James Jacono

UNITED S TATES B ANKRUPTCY COURT
FOR T HE E ASTERN DISTRICT O F PENNSYLVANIA
In re 	: 	Chapter 13
:
JAMES JACONO, 	: 	Bankruptcy No. 05-15384DWS
:
Debtor. 	:
MEMORANDUM OPINION
BY: 	DIANE WEISS SIGMUND, Chief Bankruptcy Judge
Before the Court is the Motion of the Department of Housing and Urban
Development (“HUD”) for Relief from Automatic Stay (the “Motion”) to allow a judicial
proceeding pending in the United States District Court for the Eastern District of
Pennsylvania to proceed. For the reasons that follow, the Motion will be granted.
BACKGROUND
The Debtor resides in certain property located at 4178 Oliver Lane, Boothwyn,
Pennsylvania (the “Property”), a residential property purchased in the 1970's by his father
William Jacono (“William”), who died on October 11, 2002. 	On June 11, 1993 William
executed an Adjustable Rate Note (Home Equity Conversion) secured by an Open-End
Mortgage 	on 	the 	Property 	which 	HUD 	took 	by 	assignment 	on 	February 	4, 	2000
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1 Known as a HECM loan, it is funded by a mortgage lender, bank, credit union or savings
and loan association and insured by the FHA. 	Borrowers must be 62 and older and are able to
convert the equity in their homes into monthly streams of income to be repaid when the homes are
no longer occupied. See htpp://www.hud.gov
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(the “HECM”).1 Exhibit HUD-2. The financing transaction is commonly referred to as a
reverse mortgage in that the lender either advances in a lump sum or in installments a sum
of money based on the age of the borrower, the interest rate at closing and the equity in the
real estate. 	See htpp://www.reversemortagelenders.org. 	The unique feature of a reverse
mortgage loan is that no payment is due until the borrower no longer owns or occupies the
home as his principal residence. 	Id. 	Subsequent to William’s death, a Home Equity
Conversion Mortgage Payoff Statement was transmitted to the Estate of William Jacono
indicating a payoff amount of $185,951.59 as of April 18, 2005. HUD has filed a secured
proof of claim in the bankruptcy case in this amount. Exhibit HUD-1.
While the record is silent as to when HUD learned of William’s death, it apparently
made a demand for full repayment prior to April 18, 2005 because in July 2003 HUD
commenced a non-judicial proceeding and then when it was challenged, initiated United
States v. William Jacono, Deceased, any Heirs, Executors or Assigns of Said William
Jacono, C.A. No. 04- 3478 (E.D. Pa. 2004) seeking judicial foreclosure of the Property (the
“District Court Action”). Motion ¶ 9, Answer ¶ 1. 	Debtor defended the District Court
Action, contending that the loan was invalid because William had transferred the Property
to a trust for Debtor’s benefit before the loan was made. HUD filed a motion for summary
judgment in the District Court Action and after the motion was fully briefed, Debtor filed the
instant Chapter 13 case. The filing stayed further proceedings in the District Court Action.
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2 While a court may not take judicial notice sua sponte of facts contained in the debtor’s file
that are disputed, In re Augenbaugh, 125 F.2d 887 (3d Cir. 1942), it may take judicial notice of
adjudicative facts “not subject to reasonable dispute ... [and] so long as it is not unfair to a party to
do so and does not undermine the trial court’s factfinding authority.” In re Indian Palms Assoc., 61
F.3d 197, 205 (3d Cir. 1995) (citing Fed.R.Evid. 201(f) advisory committee note (1972 proposed
rules). Moreover, “factual assertions in pleadings, which have not been superceded by amended
pleadings, are judicial admissions against the party that made them. Larson v. Gross Bank, 204 B.R.
500, 502 (W.D. Tex. 1996) (statements in schedules). 	See also In re Musgrove, 187 B.R. 808
(Bankr. N.D. Ga. 1995) (same); In re Leonard, 151 B.R. 639 (Bankr. N.D.N.Y. 1992) (same).
