§ 124.4 — Postconfirmation Default and Relief from the Stay

Revised: June 8, 2004

[1]

Neither § 1327 nor principles of res judicata bar relief from the stay after confirmation when relief is based on postconfirmation default under the plan.1 From the reported decisions, the most common postconfirmation defaults supporting relief from the stay are the debtor’s failure to make payments directly to the holder of a home mortgage2 and the debtor’s failure to make payments to the Chapter 13 trustee.3

[2]

When the debtor cures default and maintains payment with respect to a home mortgage that has an adjustable interest rate or that requires a monthly deposit toward taxes and insurance,4 changes in the interest rate or the escrow amount during the Chapter 13 case generate postconfirmation defaults when the debtor’s payments do not also adjust. Mortgage servicers contribute to this problem by disabling routine computer-generated notices to Chapter 13 debtors out of fear of violating the stay. One district court held that it is not a violation of the automatic stay for a mortgage holder to give notice of postconfirmation advances and escrow deficiencies; but it is not cause for relief from the stay that the debtor did not pay postconfirmation advances for taxes, insurance and escrow deficiencies when the mortgage holder failed to give notice consistent with the contract or applicable real estate law.5 Perhaps more accurately, the Bankruptcy Court for the Western District of Texas acknowledged that a mortgage holder ordinarily needs relief from the stay to contact the debtor about postconfirmation default in payments, but because there is no injury to the debtor from such contact, “if mortgage lenders send informal notices . . . in Chapter 13 cases, no sanctions will issue as a result of that notice.”6

[3]

Misconduct after confirmation may also be cause for relief from the stay. For example, it has been held that a creditor is entitled to relief from the stay after confirmation when the debtor failed to reveal the creditor and then defaulted on payments to that creditor after confirmation.7 A postconfirmation, nonmonetary default might be cause for relief from the stay. For example, many home mortgage instruments prohibit renting the property to a nonowner occupant. The Chapter 13 debtor who rents a residence to a non-family member after confirmation may generate a default that is cause for relief from the stay even if payments are current under the plan.8

[4]

When cause for relief from the stay is default in payments under the plan, the debtor’s typical response is a motion to modify the plan to cure or to eliminate the default.9 Often, the outcome of the postconfirmation stay relief request depends on whether the court grants or denies the motion to modify filed in response.10

[5]

Several courts have concluded that a secured claim holder is not necessarily entitled to relief from the stay notwithstanding a postconfirmation default in payments when the value of its collateral exceeds its allowed secured claim, because the equity protects the creditor.11 The equity cushion gives the debtor a breathing space in which to bring the payments current, sell the property12 or modify the plan.13 One reported decision instructs mortgage creditors that “when there is an equity cushion in excess of $10,000” the mortgage holder must give notice of a postconfirmation default to the debtor and the debtor’s attorney with an opportunity to cure the default before filing a motion for relief from the stay.14

[6]

These courts may be overemphasizing equity cushion analysis when assessing cause for postconfirmation relief from the stay. When the creditor seeks relief from the stay for cause under § 362(d)(1), equity is not a statutory element as it is under § 362(d)(2).15 If an equity cushion is a defense to a postconfirmation request for relief from the stay based on the debtor’s default in payments under the plan, then every oversecured claim holder is at the mercy of the Chapter 13 debtor to receive or not receive its payments under the plan. The quid pro quo for the cramdown of secured claim holders at confirmation16 is the debtor’s obligation to make the payments called for by the plan. Material failure to do so entitles the creditor to relief from the stay to realize upon its collateral.

