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In re Maike

United States District Court, E.D. Michigan, Northern Division

August 15, 2017

IN RE CRAIG W. MAIKE, Debtor.
v.
CRAIG W. MAIKE, Debtor Consol Appellant, THOMAS W. McDONALD, JR., Chapter 13 Trustee, Appellant,
v.
UNITED FINANCIAL CREDIT UNION, Appellee.

          OPINION AND ORDER AFFIRMING ORDER OF THE BANKRUPTCY COURT

          THOMAS L. LUDINGTON, United States District Judge

         This consolidated bankruptcy appeal was initiated by Debtor Craig Maike and Chapter 13 Bankruptcy Trustee Thomas W. McDonald (together “Appellants”). The bankruptcy proceeding at issue was the subject of a previous appeal to this Court by Appellee United Financial Credit Union (“UFCU”) on September 9, 2015. See in re Maike, Case No. 15-cv-13176 (Sept. 9, 2015) (hereinafter Maike I). That appeal was addressed by an opinion dated April 7, 2016. The Court held that 11 U.S.C. § 1322(b)(5) does not allow the plan itself to create defaults at the expense of the protected homestead mortgagee in order to accrue funds for the administrative expense of the debtor's counsel.

         Following remand, on January 11, 2017, Appellants initiated separate appeals from a bankruptcy court order denying the Trustee's motion to alter or amend judgment or for reconsideration. In essence, Appellants argue that by ordering the Debtor's attorney to remit $623.63 to the Trustee in order to pay Appellee UFCU, the bankruptcy court misconstrued this Court's previous order and unfairly enriched the mortgagee at the expense of the Debtor's Attorney by requiring Debtor Maike to pay two “gap payments” to the homestead mortgagee for the months of March and April of 2015 upon confirmation of the revised plan. The appeals were consolidated on March 10, 2017. See ECF No. 5. For the reasons stated below, the order of the bankruptcy court will be affirmed.

         I.

         Debtor Maike entered into a note and mortgage agreement with Appellant UFCU on March 2, 2007. Pursuant to that agreement, UFCU lent Maike $62, 000, for which UFCU received a security interest in Maike's primary residence and the right to receive interest at the rate of 8.0 percent on any unpaid balance. The parties agreed that Maike would make monthly payments in the amount of $454.93. If Maike failed to make such payments as due, he would be in default. UFCU would then have the option to provide Maike notice that failure to correct his default within 30-days would result in acceleration of the balance due on the note.

         By 2014 Maike was struggling to make his monthly mortgage payments. Accordingly, on January 24, 2014 Maike and UCFU entered into an agreement modifying the original note. Under the amendment, the monthly principal and interest payment was reduced from $454.93 to $367.36, beginning on February 2, 2014. BR. 25. The parties agreed that Maike was relieved from making the December 2, 2013 and January 2, 2014 payments. Id. The parties also agreed to a reduction of the interest rate from 8.0 percent to 5.375 percent, and UFCU agreed to forgive the past due interest amount of $445.30. Id. As part of the amendment, Maike acknowledged that as of January 24, 2014 he still owed a principal balance in the amount of $59, 754.80. The modification agreement only addressed Maike's default, and did not otherwise affect either party's rights prospectively under the loan agreement.

         A.

         On February 10, 2015, after again falling behind in his mortgage payments in the amount of $2, 515.90, Maike sought Chapter 13 Bankruptcy protection in the Eastern District of Michigan. Maike then filed his proposed Chapter 13 Bankruptcy plan on February 14, 2015 based on the Eastern District of Michigan model Chapter 13 plan. Maike's proposed plan called for making payments into the plan in the amount of $660.00 per month. Pursuant to the model plan, he proposed paying his attorney fees in full, in the amount of $2, 910, before beginning monthly payments in the amount of $510.00 to UFCU. UFCU filed an objection to Maike's plan on April 14, 2015, arguing that the plan impermissibly altered its rights to receive payments each month during the pendency of the plan under 11 U.S.C. §§ 1322(b)(2) and 1322(b)(5).

         The initial confirmation hearing took place on April 23, 2015. At the hearing, UFCU argued that by allocating all of the plan payments to Maike's attorney's fees prior to payment to UFCU, the plan impermissibly created a post-petition default of Maike's mortgage obligations and altered UFCU's right to receive payments each month in violation of § 1322(b)(2). Maike disagreed, arguing that his attorney fees should be paid first as a priority administrative expense. The Trustee agreed with Maike. Problematically, on that date the Trustee had not received sufficient funds from Maike to pay Maike's attorney, and the bankruptcy court was hesitant to confirm the plan before the plan had accumulated enough funds both to pay Maike's attorney in full and to commence monthly payments to UFCU, the homestead mortgagee. At the urging of the Trustee, the bankruptcy court therefore decided to adjourn the confirmation hearing until the Trustee had sufficient funds to pay Maike's attorney in full and begin monthly payments to UFCU, which the bankruptcy court calculated to be in late July.

         Following adjournment of the confirmation hearing, on May 21, 2015 UFCU filed a motion to compel payments under § 1322(b)(2). Reiterating its objections from the April 23, 2015 hearing, UFCU argued that “§1322(b)(2) and §1322(b)(5) act in concert to require regular contractual payments on a mortgage claim during the pendency of the bankruptcy case when a debtor chooses to treat the mortgage claim pursuant to §1322(b)(5).” At a motion hearing held on July 9, 2015, the bankruptcy court declined to order payments or lift the automatic stay, and reaffirmed its decision to adjourn the confirmation hearing to a time when the Trustee had sufficient funds to pay Maike's attorney in full and begin monthly payments to UFCU. The confirmation hearing was later adjourned to August 20, 2015.

         At the time of the August confirmation hearing, the Trustee reported to the bankruptcy court that he had received $3, 144.90. Of that, he proposed to pay $2, 910 towards Maike's attorney fees under the plan. BR. 182. This left $234.90 available to begin payments to UFCU. This was short of the $503.18 that UFCU was ultimately to receive under the plan each month. At the hearing, UFCU informed the bankruptcy court that because it had not received payments since Maike's initial Chapter 13 filing in February, it was owed an additional $3, 019.18 in post-petition arrearage. It also renewed its objections under §1322(b)(2) and §1322(b)(5). The bankruptcy court took the matter under advisement.

         On September 3, 2015, the bankruptcy court issued its opinion overruling UFCU's objections. The court concluded that under the plan UFCU would receive its contractual payment of $503.18 each month, that its post-petition arrearage of $3, 522.26 would take 28 months to cure, and that its prepetition arrearage of $2, 515.90 would then take 20 additional months to cure. The total arrearage owed to UFCU would therefore be cured within the 60 months required under Chapter 13. On September 4, 2015 the bankruptcy court issued an order confirming Maike's Chapter 13 plan. The trustee was ordered to pay Maike's attorney in full and commence monthly payments to UFCU. UFCU then filed a notice of appeal on September 9, 2015. See Maike I, Case No. 15-cv-13176 (Sept. 9, 2015).

         B.

         In Maike I, UFCU argued that its rights under 11 U.S.C. § 1322(b)(2) as the holder of the security interest in Maike's principal residence were violated when the bankruptcy court delayed confirmation of Debtor Maike's Chapter 13 Bankruptcy Plan for over four months in order to accrue cash to pay Maike's attorney. Maike disagreed, arguing that the plan reasonably cured his pre-petition and post-petition defaults, and provided payments to UFCU in accordance with 11 U.S.C. § 1322(b)(5). Maike further argued that lump-sum priority payment to his attorney was proper under 11 ...


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