3 The Debtor has scheduled it as a disputed secured claim of $180,000. However, the only
dispute raised was whether the mortgage was valid. The Debtor does not contend the amount is
incorrect.
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Debtor contends that notwithstanding his view that the HECM is invalid, he is
prepared to treat it as a secured claim in his Chapter 13 plan (the “Plan”). 	Under his
proposed Plan, Debtor, who is 70 years old, would secure another HECM to pay off the
existing HECM and the claims of the Delaware County Tax Claims Bureau. Recognizing
that the proceeds of such a loan would be insufficient to pay these claims in full, he looks
to an eminent domain claim arising out of a property at 2811 W. 2nd Street, Chester
(the “Eminent Domain Recovery”) to satisfy the balance. Payment from these sources shall
be made to the Chapter 13 trustee by March 31, 2006. However, if he is unsuccessful in
doing so by that date, he will sell the Property by March 31, 2007. Exhibit HUD-1. Pending
the occurrence of one of these events, Debtor proposes to pay $10 per month to the
Chapter 13 trustee for 36 months which is his sole disposable income since he is retired and
receiving only social security.
Debtor’s schedules evidence secured claims of $507,418.60.2 In addition to HUD’s
claim of $185,951.59, 3 there are scheduled secured claims of the Delaware County taxing
authority (“County Claim”) and a “potential lien” claim by William Jacono Realty, Inc.
(“Realty”) in the amount of $310,418.60. In addition to his treatment of HUD, the Plan treats
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4 Delaware County has filed two proofs of claim. The second and larger proof of claim
relates to another property which Debtor stated relates to the house he lived in with his former
wife until 1978 and which is not contemplated to be paid under the Plan.
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the County Claims, Class Three, as being paid directly by arrangements outside the Plan,
“although it is expected that these creditors’ claims against the Home will be paid out of the
proceeds of the refinancing or sale” Id. 	Debtor testified that he did not have money to pay
his real estate taxes for the first time in 2004 and believed the obligation was around $5000.
This testimony is consistent with the proof of claim filed in the amount of $5587.56.4 As to
the Realty claim, classified as Class Four, the Debtor indicates it will be treated “outside of
the plan.” Id.
In support of the feasibility of the Plan, Debtor produced a memo dated July 11, 2005
from Karen Curry, a representative of Financial Freedom (“Financial”), which indicated that
as of that date, the amount available under the HECM program for the Property at the current
rate of interest was $147,841. This memo from Financial, a broker of reverse mortgages,
is Debtor’s sole document relating to the anticipated new HECM and represents Debtor’s
latest communication about this subject. Debtor acknowledged that he had no pending
application for a loan, an application made several years ago having been abandoned when
the lender would not advance more that $110,000 based on the current interest rate.
Debtor also elicited the testimony of Dennis Dunn, Esquire (“Dunn”), the lawyer
pursuing the Eminent Domain Recovery, to support the feasibility of the Plan insofar as it
is to be funded by the potential proceeds from the eminent domain case. 	Dunn testified
that he was retained in early 2004 to represent William Jacono Realty, Inc. (“Realty”),
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5 Dunn could not recall the name of the trustee.
6 Dunn did not know who the prior attorneys were or why they took no action to pursue
Realty’s claims.
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a corporation owned by the William Jacono Trust5 as to which debtor is the beneficiary.
In 2001 the Pennsylvania Department of Transportation (“PennDOT”) condemned a property
owned by Realty pursuant applicable state law. While the next step after the taking was to
have the condemned property valued, Realty has not filed the requisite petition for review
which would fix the value of the property.6 Dunn explained he needed to secure an appraisal
first and while he had hired an appraiser within the last month or so, the appraiser would not
be able to produce his report until mid to late September. In addition to PennDOT’s actions
against Realty, Realty filed a summons in 2004 to preserve its claim for a de facto taking or
trespass in connection with additional property taken in addition to the condemned property.
