Roderick Defer Discharge

8/8/2019 Roderick Defer Discharge

1/14

In re Roderick, Case No. 09-22866-C-7 (Bankr. E.D. Cal. 3/8/2010) (Bankr. E.D. Cal., 2010)

- 1 -

Page 1

In re: PAUL DEWAYNE RODERICK and CYNTHIA LEE RODERICK, Debtor(s).

Case No. 09-22866-C-7.DC No. PD-1.

United States Bankruptcy Court, E.D. California.

March 8, 2010.

Pite, Duncan, LLP, Erin L. Laney,Josephine Salmon, San Diego, California, formovant Wells Fargo Home Mortgage, Inc., asServicing Agent for Wells Fargo Bank, N.A.

Paul Dewayne Roderick and Cynthia LeeRoderick, Marysville, California, debtors,appearing in propria persona.

KLEIN, Bankruptcy Judge

Chapter 7 debtors acting in good faith tonegotiate a reaffirmation agreement thatmodifies their mortgage invoke Federal Rule ofBankruptcy Procedure 4004(c)(2) to deferdischarge and thereby defer expiration of theautomatic stay per 11 U.S.C. 362(c)(2)(C)until the mortgagee decides whether to allowmortgage modification. The mortgageeacknowledges it has repeatedly requested,received, and mislaid the same information fromthe debtors, and after four short-term dischargedeferrals, wants more time. Those deferrals

having proven inadequate, the motion isGRANTED and discharge deferred for six moremonths.

This opinion is published to highlight Rule4004(c)(2) as a tool in a debtor's toolbox topreserve the automatic stay during mortgagemodification negotiations and to call attention tothe status of a mortgage modification as a formof reaffirmation that will be unenforceable as apersonal liability of debtor unless it is madebefore the discharge is entered.

Page 2

Facts

Several months before filing thisbankruptcy case, Paul and Cynthia Roderickbegan mortgage loan modification discussionswith their lender, Wells Fargo Bank, N.A.

When they filed their pro se chapter 7 caseon February 20, 2009, they scheduled theirMarysville, California, residence as worth$189,000, subject to a $231,442 debt to WellsFargo.

Consistent with their prepetitiondiscussions with Wells Fargo, the Rodericksstated their intention under 11 U.S.C. 521(a)(2) to reaffirm the Wells Fargo mortgage

loan debt.

Wells Fargo promptly requested, and theRodericks supplied, their written authorizationfor loan modification discussions to proceedduring the bankruptcy case.

Wells Fargo also told the Rodericks not tomake payments on their mortgage after February2009. The Rodericks complied, but neverthelessset aside $1500 per month against the mortgage.

Despite its awareness that the debtors

intended to reaffirm the mortgage debt, anddespite having told the debtors to cease makingpayments, Wells Fargo, acting through itsservicing agent Wells Fargo Home Mortgage,Inc., moved for relief from the automatic stay onMarch 20, 2009, seeking permission to foreclosebecause the debtors had ceased makingpayments. It also sought attorney's fees and costsfor making the motion.

The Rodericks opposed the stay reliefmotion. They described their discussions with

Wells Fargo and stated that they were settingaside $1500 per month even though Wells Fargohad told them to cease making payments.

At the initial hearing on April 21, 2009,counsel for Wells

Page 3


2/14


- 2 -

Fargo did not know the status of loanmodification discussions and agreed to continuethe stay relief motion to May 26, 2009.

At the May 26 hearing, Wells Fargorequested another continuance because it had not

yet decided whether it would agree to a loanmodification.

This scene repeated itself three more times,resulting in a chain of continuances to July 28,2009, then September 8, 2009, then October 27,2009.

As their scheduled discharge loomed, theRodericks asked that entry of the discharge bedeferred in tandem with the continuances so thatthey would not lose the benefit of the automaticstay that, pursuant to 362(c)(2)(C), otherwisewould expire with respect to them as of the entryof their discharge. Without objection, entry ofdischarge was ordered deferred several times onthe authority, inter alia, of Rule 4004(c)(2) todates shortly after the continued stay reliefhearings.

At the October 27 hearing, counsel forWells Fargo asserted that the loan modificationprocess was incomplete, saying the debtors hadnot supplied a particular item of information.

Mrs. Roderick instantly, and with theindignation that only a pro se litigant canexpress convincingly, protested that theputatively missing information had been givento Wells Fargo several times. She brandished asheaf of papers documenting contacts withWells Fargo and narrated her odyssey trying todeal with Wells Fargo and its repeated requestsfor submission of information previouslysupplied or for new information never beforerequired notwithstanding prior statements thattheir application was complete. She noted that

Wells Fargo once even

Page 4

made her start over and submit a newapplication.

Wells Fargo did not contest Mrs.Roderick's rendition of the facts and requestedyet another continuance of its motion for relieffrom stay. It could not state when Wells Fargowould make a decision on the loan modification.

This time, the court continued the stayrelief motion for six months, as it was apparentthat debtors acting in good faith were beingburdened by being dragged back to court forrepeated short-term continuances when no loanmodification decision was in sight. Nearly oneyear after it began the process, Wells Fargo wasstill having difficulty determining whether it hada completed loan modification application uponwhich it could act.

