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American First Federal, Inc. v. Theodore

United States District Court, D. Vermont

January 26, 2018

JAMES T. THEODORE, individually and d/b/a JTT PROPERTIES, Appellee.


          Christina Reiss District Judge

         Appellant American First Federal, Inc. ("Appellant") seeks reconsideration of this court's August 30, 2017 Order affirming the United States Bankruptcy Court for the District of Vermont's Order of Discharge for Debtor and Appellee James T. Theodore ("Debtor"). On September 13, 2017, Appellant filed a motion for rehearing pursuant to Fed.R.Bankr.P. 8022(a)(2), arguing that the district court overlooked (1) the legal principle that a debtor's bankruptcy plan remains binding on a debtor following discharge without a reaffirmation agreement; and (2) the lack of findings of fact required by 11 U.S.C. § 1141(d)(5) to support the Bankruptcy Court's decision to grant Debtor's discharge. The court granted Appellant's motion for a rehearing on October 10, 2017 and heard oral argument on November 17, 2017. Debtor opposes rehearing and any reconsideration of this court's decision.

         I. Factual Background.

         On February 25, 2010, Debtor, individually and d/b/a JTT Properties, filed for bankruptcy protection pursuant to chapter 11 of the Bankruptcy Code. Debtor's bankruptcy estate included twelve multi-family properties. For approximately six months preceding Debtor's bankruptcy filing, Debtor failed to make payments on six mortgage notes secured by the properties and held by the Federal National Mortgage Association ("Fannie Mae"). Approximately two weeks prior to Debtor's bankruptcy filing, Fannie Mae served Debtor with a notice of non-judicial foreclosure sale.

         On November 23, 2010, Debtor filed his initial disclosure statement and plan with the Bankruptcy Court to which Fannie Mae objected. Thereafter, the parties negotiated regarding the extent to which Debtor's pre-petition liabilities under the mortgage notes would be payable under his chapter 11 plan. On October 27, 2011, the Bankruptcy Court confirmed the Debtor's chapter 11 plan ("2011 Plan") with the consent of Fannie Mae. The 2011 Plan incorporated the terms of modification agreements between Debtor and Fannie Mae, including the re-amortization of the mortgage notes secured by the properties. The 2011 Plan required Debtor to make fixed monthly payments of principal and interest to Fannie Mae with a balloon payment on December 31, 2015.

         On December 16, 2015, Debtor moved to modify the 2011 Plan. Fannie Mae objected, and the Bankruptcy Court denied the motion on January 28, 2016. Shortly thereafter, in March 2016, Fannie Mae transferred its interest in the modified mortgage notes, secured by the properties, to Appellant. Four months later, in July 2016, following maturity of the debts under the 2011 Plan, Appellant and Debtor entered into additional loan modification agreements regarding all six mortgage notes, extending the maturity date and setting forth new loan balances and payment schedules. On July 22, 2016, Debtor moved to modify the 2011 Plan to incorporate the terms of the most recent loan modification agreements ("2016 Modified Plan"). Paragraph 5.6.2 is representative of the modification of each note held by Appellant covered by the 2016 Modified Plan:

Commencing on August 1, 2016, . . . and continuing on same day of each successive month thereafter until June 30, 2021, [Debtor] shall make monthly equal blended installment payments of principal plus interest, based upon a twenty five (25) year amortization schedule with interest fixed at 5.25% per annum, on a mortgage amount of $186, 689.08. The monthly payments shall be $1, 118.73. A balloon payment or refinancing will occur by June 30, 2021, unless extended by agreement of the parties.

(Doc. 2-31 at ¶ 5.6.2); see also Id. at ¶ 5.7.2, ¶ 5.8.2, ¶ 5.9.2, ¶ 5.10.2, ¶ 5.11.2.

         Debtor submitted the 2016 Modified Plan for the Bankruptcy Court's approval. The Bankruptcy Court granted the motion to modify its Confirmation Order on August 10, 2016 and thereby confirmed the 2016 Modified Plan. Both the 2011 Plan and the 2016 Modified Plan stated that reaffirmation agreements would only be enforceable if entered in accordance with 11 U.S.C. § 524. See Doc. 2-2 at 34, ¶ 11-4; Doc. 2-31 at 33, ¶11-4.[1]

         Debtor is current on his payments under the 2016 Modified Plan and has filed all required monthly operating reports. In the absence of motions from the Office of the United States Trustee indicating otherwise, the Bankruptcy Court assumed that Debtor complied with all requirements imposed by the United States Trustee, including the requirement to pay quarterly fees.

