LEGAL ALERT: The Ironclad Protection of §1322(b)(2) [The “Anti-Modification” Provision] Controls Over Confirmed Chapter 13 Plan

By Jeffrey Fraser, ALAW Partner, Bankruptcy

The Eleventh Circuit Court of Appeals in In re Bozeman, 2023 U.S. App. LEXIS 545 (11th Cir., Jan. 10, 2023, No. 21-10987) delivered a strong opinion highlighting the “ironclad, do not touch” anti-modification provisions set forth in §1322(b)(2). The appellate court was confronted with a scenario where the finality/res-judicata effect of a confirmed plan was in direct conflict with the a mortgage lender’s rights under §1322(b)(2). The Bozeman debtor proposed to pay a mortgage creditor in full through a chapter 13 plan. The mortgage creditor filed an “arrearage only” proof of claim indicating that the debtor was $6,817.42 delinquent to the creditor as of the date of the petition (the claim did not provide for the total amount due on the claim). The debtor’s plan – after notice and a confirmation hearing – was confirmed with the “pay all” treatment. The ultimate intent and effect of this plan was to pay an amount that would result in a “paid in full” claim at the conclusion of the bankruptcy, satisfying the mortgage creditor’s lien. The mortgage creditor never objected to this plan.

At the end of the plan period, the chapter 13 trustee issued the notice of plan completion, indicating that the creditor had been paid the amount proposed in the plan (the $6,817.42 in the creditor’s claim), and the creditor’s entire mortgage debt was therefore paid in full. The creditor objected to the notice, claiming the debtor had not made any ongoing payments on the mortgage. The debtor asserted that the creditor was paid everything it asked for in its original proof of claim, and as a result the creditor’s lien must be satisfied. The bankruptcy court agreed and held that creditor’s lien was satisfied (as the confirmed plan had the res judicata effect of a final judgment). The District Court affirmed, and the creditor appealed. The appellate court explained that the anti-modification provision of §1322(b)(2) protects mortgage creditors that hold a security interest in real property that is the debtor’s primary residence even if those creditors don’t protect themselves by engaging in the bankruptcy process (or even filing a misleading proof of claim).

In fact, the appellate court expressed that the finality of a confirmed plan can still harmonize with the anti-modification protection of §1322(b)(2). The Bozeman creditor was still bound by the plan and prevented from complaining about any infirmities contained, therein. The creditor could have acted to force the debtor to comply with the Code prior to confirmation. Despite the creditor’s failure to object, amend the claim, or otherwise oppose the plan before (or after confirmation), the Bankruptcy Code still affords special protections to homestead mortgage holders’ rights. So even though this case and others recognize the importance of finality in a confirmed plan, secured liens will still survive a bankruptcy proceeding. In sum §1322(b)(2)’s anti-modification protection barred the lower court rulings, and the appellate court reversed and remanded holding that release of the creditor’s lien before its loan had been paid in full violates §1322(b)(2) and until the creditor is paid in full – consistent with its mortgage – its lien remains intact.

This case is a great reinforcement for mortgage creditors (and the attorneys that represent them), as it confirms that a mortgage loan on a debtor’s principal residence will survive notwithstanding a mortgage creditor’s failure to protect its rights during the bankruptcy case.

In re Bozeman.pdf