[7]

Because § 362(g) imposes no burden of proof on the creditor under § 362(d)(1), it is arguable that the creditor seeking stay relief based on a postconfirmation default under the plan carries its burden of proof without presenting any evidence. At least one court has faced this issue directly and concluded that although a failure to make postconfirmation mortgage payments is a material default and is cause for relief from the stay, relief to the creditor is not automatic: the creditor must at least establish a “prima facie case,” for example, by proving that the debtor defaulted in postconfirmation payments.17

[8]

The moving creditor is best advised to be prepared to prove that a default has occurred and that the default is “material.” Materiality may be in the eye of the beholder. One court found that a postconfirmation default that was substantial in dollar amount was not material when the creditor’s interest in the debtor’s property was otherwise protected by good maintenance and by partial payments after confirmation.18 In an opinion especially insightful of the mechanics of Chapter 13 plans, one court held that a secured claim holder was not entitled to postconfirmation relief from the stay based on minor defaults in payments caused by the timing of remittance by employers to the trustee and caused by the priority of administrative expenses during the early months of distributions under the plan:

Since a creditor’s rights are redefined by the terms of the confirmed plan, where a debtor materially defaults under the terms of his confirmed plan the creditor may be entitled to relief from the automatic stay. . . . While evidence was presented at trial that certain of the Debtors are in arrears under the terms of their confirmed plans, the arrearage amounts are insignificant in relation to the amount of money that the Debtors have paid and are paying into their plans. A post-confirmation default must be material in order to constitute grounds for relief from the automatic stay. . . . Green Tree’s argument that the Court should hold the Debtors responsible for the manner in which the Trustee disburses funds is wholly unfounded. . . . Where an administrative expense, such as the debtor’s attorney fee in this instance, is paid in full during the early part of the plan, other creditors necessarily receive less than their designated portion of the total plan payment during these months of preemption. However, once the preempting administrative expense is paid in full, the creditors then receive a monthly amount greater than the amount designated by the plan for a period of time. Assuming the debtor completes the plan, the creditors will receive the appropriate amount over the life of the plan. . . . Green Tree has failed to show that any of the Debtors are in material default under their respective plans. . . . [T]he Trustee’s office disburses between 10,000 and 15,000 checks to creditors each month. It would be extremely burdensome for the Chapter 13 Trustee to review every contract involving a home mortgage, determine the due date, and pay each individual creditor in accordance with its particular contract. If Green Tree’s argument [that payments by a Chapter 13 trustee on a day of the month different from the due date required by contract constituted an impermissible modification of rights under § 1322(b)(2)] were accepted by this Court, then the only way a debtor could comply with the Bankruptcy Code would be to pay any secured creditor protected from modification of its rights under § 1322(b)(2) outside of the plan. Such a result is not mandated by § 1322(b)(2).19
[9]

Relief from the stay after confirmation should have the same fundamental effect as relief from the stay before confirmation—the statutory injunctions in § 362(a) are dissolved and the creditor is free to select a forum to enforce its rights.20 Although there is nothing in § 362 to suggest this result, one reported bankruptcy court decision concludes that when the debtor defaults after confirmation and a mortgage holder is granted relief from the stay, the creditor is not bound by provisions of the confirmed plan. In In re Miano,21 the confirmed plan fixed the amount of the mortgage holder’s claim. The debtor defaulted, and the mortgage holder was granted relief from the stay. Before a foreclosure sale could be completed, the debtor sold the property and the parties then disputed the amount due the mortgage holder. The bankruptcy court concluded that the mortgage holder could recover its entire debt from the proceeds of sale not limited by the amount of its secured claim fixed in the confirmation order:

[The mortgage holder] obtained relief from the automatic stay . . . [the mortgage holder] is no longer bound by the terms of the plan. The controlling principle is ultimately one of equity: if a debtor fails to fulfill his obligations under a plan, he cannot reasonably expect his creditors to remain bound by it. Moreover, confirmation . . . could no longer bind [the mortgage holder] because Code section 363(d) provides that the trustee, and therefore the debtor under Code section 1303, may only use, sell or lease property to the extent not inconsistent with stay relief under Code section 362(d).22
[10]

Perhaps relief from the stay based on a debtor’s default under the confirmed plan would be cause for relief from a confirmation order;23 but there is nothing in § 362(d) that automatically nullifies the effects of confirmation under § 1327. The “principle of equity” cited in Miano indeed may cut against relief from the confirmation order—for example when the proceeds from the sale of property after relief from the stay include value for the estate created by payments from the debtor during the Chapter 13 case. Other creditor interests are implicated. The appreciated value of property may be captured for unsecured creditors when the property is liquidated after confirmation and lienholders are paid the allowed amounts of their secured claims.24 Ordinarily, relief from the stay should not change the substantive rights of the debtor or creditors.

