Opinion
Case No. 04-10526.
January 4, 2005
MEMORANDUM OPINION
Introduction
Mark Anthony Roberts and Dawn Renee Roberts (the "Debtors") are before the court on the Motion to Avoid and Set Aside Mortgage Filed by Fairbanks, Successor to Meritage Mortgage Corporation that they filed in this case on September 16, 2004. The motion seeks to avoid the mortgage of Fairbanks Capital Corporation and/or Meritage Mortgage Corporation ("Meritage") due to a defective acknowledgment. Having considered the Debtors' motion, Meritage's response thereto, and the briefs and arguments of counsel, the court concludes that the motion must be overruled.
The Debtors' motion asserts that the mortgage is held by Fairbanks, as successor to Meritage Mortgage Corporation. Meritage's response indicates that the mortgage is held by Meritage Mortgage Corporation in care of Select Portfolio Servicing, Inc., formerly known as Fairbanks Capital Corporation.
Factual and Procedural Background
On or about September 5, 2002 the Debtors executed a Mortgage on their residence (the "Property") in favor of Meritage Mortgage Corporation, and the mortgage was recorded in the office of the Clerk of Boyd County, Kentucky on September 17, 2002. On July 2, 2004 the Debtors filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code. The Debtors' Schedule D (Creditors Holding Secured Claims) listed Fairbanks as holding a $24,000 claim secured by a first mortgage on the Property, and the claim was not listed as contingent, unliquidated, or disputed. That same day, the Debtors filed two proposed Chapter 13 Plans (the "Plans"). Paragraph III.F. of each of the Plans provides:
Any creditor filing a claim as secured that is not otherwise provided for by this plan or Court order shall be treated as a claim secured to the extent of the value of the collateral set forth in the proof of claim, to be paid inside the plan with interest at the contract rate.
Paragraph III.E. of the Plan filed at 11:20 a.m. (the "First Plan") indicates that no liens are to be avoided under § 522(f) of the Bankruptcy Code; Paragraph III.E. of the Plan filed at 11:23 a.m. (the "Second Plan") provides that the liens of World Finance Corp. and American General were to be avoided under § 522(f). Paragraph VII ("Special Provisions") of the First Plan is blank; Paragraph VII of the Second Plan states:
If The [ sic] Debtor has stated in Section F [ sic — presumably Section III.F.] that a claim is Unsecured then it shall be treated as unsecured even if the Creditor files a claim as Secured. The mortgage debt owed to Fairbanks shall be treated as an unsecured debt due to a defective notarization on the mortgage.
On July 8, 2004 the court issued a notice setting November 23, 2004 as the deadline for filing proofs of claim in the Debtors' Chapter 13 case. On September 13, 2004 the court confirmed one of the Plans, not specifying which. Meritage did not timely file a proof of claim.
As mentioned above, on September 16, 2004 the Debtors filed the motion presently before the court. The motion was served on Meritage by mailing it to "Fairbanks, Successor to Meritage Mortgage Corp., P.O. Box 9001710, Louisville, Kentucky 40290." Meritage filed an objection on September 30, 2004 (which it supplemented on November 9, 2004) and the court conducted hearings on the motion on October 13 and November 12, 2004. On November 15, 2004 the court entered an order affording the Debtors through December 1, 2004 within which to file a brief, affording Meritage and Beverly M. Burden, the standing Chapter 13 trustee (the "Trustee"), through December 15, 2004 within which to file responsive briefs, and affording the Debtors through December 20, 2004 within which to file a reply brief. The Debtors filed a brief on November 30, 1004. On December 7, 2004 the Trustee filed a response agreeing with the Debtors' position that "[t]he confirmed plan is res judicata as to all issues addressed by the plan," but asking the court to overrule the Debtors' motion because avoidance must be sought by an adversary proceeding initiated by the Trustee. The Trustee also stated that, if the Debtors are unsuccessful in avoiding the mortgage or Meritage does not consent to the avoidance, the Trustee will file a complaint to set the mortgage aside. Meritage filed a brief in support of its position on December 14, 2004. The Debtors did not timely file a reply brief. Legal Discussion
The Debtors argue, first, that Meritage is bound by the Second Plan's provision for the avoidance of the mortgage. While it is true that "[t]he provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of 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 Second Plan — assuming it was the Plan confirmed by the court — simply does not provide for the avoidance of the mortgage. Rather, Paragraph VII of the Plan provides only that the Fairbanks mortgage would be treated as an unsecured claim. Accordingly, Meritage will not receive any distributions on account of a secured claim (including interest thereon); however, the mortgage will remain in effect and, absent avoidance, will remain enforceable after the conclusion of the case to the extent enforceable under applicable nonbankruptcy law. Although Meritage will not receive a distribution in this Chapter 13 case, its mortgage has not been avoided by virtue of confirmation of either of the Plans.