The court also granted the debtors' Rule

4004(c)(2) motion to defer the discharge to adate certain after the six-month continued date.This decision memorializes that ruling.

Jurisdiction

Subject-matter jurisdiction is based on 28U.S.C. 1334(a). Stay relief is a coreproceeding. 28 U.S.C. 157(b)(2)(G). Thedeferral of entry of discharge is likewise a coreproceeding. 28 U.S.C. 157(b)(2)(A) & (O).

Discussion

The issues presented implicate thereaffirmation agreement provisions of theBankruptcy Code and the terms of the dischargeinjunction. Taken together, these inform the rolefor Rule 4004(c)(2) in the context of mortgagemodifications.

Page 5

I

The ability of debtors to request deferral of

discharge is a procedural corollary to theprovision in Bankruptcy Code 524(c) thatreaffirmations are not enforceable againstdebtors unless made before the discharge isentered. By statute, no agreement for which theconsideration is "in part" based on adischargeable debt is enforceable if the


3/14


- 3 -

agreement is made after the granting of adischarge. 11 U.S.C. 524(c)(1).1 Thisnecessitates a rule of procedure to defer adischarge in order to facilitate on-goingnegotiations of reaffirmation agreements.

Without a way to defer discharge,reaffirmation agreements that are actually indebtors' best interests could become impossible.Similarly, creditors are better off havingreaffirmed debt obligations that they will be ableto enforce after bankruptcy. Thus, Rule4004(c)(2) authorizes debtors, but only debtors(in light of negotiating imbalances), to ask thattheir discharges be deferred. Fed. R. Bankr. P.4004(c)(2).2

Page 6

When Rule 4004(c)(2) was promulgated in1983, the Advisory Committee on BankruptcyRules explained that its purpose was toaccommodate problems presented by therequirement in Bankruptcy Code 524(c)(1)that an enforceable reaffirmation agreementmust have been made before the discharge:

The last sentence of subdivision(c) takes cognizance of 524(c)of the Code which authorizes adebtor to enter into enforceable

reaffirmation agreements onlyprior to entry of the order ofdischarge. Immediate entry ofthat order after expiration of thetime fixed for filing complaintsobjecting to discharge mayrender it more difficult for adebtor to settle pendinglitigation to determine thedischargeability of a debt andexecute a reaffirmationagreement as part of the

settlement.

Fed. R. Bankr. P. 4004(c), advisorycommittee note.3

It is also significant that an incidentalconsequence of Rule 4004(c)(2) discharge

deferral is that the automatic stay, whichotherwise expires upon entry of discharge,continues to protect the debtor. 11 U.S.C. 362(c)(2)(C).4

Page 7

II

Two fundamental bankruptcy doctrinesinfluence the analysis of the concept thatmortgage modifications constitute reaffirmationagreements to the extent they implicate thepersonal liability of debtors: first, the dischargeterminates the debtor's personal liability exceptas otherwise provided in the Bankruptcy Code;and, second, liens that attached to propertybefore bankruptcy remain attached to theproperty after bankruptcy unless they arespecifically avoided during the bankruptcy case.

A

A reaffirmation agreement is an agreementbetween a creditor and debtor, "theconsideration for which, in whole or in part, isbased on a debt that is dischargeable" in a caseunder title 11. 11 U.S.C. 524(c)(1). In order tobe enforceable, a reaffirmation agreement mustbe "made" before the discharge is entered. Id.

One must also focus on what is beingreaffirmed. The view is through the prism of thetwo main facets of the terms of the discharge asprescribed by Bankruptcy Code 524(a)(1).

First, discharge "voids any judgment" atany time obtained "to the extent that such judgment is a determination of the personalliability of the debtor" with respect to adischarged debt. 11 U.S.C. 524(a)(1). Second,discharge "operates as an injunction" against anyact to collect, recover, or offset any dischargeddebt "as a personal liability of the debtor." 11U.S.C. 524(a)(2). Hence, the heart of thedischarge is the

Page 8

"personal liability of the debtor."5


4/14


- 4 -

Accordingly, a post-discharge transactionin any way connected with prepetition debt isvulnerable to attack as unenforceable as topersonal liability. The problem is that the phrase"consideration for which, ... in part, is based on adebt that is dischargeable" in the definition of a

reaffirmation agreement leads to a question offact, the determination of which is subject to thevagaries of litigation. 11 U.S.C. 524(c).

Nor can one rely upon traditionalstructuring strategies to elude reaffirmationstatus. Designating a post-discharge transactionas a new loan, refinancing, or novation, will notnecessarily eliminate the question whether itnevertheless is an unenforceable reaffirmationagreement as to personal liability. Estoppel maybe difficult to rely upon. Loan Star Sec. &

Video, Inc. v. Gurrola (In re Gurrola), 328 B.R.158, 168-76 (9th Cir. BAP 2005). Ultimately,whether consideration is "in part" based on adischargeable debt will be a question of fact thatcould be raised in defense of an action on thedebt and, as bankruptcy

Page 9

courts have jurisdiction to enforce discharges,determined by a bankruptcy judge in a reopenedbankruptcy case. The outcome of any fact-specific inquiry in litigation is inherentlyuncertain.