         11. Procedural Background.

         A. The Bankruptcy Court's December 22, 2016 Order Granting Debtor's Motion for Entry of Discharge.

         On November 8, 2016, Debtor filed a motion for entry of discharge and final decree, stating that he had completed "[a]ll payments" and "complied with the terms of the [2016 Modified] Plan." (Doc. 2-35 at 1, ¶ 1.) Debtor concedes this statement should be interpreted to mean that he was current with his payments under the 2016 Modified Plan, not that he had actually made all of the payments due thereunder.[2] Appellant objected on December 1, 2016, requesting that the Order "expressly state that the discharge would not apply to [Appellant's] modified debts." (Doc. 3 at 12.) On December 9, 2016, the Bankruptcy Court held a hearing on the motion at which Appellant failed to appear. At the hearing, Debtor challenged Appellant's objection on the grounds that his personal liability to Appellant under the modified debts should be discharged pursuant to 11 U.S.C. § 1141 because the parties did not enter into a reaffirmation agreement under 11 U.S.C. § 524. As this argument had not been briefed by the parties and Appellant was not present, the Bankruptcy Court issued a Scheduling Order for additional briefing on this issue. After filing its supplemental memorandum of law on December 14, 2016, Appellant submitted an addendum on December 16, 2016, two days after the filing deadline had passed, asserting that Debtor had not complied with § 1141(d)(5)(B) and therefore was not eligible for chapter 11 discharge as an individual. Debtor moved the Bankruptcy Court to strike the addendum because it was untimely and raised arguments beyond the scope of Appellant's original objection.

         On December 22, 2016, the Bankruptcy Court issued its Memorandum of Decision finding that, because the parties did not comply with § 524 in modifying the loan agreements, Appellant was precluded from enforcing the debts included in the 2016 Modified Plan against Debtor personally. Overruling Appellant's objection and striking its addendum as untimely, the Bankruptcy Court entered an Order of Discharge on December 30, 2016. Appellant filed a notice of appeal that same day.

         B. The District Court's August 30, 2017 Order Affirming the Bankruptcy Court.

         In its appeal before this court, Appellant argued that the Bankruptcy Court erred (1) in granting a discharge of Debtor's "pre-petition claims even though those claims are payable in part under a confirmed plan"; (2) in granting Debtor's personal discharge "before the plan payments were complete"; (3) in not following United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010) and "refusing to consider [Appellant's] statutory arguments under 11 [U.S.C] § 1141(d)(5)(B)"; (4) in failing to evaluate whether Debtor met the requirements of a discharge under 11 U.S.C. § 1141(d)(5)(A)-(B); (5) in granting a discharge when Debtor "did not present proof that he was entitled to a discharge under 11 [U.S.C.] § 1141"; and (6) in granting a discharge without finding that Debtor "had completed all payments under his plan." (Doc. 3 at 6-7.)

         On August 30, 2017, this court (Murtha, J., presiding) affirmed the Bankruptcy Court's decision. The court found that the Bankruptcy Court "made clear the discharge was as to [Debtor's] personal liability on the [mortgage] notes[, ]" removing Debtor's personal liability for debts provided by the chapter 11 plan. (Doc. 8 at 4.) The court distilled Appellant's remaining allegations of error as involving "whether and to what extent the Bankruptcy Court considered 11 U.S.C. § 1141 and if it erred in its application[] ... by granting a discharge to [Debtor] before plan payments were complete[.]" Id. Concluding that the Bankruptcy Court properly found that the loan modifications between Debtor and Appellant must comply with § 524 in order to be enforceable, in the absence of compliance, this court determined that Debtor was properly granted a discharge as to his personal liability on those debts. The court found that the Bankruptcy Court did not fail to consider whether Debtor was entitled to a discharge of his personal liability under § 1141 because the Bankruptcy Court held a hearing on the issue and allowed post-hearing briefing on the issue.

         III. Conclusions of Law and Analysis.

         A. ...

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