[11]

The U.S. Court of Appeals for the First Circuit has rejected the holding in Miano that postconfirmation stay relief includes relief from the binding effect of confirmation under § 1327. In Carvalho v. Federal National Mortgage Ass’n (In re Carvalho),25 FNMA stipulated that its first mortgage on a multifamily residence was subject to modification and could be bifurcated. The confirmed plan provided full payment of the secured portion of the claim and a 10 percent dividend on the unsecured portion. The debtors defaulted after confirmation, and FNMA was granted relief from the stay. FNMA refrained from foreclosure long enough for the debtors to complete payments under the plan. When the debtors then asserted that FNMA’s lien was discharged, FNMA cited Miano and claimed that relief from the stay released it from the bifurcation provision of the confirmed plan. The First Circuit explained that postconfirmation default was cause for relief from the stay but did not reverse the lien-stripping effect of the confirmation order:

To the extent that a confirmed plan resembles a contract, there is no legally sound reason why the remedy for every default necessarily should be rescission. . . . To accept FNMA’s position would tilt the scales in favor of secured creditors, allowing them to use the fortuity of even a technical post-confirmation default to disrupt a confirmed plan. That would confuse the function of an order lifting the automatic stay with the function of an order dismissing a Chapter 13 petition. . . . [B]ifurcation of a creditor’s claim into secured and unsecured portions is not annulled by the mere act of granting relief from the automatic stay.26
[12]

Sometimes after postconfirmation default and relief from the stay, the debtor has a change of fortune and either wants to resume plan payments or needs some time to deal with the cranky creditor. The first inclination of many debtor’s attorneys is to move the bankruptcy court to “reimpose” the automatic stay. There is no provision of the Bankruptcy Code or Rules for reimposing the automatic stay once relief has been granted. It has been held that a motion to reimpose the stay is really a request for an injunction and is measured against the usual standards in Bankruptcy Rule 7065 (Rule 65 of the Federal Rules of Civil Procedure).27 Technically, a motion to reimpose the stay is not correct procedure to request an injunction; under Bankruptcy Rules 7001(7) and 7065, the debtor should file an adversary proceeding and move for a temporary restraining order or preliminary injunction within that adversary proceeding.

[13]

If the creditor with relief from the stay does not oppose an injunction, most courts will enter an order that has the same effect as reimposing the stay. Having said that, one bankruptcy court reported a decision holding that once relief from the stay has been granted after confirmation, the stay cannot be reinstated even with consent of the creditor—the parties can negotiate a private forbearance agreement, but the stay is gone for good.28 In an unreported decision, this same bankruptcy court temporarily enjoined a mortgage holder from completing foreclosure after relief from the stay based on postconfirmation default when the debtors convinced the court they could refinance to pay the mortgage holder and to pay off the Chapter 13 plan.29


 

1  Carvalho v. Federal Nat’l Mortgage Ass’n (In re Carvalho), 335 F.3d 45, 49 (1st Cir. 2003) (“[C]onfirmation of a Chapter 13 plan customarily is res judicata as to all issues that were or could have been decided during the confirmation process. . . . A debtor’s post-confirmation default, like many other post-confirmation events, does not come within the preclusive reach of a confirmed plan . . . because the factual circumstances surrounding post-confirmation events could not have been considered and resolved by a bankruptcy court at the time of confirmation.”). Accord Western Equities, Inc. v. Harlan, 783 F.2d 839 (9th Cir. 1986); Ellis v. Lindstrom, 60 B.R. 432 (B.A.P. 9th Cir. 1985); In re Smith, 104 B.R. 695 (Bankr. E.D. Pa. 1989); Ford v. Fidelity Consumer Discount Co. (In re Young), 76 B.R. 504 (Bankr. E.D. Pa. 1987); E.F. Hutton Mortgage Corp. v. Radney (In re Radney), 68 B.R. 444 (Bankr. M.D. Ga. 1987); E.F. Hutton Mortgage Corp. v. Williams (In re Williams), 68 B.R. 442 (Bankr. M.D. Ga. 1987); In re Davis, 64 B.R. 358 (Bankr. S.D.N.Y. 1986).