Although any debt may be reaffirmed, mostreaffirmations involve secured debts. Since liensordinarily survive bankruptcy regardless ofreaffirmation, the reaffirmation of a secured debthas the main effect of preserving the debtor'spersonal liability for the debt. Thus, the mostcommon use of reaffirmations is to prevent"recourse" debt from becoming "nonrecourse"debt.

Negotiations focused on revising the termsof the obligation to be reaffirmed are common.Indeed, Congress in 524(c) twice used thephrase "negotiating an agreement under thissubsection" in a context connoting itsexpectation that negotiations will occur. 11U.S.C. 524(c)(3) & (6). Such negotiated

modifications may include capitalizing or addingmissed payments to the end of the loan paymentschedule or substantially reducing principal andinterest.

Wells Fargo Bank, N.A., as a case in point,

systematically agrees to reaffirmations that writedown automobile loans to the value of thesubject vehicle and reduces the interest rate.6

Page 10

B

A mortgage modification appears to be areaffirmation agreement to the extent that itaffects a debtor's personal liability. There is nosound basis to distinguish mortgagemodifications from other negotiated

reaffirmation agreements.

1

Although mortgages take a number offorms in the various states, all involve a personalobligation to pay money backed by some formof charge against, or interest in, real estate tosecure payment of the debt. Unless the debt is"nonrecourse" either by contract or by statute sothat the creditor may enforce the obligation onlyagainst the collateral, the obligor remains

personally liable.

In general, two categories of mortgage the lien of the mortgage in favor of the lienor-mortgagee and the note and deed of trust inwhich title is conveyed to a trustee for theduration of the life of the obligation predominate.

Upon completion of the terms of thecontractual debt obligation (typically payment),either the mortgagee must release the lien or thetrustee under the deed of trust must reconvey

title. All such forms of security are within thedefinition of "lien" under the Bankruptcy Code.11 U.S.C. 101(37).7

Page 11


5/14


- 5 -

The personal liability of the debtor for amortgage-type debt depends upon the contractand upon nonbankruptcy law. In an express"nonrecourse" debt scenario, the contractprovides that the creditor's sole recourse will beagainst the collateral. De facto "nonrecourse"

debt results in a functional sense whennonbankruptcy (typically, state law)enforcement mechanisms or prohibitionsinsulate obligors from personal liability in amanner that operates to render certain categoriesof mortgage debt into nonrecourse debt,regardless of the contractual terms.

As to the latter category the functionaleffect of state law enforcement mechanisms andlimitations myriad variations among thestates make it difficult to generalize about

whether any particular mortgage-type obligationis or is not nonrecourse debt in a functionalsense.

2

California law controls this case. Whatmatters for present purposes is that, at least as amatter of theory, the debtors in this case couldbe exposed to personal liability on theirresidential mortgage. Hence, reaffirmation is notchimerical.

To be sure, the great majority of mortgageson California owner-occupied residences are, inthe functional de facto sense, "nonrecourse" foreither of two reasons. First, California permitsthe foreclosing creditor to elect a simplified andexpedited nonjudicial foreclosure, followingwhich there can be no deficiency judgment. Cal.Code Civ. Proc. 580d; 4 B.E.

Page 12

WITKIN, SUMMARY OF CALIFORNIA

LAW: SECURITY TRANSACTIONS INREAL PROPERTY 199 (10th ed. 2005)(hereafter "WITKIN").

Nonjudicial foreclosure is normallypreferred over the more protracted andexpensive judicial procedure for obtaining a judgment of foreclosure and a deficiency

judgment premised on personal liability. Cal.Code Civ. Proc. 725a-730.5; WITKIN 139-43 & 178-81. The economics of thetransaction costs discourage creditors frompursuing judicial foreclosure unless a deeppocket lurks in the background. Nevertheless,

since any California mortgagee can choosebetween judicial and nonjudicial foreclosure, itis not apodictic that the structure of theforeclosure system perfectly insulates Californiaowner-occupants from personal liability onaccount of their mortgage debts.

Next, California insulates owner-occupantsof residences with fewer than four units byprohibiting deficiency judgments in judicialforeclosures with respect to purchase moneyobligations. Cal. Code Civ. Proc. 580b. That

protection is also imperfect as the statute limitsit to financing "to secure repayment of a loanwhich was in fact used to pay all or part of thepurchase price" of the owner-occupied dwelling.Id. (emphasis supplied). California courtsconstrue 580b as narrowly limited to the"standard purchase money transaction."Compare Roseleaf Corp. v. Chierighino, 59 Cal.2d 35, 41 (1963) (Traynor, J.), with Brown v.Jensen, 41 Cal. 2d 193, 198 (1953); WITKIN 182-89.

Since the refinancings and home equitylines of credit that have been popular in recentyears are not necessarily "standard purchasemoney transactions," the insulation of 580(b)is spottier than one might otherwise assume. Byrefinancing, many

Page 13

California owner-occupants may have lost theirstatutory insulation from deficiency judgments.See WITKIN 182-83.

Junior mortgages, which are also eligiblefor mortgage modification, may also entailpersonal liability for California debtors when thelien of the junior mortgage is eliminated as aconsequence of foreclosure by a senior lienor.The so-called "sold-out junior" may sue on thedebt, particularly if the junior financing


6/14


- 6 -

transaction was not part of a standard purchasemoney transaction. Roseleaf Corp., 59 Cal. 2d at39-40; WITKIN 205.

