IN RE SCHMID

GUY HUMPHREY, Bankruptcy JudgePage 2

This adversary proceeding concerns whether the Debtor, Douglas A. Schmid, can reclassify an allowed secured claim, when the Debtor's confirmed plan provided the claim was secured. Specifically, the issue is whether the Debtor can avoid an asserted "wholly unsecured" mortgage on his primary residence when the Debtor's confirmed plan makes no provision for such a remedy and instead provides the holder of the mortgage as having a secured claim to be paid under the Debtor's Chapter 13 plan. The court concludes that the Debtor cannot pursue this adversary proceeding as a matter of law because the Debtor, just like any creditor, is bound by the terms of his confirmed plan. This court has jurisdiction pursuant to 28 U.S.C. § 1334 and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K).

Procedural Background

On January 23, 2003, the Debtor filed a Chapter 13 petition (Est. Doc. 1) and a Chapter 13 plan (Est. Doc. 4). The plan proposed to pay $900 each month, for 60 months, with a 100 percent dividend to all non-priority unsecured creditors. The plan proposed to pay Irwin Home Equity formerly known as Providian National Bank ("Irwin"), which holds the second mortgage on the Debtor's primary residence, located at 2510 Woodside Avenue, Springfield, Ohio 45503 (the "Property"), $235 each month and to cure a pre-petition arrearage owed to Irwin over the length of the Debtor's plan. Id. The Property was scheduled as having a value of $70,000 and the secured claim held by National City Bank under the first mortgage was scheduled at $55,000 (Est. Doc. 1). The plan was confirmed without objection (See Est. Doc. 18).

On January 27, 2004, the Debtor moved to modify the plan by raising the plan payment to $1,333 each month due to a child support obligation ending (Est. Doc. 33). This motion for modification, which did not address Irwin's allowed secured claim was also approved without objection by a March 16, 2004 order (Doc. 40). Following this modification, the court's docket did not have any new docket entries until 2 1/2 years later, when, on September 5, 2006, an appraisal was filed by C.E. McMonigle, at the behest of the Debtor, which appraised the property as being worth $50,000 as of July 18, 2006 (Est. Doc. 43).

Providian filed a secured proof of claim (court claim 5-1) on March 20, 2003 for $17,041.96. The Debtor's objection to that proof of claim is being determined through an order being filed in the Debtor's estate case simultaneously with this Decision. Subject to determination of the Debtor's objection to that proof of claim, Irwin has an allowed secured claim. 11 U.S.C. § 502(a).

On July 16, 2007, the Debtor filed this adversary proceeding (Doc. 1) and a claim objection (Est. Doc. 45) against the Defendant, Irwin. The complaint and the claim objection allege that the value of the Property was less than the first mortgage held by National City Bank and, therefore, Irwin's second mortgage lien should be released since there was no value in the Property to which Irwin's mortgage could attach. See Lane v. Western Interstate Bancorp. (In re Lane), 280 F.3d 663 (6th Cir. 2002) (Despite the language of § 1322(b)(2), a Chapter 13 debtor can modify a "wholly unsecured mortgage" (i.e. where there is no value in the property in excess of prior liens on a debtor's principal residence)). The complaint valued the residence at $50,000 based on the July 18, 2006 appraisal and noted that National City Bank's balance on its loan secured by the first mortgage was $54,935.71 on the petition date (Doc. 1). On September 13, 2007, Irwin answered the complaint (Doc. 6) and the claim objection (Est. Doc. 49), which, in essence, generally denied the substantive allegations and asserted the Debtor was bound by the Debtor's confirmed Chapter 13 plan. Following a pre-trial conference held on December 6, 2007, the court set dates for any motions for summary judgment in a December 10, 2007 order (Doc. 13). On January 9, 2008, Irwin filed its motion for summary judgment (Doc. 15). The Debtor filed a response on January 28, 2008 (Doc. 16).

Summary Judgment Standard

The standard to address the parties' filings is contained in Federal Rule of Civil Procedure 56(c) and is applicable to adversary proceedings through Bankruptcy Rule 7056 and states, in part, that a court must grant summary judgment to the moving party if:

the pleadings, the discovery and disclosure statements on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a matter of law.

Federal Rule of Civil Procedure 56(c).

In order to prevail, the moving party, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331 (1986). If the burden is on the non-moving party at trial, the movant must: 1) submit affirmative evidence that negates an essential element of the nonmoving party's claim; or 2) demonstrate to the court that the nonmoving party's evidence is insufficient to establish an essential element of the nonmoving party's claim. Id. at 331-332. Thereafter, the opposing party "must come forward with `specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986) (citations omitted); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-51 (1986). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita, 475 U.S. at 586-88.

