Jose O. Morales and Carmen M. Morales

FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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: 	Chapter 13
In re: 	:
: 	Case No. 13-36516 (cgm)
Jose and Carmen Morales, 	:
:
Debtor(s). 	:
:
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MEMORANDUM DECISION DENYING MOTION TO APPROVE LOAN
MODIFICATION AND REDUCE CLAIM IN PART AND GRANTING IN PART
A P P E A R A N C E S :
Andrea B. Malin
Genova & Malin, Attorneys
The Hampton Center
1136 Route 9
Wappingers Falls, NY 12590-4332
Attorney for Debtors
Jay Teitelbaum
Teitelbaum & Baskin, LLP
1 Barker Avenue, Third Floor
White Plains, New York 10601
Attorney for JPMorgan Chase Bank, N.A.
CECELIA G. MORRIS
CHIEF UNITED STATES BANKRUPTCY JUDGE
Debtors filed a motion to approve a loan modification based on a Home Affordable
Modification Program trial plan. The proposed order includes language that would reduce the
mortgagee’s bankruptcy claim to zero. The mortgagee objects to the claim provision in the
order, arguing that the HAMP trial modification does not create a basis for altering its secured
claim. The Court agrees with the mortgagee and strikes the claim reduction language from the
order.
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Jurisdiction
This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. §
157(a) and the Amended Standing Order of Reference signed by Chief Judge Loretta A. Preska
dated January 31, 2012. This is a “core proceeding” under 28 U.S.C. § 157(b)(2)(B) (allowance
of claims against the estate).
Background1
On December 4, 2013, the Debtors filed a Motion to Approve Loan Modification and
Reduce Claim to Zero (“Motion”). Mot. 1, ECF No. 34. The Motion states that the Debtors
were offered a trial modification (the “Trial Modification”) by J.P. Morgan Chase, N.A.
(“Creditor”). 	Id. at 2. The Trial Modification is a trial plan (“Trial Period Plan”) under the
Home Affordable Modification Program (“HAMP”) and requires the Debtors to make three
monthly trial payments of $1,600.44 beginning January 1, 2014. Id. Debtors state that the final
loan modification “that will result” from the Trial Modification will recapitalize arrears under the
original note and mortgage into a new loan. Id. at 2-3. According to the Debtors, “if the debtors
make the THREE (3) trial payments, the debtors will be given a Final Loan Modification
Agreement without condition or limitation.” Id. at 3. Debtors seek approval of the Trial
Modification at this stage despite the fact that “the [f]inal [m]odification is conditional upon the
debtors’ performance [of the Trial Modification].” Id.
Attached to the Motion is a proposed order (“Proposed Order”) that contains some
provisions that are not discussed in the body of the Motion. Prop. Order 3, ECF No. 34. The
Proposed Order seeks to reduce the Creditor’s claim to zero (“Claim Language”). Id. The
Proposed Order provides “that Claim No. 12 filed on October 1, 2013 by J.P. MORGAN
1 	Unless otherwise noted, the following discussion constitutes the Court’s findings of facts and conclusions
of law pursuant to Fed. R. Bankr. P. 7052.
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CHASE, N.A. (“CHASE”) is hereby reduced to zero and will receive no payment under the plan
. . . .” Id. The Proposed Order also states
that J.P MORGAN CHASE, N.A. shall deliver to the debtors the permanent loan
modification agreement within 30 days of the date upon which the debtors
completes [sic] the trial payments and shall return to the debtors a fully executed
copy thereof within twenty-one (21) days of its receipt of the Loan Modification
Agreement executed by the debtors.
Id.
Creditor filed a limited objection to the Motion. Obj. 1, ECF No. 37. Creditor opposes
“to the extent of the proposed treatment of the [Creditor’s] Claim.” Id. at 2. According to the
Creditor, alteration of the claim during the Trial Modification violates § 502 of the Bankruptcy
Code.2 Id. Creditor states that the basis for its claim is the underlying loan obligation, an
obligation that the Creditor believes to be unchanged by the Trial Modification. Id. at 4-6. To
the extent a permanent modification would affect the claim based on the underlying loan
obligation, the Creditor argues that there are several conditions to permanent modification that
are not presently satisfied. Id. at 4.
