Maryann Minor

I N THE UNITED S TATES B ANKRUPTCY C OURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
I N RE 	: CHAPTER 13
:
MARYANN MINOR 	:
D EBTOR( S) 	: B ANKRUPTCY NO. 08-10108 SR
OPINION
B Y: STEPHEN RASLAVICH, UNITED STATES B ANKRUPTCY JUDGE .
Introduction.
HSBC Mortgage Corporation has objected to confirmation of the Debtor’s Chapter
13 Plan. The Debtor, in turn, has objected to HSBC’s Proof of Claim. A hearing on the
objections was held on October 1, 2008, after which the parties submitted briefs on the
limited question of whether HSBC is precluded from objecting to confirmation. The
Court took that matter under advisement.
Factual Background
HSBC holds the note and mortgage on the Debtor’s home. The principal loan
amount is $31,6000, payable over 15 years, and accrues interest at fixed rate of
11.625%. The loan was made in October 30,1997 and the last payment is due
November 4, 2012.
	See Note and Mortgage attached to Proof of Claim. It is also in
default. The Debtor’s Schedules list the HSBC secured debt at $42,000.
	See Schedule
A. HSBC’s Proof of Claim is in the amount of about $56,000 with no arrearages
claimed.
	See Proof of Claim. The Plan, however, proposes to pay HSBC $35,000 over
60 months at 7% interest. This prompted an objection to confirmation from HSBC.
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The Debtor, in turn, objected to the HSBC claim.
HSBC’s Claim
There appears to be no dispute that HSBC’s claim is secured solely by a
mortgage on the Debtor’s home. That circumstance often limits how a debtor may deal
with the claim in a Chapter 13 plan. The Code provides that a Chapter 13 plan may
“modify the rights of holders of secured claims,
other than a claim secured only by a
security interest in real property that is the debtor's principal residence....” 11 U.S.C. §
1322(b)(2) (emphasis added). Put more directly, the anti-modification clause bars a
debtor from modifying the rights of a creditor who has a claim secured only by the
debtor's principal residence.
	In re McDonald, 205 F.3d 606, 609 (3d Cir.2000). 	That
clause, however, is not without exceptions:
Notwithstanding subsection (b)(2) and applicable non-
bankruptcy law---
…
(2) in a case in which the last payment on the original
payment schedule for a claim secured only by a security
interest in real property that is the debtor’s principal
residence is due before the date on which the final payment
under the plan is due, the plan may provide for the payment
of the claim as modified pursuant to section 1325(a)(5) of
this title.
11 U.S.C. § 1322(c)(2). The last payment on the Debtor’s loan from HSBC is due
November 4, 2012; the last payment under her Chapter 13 plan will be made January
2013. Because the
last loan payment precedes the
last plan payment, the Debtor’s
treatment of HSBC qualifies for the exception to the antimodification rule of §
1322(b)(2). In other words, the HSBC secured claim may be crammed down pursuant
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1 The previous holder of the note and mortgage appears to be Champion Mortgage
Company.
3
to § 1325(a)(5). Where the parties disagree is on the
amount which must be paid on
that claim.
The Parties’ Positions
The Debtor argues that principles of res judicata bind HSBC to accept the
amount proposed in her plan. That amount, she explains, derives from a prior
bankruptcy. In that earlier case, she goes on, the Debtor proposed a lesser amount to
HSBC’s predecessor1 who did not object. That plan was subsequently confirmed and
this, she concludes, settled the question of what the Debtor owes HSBC on this loan.
For its part, HSBC disputes the central premise of the Debtor’s argument. It
contends that confirmation of the prior plan has no bearing on this case. The main
case in which that plan was confirmed, HSBC emphasizes, was
dismissed. Under Code
§ 349, dismissal restored to HSBC all those prepetition property rights which it had in
the Debtor’s home. As a result, the pending plan’s proposed treatment of HSBC’s claim
is to be judged independently of anything that happened in the prior case. The
pending plan does not pay HSBC the present value of its claim; therefore, it may not be
confirmed.
Substantive Rights;
Procedural Rules
The crux of the parties dispute is over the applicable law. Where HSBC relies on
a specific, substantive provision of the Bankruptcy Code, the Debtor rests on a
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procedural rule of preclusion. The interplay of federal statutes and rules is dealt with in
the Rules Enabling Act:
(a) The Supreme Court shall have the power to prescribe
general rules of practice and procedure and rules of
evidence for cases in the United States district courts
(including proceedings before magistrate judges thereof)
and courts of appeals.
