Opinion
Case No. 3:13-bk-7435-PMG Adv. No. 3:17-ap-236-PMG
05-15-2018
In re: Curtis Houston Terrell Ray Houston, Debtors. Curtis Houston Terrell Ray Houston, Plaintiffs, v. Rushmore Loan Management Services, LLC, Beneficial Florida, Inc., Defendants.
Chapter 13
ORDER DENYING RUSHMORE LOAN MANAGEMENT SERVICES, LLC'S AMENDED MOTION TO DISMISS PLAINTIFFS' COMPLAINT
THIS CASE came before the Court for a hearing to consider Rushmore Loan Management Services, LLC's Amended Motion to Dismiss Plaintiffs' Complaint. (Doc. 13).
Section 524(i) of the Bankruptcy Code provides that a creditor's willful failure to credit payments in the manner required by a confirmed Chapter 13 plan constitutes a violation of the discharge injunction, if the failure caused a material injury to the debtor.
Section 524(j) provides a limited exception to the discharge injunction for actions taken to obtain regular payments from a debtor in the ordinary course of business.
In this case, the Debtors' confirmed Chapter 13 Plan provided for payment of the Debtors' regular mortgage installments, and also provided for payment of their prepetition mortgage arrearage. The Plan was completed in 2017. In the Complaint currently before the Court, the Debtors allege that the Plan payments were misapplied during the Chapter 13 case, and that Rushmore sent them a notice of default and threat of foreclosure on October 24, 2017.
The Complaint states a claim for violation of the discharge injunction under §524(i) of the Bankruptcy Code. Additionally, Rushmore did not show that the conduct alleged in the Complaint is excepted from the discharge injunction by §524(j) of the Bankruptcy Code, because the alleged notice of default was not sent in the ordinary course of business to obtain the regular monthly mortgage payments from the Debtors.
Accordingly, Rushmore's Amended Motion to Dismiss the Complaint should be denied.
Background
The Debtors filed their petition under Chapter 13 of the Bankruptcy Code on December 23, 2013.
On their schedule of assets filed with the petition, the Debtors listed their homestead real property located at 11608 Longwood Key Drive West, Jacksonville, Florida. On their schedule of liabilities, the Debtors listed Beneficial as a secured creditor holding a mortgage on the home.
On May 5, 2014, Beneficial filed Claim Number 2 in the Debtors' bankruptcy case. Claim 2 was filed as a secured claim in the amount of $159,993.85, and asserted a prepetition arrearage in the amount of $39,525.20.
On May 6, 2014, the Debtors filed their Second Amended Chapter 13 Plan. (Main Case, Doc. 31). According to the Plan, the Trustee was to make the regular monthly mortgage payments to Beneficial over the life of the Plan, and to pay Beneficial $775.01 per month on account of its arrearage claim of $39,525.20 "to bring the mortgage payments current over the life of the plan."
On July 30, 2014, the Court entered an Order Confirming the Debtors' Second Amended Chapter 13 Plan. (Main Case, Doc. 35).
On May 2, 2017, the Trustee filed a Notice of Completion of Chapter 13 Plan, and on May 3, 2017, the Court entered a Discharge of Debtors after Completion of Chapter 13 Plan. (Main Case, Docs. 45, 46).
On December 22, 2017, the Debtors filed the Complaint that commenced this adversary proceeding. In the Complaint, the Debtors allege:
20. After the Discharge of the Chapter 13 case, the PLAINTIFFS had resumed making the required monthly mortgage payments to RUSHMORE on the Longwood property in June of 2017. However, RUSHMORE has claimed the mortgage was in default at the time of Discharge and continuing thereafter. On October 24, 2017, RUSHMORE mailed to the PLAINTIFFS a default letter and threatened foreclosure of the home.(Doc. 1, Complaint, ¶¶ 20, 24). Consequently, the Debtors allege that Rushmore violated the discharge injunction pursuant to §524(i) of the Bankruptcy Code, and ask for an order directing Rushmore to bring the mortgage account current and to pay the Debtors' attorney's fees, costs, and actual damages, among other relief.
. . .
24. RUSHMORE and BENEFICIAL misapplied Debtor's confirmed Plan payments. As a result of RUSHMORE and BENEFICIAL misapplying payments, RUSHMORE asserts the PLAINTIFFS are seriously delinquent and seeks to collect improper fees, interest and charges.
Discussion
Section 524(a)(2) of the Bankruptcy Code provides that a bankruptcy discharge operates as an injunction against acts to collect discharged debts as a personal liability of the debtor. 11 U.S.C. §524(a)(2).
Section 524(i) of the Bankruptcy Code provides:
11 USC §524. Effect of discharge11 U.S.C. §524(i). In other words, if a secured creditor does not properly apply mortgage payments made under a confirmed plan, "§524(i) treats such conduct as a violation of the discharge injunction even if the underlying debt is not discharged." In re Ridley, 572 B.R. 352, 360-61 (Bankr. E.D. Okla. 2017).
. . .
(i) The willful failure of a creditor to credit payments received under a plan confirmed under this title, . . . shall constitute a violation of an injunction under subsection (a)(2) if the act of the creditor to collect and failure to credit payments in the manner required by the plan caused material injury to the debtor.