Creditor believes that reclassification of its claim during the Trial Modification forces the
Creditor to preemptively object to confirmation of any chapter 13 plan that does not treat its
unmodified arrears. Id. at 2. Creditor asserts that confirmation of a plan based only on the Trial
Modification will lead to an infeasible plan if no permanent modification is executed. Id.
In further support of its position, Creditor points to this Court’s General Order M-
451(VI)(c)(4), which provides that “[i]n a chapter 13 case, the deadline by which a Creditor must
object to confirmation of the Chapter 13 plan shall be extended to permit the Creditor an
additional (14) days after the filing of the ‘Order Terminating Loss Mitigation and Final
2 Unless otherwise noted, all sectional references are to the United States Bankruptcy Code, 11 U.S.C. §§ 101 –
1532 (2012).
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Report.’” Id. at 6 (quoting In re Adoption of Modified Loss Mitigation Program Procedures,
Gen. Or. No. M–451, at 8 (June 17, 2013) (amending General Orders M-364 and M-413),
available at http://www.nysb.uscourts.gov/court-info/local-rules-and-orders/general-orders)).3
Creditor argues that this provision recognizes that confirmation must wait until Loss Mitigation
is terminated. Obj. 6, ECF No. 37. According to Creditor, termination would only properly
occur in this case after execution of a permanent modification. Id.
Discussion
A. The Court’s Loss Mitigation program and HAMP modifications.
The Trial Modification was achieved through this Court’s Loss Mitigation program.
“The premise of the Loss Mitigation program is simple: Put the decision-making parties in direct
contact with each other, and set a schedule for their discussion as to what can be done about the
debtor's home.” In re Bambi, 492 B.R. 183, 188 (Bankr. S.D.N.Y. 2013) (quoting Hon. Cecelia
G. Morris & Mary K. Guccion, The Loss Mitigation Program Procedures for the United States
Bankruptcy Court for the Southern District of New York, 19 Am. Bankr. Inst. L. Rev. 1, 4
(2011)). Many parties in Loss Mitigation seek to utilize HAMP. The court in In re Cruz
provided a synopsis of HAMP:
HAMP arose out of the Emergency Economic Stabilization Act of 2008, and is
administered by the Federal National Mortgage Association (“Fannie Mae”) as
the agent of the Department of the Treasury. The program requires that all
mortgage loans owned or guaranteed by Fannie Mae or the Federal Home Loan
Mortgage Corporation 	(“Freddie Mac” 	and 	together 	with 	Fannie Mae, 	the
government-sponsored agencies or “GSEs”) that meet certain requirements be
evaluated by the loan servicers for loan modifications. If a borrower qualifies,
then the servicer is obligated to modify the loan in accordance with a predefined
formula that reduces the borrower's monthly payment to 31% of his gross income
for the first five years. In addition, many servicers of mortgage loans not owned
by the GSEs have executed so-called Servicer Participation Agreements (“SPAs”)
with Fannie Mae, as agent for the Treasury Department, by which they agree to
review and modify loans on similar terms.
3 General Order M-451 shall be short cited hereinafter as Gen. Or. M-451.
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Cruz v. Hacienda Assocs., LLC (In re Cruz), 446 B.R. 1, 3 (Bankr. D. Mass. 2011) (internal
citation omitted).
The Treasury Department, acting through Fannie Mae, has produced guidelines that
mortgage servicers must follow when a borrower is considered for a modification under HAMP.
Id.; see also U.S. Dep’t of the Treasury, Making Home Affordable Program Handbook for
Servicers of Non-GSE Mortgages (ver. 4.3 2013).4 Pursuant to these Guidelines, “[f]ollowing
underwriting, N[et] P[resent] V[alue] evaluation and a determination, based on verified income,
that a borrower qualifies for HAMP, servicers will place the borrower in a trial period plan
(TPP).” HAMP Guidelines at 122. The Trial Period Plans typically last three months. See id.
