Maike

Filing 18

OPINION and ORDER Affirming Order of the Bankruptcy Court. Signed by District Judge Thomas L. Ludington. (KWin)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
NORTHERN DIVISION
IN RE:
CRAIG W. MAIKE,
Debtor.
THOMAS W. McDONALD, JR., Chapter 13 Trustee,
Appellant,

17-cv-10080-BC
Honorable Thomas L. Ludington

vs.
CRAIG W. MAIKE, Debtor
Consol Appellant,
vs.
UNITED FINANCIAL CREDIT UNION,
Appellee.
/
OPINION AND ORDER AFFIRMING ORDER OF THE BANKRUPTCY COURT
This consolidated bankruptcy appeal was initiated by Debtor Craig Maike and Chapter 13
Bankruptcy Trustee Thomas W. McDonald (together “Appellants”). The bankruptcy proceeding
at issue was the subject of a previous appeal to this Court by Appellee United Financial Credit
Union (“UFCU”) on September 9, 2015. See in re Maike, Case No. 15-cv-13176 (Sept. 9, 2015)
(hereinafter Maike I). That appeal was addressed by an opinion dated April 7, 2016. The Court
held that 11 U.S.C. § 1322(b)(5) does not allow the plan itself to create defaults at the expense of
the protected homestead mortgagee in order to accrue funds for the administrative expense of the
debtor’s counsel.

Following remand, on January 11, 2017, Appellants initiated separate appeals from a
bankruptcy court order denying the Trustee’s motion to alter or amend judgment or for
reconsideration. In essence, Appellants argue that by ordering the Debtor’s attorney to remit
$623.63 to the Trustee in order to pay Appellee UFCU, the bankruptcy court misconstrued this
Court’s previous order and unfairly enriched the mortgagee at the expense of the Debtor’s
Attorney by requiring Debtor Maike to pay two “gap payments” to the homestead mortgagee for
the months of March and April of 2015 upon confirmation of the revised plan. The appeals were
consolidated on March 10, 2017. See ECF No. 5. For the reasons stated below, the order of the
bankruptcy court will be affirmed.
I.
Debtor Maike entered into a note and mortgage agreement with Appellant UFCU on
March 2, 2007. Pursuant to that agreement, UFCU lent Maike $62,000, for which UFCU
received a security interest in Maike’s primary residence and the right to receive interest at the
rate of 8.0 percent on any unpaid balance. The parties agreed that Maike would make monthly
payments in the amount of $454.93. If Maike failed to make such payments as due, he would be
in default. UFCU would then have the option to provide Maike notice that failure to correct his
default within 30-days would result in acceleration of the balance due on the note.
By 2014 Maike was struggling to make his monthly mortgage payments. Accordingly, on
January 24, 2014 Maike and UCFU entered into an agreement modifying the original note.
Under the amendment, the monthly principal and interest payment was reduced from $454.93 to
$367.36, beginning on February 2, 2014. BR. 25. The parties agreed that Maike was relieved
from making the December 2, 2013 and January 2, 2014 payments. Id. The parties also agreed
to a reduction of the interest rate from 8.0 percent to 5.375 percent, and UFCU agreed to forgive

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the past due interest amount of $445.30. Id. As part of the amendment, Maike acknowledged
that as of January 24, 2014 he still owed a principal balance in the amount of $59,754.80. The
modification agreement only addressed Maike’s default, and did not otherwise affect either
party’s rights prospectively under the loan agreement.
A.
On February 10, 2015, after again falling behind in his mortgage payments in the amount
of $2,515.90, Maike sought Chapter 13 Bankruptcy protection in the Eastern District of
Michigan. Maike then filed his proposed Chapter 13 Bankruptcy plan on February 14, 2015
based on the Eastern District of Michigan model Chapter 13 plan. Maike’s proposed plan called
for making payments into the plan in the amount of $660.00 per month. Pursuant to the model
plan, he proposed paying his attorney fees in full, in the amount of $2,910, before beginning
monthly payments in the amount of $510.00 to UFCU. UFCU filed an objection to Maike’s plan
on April 14, 2015, arguing that the plan impermissibly altered its rights to receive payments each
month during the pendency of the plan under 11 U.S.C. §§ 1322(b)(2) and 1322(b)(5).
The initial confirmation hearing took place on April 23, 2015. At the hearing, UFCU
argued that by allocating all of the plan payments to Maike’s attorney’s fees prior to payment to
UFCU, the plan impermissibly created a post-petition default of Maike’s mortgage obligations
and altered UFCU’s right to receive payments each month in violation of § 1322(b)(2). Maike
disagreed, arguing that his attorney fees should be paid first as a priority administrative expense.
The Trustee agreed with Maike. Problematically, on that date the Trustee had not received
sufficient funds from Maike to pay Maike’s attorney, and the bankruptcy court was hesitant to
confirm the plan before the plan had accumulated enough funds both to pay Maike’s attorney in
full and to commence monthly payments to UFCU, the homestead mortgagee. At the urging of