The complaint has not been filed.
HUD contends that the Debtor’s Plan cannot be confirmed. 	The ability to secure
another HECM in the absence of equity in the Property, according to HUD’s counsel, is
problematic and the Debtor has not even applied to secure this financing. The contemplated
proceeds of $147,000 from a new HECM could not pay HUD’s claim of $185,000 as well
as the County Claim of $5,000 plus interest and costs. The Eminent Domain Recovery, HUD
argues, is too speculative to fill in the gap. To allow this bankruptcy case to proceed, would
be to force HUD, whose debt was due in 2002, to wait until the earliest 2006 but more likely
2007 to receive payment without any assurance that it would be paid.
DISCUSSION
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The automatic stay of § 362 is one of the fundamental debtor protections provided by
the bankruptcy laws. It gives the debtor a breathing spell from his creditors by stopping all
collection efforts, all harassment and all foreclosure actions while the debtor attempts a
repayment or reorganization plan. H.R.Rep. No. 595, 95th Cong., 1st Sess 174-75 (1977);
S.Rep.No. 989, 95th Cong. 2d Sess. 49-50 (1978). 	However, if there is no realistic
repayment plan being proposed and the stay merely obstructs a creditor from the exercise of
its valid contractual remedies, the stay should be lifted. E.g. In re Brown, 290 B.R. 415
(Bankr. M.D. Fla. 2003) (cause exists to lift stay to allow mortgage foreclosure sale
purchaser to complete his eviction given lack of evidence that she could feasibly perform
under a Chapter 13 plan).
Generally, the decision whether to modify, condition, or annul the bankruptcy stay
under Section 362(d) is within the discretion of the bankruptcy court. 	See Matter of
Holtkamp, 669 F.2d 505 (7th Cir. 1982); In re Shariyf, 68 B.R. 604 (E.D. Pa. 1986); In re
Colonial Center, Inc., 156 B.R. 452, 459 (Bankr. E.D. Pa. 1993). The determination is made
by examining the totality of the circumstances. Matter of Baptist Medical Center of New
York, Inc., 52 B.R. 417, 425 (E.D.N.Y. 1985); Colonial Center, 156 B.R. at 459.
Relief from stay under § 362(d)(1) may be granted for "cause, including the lack of
adequate protection of an interest in property of such party in interest." The party seeking
relief from the stay has an initial burden to demonstrate cause for relief. In re Ward, 837
F.2d 124, 128 (3d Cir. 1988); In re Purnell, 92 B.R. 625, 631 (Bankr. E.D. Pa. 1988); In re
Kim, 71 B.R. 1011, 1015 (Bankr. C.D. Cal. 1987). This follows from the principle that a
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7 Debtor has maintained his litigation position that William did not own the Property when
he gave the mortgage having previously transferred it to a trust. This issue is before the District
Court and Debtor will have the opportunity to pursue it if stay relief is granted. However, Debtor
filed this case to treat the HECM as a secured obligation under a Chapter 13 plan which presents for
this Court the question of whether a feasible plan has been proposed. Needless to say, if Debtor’s
sole contention is that the mortgage is invalid, I would have entered a bench order lifting the stay
to allow the District Court to decide the pending motion.
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party seeking to alter the status quo has some initial burden to justify the relief sought.
See generally In re Fries, 68 B.R. 676, 684-85 (Bankr. E.D. Pa. 1986).
FSG Service Corp. v. Kim (In re Kim) defined this initial burden as follows:
Where, as here, relief from stay is grounded in cause, based
upon lack of post-confirmation maintenance payments, the
moving creditor must establish a prima facie case supporting the
cause for relief from the stay. 	Such a prima facie case must
include: (1) a showing of an obligation owing by the debtor to
the creditor; (2) a valid security interest as to which relief from
the stay is sought...; (3) the cause justifying relief from stay,
such as post-petition or post-confirmation default.