According to the Guidelines, “[b]orrowers who make all trial period payments timely and who
satisfy all other trial period requirements will be offered a permanent modification.” Id.
Once an agreement is reached in Loss Mitigation, the Procedures allow parties to obtain
court approval of the agreement “in any manner permitted by the Bankruptcy Code and Federal
Rules of Bankruptcy Procedure . . . , including, but not limited to, a stipulation, sale, plan of
reorganization or amended plan of reorganization; and a Motion to Approve Loan Modification.”
Gen. Or. M-451 at 7. Parties often seek approval of HAMP Trial Plans before a permanent
modification is offered, and the Court provides a form Order Approving Trial Loan Modification to
facilitate those approvals. See Order Approving Trial Loan Modification, United States Bankruptcy
Court, Southern District of New York, http://www.nysb.uscourts.gov/sites/default/files/TrialMod
ProposedOrderEO.docx (last visited March 5, 2014).
B. The incentive to reduce the claim.
Chapter 13 debtors often seek to reduce, reclassify, or moot the lender’s secured claim as part
4 The HAMP Handbook shall be hereinafter short cited as “HAMP Guidelines.”
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of a motion to approve a loan modification. The reason is that the debtor cannot confirm a chapter
13 plan that incorporates the modification where a secured claim based on the original loan
obligation is outstanding. An allowed secured claim can only be treated in one of three ways in a
chapter 13 plan. 11 U.S.C. § 1325(a)(5); Associates Commercial Corp. v. Rash, 520 U.S. 953, 956-
57 (1997). The plan can provide for surrender the collateral securing the claim, payment of the claim
in an amount “not less than the allowed amount of such claim,”5 or provide a treatment that the
claimant will accept. Id.
In Loss Mitigation cases where a loan modification is offered, this means the debtor can pay
the claim in full, surrender the principal residence, or obtain acceptance from the creditor. In cases
where a Trial Period Plan is offered, some debtors wait to execute a permanent modification
before confirming the plan. Once a permanent modification is executed, acceptance of the plan
by the creditor is much more likely. None of the three options are viable during Trial Period Plans.
The debtor will seek to retain the collateral and make the modified payment. The lender may also
decline to accept treatment in the plan that provides for less than payment of its entire secured
claim, despite a Court-approved Trial Period Plan. As this case illustrates, lenders may not be
convinced that the trial plan will become a permanent modification.
5 The Supreme Court in Rash labeled § 1325(a)(5)(B), which allows the debtor to pay the allowed amount of the
secured claim, as the “‘cram down’ power.” 520 U.S. at 957. By using cramdown,
the debtor is permitted to keep the property over the objection of the creditor; the creditor retains
the lien securing the claim, see § 1325(a)(5)(B)(i), and the debtor is required to provide the
creditor with payments, over the life of the plan, that will total the present value of the allowed
secured claim, i.e., the present value of the collateral, see § 1325(a)(5)(B)(ii). The value of the
allowed secured claim is governed by § 506(a) of the Code.
Id. Section 1322(b)(2) makes it impossible for the Debtors in this case to elect cram down with respect to this
secured claim. Section 1322(b)(2) provides that the chapter 13 plan may “modify the rights of holders of secured
claims, other than a claim secured by a security interest in real property that is the debtor’s personal residence . . . .”
The simple rule is that “a debtor cannot strip down a mortgage lien on the debtor’s principal residence . . . if the
mortgage lien is secured by some value in the property.” In re Laycock, 497 B.R. 396, 398 (Bankr. S.D.N.Y. 2013);
see also Dewsnup v. Timm, 502 U.S. 410, 417 (1992); Nobelman v. American Savings Bank, 508 U.S. 324, 331-32
(1993). The Loss Mitigation program only applies to principal residences, meaning that this claim is not subject to
cram down. Gen. Or. M-451 at 2.
