In the United States Court of Appeals for the Eleventh Circuit’s (“the Court”) recently issued decision In re Bozeman, 2023 U.S. App. LEXIS 545 (11th Cir., Jan. 10, 2023, No. 21-10987), the Court struck a decisive victory in favor of Mortgage lenders’ rights, holding that in a battle for supremacy between anti-modification protections and a court-confirmed bankruptcy plan, a lender’s rights will always prevail as the victor.
This matter begins in 2015, when Defendant Judith Bozeman (“Defendant”) mortgaged her home to Plaintiff Mortgage Corporation of the South (“MCS”) in exchange for a $14,000 loan, granting MCS a security interest in her home as collateral. In 2016, Defendant filed for Chapter 13 bankruptcy, with MCS filing a proof of claim for $6,817.42 in arrearages–importantly, this proof of claim explicitly stated “arrearage only” and did “not include the amount outstanding on [Defendant]’s loan after payment of the arrearages.”
Defendant later submitted a proposed bankruptcy payment plan (“the Plan”) that listed MCS’s debt under a section which provided that creditors’ claims were to be paid pursuant to “the terms and conditions . . . required [by] [11 U.S.C.] § 1325(a)(5).” The Bankruptcy Court reviewed the Plan and held it to be a “full-payment plan,” as it “provided for payment of the full balance of [all] identified debts within the life of the Chapter 13 plan.” This meant that Defendant’s entire debt to MCS would be considered fully paid when all payments owed under the Plan were completed. MCS never objected to this categorization of the Plan nor filed an amended proof of claim.
In May 2019, the appointed bankruptcy trustee filed a notice that Defendant had completed her payments owed under the Plan, indicating that Defendant had paid $6,817.42, which constituted the “entire mortgage debt” owed to MCS. After receiving this notice MCS objected, advising that Defendant had paid “nothing” towards the actual balance due on the mortgage, and thus seeking to lift the bankruptcy stay and foreclose on Defendant’s home. Defendant contested MCS’s sought-after relief, asserting that she had “paid MCS everything it had asked for in its original proof of claim” and had thus “satisfied the lien MCS held against her property.” The Bankruptcy Court agreed with Defendant’s contentions and held MCS’s lien satisfied. MCS appealed this holding, with the District Court affirming the Bankruptcy Court, and the matter then proceeding upwards to the Court for a higher-level appellate review.
On appeal before the Court was only one question–“whether [Defendant]’s payoff of [the] Plan entitled her to satisfaction of MCS’s lien on her home.” This ultimate determination consisted of two component parts, the first being an assessment of whether the anti-modification provision present in the Plan barred satisfaction. The Court reviewed the subject provision, which stated in relevant part that the:
[P]lan may—(2) 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.
Thus, by its plain language, the provision prohibited the modification of “rights like MCS’s,” as the mortgage loan fell squarely within its scope. However, the Court observed that the application of this provision also necessitated consideration of 11 U.S.C. § 1322–which protects “from modification the rights of homestead-mortgage lenders as they concern those lenders’ secured interests in [a] debtor’s principal residence, when the final original payment schedule does not expire before the [payment] plan period ends.” More specifically, the Court recognized the nuance that, as provided in 11 U.S.C. § 1322(b)(2), the Bankruptcy Code “protects ‘the rights’ of homestead-mortgagees, as opposed to ‘claims.’”
The Court identified that MCS’s “rights” were reflected in the language of the mortgage instruments, which were indisputably valid and enforceable, as Defendant had executed a promissory note and accompanying mortgage which gave MCS “the right to foreclose” on her home if she defaulted on her obligation to “pay MCS the $14,000 she borrowed” plus interest. The Court held that these were “rights”–not claims–“that were ‘bargained for by the mortgagor and the mortgagee,’ and [were] [thus] rights protected from modification by § 1322(b)(2).” The Court explained that in the event MCS’s lien were to be released, as had been done below, MCS “would have no mechanism to collect the remaining balance” it was owed, an outcome which the Code’s “protections for the rights of primary-residential mortgage holders forbid[s].”
The anti-modification provision accordingly barred the lower courts’ holdings, as while the Plan stated that Defendant’s payment “of the full balance owed to MCS”–which was the arrearage value only–would “satisfy the full scope of [Defendant’s] obligation,” this language did “not square with controlling legal authority” as the “critical inquiry for  anti-modification provision[s] involves the ‘rights of holders.’” Thus, while it was true “that the sole timely proof of claim that MCS filed during the bankruptcy proceeding sought only $6,817.42 in arrears, nothing about that claim (or the absence of any additional claim) changed the fact that MCS was entitled under the terms of the mortgage . . . to receive full payment on the balance of its loan”–i.e., receipt of full payment was MCS’s un-voidable right
The Court thus overturned both the Bankruptcy and District Courts’ holdings, as it was “not persuaded that MCS’s arrearages-only claim changed the nature of its rights,” as even though Defendant had “paid MCS’s full arrearages claim through the Plan, MCS retain[ed] the right to receive the entire balance” as the Code “preclude[d] the Plan from modifying the amount that MCS was entitled to under the primary residential mortgage”–i.e., it precluded the modification of MCS’s rights.
The Court also considered the secondary question of whether the Bankruptcy Court’s confirmation of the Plan overrode the anti-modification provision and required the release of MCS’s lien. While the Court acknowledged the general “importance of [the] finality of confirmed [payment] plans,” that the Plan was “valid and enforceable” by virtue of its confirmation, and that “MCS had ample opportunity to participate in the underlying proceeding and file a timely amended claim with the full balance it was owed” or object to the proposed Plan, these considerations and errors did “not change the fact that the [Code] still affords special protections to homestead-mortgage holders’ rights.”
Accordingly, the Court was required to “hold that MCS’s lien survived [Defendant]’s bankruptcy,” as based on the “terms of the mortgage . . . MCS had the substantive right to collect the full balance it lent to [Defendant] as well as the right to hold its lien on the property as collateral until the debt had been paid.” Further, “under the anti-modification provision, [the] Plan could not legally modify those rights.” The Court thus held that “because releasing MCS’s lien before MCS receives full payment would impermissibly modify MCS’s rights, MCS’s lien must survive the bankruptcy proceeding,” and while “it [was] too late to alter the Plan, it [was] not too late for MCS to invoke the Code’s special protection for homestead mortgagees.”
Based on the above reasoning, the Court ruled that the “release of MCS’s lien before its loan had been repaid in full violate[d] § 1322(b)(2)’s anti-modification clause” and “[u]ntil MCS is paid in full, its lien remains intact.”
This Opinion reaffirms the significant strength of a mortgage lender’s right to receive the full value of its mortgage loan on a debtor’s principal residence, providing that this right will survive even where the lender failed to protect its rights by submitting incorrect proofs of claim and failing to object to proposed payment plans in a timely manner, and will still prevail even over a court’s approval of a contrary payment plan.
For a copy of the decision, please contact Michael O’Donnell at email@example.com, Kevin Hakansson at firstname.lastname@example.org, James Mazewski at email@example.com or Kori Pruett at firstname.lastname@example.org.