In this instance, the subject debt appears tobe refinanced debt. Thus, the debtors' stated

desire to affirm their mortgage debt to WellsFargo potentially has legal and practicalsignificance that dovetails back to the effect ofthe discharge.

3

The Bankruptcy Code makes no relevantdistinction between debt secured by realproperty and debt secured by other than realproperty. In the eyes of the bankruptcydischarge, a mortgage lien is no different thanany other lien.

As with liens generally, the lien of amortgage survives the discharge as a chargeagainst the subject real property (or interest inreal property) to secure a debt, unless there is anorder specifically altering or eliminating the lien.The debtor's personal liability on the debt,however, terminates upon the entry of thedischarge unless there is an enforceablereaffirmation agreement. If there is not anenforceable reaffirmation, then only the lien maybe enforced after entry of the discharge, which

lien the creditor can agree to release for

Page 14

less than (but probably not more than) theamount of the debt.

Therein lies the relevance of thereaffirmation agreement provision ofBankruptcy Code 524(c) to mortgagemodification in relation to the timing of thedischarge. A mortgage modified before thedischarge preserves the personal liability of thedebtor. A mortgage modified after the dischargeis entered can only modify the terms underwhich the lien will be released.

4

The conclusion that mortgagemodifications are reaffirmations for purposes ofassessing post-discharge personal liability is notundermined by the provision in BankruptcyCode 524(c)(6)(B) that the court is notrequired to approve a reaffirmation of consumer

debt secured by real property as being in thedebtor's best interest and as not imposing anundue hardship, which otherwise is requiredwhenever the debtor was not represented bycounsel during the negotiation of thereaffirmation agreement. 11 U.S.C. 524(c)(6)(B). That provision applies only to thesixth essential element of an enforceablereaffirmation and, in particular, does not excusecompliance with the first essential element thatthe agreement be "made" before the discharge.

The text of 524(c), as set out in themargin, specifies five essential elements for anenforceable reaffirmation agreement that alwaysapply and a sixth that applies only when thedebtor was not represented by counsel inconnection with

Page 15

reaffirming, except for consumer debt securedby real property.8

Page 16

Under the plain language of the statute, theprovision of 524(c)(6)(B) that excusescompliance with 524(c)(6)(A) does not excusecompliance with the other five essentialelements of an enforceable reaffirmationagreement.

Moreover, the 2005 Amendments to theBankruptcy Code gave the court additionalpower to disapprove a reaffirmation agreement(except on debt to credit unions), if the debtor's

surplus income over expenses is not sufficient tomake scheduled payments on the reaffirmeddebt. 11 U.S.C. 524(m). Nothing suggests that 524(m) does not also apply to mortgages.

Since nothing in 524(c) suggests that areaffirmation agreement made after entry of adischarge is enforceable against the debtor as a


7/14


- 7 -

personal liability if the requirement of 524(c)(1) is not satisfied, it follows that the rulesof procedure designed to facilitate thenegotiation of reaffirmation agreements apply tomortgage modification situations.

III

This brings the analysis back to the detailsof Rule 4004(c)(2):

Notwithstanding Rule4004(c)(1), on motion of thedebtor, the court may defer theentry of an order granting adischarge for 30 days and, onmotion within that [period], thecourt may defer entry of theorder to a date certain.

Fed. R. Bankr. P. 4004(b)(2).

Rule 4004(c)(2) limits the sweep of theaffirmative command of Rule 4004(c)(1) that thecourt shall "forthwith" grant the discharge uponcompletion of the basic prerequisites fordischarge. If the discharge is deferred, then, asnoted above,

Page 17

there is the incidental consequence of extendingthe duration of the debtor's enjoyment of theprotection of the automatic stay. 11 U.S.C. 362(c)(2)(C).

A

One technical problem in Rule 4004(c)(2)merits discussion. A word essential to makingsense of the rule is omitted. No confusionresults, however, as the context of the rule issuch that the omitted word can only be the word"period."

Specifically, the text of Rule 4004(c)(2),promulgated in 1983 as the last sentence of Rule4004(c), omits the word "period" from thefollowing: "defer the entry of an order granting adischarge for 30 days and, on motion within that[period], the court may ..." Fed. R. Bankr. P.

4004(c)(2). The word "period" needs to beinserted because the phrase "on motion withinthat, the court may" is nonsense.

From context, the omitted word can only bethe antecedent to which "within that" points. As

the drafting conventions of the rules prefer"period" over "time," the omitted word must be"period." This solution to the omission is so farbeyond doubt that the Collier treatise and Collierpublication of the text of the rules go so far as toinsert the missing word "period" as if the rulehad been corrected.

Nor does there appear to have been areported controversy regarding the omission.

To the extent a judicial ruling is needed tofill in the gap, this court now holds that themissing word after "within that" in Rule4004(c)(2) is "period." Thus, Rule 4004(c)(2)

Page 18

permits the debtor to make a motion to deferentry of discharge for 30 days and, on motionwithin that period, the court may defer dischargeto a date certain.

B

Timing and mechanics are considerations.Rule 4004(c)(2) contemplates an initial 30-daydeferral of discharge that may be furtherextended to a date certain on motion nominallyto be made "within the 30 day period" of theinitial deferral.