(b)
Such rules shall not abridge, enlarge or modify any
substantive right. All laws in conflict with such rules shall be
of no further force or effect after such rules have taken effect.
28 U.S.C. § 2072 (a), (b) (emphasis added). The extent to which a statute affords a
substantive right is a function of the breadth of the remedy.
	See U.S. Express Lines,
Ltd v. Higgins, 281 F.3d 383, 392 (3d Cir.2002). The Supreme Court has held that
“rules which
incidentally affect litigants' substantive rights do not violate” § 2072 if they
are “reasonably necessary to maintain the integrity of that system of rules.” In
Burlington Northern Railway Co. v. Woods, 480 U.S. 1, 5, 107 S.Ct. 967, 970, 94
L.Ed.2d 1 (1987) (emphasis added) For HSBC, the question becomes what rights are at
stake and how would such rights be affected by application of res judicata?
HSBC’s Rights
Upon Dismissal
The substantive right that HSBC relies on is found in § 349 of the Bankruptcy
Code:
Effect of dismissal
(b) Unless the court, for cause, orders otherwise, a dismissal
of a case other than under section 742 of this title--
…
(3)
revests the property of the estate in the entity in which
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such property was vested immediately before the
commencement of the case under this title.
11 U.S.C. § 349(b)(3) (emphasis added). “The basic purpose of the subsection
[349(b)] is to undo the bankruptcy case, as far as practicable, and to restore all
property rights to the position in which they were found at the commencement of the
case. This does not necessarily encompass undoing sales of property from the estate to
a good faith purchaser.” H.R.Rep. No. 595, 95th Cong., 1st Sess. 338 (1977), U.S.Code
Cong. & Admin.News 1978, pp. 5963, 6294-95. Bankruptcy Judge Fox of this District
notes that:
The general idea behind § 349 is that the dismissal of a
bankruptcy case should re-establish the rights of the parties
as they existed when the petition was filed.... Indeed, unless
the court indicates otherwise, the general effect of an order
of dismissal is to “restore the status quo ante;” it is as if the
bankruptcy petition had never been filed.
In re Randall, 358 B.R. 145, 168 (2006)
quoting In re Derrick, 190 B.R. 346, 350
(Bankr.W.D.Wis.1995) (citations omitted);
see, e.g., In re Serrato, 214 B.R. 219, 227
(Bankr.N.D.Cal.1997);
In re Lewis & Coulter, Inc., 159 B.R. 188, 190
(Bankr.W.D.Pa.1993);
In re Van Stelle, 354 B.R. 157, 167-168 (Bankr.W.D.Mich.2006).
see also
In re Nash, 765 F.2d 1410, 1413 (9th Cir. BAP 1985) (holding that in the
Chapter 13 context where a debtor has confirmed a plan but the case nevertheless is
dismissed, the order of dismissal essentially acts to vacate the confirmed plan);
accord
In re Keener, 268 B.R. 912, 919 (Bankr.N.D.Tex. 2001);
In re Groves, 27 B.R. 866, 868
(Bankr.D.Kan.1983);
In re Beasley, 22 B.R. 773 n.1 (Bankr.W.D.Tenn.1982).
Under this provision, the effect of dismissal of the Debtor’s prior case is to place
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HSBC back in the position that it was in before the bankruptcy was filed. That position
was the holder of a claim secured by a mortgage on Debtor’s home
free of
modification. To use the exact words from the statute, it “revested” in HSBC the
prepetition rights it had in the note and mortgage. Those rights had been altered by
confirmation of the original plan, but dismissal of the case undid all of that. Precluding
such a right certainly cannot be characterized as incidental.
Yet that is what the Debtor asks the Court to do. And the means by which the
Debtor would have the Court act is the application of a rule of procedure. Res judicata,
sometimes referred to as claim preclusion, is a rule of procedure.
	See Davis v. U.S.
Steel Supply, 688 F.2d 166, 177 (3d Cir. 1982);
see also 18 Wright & Miller,
Federal
Practice and Procedure, Civil 2d § 4401 et seq. As such, it may not be applied to
deprive HSBC of a property right specifically set forth in the Bankruptcy Code. To allow
otherwise would run afoul of a basic tenet of statutory construction.