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the Trustee, the bankruptcy court therefore decided to adjourn the confirmation hearing until the
Trustee had sufficient funds to pay Maike’s attorney in full and begin monthly payments to
UFCU, which the bankruptcy court calculated to be in late July.
Following adjournment of the confirmation hearing, on May 21, 2015 UFCU filed a
motion to compel payments under § 1322(b)(2). Reiterating its objections from the April 23,
2015 hearing, UFCU argued that “§1322(b)(2) and §1322(b)(5) act in concert to require regular
contractual payments on a mortgage claim during the pendency of the bankruptcy case when a
debtor chooses to treat the mortgage claim pursuant to §1322(b)(5).” At a motion hearing held on
July 9, 2015, the bankruptcy court declined to order payments or lift the automatic stay, and
reaffirmed its decision to adjourn the confirmation hearing to a time when the Trustee had
sufficient funds to pay Maike’s attorney in full and begin monthly payments to UFCU. The
confirmation hearing was later adjourned to August 20, 2015.
At the time of the August confirmation hearing, the Trustee reported to the bankruptcy
court that he had received $3,144.90. Of that, he proposed to pay $2,910 towards Maike’s
attorney fees under the plan. BR. 182. This left $234.90 available to begin payments to UFCU.
This was short of the $503.18 that UFCU was ultimately to receive under the plan each month.
At the hearing, UFCU informed the bankruptcy court that because it had not received payments
since Maike’s initial Chapter 13 filing in February, it was owed an additional $3,019.18 in postpetition arrearage. It also renewed its objections under §1322(b)(2) and §1322(b)(5). The
bankruptcy court took the matter under advisement.
On September 3, 2015, the bankruptcy court issued its opinion overruling UFCU’s
objections. The court concluded that under the plan UFCU would receive its contractual payment
of $503.18 each month, that its post-petition arrearage of $3,522.26 would take 28 months to

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cure, and that its prepetition arrearage of $2,515.90 would then take 20 additional months to
cure. The total arrearage owed to UFCU would therefore be cured within the 60 months required
under Chapter 13. On September 4, 2015 the bankruptcy court issued an order confirming
Maike’s Chapter 13 plan. The trustee was ordered to pay Maike’s attorney in full and commence
monthly payments to UFCU. UFCU then filed a notice of appeal on September 9, 2015. See
Maike I, Case No. 15-cv-13176 (Sept. 9, 2015).
B.
In Maike I, UFCU argued that its rights under 11 U.S.C. § 1322(b)(2) as the holder of the
security interest in Maike’s principal residence were violated when the bankruptcy court delayed
confirmation of Debtor Maike’s Chapter 13 Bankruptcy Plan for over four months in order to
accrue cash to pay Maike’s attorney. Maike disagreed, arguing that the plan reasonably cured his
pre-petition and post-petition defaults, and provided payments to UFCU in accordance with 11
U.S.C. § 1322(b)(5). Maike further argued that lump-sum priority payment to his attorney was
proper under 11 U.S.C. §§ 1326(b)(1), 507(a)(2), 503(b)(2), and 330(a)(4) B), which together
create an administrative priority for payment of debtor attorney’s fees.
This Court issued an opinion and order on April 7, 2016, reversing confirmation of the
proposed Chapter 13 Plan, and remanding the case to the bankruptcy court. In the opinion, the
Court noted that, “[w]hile a plan may modify the rights of holders of most secured claims, §
1322(b)(2) does not allow a plan to modify the rights of a claim secured only by a security
interest in real property that is the debtor’s principal residence.” Maike I at 7. Relying on
Nobelman v. American Savings Bank, 508 U.S. 324, 327 (1993), the Court emphasized that the
language of § 1322(b)(2) focuses on the rights of the holders of such claims, not just on the claim
itself. However, the Court also relied on Nobleman in noting that a homestead mortgagee may

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still be affected by a mortgagee’s Chapter 13 bankruptcy. Elements of the Chapter 13 Plan that
may affect the homestead mortgagee include the automatic stay, pre-petition defaults, and certain
post-petition defaults, such as post-confirmation defaults caused by the debtor and certain “gappayments” created by the structure of the bankruptcy code itself through § 1326(a) (holding that
plan payments should begin 30 days after the filing of a Chapter 13 petition).
The opinion and order observed the Code-created tension between the special protections
afforded to the homestead mortgagee and the priority afforded to a debtor’s attorneys’ fees. See
§§ 1326(b)(1), 507(a)(2), 503(b)(2), and 330(a)(4)(B).