1

The first mechanical question is whetherthe rule creates a straightjacket in which noinitial order may defer a discharge for more orless than 30 days, even if it is known that several

months will be needed to resolve the matter.

If it is known at the outset that more than a30-day deferral will be needed, then it would bean excessive formalism to require two motionsunder Rule 4004(c)(2) and would be inconsistentwith the obligation to construe the rules to


8/14


- 8 -

secure just, speedy, and inexpensivedetermination of every case and proceeding.Fed. R. Bankr. P. 1001. It follows that a courthas discretion in an initial motion for deferral toleapfrog the initial 30-day extension and deferdischarge to a date certain.

2

The second mechanical question is whetherRule 4004(c)(2) permits the fourth extensionthat is now being ordered. In other words, maythere may be multiple successive extensions to adate

Page 19

certain? The pertinent language of Rule4004(c)(2) is: "on motion within that [period],

the court may defer entry of the order to a datecertain." Fed. R. Bankr. P. 4004(c)(2). Althoughthe sense of the language is singular,conventional statutory analysis answers thequestion in the affirmative as permittingmultiple successive extensions.

The rules of construction prescribed byBankruptcy Code 102 are expresslyincorporated into the rules by Rule 9001. Fed. R.Bankr. P. 9001 ("the rules of construction in 102 of the Code govern their use in these rules").

Bankruptcy Code 102(7) provides that "thesingular includes the plural." 11 U.S.C. 102(7).Accordingly, multiple successive extensions todates certain are permitted by Rule 4004(c)(2).Hence, the subsequent extension in this instanceis authorized by the rule.

3

An additional question is whether a motionfor deferral to a date certain, which Rule4004(c)(2) says is obtained "by motion madewithin that [period]," actually must be madebefore the prior deferral period has expired. The"motion-made-within-that-period" deadline inRule 4004(c)(2) turns out to be not so rigid asfirst meets the eye once it is recognized that thetime may be retroactively enlarged under Rule9006(b)(1) upon a showing of excusable neglect.Fed. R. Bankr. P. 9006(b)(1).

Rule 9006(b) permits the time for any act"required or allowed to be done at or within aspecified period by these rules" to be enlargedunless Rules 9006(b)(2) or (3) either prohibit orlimit enlargement. Fed. R. Bankr. P. 9006(b)(1).

Page 20

An enlargement under Rule 9006(b)(1) maybe retroactive upon a showing of "excusableneglect." Fed. R. Bankr. P. 9006(b)(1); PioneerInv. Servs. Co. v. Brunswick Assocs. Ltd.P'ship, 507 U.S. 380, 388-95 (1993).

Retroactive enlargements for making Rule4004(c)(2) motions are permitted because,notwithstanding the rule's apparent internal timelimit, Rule 4004(c)(2) is not designated in Rules9006(b)(2) or (3) as a rule for whichenlargements are either not permitted or arelimited. Fed. R. Bankr. P. 9006(b)(2) (noenlargements) & 9006(b)(3) (enlargementslimited). Where internal time limits in variousrules are inflexible, Rule 9006 is specific aboutenforcing them. Pioneer Inv. Servs. Co., 507 atU.S. 389 n.4. Since Rule 4004(c)(2) is notnamed in either Rule 9006(b)(2) or (b)(3), itfollows that enlargement is permitted and maybe retroactive upon a showing of excusableneglect. Id.; Fed. R. Bankr. P. 9006(b)(1).

As the initial deferral motion does not havea designated deadline, the first Rule 4004(c)(2)motion is timely if it is made before thedischarge is entered.

C

Although no reported decision appears tohave considered the effect of Rule 9006 on thequestion of retroactive enlargement before adischarge is actually entered, decisionsconstruing Rule 4004(c)(2) reveal important

features about the landscape.

Page 21

1

Bankruptcy courts have divided on thequestion whether the discharge can or should be


9/14


- 9 -

vacated so that an otherwise unenforceable,post-discharge reaffirmation agreement canbecome enforceable. Compare, e.g., In reEdwards, 236 B.R. 124, 126-27 (Bankr. D.N.H.1999) (permissible to vacate discharge), with,e.g., Rigal v. Fleet Mortgage Corp. (In re Rigal),

254 B.R. 145, 148 (Bankr. S.D. Tex. 2000)(impermissible to vacate discharge).

The debate heretofore has touched onFederal Rule of Civil Procedure 60(b), asincorporated by Rule 9024, and has not focusedon the role of retroactive enlargements upon ashowing of excusable neglect. Fed. R. Civ. P.60(b), incorporated by Fed. R. Bankr. P. 9024;& Fed. R. Bankr. P. 9006(b). As no dischargehas been entered in this case, the issue is left toanother day.

2

The teaching of the second group of casesis that caution is needed when a court acts so asto increase the "gap" between the deadline toobject to discharge and the entry of discharge.

The puzzle is how one goes aboutchallenging a discharge when the crucial factswarranting denial or revocation of discharge arediscovered during the interval between thedeadline to object to discharge fixed by Rule

4004(b), which time is not subject to retroactiveextension, and the actual entry of discharge thatcan then be revoked for fraud not known "untilafter" the granting of such discharge. CompareFed. R. Bankr. P. 4004(b) & 9006(b)(3) (noretroactive extension), with 11 U.S.C. 727(d),1228(d), & 1328(e); Morse v. Perotta (In rePerotta),

Page 22

406 B.R. 1, 10-13 (Bankr. D.N.H. 2009)

(collecting cases).