 

2  See, e.g., In re Hayward, 281 B.R. 362 (Bankr. S.D. Ala. 2001) (Upon second postconfirmation default in payments directly to a mortgage holder, stay relief is granted.); In re Binder, 224 B.R. 483, 490 (Bankr. D. Colo. 1998) (Default in mortgage payments “outside” confirmed plan is cause for relief from the stay; mortgage holder is not limited to remedy of conversion or dismissal. “Granting relief from stay for Debtor’s default in performance of post-confirmation obligations to Chase Manhattan does not upset the plan; it implements it. To restrict Chase Manhattan to dismissal or conversion of this case would be inconsistent with the plan terms, as well as the purpose of Chapter 13. Denial of relief from stay would be contrary to the implicit meaning of ‘payment outside the plan’ . . . . Cause exists for granting Chase Manhattan’s Motion.”); In re Burton, 195 B.R. 588 (Bankr. W.D.N.Y. 1996) (Mortgage holder entitled to emergency relief from the stay where debtor defaulted in payments after confirmation and filed a second Chapter 13 case while the first was still pending in an effort to fix the problem.); FSFG Serv. Corp. v. Kim (In re Kim), 71 B.R. 1011 (Bankr. C.D. Cal. 1987) (Failure to make postconfirmation mortgage payments is a material default and is cause for relief from the stay.).

 

3  See, e.g., Ellis v. Lindstrom, 60 B.R. 432 (B.A.P. 9th Cir. 1985) (Relief from stay after confirmation is not barred by § 1327(a) when relief is based on defaults in postconfirmation payments.); In re Clark, No. 4:02-BK-10963E, 2002 WL 32114480, at *2 (Bankr. E.D. Ark. Sept. 3, 2002) (unpublished) (Cause for stay relief after confirmation that the debtor missed plan payments, failed to license a motor home as required by contract and failed to prove insurance. “Post-confirmation defaults are not considered in the confirmation process and are therefore not subject to res judicata flowing from the confirmation order.”).

 

4  See § 129.1 [ Overview: General Rules for Saving Debtor’s Home ] § 81.1  Overview: General Rules for Saving Debtor’s Home.

 

5  Chase Manhattan Mortgage Corp. v. Padgett, 268 B.R. 309 (S.D. Fla. 2001).

 

6  In re Martinez, 281 B.R. 883, 887 (Bankr. W.D. Tex. 2002) (In a district where postpetition mortgage payments are made directly by the debtor to the lender and in which property of the estate does not revest in the debtor at confirmation, mortgage holder ordinarily needs relief from the stay to contact the debtor about postconfirmation default in direct payments; however, because the debtor is not damaged by notice of a postconfirmation default, in the future creditors can give an informal notice of default without violating the automatic stay. “[A] debtor suffers no actual damages from merely being notified of a missed mortgage payment—and cannot ‘manufacture’ such damages in the form of attorneys’ fees for filing a sanctions motion that, but for those fees, has no independent basis for recovery. . . . [T]hough sending an innocent notice of a missed mortgage payment post-confirmation could constitute a ‘wilful’ violation of the automatic stay within the meaning of the statute, it is a ‘no harm’ violation that cannot, as a matter of law, justify a debtor’s filing a motion for sanctions, because it generates no ‘actual damages’ within the meaning of the statute. As a matter of law, if mortgage lenders send informal notices of the sort recommended in this decision in chapter 13 cases, no sanctions will issue as a result of that notice.”).

 

7  Western Equities, Inc. v. Harlan, 783 F.2d 839 (9th Cir. 1986) (When the plan did not reveal second mortgage with balloon payment and debtor defaulted after confirmation, creditor is entitled to relief from stay.).

 

8  Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993), supports the argument that nonmonetary defaults after confirmation are a ground for relief from the stay by a home mortgage holder that is protected from modification by § 1322(b)(2). See §§ 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman and 132.1 [ Nonmonetary Defaults ] § 82.3  Nonmonetary Defaults.