There can be no question that the First Plan did not provide for the avoidance of the mortgage, as Meritage (or Fairbanks) was not even mentioned therein.
Indeed, since Meritage has failed timely to file a proof of claim, it appears that it will not receive any distribution on its claim even if treated as an unsecured claim.
The conclusion that neither of the Plans avoids Meritage's mortgage is pointed up by the fact that the Debtors filed a motion to avoid the mortgage: if the avoidance was effected by confirmation of a Plan, the motion would not have been necessary.
Meritage asserts that the motion should be overruled because an adversary proceeding is required. Meritage is correct. While the avoidance of judicial liens and nonpossessory, nonpurchase-money security interests impairing exemptions may be sought by motion, Fed.R.Bankr.P. 4003(d); 11 U.S.C. § 522(f), the Debtors' motion does not fall within that category — a conclusion that is underscored by Paragraph III.E. of the Plans, neither of which provides for the avoidance of Meritage's mortgage under § 522(f). An adversary proceeding is required. Fed.R.Bankr.P. 7001(2); see, e.g., United States v. Mathews (In re Mathews), 209 B.R. 218, 222 (B.A.P. 6th Cir. 1997); In re Lafoon, 278 B.R. 767, 770 (Bankr. E.D. Tenn. 2002); In re Baker, 246 B.R. 379, 381, 384 (Bankr. E.D. Mo. 2000); Canelos v. Mignini (In re Canelos), 216 B.R. 159, 165 (Bankr. D. Md. 1997); In re Colston, 213 B.R. 704, 708-09 (Bankr. S.D. Ohio 1997). But see Fid. Fin. Servs. v. Schweitzer, 16 B.R. 476, 476 (W.D. Ky. 1981) (lien avoidance pursuant to § 522(h) need not be sought by adversary proceeding).
Even if the motion is treated as a complaint, no summons was issued with respect thereto and service was not made in accordance with Rule 7004 of the Federal Rules of Bankruptcy Procedure. See Fed.R.Bankr.P. 9014(b), 7004(b)(3).
Meritage also asserts that the Debtors lack standing to avoid the mortgage. Again, Meritage is correct. Under § 522(h) of the Bankruptcy Code, a debtor may avoid a transfer that is avoidable by the trustee but that the trustee does not attempt to avoid, but only if the debtor could have exempted the property under § 522(g)(1) if the trustee had avoided the transfer. Section 522(g)(1) authorizes a debtor to exempt property recovered by a trustee (if it would have been exempt had there been no transfer) only if "the debtor could have avoided such transfer under subsection (f)[(1)(B)] of this section" or "such transfer was not a voluntary transfer of such property by the debtor." 11 U.S.C. § 522(g)(2), (1)(A). Meritage's mortgage cannot, as explained above, be avoided by the Debtors under § 522(f), and a mortgage is a voluntary transfer. E.g., Erdheim v. Thaler (In re Erdheim), 173 F.3d 844 (Table), 1999 WL 147039 (2d Cir. 1999); Trentman v. Meritech Mortgage Serv. (In re Trentman), 278 B.R. 133, 135-36 (Bankr. N.D. Ohio 2002). Accordingly, the Debtors may not exempt the collateral under § 522(g) so they may not avoid the mortgage thereon under § 522(h). As one of our sister courts summarized, after discussing the interplay of § 522(h) and (g):
Thus, taken together these provisions provide a debtor with the standing to avoid a transfer of property under § 544 if four conditions are met: (1) the bankruptcy trustee does not attempt to avoid the transfer; (2) the debtor could have exempted the property; (3) the debtor did not conceal the property; and (4) the debtor did not voluntarily transfer the property.
Trentman, 278 B.R. at 135 (citations omitted). The fourth requirement is lacking here, so the relief sought by the Debtors must be denied. Conclusion
The first requirement is also lacking, because the Trustee does intend to seek to avoid the mortgage if it is not avoided on the Debtors' motion or by agreement. The second requirement may also be lacking, if the mortgage includes a "boilerplate" waiver of the homestead exemption and that waiver would remain enforceable if the mortgage is avoided. See also K.R.S. § 427.060.
For the foregoing reasons, the court will enter a separate order overruling the Debtors' motion to avoid Meritage's mortgage on the Property. The order will be entered without prejudice to the Trustee's right to seek to avoid the mortgage by a proper proceeding.