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Other debtors attempt to object to the claim and confirm a chapter 13 plan prior to
execution of the permanent modification. The Court believes this is due to delays in receiving
permanent modifications from lenders. The Court’s experience is consistent with the allegations
in numerous published opinions. See, e.g., Salvador v. Bank of America (In re Salvador), 456
B.R. 610, 617 (Bankr. N.D. Ga. 2011) (Debtors allegedly signed a trial plan on December 7,
2009, made the necessary payments, and did not receive a permanent modification); Jenkis v. JP
Morgan Chase Bank, N.A. (In re Jenkins), 488 B.R. 601, 610 (Bankr. E.D. Tenn. 2013) (Lender
asserted that it “did not determine during the Trial Period that Plaintiffs qualified for a permanent
modification, so it did not provide Debtors with a fully executed copy of the Modification
Agreement . . . . Accordingly, the Loan Documents were not modified . . . [and] the Plaintiff’s
obligations reverted back to the contractual terms . . . .”); Bosque v. Wells Fargo Bank, N.A., 762
F. Supp. 2d 342, 354-56 (D. Mass. 2011) (Plaintiffs sought provisional class certification and an
order compelling defendant to provide notice of the lawsuit to all borrowers who signed trial
plans but were not offered permanent modifications by the dates specified in the trial plan
agreements; court denied motion without prejudice and allowed continued discovery); Picini v.
Chase Home Finance LLC, 854 F. Supp. 2d 266, 270 (E.D.N.Y. 2012) (Plaintiffs alleged that
they made all required payments under a March 2010 trial plan and did not receive any
information regarding a potential permanent modification until October 2010, and were then
dropped from HAMP entirely). Given this landscape, it is not surprising that many debtors
attempt to reclassify, reduce, or moot the secured claim during the Trial Period Plan so they can
move forward with confirmation in a timely fashion.
Despite the practical appeal of reclassification of the secured claim during the Trial
Period Plan, § 502(a) provides that “[a] claim or interest, proof of which is filed under section
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501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general
partner in a partnership that is a debtor in a case under chapter 7 of this title, objects.” The
Motion and Proposed Order must give rise to a valid claim objection before the Court can enter
the Proposed Order as written.
C. The Trial Modification does not provide a basis for reclassification of the Creditor’s
claim.
Section 502(b) provides that “[e]xcept as provided in subsections (e)(2), (f), (g), (h) and
(i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall
determine the amount of such claim in lawful currency of the United States as of the date of the
filing of the petition, and shall allow such claim in such amount, except to the extent that” one of
the nine exceptions listed in § 502(b)(1) – (9) are applicable. Subsections (e)(2), (f), (g), (h), and
(i) are not relevant here.
“[T]he Supreme Court has held that if there is no basis to disallow a claim under section
502, the claim must be allowed.” Harbinger Capital Partners LLC v. Ergen (In re LightSquared
Inc.), ___ B.R. ___, Ch 11 Case No. 12-12080 (SCC), Adv. No. 13-1390 (SCC), 2013 WL
6140717, at *10 (Bankr. S.D.N.Y. Nov. 21, 2013) (citing Travelers Cas. & Surety Co. of Am. v.
Pacific Gas & Electric Co., 549 U.S. 443, 449 (2007)). Paragraphs (b)(1) through (9) of §
502(b) provide the only bases for objecting to a claim. In re Muller, 479 B.R. 508, 512 (Bankr.
W.D. Ark. 2012) (citation omitted).
The only potentially applicable provision is § 502(b)(1), which states that a claim may be
disallowed if “such claim is unenforceable against the debtor and property of the debtor, under
any agreement or applicable law for a reason other than because such claim is contingent or
unmatured.” To enter the Claim Language, there must either be an agreement between the
parties to disallow the claim, or the claim must be unenforceable under applicable law
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The HAMP Guidelines and the Trial Modification agreement reveal that the Trial
Modification does not constitute an agreement between the Debtors and the Creditor to modify
Creditor’s secured claim. There are several conditions in the HAMP Guidelines that must be met
before a Trial Period Plan can be converted to a permanent modification. The HAMP Guidelines
provide that “[b]orrowers who make all trial period payments timely and who satisfy all other
trial period requirements will be offered a permanent modification.” HAMP Guidelines at 122.