This "gap" conundrum reflects an imperfectcoordination between the rules and the statutethat has existed since 1983 whenever the entryof the order of discharge is not instantaneousupon expiration of the deadline to object todischarge. The gap would be adjustable if Rule

4004(b) had a procedure for extending thedeadline to object to discharge less rigid than aninsistence that the motion be filed before thedeadline has expired. Fed. R. Bankr. P. 4004(b).

The "gap" problem is not unique to Rule

4004(c)(2) and has gradually been expandingsince 1983 in proportion to the erection ofvarious barriers to entry of discharge. In additionto Rule 4004(c)(2), discharge is also deferred ina manner that does not affect the deadline forobjecting to discharge for eight other reasons setforth in the margin.9

Page 23

Courts are divided on how to deal with thegap when a basis to challenge the discharge isdiscovered after the Rule 4004(b) deadline forobjecting to discharge and before the entry ofdischarge that starts the time in which to seek tohave the discharge revoked. Literalists wouldgive debtors a free pass that enables them toretain discharges obtained by fraud. E.g., Zedanv. Habash (In re Habash), 529 F.3d 398, 405-06(7th Cir. 2008) (dictum). Courts that apply amore flexible approach so as to thwartillegitimate discharges reason that the rules ofprocedure must give way to the statute. E.g.,Citibank v. Emery (In re Emery), 132 F.3d 892,895-96 (2d Cir. 1998); Ross v. Mitchell (In reDietz), 914 F.2d 161, 164 (9th Cir. 1990). Athird approach builds on Bankruptcy Code 105and the Supreme Court's decision in Marrama v.Citizens Bank, 549 U.S. 365 (2007), to permitobjections to discharge to be filed after the Rule4004(b) deadline but before the discharge isentered, reasoning that abuse of processotherwise would result. Perrotta, 406 B.R. at 16-17.

The "gap" will be manageable in thisinstance because the law of the Ninth Circuit

gives a bankruptcy court discretion, in the nameof complying with the spirit of the Federal Rulesof Bankruptcy Procedure, to indulge in the legalfiction of "deeming" a discharge to have beenentered immediately upon expiration of the Rule4004(b) deadline in which to object to dischargeeven though it actually is deferred. Sherman v.


10/14


- 10 -

SEC (In re Sherman), 491 F.3d 948, 966-67 (9thCir. 2007), explaining

Page 24

Dietz, 914 F.2d at 164. Thus, if a dysfunction

arises because of the "gap" that is beingextended, this court has discretionary tools todeal with the situation.

IV

Having concluded that Rule 4004(c)(2) iseligible to be employed during the pendency ofloan modification negotiations, the questionbecomes whether it is appropriate to do so in thisinstance and to do so for a substantial period oftime.

A

The threshold prerequisite to an exercise ofdiscretion to defer discharge under Rule4004(c)(2) is that the debtors must be acting ingood faith.

As noted at the outset, the court ispersuaded that these debtors are acting in goodfaith. They say they are setting aside funds topay the mortgage. The $42,000 differencebetween the amount of the debt and thepresumed value of the residence suggests that anagreed mortgage modification is a realisticexpectation. Nothing in the record suggests thatthey are enjoying a free ride during thependency of the automatic stay.

B

The Wells Fargo position is typical of whatthe court has been hearing in other cases withregularity. Institutional mortgage lenders havebeen coming before this court seeking relieffrom the automatic stay to foreclose on a chapter

7 debtor's home on grounds there is no equity inthe property

Page 25

despite on-going modification negotiations andthat payments are in arrears, even though the

mortgage creditor may have counseled thedebtors to stop making payments. These lendersoften acknowledge, as here, that the debtor'ssometimes-multiple requests for consensualmodification of the mortgage have been "lost" or"mislaid." If not "lost," they say, as here, that

action will be "delayed" for many monthsbecause they are busy.

The utility of deferring discharge pursuantto Rule 4004(c)(2) is to preserve the status quoduring the period it takes for the creditor toequilibrate the asymmetry between its urgentstay relief motion filed at the outset of the caseand the same creditor's seemingly lackadaisicalapproach to considering whether to agree tomodify the mortgage.

There is, of course, every reason to expectWells Fargo will negotiate in good faithconsistent with the requirement of Californialaw that every contract is subject to an impliedcovenant, or duty, of good faith and fair dealing.E.g., Waller v. Truck Ins. Exch., Inc., 11 Cal.4th1, 35-36 (1995).

As Wells Fargo requests that its long-continued stay relief motion be further continuedand agrees that a further deferral of dischargeunder Rule 4004(c)(2) is also appropriate, it isnot necessary to decide whether its motionshould be denied on the basis of inequitableconduct in the filing of an unnecessary stay10relief motion and lack of clean hands whenfiling a motion

Page 26

premised on nonpayment promptly after tellingthe debtors to suspend payment. Rather, the onlyremaining question is for how long to continuethe stay relief motion and to defer discharge.