A. The Debtors' Complaint states a claim for violation of the discharge injunction under §524(i).
The "classic" situation that §524(i) was designed to address is where "a chapter 13 debtor makes all the required payments on long-term debt required through the life of his confirmed plan, receives a discharge, and is then told that his mortgage is in default, he owes additional charges, and is threatened with foreclosure." In re Ridley, 572 B.R. at 361.
In this case, the Debtors allege in their Complaint that their confirmed Plan provided for payment of the regular mortgage amounts and for payment of the prepetition arrearage (¶¶ 13-15), that they complied with the Plan in all respects and the Court entered a Discharge (¶¶ 16, 19), that the payments were misapplied during the plan period (¶¶ 22-24), and that Rushmore asserted that the mortgage was in default at the time of Discharge and threatened to foreclose on their home (¶ 20).
The Complaint states a claim for violation of the discharge injunction under §524(i) of the Bankruptcy Code. Section 524(i) provides a remedy to debtors for misapplication of mortgage payments once a discharge injunction is entered. In re Ridley, 572 B.R. at 362(citing In re Mattox, 2011 WL 3626762 (Bankr. E.D. Ky)). It is intended to protect debtors from any creditor who fails to credit payments in the manner required by a confirmed plan. In re Hudak, 2008 WL 4850196, at 9-10 (Bankr. D. Colo.).
B. Rushmore did not establish an exception to the discharge injunction under §524(j).
In its Motion to Dismiss the Complaint, Rushmore asserts that its communications with the Debtors are excepted from the discharge injunction by §524(j) of the Bankruptcy Code, because the communications were accounting notices of the mortgage debt that were sent in the ordinary course of business.
Section 524(j) of the Bankruptcy Code provides:
11 USC §524. Effect of discharge
. . .
(j) Subsection (a)(2) does not operate as an injunction against an act by a creditor that is the holder of a secured claim, if-11 U.S.C. §524(j)(Emphasis supplied). The section has a fairly specific purpose "to statutorily recognize the 'ride-through option' with respect to mortgage liens on property." In other words, under §524(j), "a mortgagee with a lien on a debtor's principal residence is permitted to send statements to a debtor in the ordinary course of business, instead of seeking in rem relief, permitting the debtor to pay the secured debt and keep the property." In re Gill, 529 B.R. 31, 37-38 (Bankr. W.D.N.Y. 2015).
(1) such creditor retains a security interest in real property that is the principal residence of the debtor;
(2) such act is in the ordinary course of business between the creditor and the debtor; and
(3) such act is limited to seeking or obtaining periodic payments associated with a valid security interest in lieu of pursuit of in rem relief to enforce the lien.
The section is intended to allow a mortgage holder to send a debtor periodic statements, so that the debtor can continue to make regular mortgage payments if he is retaining his home. Section 524(j) "codifies case law in which courts allowed creditors to send monthly statements to enable debtors to continue making payments on mortgage loans." In re Whitaker, 2013 WL 2467932, at 8-9 (Bankr. E.D. Tenn.)(cited in In re Lemieux, 520 B.R. 361, 369 (Bankr. D. Mass. 2014)).
In this case, the Debtors are retaining their home. In their Complaint, however, the Debtors allege that their payments were misapplied during the Chapter 13 plan period, and that Rushmore sent a notice of default and threat of foreclosure shortly after the Discharge was entered. (Complaint, ¶ 20). According to the Complaint, therefore, Rushmore's communications with the Debtors were not intended to assist the Debtors in making their regular mortgage payments, but were instead intended as the initial steps in an action to foreclose the home.
Consequently, the conduct alleged in the Complaint is not excepted from the discharge injunction by §524(j) of the Bankruptcy Code, because the alleged actions were not in the ordinary course of business between Rushmore and the Debtors, and were not limited to obtaining monthly mortgage payments from the Debtors in lieu of foreclosure. See In re Hudak, 2008 WL 4850196, at 9-10(Section 524(j) is only intended to protect secured creditors from liability for sending accurate, periodic statements to debtors in the ordinary course of their relationship.).
Conclusion
Section 524(i) of the Bankruptcy Code provides that a creditor's willful failure to credit payments in the manner required by a confirmed Chapter 13 plan constitutes a violation of the discharge injunction, if the failure caused a material injury to the debtor.
Section 524(j) provides a limited exception to the discharge injunction for actions taken to obtain regular payments from a debtor in the ordinary course of business.
In this case, the Debtors' confirmed Chapter 13 Plan provided for payment of the Debtors' regular mortgage installments, and also provided for payment of their prepetition mortgage arrearage. The Plan was completed in 2017. In the Complaint currently before the Court, the Debtors allege that the Plan payments were misapplied during the course of the Chapter 13 case, and that Rushmore sent them a notice of default and threat of foreclosure on October 24, 2017.
The Complaint states a claim for violation of the discharge injunction under §524(i) of the Bankruptcy Code. Additionally, Rushmore did not show that the conduct alleged in the Complaint is excepted from the discharge injunction by §524(j) of the Bankruptcy Code, because the alleged notice of default was not sent in the ordinary course of business to obtain the regular monthly mortgage payments from the Debtors.
Accordingly:
IT IS ORDERED that Rushmore Loan Management Services, LLC's Amended Motion to Dismiss Plaintiffs' Complaint is denied.
DATED this 15 day of May, 2018.
BY THE COURT
Paul M. Glenn
PAUL M. GLENN
United States Bankruptcy Judge