Waterfield Mortgage Co. v. Clark (In Re Clark)

Citations: 31 B.R. 502; 1983 Bankr. LEXIS 5806Docket: Bankruptcy No. 3-82-02442, Adv. No. 3-83-0201

Court: United States Bankruptcy Court, S.D. Ohio; July 14, 1983; Us Bankruptcy; United States Bankruptcy Court

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The United States Bankruptcy Court for the Southern District of Ohio addressed a "Complaint to Modify Stay" filed by Waterfield Mortgage Company against Robert J. and Brenda C. Clark. The preliminary hearing took place on April 12, 1983, following the parties' agreement to submit their case based on a record and stipulations of fact, alongside a Pretrial Order approved on May 23, 1983. 

The Clarks filed a Chapter 13 Petition on August 31, 1982, which was confirmed by the Court on October 13, 1982. Their Chapter 13 Plan requires the Trustee to pay Waterfield Mortgage 100% of its secured claim related to the mortgage on their home. By April 16, 1983, Waterfield's claim was established at $31,262.58 for unpaid principal, $2,636.38 for accrued interest, and $95.36 in late charges, with additional unspecified collection expenses. The Clarks were one month in arrears at the time of their filing, totaling $490.88. 

The Clarks made a payment of $2,573.47 to the Trustee by March 25, 1983, but had incurred postconfirmation obligations amounting to $3,436.16, while Waterfield received only $1,591.14 in distributions. The value of the real estate was not contested, with the Debtors estimating its fair market value at $31,500.00, compared to a Trustee's appraisal of $36,000.00. Waterfield contends that the Plan is underfunded and does not adequately address prepetition arrears, claiming it violates 11 U.S.C. § 1322(b)(2) by modifying its secured claim on the Clarks' residence. The Clarks counter that their Plan fully pays Waterfield's claim and that they have made timely payments to the Trustee. The Chapter 13 Trustee is not named as a party in this Complaint.

The Trustee received the Complaint due to standard court practices for Chapter 13 proceedings and filed an "Answer" on April 5, 1983, asserting his fiduciary role and interest in the property involved. He stated that he would not endorse orders for relief from stay unless they included specific language regarding his necessary involvement in any related state court actions. The Trustee did not actively participate in the adversarial proceedings, missing key hearings and filing no responsive pleadings. The Debtors asserted that the Trustee is a necessary party to the case.

The Court determined that 11 U.S.C. § 1322(b)(2) restricts debtors from modifying the rights of creditors secured by a security interest in their primary residence, acknowledging the Plaintiff as such a creditor. The central issue is whether the Plaintiff is entitled to relief from stay if a confirmed plan, complying with § 1322(b)(2), is deemed to operate against its provisions. The Debtors' Plan proposes full payment of the Plaintiff's claim, despite delays attributed to inadequate funding or processing issues. The Court clarified that the Trustee is not a party to this proceeding, as he was not named in the Complaint and his "Answer" did not address the core issues. It is deemed surplusage. The Debtors have adhered to all Chapter 13 requirements, and while the Plan appears compliant, the Plaintiff argues that its execution effectively modifies the secured claim, potentially justifying relief from the stay. The Court concluded that resolving this issue necessitates the Trustee's involvement.

Debtors' Chapter 13 Plan aims to cure defaults and ensure full payment of current mortgage obligations, with all required payments made to the Chapter 13 Trustee. Any claims of modification of Plaintiff's claim attributed to delays in claim processing do not constitute a cause of action against Debtors, as they have complied with the Bankruptcy Code and court orders; such claims would instead pertain to the Trustee's management duties. The court typically does not address claims for modifications arising solely from standard administrative delays and will not enforce penalty provisions for breaches due to these delays. Claims for damages must be substantiated with actual (mitigated) damages or comply with specific sections of the Bankruptcy Code.

If the modification of Plaintiff's claim stems from inadequate funding or delayed payments, the Chapter 13 Plan's funding is final and cannot be contested, as the Plaintiff was properly notified of the Plan's terms and the confirmation hearing, which the Trustee endorsed. The Court asserts that relitigating these settled issues is not permissible. While underfunding does not negate lien rights, it allows creditors to seek relief from stay only if collateral is at risk. Debtors' Plan promises full payment of Plaintiff's secured claim; however, the Plaintiff must show a material default to pursue dismissal or conversion of Debtors' case. The Court finds that seeking relief from stay based on underfunding alone is inappropriate, and Plaintiff is estopped from revisiting the funding adequacy issue, having not provided alternative grounds for relief.

Plaintiff has not provided sufficient grounds for relief in this case. The Court observes that while the issue was not litigated, the Debtors appear to have equity in the property and the Plaintiff has not claimed that its lien is inadequately protected. The Court indicates that if funding were relevant to the relief determination, it is inappropriate to assess the adequacy of a Chapter 13 plan without input from the Chapter 13 Trustee, who is a necessary party under Rule 719(a) of the Bankruptcy Rules. The Trustee has complete access to the debtor's plan records, and any decision made without the Trustee could lead to significant errors. Consequently, the Court has ordered that the Trustee's Answer filed on April 5, 1983, be stricken from the record due to his non-joinder in the pleaded issues. The Plaintiff is granted a two-week period to amend its Complaint to include the Trustee as a defendant and address the legal concerns raised. If the Trustee is not joined within this timeframe, the case will be dismissed without prejudice for failing to state a cause of action and for not joining an indispensable party.