However, the Court noted that

administrative expenses, such as attorney’s fees do not have absolute priority, but under §
1326(b)(1) may be paid first or concurrently. The Court therefore found that “the debtor’s
attorney may not be paid in full at the expense of the homestead mortgagee.” Maike I at 15.
The Court ultimately concluded that because Maike’s post-petition default to the
homestead mortgagee was created by the Chapter 13 Plan itself and by court-ordered
adjournments of the confirmation hearing, the defaults were not curable under § 1322(b)(5). As
explained by the Court:
While it is true that § 1322(b)(5) may allow cure of post-petition default over a
reasonable period of time, the language of that section does not contemplate or
authorize a post-petition default created by the plan itself in order to accumulate
cash for a preferred creditor – the debtor’s attorney. As explained by the Eastern
District of Missouri Bankruptcy Court, “[t]he opportunity to cure a default is a
shield by which a debtor can heal a delinquent debt. It is not a sword which the
debtor can use to further delay payment while the attorney collects a fee.” In re
Townsend, 186 B.R. 248, 249 (Bankr. E.D. Mo. 1994).
Id. After distinguishing precedent cited by Appellee and amicus, the Court further explained:
Neither Appellee nor amicus have advanced any Congressional history suggesting
that Congress intended § 1322(b)(5) to allow the plan itself to create a postpetition default in payment to the homestead mortgagee, thereby circumventing
the protections expressly provided to that creditor under § 1322(a)(2). Appellee
and amicus also do not explain where Congress evidenced an intent for §
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1322(b)(5) to allow a bankruptcy court to delay confirmation of the plan – thereby
delaying payments to the homestead mortgagee in contravention of § 1322(b)(2) –
in order to accumulate funds to pay the debtor’s attorney. Such delays are not
authorized under §§ 1322(b)(2) and 1322(b)(5), and they conflict with the Act’s
emphasis on tight deadlines and speedy resolution of Chapter 13 plans. Such
delays are also inconsistent with § 1324(b), which provides that a Chapter 13
confirmation hearing may be held “not earlier than 20 days and not later than 45
days after the date of the meeting of creditors under section 341(a) unless the
court determines that it would be in the best interests of the creditors and the
estate to hold such hearing at an earlier date….” Id. (emphasis added).
While post-confirmation default in Chapter 13 cases resulting from the timing
provisions of the code or from defaults in payments by the debtor may often be
inevitable, and curable under § 1322(b)(5), it does not follow that § 1322(b)(5)
allows a Chapter 13 plan to intentionally modify the homestead mortgagee’s right
to receive payment each month in contravention of § 1322(b)(2). Section
1322(b)(5) exists as a mechanism to cure defaults and maintain payments while a
bankruptcy case is pending – it does not exist to allow the plan itself to create
defaults at the expense of the homestead mortgagee in order to prioritize payment
to debtor’s counsel, exclusively.
Id. The Court finally observed that the plan-created arrearage not only violated the homestead
mortgagee’s rights under § 1322(b)(2), but also harmed the Debtor, who accumulated further
interest on his unpaid mortgage principal. The Court therefore reversed the bankruptcy court’s
order affirming the Chapter 13 Plan, and remanded the case for further proceedings.
C.
Following remand, on June 23, 2016 Maike submitted an amended Chapter 13
Bankruptcy Plan in an attempt to comply with this Court’s order. The proposed plan was
identical to the previously confirmed plan, except that it revised the Plan’s effective confirmation
date to the date of the original confirmation hearing: April 23, 2015. See ECF No. 15-2.
According to Appellee, this revision allowed Maike to credit the plan payments he had been
making for the previous 16 months under the previous plan to his payments due under this new
plan, thus preventing him from having to restart the five-year period.