	See 28 U.S.C. §
2072(b)
Debtor’s Arguments
In the face of this authority, the Debtor steadfastly maintains that principles of
preclusion do, indeed, apply. Her main argument for this proposition is offered in a
rather unusual fashion. Debtor has attached to her brief another brief in a different
case which her counsel has pending before Judge Sigmund of this District:
In re Nix-
Pearson, 07-10612. In that case, her counsel explains, the same argument that the
Debtor is making here was successful. That, however, is not reflected by what is
attached. The plan in that case (also attached) reveals that the secured creditor (HSBC
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2
See Nix-Pearson Brief, attached as Ex. C to Debtor’s Brief.
3
See id. n.2.
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in that case as well) held two mortgages on the property. The first mortgage would be
cured while the second would be paid off through the plan.
	See Third Amended Plan,
Ex. E to Debtor’s Brief. This plan was confirmed but the Confirmation Order does not
state whether Judge Sigmund endorsed the res judicata argument raised here. There
is similarly no transcript of any hearing from that case which might confirm counsel’s
representations. In fact, there is nothing in the attachments demonstrating that the
second mortgage loan in that case would be paid less than the present value of the
note. In other words, Debtor’s submission raises as many questions as they do
answers. As a consequence, the Court does not find it persuasive.
Where the Debtor comes close to addressing HSBC’s premise, 2 she falls short.
The Debtor’s attempt to distinguish Code § 349 never speaks to the applicable
paragraph. She argues that subsection (b)
(1) has no bearing here.
	See Debtor’s Brief,
Ex.C, 1. She is correct: that provision “reinstates” avoided transfers and liens upon
dismissal and HSBC holds no such interest. But it is subsection (b)
(3) which speaks to
the interest which HSBC does hold and upon which it relies.
	See 11 U.S.C. § 349(b)(3)
(revesting prepetition property rights upon dismissal);
see also HSBC Brief, 4. HSBC is
the holder of a secured claim—a property right—which revested upon dismissal.
Neither does the Court find persuasive Debtor’s reliance on
In re Ramirez, 283
B.R. 156 (Bankr.S.D.N.Y.2002)3 In
Ramirez, the debtor had sought to strip down a
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secured city tax claim.
	Id. at 158. After the Bankruptcy Court denied his request and
allowed the tax claim as fully secured, the debtor decided upon an unorthodox strategy.
He neither sought reconsideration nor filed an appeal as to the tax claim ruling.
	Id.
Instead, the debtor dismissed his bankruptcy case—his third by that time— and filed a
fourth.
	Id. In the new proceeding, he filed the very same motion to strip down the tax
claim which had failed in the prior proceeding.
	Id. The city argued that the prior ruling
in its favor was res judicata.
	Id. at 159. The debtor, in turn, relied on § 349(b)(3)
arguing that the tax ruling was undone by dismissal. In ruling in favor of the city, the
Court found that “while there is flexibility inherent in § 349, it must be given effect in
such a way as to prevent creditors from being held in limbo by repeated filings.”
Id. at
160-161
There is nothing even remotely approaching such conduct here. Unlike the
debtor in
Ramirez, there is no indication that HSBC is trying to manipulate the
bankruptcy process. For whatever reason, the prior holder (Champion) accepted the
proposed treatment of its secured claim in the previous bankruptcy. After that case
was dismissed and the Debtor filed the pending case, HSBC, the present holder,
concluded that the payment proposed was insufficient and objected. HSBC was within
its rights to do that. That the instant case was dismissed was—unlike the situation in
Ramirez—no fault of HSBC. It was the Debtor who failed to make her plan payments.
See Case No. 03-17007, ##77, 127, Motion to Dismiss and Order. The result of
dismissal is that HSBC was restored to its position and its rights as they existed
prepetition.
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Summary
The Court ascribes no res judicata effect to the confirmed plan in Debtor’s prior,
dismissed bankruptcy case. HSBC’s secured claim is to be judged independently of
anything that transpired in the prior proceeding. That is not to say, however, that she
is not entitled to receive credit for all payments made on this claim. On the contrary,
she is.
The hearing in this matter has been continued to November 5, 2008. At that
time the Court will readdress with the parties their disagreements over the components
of the HSBC claim against the backdrop of the ruling herein.
An appropriate Order follows.
By the Court:
_________________________________
Stephen Raslavich
Chief, United States Bankruptcy Judge
Dated: 	October 29, 2008
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