Consumer Bankruptcy Journal Fall 2015 - Page 21

CHAPTER 13 DEBTORS a senior mortgage lender’s latefiled proof of claim, and confirming a plan without any mortgage arrearage cure while preserving the homeowner’s automatic stay protection through the remaining life of the plan. In a ruling of first impression at the circuit court level, the Seventh Circuit in In re Pajian8 held that Rule 3002(c)’s9 90-day proof of claim filing deadline applies to secured creditors. As prevailing counsel in Pajian, I immediately recognized the strategic advantage of this ruling to NACBA attorneys striving to save homes from foreclosure despite debtors’ insufficient income to cure the mortgage arrearages. A review of the case is instructive. The Pajian debtor filed bankruptcy on the eve of a foreclosure sheriff sale on one property and after the sheriff sale of a second property. This case was debtor’s second bankruptcy case in less than a year so a motion to extend the automatic stay was required by §362(c)(3) (B).10 The mortgage lender who held notes on both properties objected to the stay extension. A trial was held and the stay was extended. Meanwhile, the claims filing deadline clock was ticking. Debtor proposed a chapter 13 plan that bifurcated the obligations owed to the mortgage lender. The plan proposed fully paying what debtor thought was the correct mortgage arrearage on the not yet foreclosed property plus the monthly postpetition mortgage payment required by the mortgage note. The plan also proposed paying a 10% dividend for the unsecured mortgage deficiency on the already foreclosed property. was ultimately confirmed. Debtor appealed directly to the Seventh Circuit. The mortgage lender objected to the plan after the proof of claim deadline had passed, asserting that the true mortgage arrearage was substantially greater than the mortgage arrearage provided in the chapter 13 plan. Debtor could not afford to cure the full mortgage arrearage asserted by the lender over the 60-month plan term.11 So debtor responded by filing a modified plan12 t hat reduced to zero ($0.00) the amount paid to the mortgage lender regarding the unsecured mortgage deficiency. Plus, the modified plan reduced to zero ($0.00) the amount of the mortgage arrearage cure, retaining only the monthly post-petition mortgage payment required by the mortgage note. c. Seventh Circuit Holds Rule 3002(c) Applies to Both Secured and Unsecured Claims The mortgage lender responded by filing a single proof of claim after the Rule 3002(c) filing deadline, combining both its secured and unsecured claims. Debtor objected to the late-filed proof of claim asserting that Rule 3002(c)’s deadline applies to both secured and unsecured claims. The bankruptcy court sustained the objection as to the unsecured mortgage deficiency, but overruled the objection as to the secured claim for the mortgage arrearage holding that Rule 3002(c)’s filing deadline does not apply to secured claims. The bankruptcy court then found that the secured creditor’s filing deadline was the date a plan National Association of Consumer Bankruptcy Attorneys Winter 2015 The Seventh Circuit reversed the bankruptcy court and held that a secured creditor must file its proof of claim by the 90-day deadline contained in Rule 3002(c). The Pajian court began its analysis by noting that a creditor must file a proof of claim in order to participate in chapter 13 plan distributions. But while all creditors must file a proof of claim in order to receive distributions, a secured creditor who fails to do so can still enforce its lien through a foreclosure action, even after the debtor receives a discharge.13 The Pajian court recognized that debtors may object and courts must disallow any claim that is not timely filed.14 But when is the deadline after which a secured creditor’s claim is “late?” The Seventh Circuit stated the issue in Pajian as whether Rule 3002(c)’s deadline applies to all creditors or merely unsecured ones. Rule 3002(a)’s15 filing requirement applies only to unsecured creditors and does not mention secured creditors. Plus, the court noted that Rule 3002 never expressly refers to “secured creditors” anywhere. But the court segregated Rule 3002(a) as only addressing the issue of “who” must file; whereas CONSUMER BANKRUPTCY JOURNAL 21