The appropriate period for further deferralis that which will facilitate efforts between thedebtors and Wells Fargo to reach a consensualand mutually beneficial resolution. Such a result,if it can be achieved, would give effect to thefundamental bankruptcy policy of a fresh startfor these debtors and of payment on satisfactory


11/14


- 11 -

terms to the creditor. If the parties are ultimatelynot successful, the usual bankruptcy and statelaw remedies will thereafter be available to theparties.

C

The Rule 4004(c)(2) discharge deferral haslimits. It cannot be used to run roughshod oversecurity interests generally. Nor can it be used asa device for indefinite delay of the inevitable.Neither circumstance would comport with therequirement that Rule 4004(c)(2) be invoked ingood faith.

Moreover, discharge deferral as a strategyfor dealing with creditors is vulnerable to thecriticism that chapter 7 liquidation is notdesigned as a long-term procedure for

Page 27

adjusting creditors' rights. That task ordinarily isleft to plans under chapters 11 and 13.

But the case of mortgages on individualdebtors' principal residences is different.Chapters 11 and 13 are inadequate for dealingwith mortgages on principal residences becausesuch obligations may not be modified by achapter 11 or 13 plan. 11 U.S.C. 1123(b)(5)

& 1322(b)(2). In contrast, chapters 11 and 13 areadequate to restructure any other mortgage.

Especially in a state that, like California,has a rapid nonjudicial foreclosure procedurethat bypasses the local courts, a debtor is leftwith little process-based leverage other than theautomatic stay and the ability to attempt tonegotiate a consensual reaffirmation.

As already explained, reaffirmations havelong served to provide a method for adjustingcreditor rights by consent, especially in chapter

7 cases. Moreover, it is common forreaffirmations to reduce principal and interest orotherwise to adjust payment terms. By enablingthe automatic stay to remain in effect by way ofdeferring discharge under Rule 4004(c)(2) fordebtors acting in good faith to negotiate

reaffirmations, debtors at least have someleverage to deal with a creditor.

The duration of the exercise of thatleverage depends upon the state of thenegotiations. When, as with mortgage

modifications, a creditor holds itself out aswilling to negotiate, the appropriate period fordischarge deferral is for the duration of thenegotiation process. Once there is no prospect offurther negotiation, it would no longer beappropriate to continue to defer discharge.

Page 28

It may also be appropriate to tailor thecontinuing stay to fit the need to deal only withsome of the creditors and not others. The courthas the ability to fit the continuing stay to thecircumstances by vacating the automatic staywith respect to creditors who are not involved inreaffirmation discussions and can do so suasponte without burdening other creditors withthe need to make motions for relief from stay.

The ultimate limitation in the use of Rule4004(c)(2) lies within the discretion of the court.Once a creditor finally and unequivocally rejectsmodification, it would be difficult to justifyfurther discharge deferral. If the court losesconfidence in a debtor's good faith or ability to

accomplish a successful modification, it likewisewould become difficult to justify furtherdischarge deferral.

D

In this instance, the initial dischargedeferrals were in short increments in reliance onrepresentations of Wells Fargo that it wouldsoon be making a decision. It is now concededthat short increments will not suffice. In view ofthe inadequacy of the prior short-term deferrals,

this deferral will be for six months and may yetagain need to be renewed until Wells Fargo,acting in compliance with its Californiacovenant of good faith and fair dealing, makes adefinitive and final determination whether topermit modification of the subject mortgage.

Page 29


12/14


- 12 -

* * *

Federal Rule of Bankruptcy Procedure4004(c)(2) permits debtors acting in good faithto request discharge deferral while attempting torenegotiate mortgages in which they would

reaffirm their personal liability. Multipleextensions may be warranted when, as here, thecreditor is proceeding at a glacial pace.

An appropriate order will issue.

---------------

Notes:

1. Bankruptcy Code 524(c)(1) provides:

(c) An agreement between a holderof a claim and the debtor, theconsideration for which, in wholeor in part, is based on a debt that isdischargeable in a case under thistitle is enforceable only to theextent enforceable under applicablenonbankruptcy law, whether or notdischarge of such debt is waived,only if

(1) such agreement was madebefore the granting of the dischargeunder section 727, 1141, 1228, or1328 of this title;

11 U.S.C. 524(c)(1) (emphasis added).

2. Rule 4004(c)(2) provides:

(2) Notwithstanding Rule4004(c)(1), on motion of thedebtor, the court may defer theentry of an order granting adischarge for 30 days and, onmotion within that [period], thecourt may defer entry of the orderto a date certain.

Fed. R. Bankr. P. 4004(c)(2).

3. Rule 4004(c)(2) was originally the final sentenceof a Rule 4004(c) without subdivisions. Althoughrelocated, the text of the original final sentence hasnot been changed.