 

9  See § 259.1 [ To Cure Postconfirmation Default ] § 127.2  To Cure Postconfirmation Default. See also § 131.1 [ Postpetition Defaults ] § 82.2  Postpetition Defaults.

 

10  See, e.g., In re Carona, 254 B.R. 364, 368 (Bankr. S.D. Tex. 2000) (“[A] material default in payments to the chapter 13 trustee constitutes sufficient cause to grant relief from the stay when the Debtor has taken no steps to cure the deficiency promptly or to modify the plan to cure the default.”).

 

11  Far W. Fed. Bank v. Vanasen (In re Vanasen), 81 B.R. 59, 62 (D. Or. 1987) (Bank has failed to show that it is entitled to relief from the stay when debtor has defaulted on payments under confirmed plan. “Bank has an adequate security cushion which protects it from economic harm. Allowing the debtors a reasonable time to sell the property and pay the debt does not ‘so affect the bank’s rights as to violate § 1322(b)(2).’”); In re Bellinger, 179 B.R. 220, 222 (Bankr. D. Idaho 1995) (Substantial equity in real property precludes relief from the stay based on postpetition and postconfirmation defaults. Debtor’s real property was worth $60,000. The amount due under the mortgage, including arrearage, was approximately $40,000. The debtor was delinquent for seven prepetition payments and six postpetition payments. In response to debtor’s motion to modify the plan to cure postpetition defaults, mortgage holder moved for relief from the stay. Stay relief was denied because the mortgage holder “failed to show the debtor has no equity in the property.”); In re McCollum, 76 B.R. 797 (Bankr. D. Or. 1987) (Postconfirmation default does not automatically entitle creditor to relief from the stay. When creditor is adequately protected by a large equity cushion, a postconfirmation default can be overcome by postconfirmation modification.); In re Brown, 70 B.R. 10 (Bankr. S.D. Ohio 1986) (Material default in the terms of a confirmed plan can be cause for relief under § 362(d)(1); however, default of $8,786 is not material when there remains equity in the creditor’s collateral, the debtor has maintained the collateral during the plan and the stream of payments received by the creditor between confirmation and the first default was adequate to protect the creditor’s interest.).

 

12  Far W. Fed. Bank v. Vanasen (In re Vanasen), 81 B.R. 59 (D. Or. 1987).

 

13  In re McCollum, 76 B.R. 797 (Bankr. D. Or. 1987).

 

14  In re Cox, 251 B.R. 446, 448 (Bankr. W.D.N.Y. 2000) (Debtor failed to make three postpetition mortgage payments totaling $1,411.44. First mortgage holder moved for termination of the stay. There was an equity cushion in excess of $37,000. “[W]hen, as in this case, there is: (1) significant equity over and above the mortgage in question, even if there are junior mortgages which result in a debtor having no overall equity; and (2) the amount of the post-petition missed payments are relatively small when compared with the equity cushion, this Court does not believe that a mortgage holder should bring an immediate motion for relief from the automatic stay. The substantial equity cushion provides sufficient adequate protection, even though the debtor is not performing as required by the plan . . . . [T]his Court expects in such circumstances, in order to avoid additional substantial costs and expenses for a debtor, that when there is an equity cushion in excess of $10,000.00, a mortgage creditor or its attorneys, will give the debtor and the debtor’s attorney a written notice that will advise them that unless all post-petition mortgage payments are brought current within ten days from receipt of the notice, the mortgage holder will incur the additional expense of preparing and filing a motion for relief from the stay, which will result in costs and expenses being charged to the debtor. If such an oversecured mortgage creditor fails to give the required ten-day written notice, this Court will not award reasonable attorney fees and expenses in connection with any stay motion.”).

 

15  See § 83.1 [ Application of § 362(d)(2) in Chapter 13 Cases ] § 64.5  Application of § 362(d)(2) in Chapter 13 Cases.

 

16  See discussion providing for secured claims beginning at § 74.1  General Rules before BAPCPA§ 75.1  In General: Modification Without § 506§ 76.1  Valuation, Claim Splitting and Dewsnup§ 77.1  “Value, As of the Effective Date of the Plan” Means Interest and § 78.1  Full Payment of Allowed Secured Claim.