Analysis

Section 1327(a) provides that "[t]he provisions of a confirmed plan bind the debtor and each creditor, whether or not such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan." 11 U.S.C. § 1327(a). The court notes that the Debtor, in his schedules, valued the Property at $70,000, which would leave equity in the Property to support the secured claim of Irwin. Assuming, for purposes of argument, that the Debtor is not bound by the valuation assigned to the property in the Debtor's Schedule A, the court notes that the confirmed plan provides for the Debtor to pay the monthly payment on Irwin's allowed secured claim and cure the pre-petition arrearage over the duration of the Debtor's plan. The plan does not make any reference in the plan to filing an adversary proceeding or taking any other action to avoid Irwin's lien as a "wholly unsecured" mortgage or to otherwise impair Irwin's secured claim other than curing the pre-petition arrearage over the duration of the plan. The Debtor failed to give Irwin any notice at the time of the scheduled confirmation hearing of its intent to reclassify Irwin's claim as unsecured and instead, 2 1/2 years after the Debtor's plan was confirmed, seeks to avoid Irwin's mortgage lien based on a July 2006 appraisal.

Irwin argues in its Motion for Summary Judgment that the Debtor is bound by the valuation of the Property set forth in the Debtor's Schedule A. Because determination of that issue is not necessary to the disposition of this adversary proceeding, the court is not determining that issue.

The Debtor argues that he is entitled to modify his plan at this time pursuant to 11 U.S.C. § 1329 and cites the decision in In re Stone, 91 B.R. 423 (Bankr. N.D. Ohio 1988) to support this proposition. In Stone, the court held, pursuant to § 1329, a debtor could surrender a vehicle and, following the disposition of the collateral, reclassify any deficiency balance on the secured portion of the claim as unsecured. However, even ignoring the fact that the Debtor has never modified his plan pursuant to § 1329 to address Irwin's allowed secured claim, the Stone decision is no longer good law in the Sixth Circuit. In Chrysler Fin. Corp. v. Nolan (In re Nolan), 232 F.3d 528 (6th Cir. 2000), the Sixth Circuit ruled that upon the voluntary surrender of a vehicle and disposition of the collateral, any deficiency remaining on the creditor's allowed secured claim cannot be reclassified as unsecured. Id. at 532.

The reasoning of the Nolan court applies to the issue in this adversary proceeding. The Nolan court found that, among other things, § 1329(a)(1), does not allow a debtor to reclassify a secured claim as unsecured post-confirmation in contradiction to a debtor's plan. The Nolan court "reject[ed] the notion that debtors have such wide latitude to subject the creditor to their whims throughout the life of the plan." Id. at 534. The Sixth Circuit's support for the principles of Nolan has not wavered and, in fact, has strengthened. More recently, the Sixth Circuit found that, after a secured creditor is granted relief from stay and disposes of its collateral, the deficiency on the secured portion of a creditor's claim remains an allowed secured claim to the extent provided for by a debtor's confirmed plan. Ruskin v. DaimlerChrysler Svcs. North Am., L.L.C. (In re Adkins), 425 F.3d 296, 303 (6th Cir. 2005).

11 U.S.C. § 1329(a)(1) states that "[a]t any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to . . . increase or reduce the amount of payments on claims of a particular class provided for by the plan[.]"

The Debtor argues that the issue of whether Irwin's mortgage lien can be avoided as "wholly unsecured" can only be resolved through an adversary proceeding and, therefore, the terms of the plan are not preclusive at to this issue. The court agrees that Bankruptcy Rule 7001(2) requires that the determination of whether a mortgage is "wholly unsecured" must be pursued through the filing and prosecution of an adversary proceeding. Therefore, it is correct that the nature of Irwin's claim, i.e. secured versus unsecured, need not have been determined prior to or at the confirmation hearing. However, for the reasons set forth in this Decision, the Debtor's plan needed to put Irwin on fair notice that the Debtor intended to treat its claim as unsecured and that the Debtor intended to file an adversary proceeding consistent with that plan provision. To the contrary, the Debtor's plan, in unambiguous language and consistent with the original valuation of the primary residence, provided to pay Irwin as a secured claim and cure any pre-petition arrearage within the length of the Debtor's plan. Irwin was entitled to rely on that plan provision. 11 U.S.C. § 1327(a).

The Debtor's attempt to reclassify Irwin's secured claim as unsecured post-confirmation is prohibited by the principles enunciated in the Sixth Circuit's decision in Nolan. This court joins In re Cruz, 253 B.R. 638 (Bankr. D.N.J. 2000) in finding that, pursuant to § 1327(a), a Chapter 13 plan binds the debtor to treatment of a claim as secured and prohibits a post-confirmation attempt to avoid a mortgage lien that is treated as secured in the debtor's confirmed plan.

Conclusion

Irwin's Motion for summary judgment is granted (Doc. 15) and any relief sought in the Debtor's complaint (Doc. 1) is denied. The court will enter a separate order consistent with this decision. In addition, for the reasons stated in this decision, the court is denying the Debtor's objection to Irwin's allowed secured claim through an order being simultaneously entered in the estate case.

IT IS SO ORDERED.