtor was responsible for paying it.
HOW TO PROCEED GOING FORWARD
While this is a favorable decision servicers, it is important that servicers continue to keep accurate records of chapter 13 plan treatment and contact counsel prior to writing off a disbursements.
By the same token, servicers should immediately contact counsel after making escrow disbursements on loans that are crammed down and or do not provide for escrow. This is to ensure that prompt action is taken to seek reimbursement. Depending on the nature of the bankruptcy, it may be prudent to file a Motion for Relief from Stay or compel plan modification based on the disbursements being rendered administrative expenses under §503. Qualified bankruptcy counsel should be able to review the case and propose the best legal strategy.
Lastly, it is important to note that this decision is only binding in the Eleventh Circuit, which encompasses Florida, Georgia and Alabama.
For more information contact the author, Seth J. Greenhill, Esq, Bankruptcy Attorney, Padgett Law Group.
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