71 B.R. 1101, 1016 (Bankr. C.D. Cal. 1987), overruled in part on other grounds by Lomas
Mortgage USA, Inc. v. Elmore (In re Elmore), 94 B.R. 670, 677 (Bankr. C.D. Cal. 1988)
(citation omitted).
HUD has presented evidence that it has a mortgage on the Property which William
granted to secure a loan which came due when he died in 2002.7 Debtor continues to live in
the Property without making any payment and proposes to have the right to continue to do
so until 2007. The secured obligations on the Property exceed the $175,000 scheduled value
of the Property, see Schedule D, an undersecured position which would grow by reason of
Debtor’s failure to pay real estate taxes. Debtor’s Schedule J does not include any real estate
tax expense going forward and thus it appears that his admitted inability to pay the 2004
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8 While HUD complains of the additional years it would be deferred by the curing of the
defaulted HECM under Chapter 13, neither it nor Debtor cited any authority to address the
permissible treatment of a reverse mortgage under Chapter 13. My research revealed one case, In
re Wilcox, 209 B.R. 181 (Bankr. E.D. N.Y. 1996), that holds that a reverse mortgage is no
different than any other matured loan that can be paid over the life of a plan. Notably the debtor
was paying property taxes and insurance as they came due and the lender’s position was not
deteriorating. Moreover, the debtor did not attempt to defer payments with a new HECM but
rather to amortize the loan over the plan period.
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taxes would continue during the Plan period. HUD has met its initial burden by this proof,
and the burden then shifts to the Debtor to establish the absence of "cause." 11 U.S.C. §
362(g). See generally Nazareth National Bank v. Trina-Dee, Inc., 731 F.2d 170, 171 (3d Cir.
1984).
In this case, the Debtor contends that HUD is adequately protected by his proposed
Chapter 13 plan. 	A viable plan of reorganization which meets a debtor’s statutory
obligations to the secured creditor may defeat a motion for relief. 	In re Philadelphia
Consumer Discount Co., 37 B.R. 946, 949 n.9 (E.D. Pa. 1984); In re Skipworth, 69 B.R. 526
(Bankr. E.D. Pa. 1987). For the reasons that follow, however, I agree with HUD that the
Debtor’s proposed Plan is far too speculative to compel HUD to forbear until 2007 with no
payment while its collateral diminishes by reason of the growing tax liens.8
There are two components to Debtor’s Plan, both of which must be accomplished for
the Plan to succeed. 	First, Debtor must be able to refinance the Property with another
HECM. Debtor has not applied for a new HECM although he has obtained an estimate of
a loan amount that might be available to him. Notably the assumptions that the broker has
utilized to calculate that loan are unstated. It seems unlikely that the loan broker is aware of
the existing liens on the Property. Since the proceeds of a new loan which Debtor’s own
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evidence fixes at $147,841.00 will not pay off the existing mature HUD obligation (including
continuing accruing interest), tax liens (also accruing interest) and 	closing costs, it is
unreasonable for Debtor to expect to secure such financing without first raising enough
supplemental funds which, with the new HECM proceeds, would retire the existing HECM.
Absent supplemental funds, the lender would be taking a second position to a defaulted
mortgage, an unlikely scenario. Thus, I will assume that the second prong of Debtor’s Plan,
i.e., the Eminent Domain Recovery, must be realized contemporaneously with any new loan
being advanced. I next consider the likelihood of this occurrence.
According to the testimony of Dunn, nothing will happen to advance the Eminent
Domain Recovery until an appraisal is secured. 	He expects that to occur by the end of
September. At the present juncture Dunn does not even know what amount he can expect
to recover if his own value of the taking prevails and whether that amount will be sufficient
to reduce the HECM to an amount that could be paid off with a new loan. Once he gets that
appraisal, he first has to file a petition to fix value. Dunn indicated that he hoped he could
negotiate a settlement but PennDOT was very difficult and he was not optimistic. 	With
regard to the second action which Realty has commenced against PennDOT by summons,
he has yet to file a complaint.