4. The relevant language of the automatic stay statuteis:

(2) the stay of any other act undersubsection (a) of this section [i.e.,acts against the debtor and thedebtor's property] continues untilthe earliest of

(C) if the case is a case underchapter 7 of this title concerning anindividual or a case under chapter9, 11, 12, or 13 of this title, thetime a discharge is granted ordenied;

11 U.S.C. 362(c)(2)(C).

5. The terms of the discharge are fixed by statute:

(a) A discharge in a case under thistitle

(1) voids any judgment at any timeobtained, to the extent that suchjudgment is a determination of thepersonal liability of the debtor withrespect to any debt dischargedunder section 727, 944, 1141, 1228,or 1328 of this title, whether or notdischarge of such debt is waived;

(2) operates as an injunctionagainst the commencement or

continuation of an action, theemployment of process, or an act,to collect, recover or offset anysuch debt as a personal liability ofthe debtor, whether or notdischarge of such debt is waived;and

(3) [community property injunctionterms omitted].

11 U.S.C. 524(a) (emphasis supplied).

6. As an illustration, Wells Fargo agrees in

reaffirmations to write down automobile loans to thevalue of the vehicle and reduce interest. For example,both of the Wells Fargo reaffirmations on this court'sJanuary 6, 2010, calendar modified loan terms infavor of debtors. On one, principal was reduced from$7,585.60 to $3,348.75 and interest was reduced from15.99% to 8%. On the other, interest was reduced


13/14


- 13 -

from 9.25% to 8%. In re Morfin, Bankr. E.D. Cal.No. 09-40038-C-7; In re Sheridan, Bankr. E.D. Cal.No. 09-37894-C-7.

7. The Bankruptcy Code definition of "lien" is:

(37) The term "lien" means charge

against or interest in property tosecure payment of a debt orperformance of an obligation.

11 U.S.C. 101(37).

8. Bankruptcy Code 524(c) provides:

(c) An agreement between a holderof a claim and the debtor, theconsideration for which, in wholeor in part, is based on a debt that isdischargeable in a case under this

title is enforceable only to anyextent enforceable under applicablenonbankruptcy law, whether or notdischarge of such debt is waived,only if

(1) such agreement was madebefore the granting of the dischargeunder section 727, 1141, 1228, or1328 of this title;

(2) the debtor received thedisclosures described in subsection(k) at or before the time at which

the debtor signed the agreement;

(3) such agreement has been filedwith the court and, if applicable,accompanied by a declaration or anaffidavit of the attorney thatrepresented the debtor during thecourse of negotiating an agreementunder this subsection, which statesthat

(A) such agreement represents afully informed and voluntaryagreement by the debtor;

(B) such agreement does notimpose an undue hardship on thedebtor or a dependant of the debtor;and

(C) the attorney fully advised thedebtor of the legal effect andconsequences of

(i) an agreement of the kindspecified in this subsection; and

(ii) any default under such anagreement;

(4) the debtor has not rescindedsuch agreement at any time prior todischarge or within sixty days aftersuch agreement is filed with thecourt, whichever occurs later, bygiving notice of rescission to theholder of such claim;

(5) the provisions of subsection (d)of this section have been complied

with; and

(6)(A) in a case concerning anindividual who was not representedby an attorney during the course ofnegotiating an agreement under thissubsection, the court approves suchagreement as

(i) not imposing an undue hardshipon the debtor or a dependant of thedebtor; and

(ii) in the best interest of the debtor.

(B) Subsection (A) shall not applyto the extent that such debt is aconsumer debt secured by realproperty.

11 U.S.C. 524(c).

9. In addition to Rule 4004(c)(2), discharge isdeferred:

for so long as there is pending a

motion to dismiss the case under 707, Fed. R. Bankr. P.

4004(c)(1)(D);

for so long as there is pending a

motion to extend the time for filinga motion to dismiss the case underRule 1017(e), Fed. R. Bankr. P.4004(c)(1)(F);


14/14


- 14 -

until the debtor pays the case

filing fee, Fed. R. Bankr. P.4004(c)(1)(G);

until the debtor files a statementof completion of a course inpersonal financial management,Fed. R. Bankr. P. 4004(c)(1)(H);

while a motion is pending to defer

or postpone discharge per 727(a)(12), Fed. R. Bankr. P.4004(c)(1)(I);

so long as there exists apresumption that a reaffirmationagreement is an undue hardshipunder 524(m), Fed. R. Bankr. P.4004(c)(1)(J);

while there is pending a motion todelay discharge on the basis thedebtor has not filed all taxdocuments required by 521(f),Fed. R. Bankr. P. 4004(c)(1)(K); or

until 30 days after a debtor is

required to file a statement underRule 1007(b)(8) has filed thestatement, Fed. R. Bankr. P.4004(c)(3).

10. There is no merit to the common assertion bymortgage creditors that stay relief is needed beforenegotiating with debtors. The conspicuous absence inthirty years of Bankruptcy Code jurisprudence ofreported decisions taking creditors to task forparticipating in voluntary reaffirmation discussionsdemonstrates the lack of merit in such a position.Stay relief motions made on that pretext arevulnerable to fee shifting in favor of the debtorfollowing compliance with the safe-harbor provisionsof Rule 9011. Fed. R. Bankr. P. 9011(c)(1)(A). Nor isthe phenomenon of unnecessary stay relief motionsharmlessmortgage creditors often file in this courtstay relief motions in no-asset chapter 7 cases in

which the stay likely will expire soon after themotion can be heard and then add about $1500 to thedebt for the cost of the motion; this smacks of anillegitimate private bankruptcy penalty.

---------------

Roderick Defer Discharge

Documents

Transcript of Roderick Defer Discharge