A necessary condition is that borrowers “make all trial period payments.” Id. The HAMP
Guidelines make clear that “[b]orrowers who do not make current trial period payments are
considered to have failed the trial period and are not eligible for a permanent modification.” Id.
at 123. Another condition is that the lender must maintain first lien position and the underlying
note and mortgage must remain fully enforceable. Id. at 128. The lender must also obtain
insurer approval for the modification. Id. at 130.
Where the conditions to receiving a permanent modification are not met, the original loan
obligation is not altered. The HAMP Guidelines provide that “[a] servicer should not change a
borrower’s scheduled loan terms in its servicing system and/or mortgage file during the trial
period.” Id. at 123. Any trial payments received by the lender are applied to the existing loan,
and are not returned to the borrower if the borrower ultimately does not qualify for a permanent
modification. Id. The fact that the underlying loan is still valid during the Trial Period Plan is
also reflected in the Trial Modification offer submitted to the Debtors, which provides that the
“existing loan and loan requirements remain in effect and unchanged during the trial period.”
Mot. Ex. A, at 2, ECF No. 34. The Court concludes that there is no agreement between the
parties to modify the Creditor’s claim at this time.
Nor does it appear that the Trial Modification renders the claim unenforceable under
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applicable law for purposes of § 502(b)(1). In deciding whether applicable law renders a claim
unenforceable, “[t]he ‘basic federal rule’ in bankruptcy is that state law governs the substance of
claims.” Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15, 20 (2000) (citing Butner v. United
States, 440 U.S. 48, 55 (1979)). New York courts have found that the trial plan does not alter the
underlying loan obligation. In Wells Fargo Bank, N.A. v. Meyers, 966 N.Y.S.2d 108, 110 (N.Y.
App. Div. 2013) (Second Department), the parties participated in mandatory foreclosure
settlement conferences pursuant to N.Y. C.P.L.R. 3408(f) (McKinney 2007 & Supp. 2013). In
August of 2009, the borrowers received a trial HAMP offer, which the borrowers signed on
September 1, 2009. Id. at 111. The trial offer indicated that the lender would not foreclose
during the Trial Period Plan if the trial payments were made; nonetheless, the lender initiated
foreclosure one day later on September 2, 2009. Id. The lender then informed the borrowers that
a second Trial Period Plan was required due to a miscalculation. Id. On April 28, 2010, the
lender sent the borrowers a letter stating that they were denied for modification, as their monthly
housing expense was less than 31% of their gross monthly income. Id. The parties appeared at a
conference before the referee, and the lender indicated that it would send the borrowers a
modification within five to seven days. Id. Despite this assurance, the lender sent the borrowers
another rejection letter on May 20, 2010. Id. Another modification was offered with higher
payments than the original; that offer was rejected by the borrowers. Id. at 111-12.
The trial court ordered the lender to provide the borrowers with a final modification
under the original trial terms, citing the lender’s failure to negotiate in good faith as required by
section 3408 of the New York Civil Practice Law and Rules. Id. at 112. The appellate court
reversed this remedy, stating that “[t]he ‘original modification agreement’ was merely a trial
arrangement, not an agreement for the binding obligations of the parties going forward.” Id. at
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116. The court noted that while section 3408 of the New York Civil Practice Law and Rules
contains no express remedy for the failure to negotiate in good faith, “[t]he courts may not
rewrite the contract that the parties freely entered into—the loan and mortgage agreements—
upon a finding that one of those parties failed to satisfy its obligation to negotiate in good faith
pursuant to CPLR 3408.” Id. at 117. The court did note that there were other potential remedies
for the failure to negotiate in good faith. Id. at 116. Forcing the creditor into a new agreement
that modified the existing loan terms was not an available remedy. Id.
Applying comparable rationale, the court in JP Morgan Chase Bank, N.A. v. Ilardo found
that
[s]ince there is no duty on the part of the HAMP servicers to modify mortgages[,]
neither the engagement in the processing of loan modification applications nor the
issuance of a [Trial Period Plan] gives rise to a right on the part of borrowers to a
permanent 	loan 	modifications 	if 	they 	successfully 	complete 	the 	trial 	plan
payments . . . .