More significantly, the property that was taken in 2001 was owned by Realty,
not Debtor. 	Realty, in turn, is owned by a trust. 	The trustee, not Debtor who is the
beneficiary, controls the litigation and has done little to advance the realization of these
proceeds. It appears that the trustee does not have the same incentive to move this forward
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9 HUD points out that the Schedules do not reflect any expectation of proceeds from the
eminent domain case. I note that the Debtor has scheduled under “Contingent and Non-contingent
Interests in Estate of Decedent, ” that he is “Beneficiary of Trust James F. Jacono Ira for William
Jacono.” Schedule B. That interest is exempted under Schedule C. Exhibit HUD-1.
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that Debtor has. Finally the Debtor’s Schedules reflect a secured obligation in the amount
of $310,418.60 in favor of Realty which the Plan states will be paid “outside the plan.” 9
Debtor was not questioned about this claim. Query how the Debtor expects Realty to release
the eminent domain proceeds to him when he has this obligation to it. 	For all of these
reasons, the prospect that Debtor will receive an Eminent Domain Recovery in an amount
sufficient to secure a new HECM to retire the existing defaulted HECM by March 31, 2006
is truly speculative. Nor does the back up provision that contemplates a sale of the Property
by March 31, 2007 offer a viable option since the value of the Property is significantly less
than the amount of the liens. 	Indeed that provision, which stretches out the period of
non-payment for HUD to a total of five years from the date the loan became due, makes the
Plan even more unfavorable to HUD.
The automatic stay is intended to strike a balance between the rights of creditors and
the debtor’s need for breathing room in order to rehabilitate or liquidate in an orderly
manner. See generally Community Federal Savings and Loan Association v. Craghead (In
re Craghead), 57 B.R. 366, 369 (W.D. Mo. 1985). When the rehabilitation, in this case the
Debtor’s desire to save the Property his father intended to pass to him, obstructs a creditor’s
exercise of its rightful remedies with no adequate protection being offered and there is a
likelihood that the creditor’s position will worsen, that balance tips too far in the Debtor’s
favor. Accordingly, the Motion shall be granted.
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An Order consistent with this Memorandum Opinion shall be entered.
DIANE WEISS SIGMUND
Chief U.S. Bankruptcy Judge
Dated: 	August 16, 2005
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UNITED S TATES B ANKRUPTCY COURT
FOR T HE E ASTERN DISTRICT O F PENNSYLVANIA
In re 	: 	Chapter 13
:
JAMES JACONO, 	: 	Bankruptcy No. 05-15384DWS
:
Debtor. 	:
ORDER
AND NOW, this 16th day of August 2005, upon consideration of the Motion of the
Department 	of 	Housing 	and 	Urban 	Development 	for 	Relief 	from 	Automatic 	Stay
(the “Motion”) to allow a judicial proceeding pending in the United States District Court for
the Eastern District of Pennsylvania (the “District Court Action”) to proceed, after notice and
hearing, and for the reasons stated in the accompany Memorandum Opinion;
It is hereby ORDERED and DECREED that the Motion is GRANTED.
DIANE WEISS SIGMUND
Chief U.S. Bankruptcy Judge
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Copies to:
David A. Scholl, Esquire
Regional Bankruptcy Center
Law Office of David A. Scholl
#6 St. Albans Avenue
Newtown, PA 19073
Patricia D. Gurgin, Esquire
Office of the U.S. Attorney
615 Chestnut Street
Suite 1250
Philadelphia, PA 19106-4476
William C. Miller, Esquire
Standing Chapter 13 Trustee
P. O. Box 40119
Philadelphia, PA 19106-0119
Dave P. Adams, Esquire
Office of the U.S. Trustee
833 Chestnut Street
Suite 500
Philadelphia, PA 19107
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