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At issue on remand was the amount that the debtor’s attorney was required to return to
the Chapter 13 Trustee for disbursement to UFCU under the revised plan. By retroactively
amending the Plan’s confirmation date, Maike’s May 2, June 2, July 2, and August 2, 2015
payment obligations to UFCU under the note and mortgage agreement were transformed into
post-petition post-confirmation payments. These payments had previously been categorized as
post-petition pre-confirmation payments. There does not appear to be any dispute regarding the
treatment of these payments, and the Trustee conceded that $120.45 should be remitted by the
Debtor’s attorney in order to pay UFCU.
Contested, however, was the effect of the revised confirmation date on Maike’s March 2
and April 2, 2015 payment obligations to UFCU, or the two remaining post-petition preconfirmation payment obligations. At the time of the initial confirmation hearing in late April,
2015, the Trustee had on hand the total amount of $1,257.96 (two months of plan payments in
the amount of $660.00 minus $62.04 in trustee fees). Of that, Maike’s plan proposed paying
$754.78 to his attorney and $503.18 to UFCU, or one month of mortgage payments. UFCU
objected to this aspect of the plan, arguing to the bankruptcy court that the plan would
improperly modify its rights as the homestead mortgagee to collect monthly payments. See ECF
Nos. 15-3, 15-5. UFCU argued that the two payments were not caused by a timing provision of
the Bankruptcy Code, but by a deliberate choice of the Debtor’s Attorney, the proposed plan, and
the Trustee to pay the attorney fees in preference to the mortgage payments. UFCU thus asserted
that it should receive two months of mortgage payments, or $1006.36, in order to pay the March
2 and April 2, 2015 payments. Without two months’ worth of payments, UFCU argued, Maike
would already be in default on his bankruptcy plan upon (retroactive) confirmation. UFCU
concluded that the Debtor’s counsel should return an additional $503.18 to the Trustee in order

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to pay UFCU. UFCU also argued that it was owed an additional $188.69 based on a partial
payment Maike made in September of 2015.
After holding a hearing on September 22, 2016, the bankruptcy court issued an order on
October 20, 2016, accepting UFCU’s arguments regarding the March and April payments, but
rejecting UFCU’s arguments with regard to the September 2015 defaults as follows:
Applying the District Court holding to this case, the first payment to United
Financial should have been $1,006.36 because two post-petition payments were
due. This is the initial payment described by the District Court. The partial
payment of $330.00 in August 2015, however, fits squarely in the District Court’s
language that acknowledges that the Code and the Debtor’s post-petition defaults
can occur. The Trustee correctly paid $314.49 to United Financial because that
was all that was available. When the Debtor paid $990.00 in September 2015, the
plan directed the Trustee to pay $503.18 to United Financial. Although United
Financial was due another $188.69 ($503.18-$314.49), that default may be cured
by section 1325(b)(5) because the Debtor’s failure to pay caused the default, not
the plan itself.
See ECF No. 15-6. In other words, the court reasoned that because two post-petition payments
were due on the confirmation date, UFCU should have been awarded $1006.36 at that time
instead of the $503.18 that it received. The bankruptcy court therefore ordered the Debtor’s
attorney to return $623.63 to the Chapter 13 Trustee for disbursement to UFCU. The court then
denied the Trustee’s subsequent “Motion to Amend/Alter or for Reconsideration.” See ECF No.
15-7.

Both the Trustee and Debtor Maike then initiated separate appeals, which were

consolidated on March 10, 2017. See ECF No. 5. UFCU has not challenged the bankruptcy
court’s ruling regarding the September 2015 default on appeal.
II.
Final orders of a bankruptcy court are appealable to a federal district court under 28
U.S.C. § 158(a). In re Gourlay, 496 B.R. 857, 859 (E.D. Mich. 2013). In the present matter,
neither the Trustee nor Debtor Maike have appealed the bankruptcy court’s original order

