Bankr. E.D.N.C.: In re Ayodele- Conduit Mortgage Payment Required 

Mr. Ayodele, despite being $6,682.22 (or roughly 6 months) delinquent on his mortgage, sought to be excused from the Local Rule requiring mortgage payments to be collected and disbursed by the Chapter 13 Trustee.

Mr.  Ayodele first challenged the validity and authority of the bankruptcy court to promulgate a local rule requiring conduit payments.  Relying on 28 U.S.C.  § 2075 and Bankruptcy Rule 9029(a)(1),  the bankruptcy court rejected this argument, finding that it could make rules “consistent with” the Bankruptcy Code.  Requiring conduit payments (subject to either Trustee assent or court excuse),  was consistent with the Bankruptcy Code for the following reasons:

(1) Presumption of Conduit Payments:  While direct payments are not prohibited, the requirements of §§ 1321, 1322(a)(1) and 1326(a)  that the debtor file a plan and remit payments to the Trustee, with the obligation in 1326(c) that the Trustee distribute funds to creditors, creates a presumption in favor of conduit payments.

(2) Orderly Process: Conduit payments allow for a Trustee to account for payments to ensure that defaults have been cured, all on-going payments made and at the end of the case efficiently determine that the mortgage is current and the outstanding principal balance.

(3) Efficient for Debtors: By combining all payments into one, particularly when combined with payroll deduction, re-organization is easier for debtors.

(4) Risk to Debtor: Missed direct payments increase the risks of dismissal and motions for relief, with the resulting increased costs for attorneys’ fees.  Additionally, while mentioned but not decided by the court, missed direct payments can result in a denial of discharge at the end of case.

(5) Bankruptcy Privileges: The court warns that since the presumption in favor of conduit payments is clear and well-established in the district, a debtor not wishing to be subject to such, should consider that prior to filing bankruptcy.

There is no denying that a undercurrent in this matter is the on-going , intemperate and intransigent hostility of the Mr. Ayodele’s attorney to conduit mortgages.   The experience of much of the rest of the consumer bankruptcy bar is that a softer approach generally leads to Trustee assent to direct  payments in far more cases than those where it is withheld,  but here fiat justitia ruat caelum and pragmatism be damned.

That aside,  one of the reasons propounded in this opinion for conduit mortgages is that the Trustee will be able to file a Motion to Deem Current under Rule 3002.1(f) and Local Rule 3070-2(e)(1).  That the bankruptcy court characterizes this and the determination of the principal mortgage balance as a “final gift”,  fails to appreciate that this is a service the Trustee owes to the debtor and is obliged to  perform, both under Rule 3002.1(f) (“the trustee shall”) and  § 1302(b)(4) “the trustee shall ... assist the debtor in performance under the plan....”)  It is hardly a gift for the Trustee to do his or her job.

Further, when the Eastern District Local Rule 3070-2(e)(2) places the obligation on the debtor to file the Notice of Final Cure if payments were made directly, this would seem to violate the requirements of Rule 3002.1(f), which place that obligation solely and squarely on the Trustee.  And just as Rule  9029 in allowing promulgation of Local Rules requires that such be consistent with “Acts of Congress”, it also requires that Local Rules similarly be consistent with the national Bankruptcy Rules.  Here the local rule, in violation of 28 U.S.C.  § 2072, arguable abridges the substantive right provided under Rule 3002.1(f).  That it would be more difficult to prepare a Notice of Final Cure where the debtor made payment directly may be true, but that should not excuse a Trustee from his or her obligations and duties.

Perhaps if the Trustees in the Eastern District more fully and willingly provided added value to the debtor for the conduit payments, the resistance would diminish.  This could include:

(1) Filing notices of bankruptcy (and termination of bankruptcy) with any county Registrar of Deeds  where the Debtor owns real property.  Such notice put all potential creditors on notice of the bankruptcy, stopping collection, precluding tax or other sales, attachment of judgment liens, etc.  This is already done in the Middle District of North Carolina and the Trustee have the economies of scale to efficiently do this.

(2) One of the issues raised in this case (and dismissed out of hand by the court) was the potential lack or delay of an  mortgage interest deduction for payments made through a conduit.  Other than having never done so in the past and the cost of doing going forward, there is nothing prohibitn Chapter 13 Trustees from providing these to Debtors and, with conduit mortgages, they may in fact be required to.

Looking at the IRS instructions for Form 1098 Mortgage Interest Statement, it is not clear that Chapter 13 Trustees are not required to provide these statements.  The instructions provide:

Collection agents. Generally, if you receive reportable interest payments (other than points) on behalf of someone else and you are the first person to receive the interest, such as a servicing bank collecting payments for a lender, you must file this form.