 

17  FSFG Serv. Corp. v. Kim (In re Kim), 71 B.R. 1011 (Bankr. C.D. Cal. 1987).

 

18  In re Brown, 70 B.R. 10 (Bankr. S.D. Ohio 1986). Accord In re Crowley, 258 B.R. 587, 592 (Bankr. D. Vt. 2000) (Mortgage holder’s claim of postconfirmation material default is rejected: “[T]he facts presented here do not prove a material failure to comply with the confirmed plan . . . [T]he debtor has substantially complied with his payment obligations under the plan, has complied with the Movants’ request for leases and proof of insurance, and is attempting to comply fully with his obligations under the plan in good faith. . . . [T]he Movants are adequately protected by the undisputed equity in the subject property. . . . [T]he brief duration and limited payment difficulties asserted herein, coupled with the profound impact of lift stay relief upon the debtor and the plan, mitigates against the relief Movants seek. . . . [T]he subject property is necessary to the debtor’s effective reorganization.”). See also In re Rucker, 278 B.R. 262 (Bankr. M.D. Ga. 2001) (Sanctions of $514.80 plus attorney fees are awarded when Conseco declared a mortgage default after confirmation based on mistaken belief that prior consent order required the debtor to pay insurance premiums.).

 

19  In re Lee, 167 B.R. 417, 426–29 (Bankr. S.D. Miss. 1992), aff’d, 22 F.3d 1094 (5th Cir. 1994). Accord In re Steele, 182 B.R. 284 (Bankr. W.D. Okla. 1995) (Mortgage holder is bound by confirmation of plan that skipped one postpetition mortgage payment and called for the payment of administrative expenses in advance of mortgage payments during the early months of the plan, notwithstanding that the effect of the plan was to create a postconfirmation default in payments to the mortgage holder. Section 1322(b)(5) is an exception to the antimodification provisions of § 1322(b)(2), and its use is not precluded by Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993). Citing Green Tree Acceptance, Inc. v. Hoggle (In re Hoggle), 12 F.3d 1008 (11th Cir. 1994), the Chapter 13 debtor could modify the plan after confirmation to provide for postpetition defaults, and thus the plan itself could provide for the creation and the payment of a postpetition “default” by scheduling mortgage payments to begin one month after the petition. The better approach would be for the debtor to begin making postpetition mortgage payments either directly to the mortgage company or to the Chapter 13 trustee with the filing of the case to avoid the accumulation of a postpetition default. That the plan contained no explanation how secured claim holders would be paid in the early months could not be challenged after confirmation by motion for relief from the stay.).

 

20  See also discussion beginning at § 63.1  Strategic Considerations and § 64.1  Lack of Adequate Protection.

 

21  261 B.R. 391 (Bankr. D.N.J. 2001).

 

22  261 B.R. at 393.

 

23  See § 223.1 [ Relief from Confirmation Order: Bankruptcy Rules 9023 and 9024 ] § 117.2  Relief from Confirmation Order: Bankruptcy Rules 9023 and 9024.

 

24  See §§ 254.1 [ Application of Tests for Confirmation ] § 126.2  Application of Tests for Confirmation, 263.1 [ To Sell or Refinance Property of the Estate ] § 127.6  To Sell or Refinance Property of the Estate, 264.1 [ To Surrender Collateral, Account for Repossession or Change the Treatment of a Secured Claim ] § 127.7  To Surrender Collateral, Account for Repossession or Change the Treatment of a Secured Claim and 266.1 [ To Increase Payments to Creditors ] § 127.9  To Increase Payments to Creditors.

 

25  335 F.3d 45 (1st Cir. 2003).

 

26  335 F.3d at 51–52.

 

27  In re Hayward, 281 B.R. 362 (Bankr. S.D. Ala. 2001) (After second postconfirmation default and relief from the stay, motion to reimpose the stay is measured against the standards for issuing an injunction.).

 

28  In re Flores, 293 B.R. 251 (Bankr. E.D. Cal. 2003).

 

29  Casner v. Chase Manhattan Mortgage Corp. (In re Casner), 302 B.R. 695 (Bankr. E.D. Cal. 2003).