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regarding payments under the revised plan, but have only appealed the bankruptcy court order
denying the Trustee’s motion for reconsideration. An order denying a motion for reconsideration
is a final order for the purposes of appeal. In re J & M Salupo Dev. Co., 388 B.R. 795, 800
(B.A.P. 6th Cir. 2008).
A bankruptcy court’s denial of a Rule 59(e) motion for reconsideration is reviewed for
abuse of discretion on appeal. Id. “Under this standard of review, the [lower court’s] decision
and decision-making process need only be reasonable. The granting of a Rule 59(e) motion is an
extraordinary remedy and should be used sparingly.” Id. (quoting and citing Pequeno v. Schmidt,
240 F. App’x 634, 636 (5th Cir. 2007). “A motion under Rule 59(e) is not intended to provide
the parties an opportunity to relitigate previously-decided matters or present the case under new
theories. Rather, such motions are intended to allow for the correction of manifest errors of fact
or law, or for the presentation of newly-discovered evidence.” Id. at 805.
Appellants argue that the bankruptcy court’s order denying the Trustee’s motion for
reconsideration contained a palpable defect in that it erroneously applied Maike I. Specifically,
Appellants argue that by ordering the Debtor’s attorney to return $623.63 to the Chapter 13
Trustee for disbursement to UFCU the bankruptcy court unjustly enriched UFCU at the expense
of the Debtor’s Attorney. Under the deferential abuse of discretion standard, the question is not
whether this Court’s previous order required the Debtor’s attorney to return $623.63 to the
Chapter 13 Trustee for disbursement to UFCU, but whether the bankruptcy court order clearly
violated the bankruptcy code or Maike I.
In arguing that the bankruptcy court opinion did not contain a clear error of law, Appellee
UFCU emphasizes its special status as a homestead mortgagee. As explained in Maike I, “[w]hile
a plan may modify the rights of holders of most secured claims, § 1322(b)(2) does not allow a

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plan to modify the rights of ‘a claim secured only by a security interest in real property that is the
debtor’s principal residence.’” Maike I (citing Nobleman, 508 U.S. at 327). This applies to “the
rights of the holders of such claims, not just on the claim itself.” Id. Such rights include “the
right to repayment of the principal in monthly installments over a fixed term at specified
adjustable rates of interest, the right to retain the lien until the debt is paid off, the right to
accelerate the loan upon default and to proceed against petitioners’ residence by foreclosure and
public sale, and the right to bring an action to recover any deficiency remaining after
foreclosure.” Maike I (quoting Nobleman, 508 U.S. at 329). In light of this law, UFCU argues
that upon confirmation it was entitled to a lump sum payment constituting any post-petition preconfirmation defaults, and that a decision to the contrary would impermissibly violate its special
protections under the code.
In countering that the bankruptcy court opinion did contain a clear error of law,
Appellants emphasize the exceptions to the homestead mortgagee’s protections recognized in
Nobleman and its progeny. Appellants also emphasize this Court’s observation in Maike I that
“post-confirmation default in Chapter 13 cases resulting from the timing provisions of the code
or from defaults in payments by the debtor may often be inevitable, and curable under §
1322(b)(5) ….” Maike I, at 14. Because the timing of the confirmation hearing is determined by
the bankruptcy code, Appellants argue that the bankruptcy court should have found that Maike’s
post-petition pre-confirmation payments were created by the code itself, and therefore curable
under § 1322(b)(5). Appellants conclude that, by requiring such defaults to be cured at the time
of confirmation, the bankruptcy court impermissibly enriched the homestead mortgagee at the
expense of the debtor’s attorney.

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Bankruptcy courts have great discretion in deciding how to allocate funds at the time of
confirmation. That discretion is bound by a number of code provisions, including the provisions
granting the homestead mortgagee special protections and the provisions requiring that the
Debtor’s Attorney be paid “first or concurrently” with other creditors. See § 1326(b)(1).
Importantly, Appellants do not assert that the Debtor’s Attorney did not receive any payment
“first or concurrently” at the time of confirmation, as required by § 1326(b)(1). Instead, it
appears as though the Debtor’s Attorney received some payment concurrently with the
homestead mortgagee’s receipt of Maike’s post-petition, pre-confirmation default payments.
Appellants have not identified any portion of Maike I, any provision of the bankruptcy code, or
any other rule of law, as they relate to the facts of this case, that required the bankruptcy court to
direct that the funds on hand at the time of confirmation be more fully allocated to Debtor’s
attorney fees. Appellants therefore have not identified any palpable defect or clear error of law in
the bankruptcy court’s decision denying the Trustee’s motion for reconsideration. Under the
deferential abuse of discretion standard of review, the bankruptcy court’s order will be affirmed.
III.
Accordingly, it is ORDERED that the order of the bankruptcy court denying the
Trustee’s motion to alter or amend judgment or for reconsideration is AFFIRMED.
s/Thomas L. Ludington
THOMAS L. LUDINGTON
United States District Judge
Dated: August 15, 2017

PROOF OF SERVICE
The undersigned certifies that a copy of the foregoing order was served
upon each attorney or party of record herein by electronic means or first
class U.S. mail on August 15, 2017.
s/Kelly Winslow
KELLY WINSLOW, Case Manager

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