In Re: Jones

Background

Shelly Jones and Warren Gregory Jones filed a voluntary Chapter 13 bankruptcy petition on January 20, 2023. Their proposed repayment plan called for monthly payments of $250 for 60 months. They listed PennyMac as a priority unsecured creditor, but PennyMac objected, asserting that it was a secured creditor with a mortgage on the Joneses’ property at 32 North Clover Street in Poughkeepsie, New York. PennyMac stated that the loan was in default and that the proposed plan did not provide for mortgage arrears or ongoing mortgage payments.

PennyMac asked the Bankruptcy Court for relief from the automatic stay. The automatic stay is the bankruptcy protection that temporarily stops many collection and foreclosure actions. At the April 25, 2023 hearing, the Joneses did not dispute that they had failed to make the required post-bankruptcy mortgage payments. They argued that they were gathering paperwork, had followed guidelines they received, were working on plan confirmation, and disputed PennyMac’s status as a secured creditor.

The Bankruptcy Court granted PennyMac’s motion on April 26, 2023, and lifted the stay. The Joneses appealed. The District Court noted that the notice of appeal referred to a March 28 order, but the attached order was dated April 26 and the Bankruptcy Court docket showed no March 28 order. The District Court therefore treated the appeal as challenging the April 26 order. The Bankruptcy Court later dismissed the Chapter 13 case after the Bankruptcy Trustee moved for dismissal, but the District Court’s decision addressed the appeal from the stay-relief order.

Arguments on Appeal

The Joneses argued that PennyMac was listed in their bankruptcy filings as an unsecured creditor and did not hold a claim to the property. PennyMac argued that it was the current holder of the note, the recorded assignee of the mortgage, and the loan servicer. It also argued that the Joneses’ failure to make post-bankruptcy mortgage payments supplied a reason to lift the stay and that the property had no equity.

District Court’s Analysis

The District Court reviewed the Bankruptcy Court’s legal conclusions independently, factual findings for clear error, and discretionary decisions for abuse of discretion. Relief from the automatic stay is reviewed for abuse of discretion, meaning the question was whether the Bankruptcy Court’s decision fell outside the range of reasonable decisions.

PennyMac Was a Party Allowed to Seek Stay Relief

The District Court held that PennyMac provided adequate proof that it held and possessed the note, was the recorded assignee of the mortgage, and serviced the loan. The record showed that the mortgage had been assigned from Plaza Home Mortgage Inc. to PennyMac Corp. and then to PennyMac. The court also stated that a mortgage servicer generally has standing to seek relief from the automatic stay, assuming it acts for a creditor entitled to seek that relief. The District Court therefore concluded that PennyMac was a party in interest.

Relief Under Section 362(d)(1)

Section 362(d)(1) requires relief from the stay for cause, including a lack of adequate protection for an interest in property. The District Court found that PennyMac submitted evidence that the mortgage was already substantially in arrears when the bankruptcy case began and that the Joneses failed to make post-bankruptcy mortgage payments beginning February 1, 2023. The Joneses did not contradict that evidence. The court held that the failure to make the mortgage payments was sufficient cause to lift the stay.

The court also determined that relevant factors concerning whether litigation should continue in another court favored PennyMac. In particular, allowing the foreclosure case to proceed would resolve property-related issues, would not interfere with the bankruptcy case, and would not prejudice other creditors because the property had no equity. The balance of harms also favored PennyMac because the Joneses had not made the mortgage payments.

Relief Under Section 362(d)(2)

Section 362(d)(2) allows relief from the stay when the debtor lacks equity in the property and the property is not necessary for an effective reorganization. PennyMac submitted evidence that the amount due on the mortgage was $228,156.04, while the property’s stated fair-market value was $222,315.04. The District Court concluded that this showed the property lacked equity.

The burden then shifted to the Joneses to show that the property was necessary for an effective reorganization. The court explained that this requires more than showing that the debtors need the property; there must be a reasonable possibility of a successful reorganization within a reasonable time. The Joneses did not argue that the property would be sold, that additional assets would become available, or that another effective reorganization was in prospect. The court therefore held that the Bankruptcy Court did not abuse its discretion in lifting the stay under section 362(d)(2) as well.

Disposition

The District Court affirmed the Bankruptcy Court’s April 26, 2023 order lifting the automatic stay. It directed the clerk to correct the docket to identify PennyMac Loan Services, LLC as the appellee and to close the case.