36 Misc. 3d 359, 373-74 (N.Y. Sup. Ct. March 5, 2012) (Suffolk County) (internal citations
omitted).
Similarly, district courts for the Southern District of New York have concluded that
HAMP does not provide a private cause of action to the borrower. Wheeler v. Citigroup, 938 F.
Supp. 2d 466, 471 (S.D.N.Y. 2013) (“HAMP does not create a private right of action for
borrowers against loan servicers.”) (citations omitted); Griffith–Fenton v. Chase Home Finance,
No. 11 CV 4877(VB), 2012 WL 2866269, at *3 (S.D.N.Y. May 29, 2012) (“HAMP does not
provide a private cause of action, nor may plaintiff enforce the agreement as a third-party-
beneficiary.”).
Creditor’s claim would remain an allowed secured claim even if completion of the Trial
Modification entitled the Debtors to a permanent modification under applicable law. Pursuant to
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§ 502(b)(1), an objection to a claim cannot stand if the sole basis for the objection is that the
claim is “contingent or unmatured.” A contingent claim is an obligation “that will become due
upon the happening of a future event that was within the actual or presumed contemplation of the
parties at the time the original relationship between the parties was created.” In re South Side
House, LLC, 451 B.R. 248, 260 (Bankr. E.D.N.Y. 2011) (quoting Olin Corp. v. Riverwood Int'l
Corp. (In re Manville Forest Prods. Corp.), 209 F.3d 125, 128–29 (2d Cir. 2000)). As noted
above, the Trial Modification agreement and the HAMP Guidelines make clear that the presence
of the Trial Modification does not affect the underlying loan. Completion of the Trial
Modification is the only way the Debtors could become entitled to a permanent modification,
and completion has not occurred. The claim will either stand or be modified, depending on the
“happening of a future event . . . .” Id. That the claim is contingent during the Trial
Modification does not provide a basis for objection.
The Court concludes that § 502(b)(1) does not apply. At this time, the Creditor holds an
allowed secured claim that must remain allowed “in such amount” as it was filed. 11 U.S.C. §
502(b).
D. The Court declines to include the language proposed by the Creditor.
Creditor proposes that the Court substitute the Claim Language in the Proposed Order
with a clause stating “that upon the execution of permanent loan modification on terms
consistent with this Order, (i) Claim No. 12 shall be expunged and reduced to zero; and (ii)
Chase shall receive no payment under the plan in connection with Claim No. 12.” Obj. 3, ECF
No. 37. As the Court concludes there is no basis to alter the Creditor’s claim at this time, the
Court will simply strike the Claim Language.
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E. 	The Court will enter the language that imposes a deadline for delivery of the permanent
modification.
The Proposed Order contains the following requirement:
J.P MORGAN CHASE, N.A. shall deliver to the debtors the permanent loan
modification agreement within 30 days of the date upon which the debtors
completes [sic] the trial payments and shall return to the debtors a fully executed
copy thereof within twenty-one (21) days of its receipt of the Loan Modification
Agreement executed by the debtors.
Prop. Order 3, ECF No. 34.
Creditor does not object to this portion of the Proposed Order. “[T]he legal standard for
determining the propriety of a bankruptcy settlement is whether the settlement is in the ‘best
interests of the estate.’” In re Adelphia Commc’ns Corp., 368 B.R. 140, 225 (Bankr. S.D.N.Y.
2007) (quotation omitted). As noted above, the Court has observed that debtors are often forced
to wait extensive periods of time to receive permanent modifications once trial plans are
complete. This delays administration of bankruptcy cases and may prejudice other creditors.
The Court will enter the language in the best interests of the estate.
Conclusion
For the foregoing reasons, the Court strikes the Claim Language from the Proposed
Order, and will enter the Proposed Order in all other respects. Debtors should submit an order
consistent with this opinion.
Dated: Poughkeepsie, New York
March 11, 2014
/s/ Cecelia G. Morris
CECELIA G. MORRIS
CHIEF UNITED STATES BANKRUPTCY JUDGE
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