Mann v. Chase Manhattan Mortgage Corp.

United States Court of Appeals
For the First Circuit

No. 02-1355

BILLINGS MANN AND CHERYL MANN,
Plaintiffs, Appellants,

v.

CHASE MANHATTAN MORTGAGE CORP.,
Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND

[Hon. Ernest C. Torres, U.S. District Judge]

Before

Boudin, Chief Judge,

Torruella, Circuit Judge,

and Cyr, Senior Circuit Judge.

Christopher M. Lefebvre, with whom Law Offices of Claude
Lefebvre & Sons, Daniel A. Edelman, Tara L. Goodwin and Edelman,
Combs & Latturner were on brief for appellants.
LeAnn Pedersen Pope, with whom Edward J. Lesniak, Burke,
Warren, MacKay & Serritella, P.C., Melissa E. Darigan, and
Partridge, Snow & Hahn, LLP were on brief for appellee.

January 17, 2003
 CYR, Senior Circuit Judge. Plaintiff-appellants Billings

and Cheryl Mann, husband and wife, appeal from a district court

judgment which (i) dismissed their claim that Chase Manhattan

Mortgage Company (“Chase”) violated the automatic stay provisions

of the Bankruptcy Code, then (ii) denied their motions to amend the

complaint. We affirm the district court judgment.

I

BACKGROUND

In 1993, the Manns and Chase entered into a $126,950

mortgage loan and related security agreement which conveyed a lien

on the Manns’ principal residence. The security agreement

provided, inter alia: “[Chase] may do and pay for whatever is

necessary to protect the value of the Property and [its] rights in

the Property . . . [including] paying reasonable attorneys’ fees.

. . . Any amounts disbursed by [Chase] under this paragraph . . .

shall become additional debt of the Borrower[s] secured by this

Security Instrument.”1

After the Manns defaulted on their mortgage payments in

1988, Chase fixed a date for a foreclosure sale and advised the

1
We review the summary judgment ruling de novo, accepting all
record evidence in the light most condign to the Manns. See In re
Gosselin, 276 F.3d 70, 71-72 (1st Cir. 2002).

2
Manns that it planned to inspect the property.2 On April 9, 1999,

the Manns filed their joint chapter 13 petition.

The $7,342.08 proof of claim submitted by Chase in the

ensuing chapter 13 proceedings included existing loan-payment

arrearages ($5,698.55), as well as related prepetition attorney

fees and inspection costs ($1,643.53). Moreover, unbeknownst to

the Manns, Chase continued to accrue postpetition attorney fees

against the Manns in its internal records, but neither submitted a

proof of claim in the chapter 13 proceedings nor billed the Manns

for the postpetition fees.

The bankruptcy court order confirming the chapter 13 plan

(i) allowed the $7,342 proof of claim filed by Chase, representing

the full mortgage arrearage and prepetition attorney fees, (ii)

directed the Manns to make all future mortgage payments directly to

Chase as and when due,3 and (iii) prescribed that unsecured

creditors were to receive not less than 17% on their allowed

claims.

Following the confirmation of their chapter 13 plan, the

Manns objected to the proof of claim filed by Chase, specifically

2
The district court rejected the contention that the
inspection and foreclosure notifications issued by Chase violated
the terms of the Security Agreement. The Manns do not challenge
these rulings on appeal.
3
Unless otherwise provided in the chapter 13 plan, title to
all property of the chapter 13 estate vests in the debtor upon
confirmation. See Barbosa v. Soloman, 235 F.3d 31, 37 (1st Cir.
2000).

3
challenging its inclusion of $1,643.53 in prepetition attorney fees

and inspection costs. Before the bankruptcy court ruled on their

objection, however, the Manns withdrew it, opting instead to

institute their putative class-action lawsuit in the United States

District Court for the District of Rhode Island. The class-action

complaint alleged, inter alia, that Chase willfully violated the

automatic stay provision, see Bankruptcy Code § 362, 11 U.S.C §

362, in that, “subsequent to plaintiffs . . . filing bankruptcy,”

Chase continued to “charge” — viz., record charges in its internal

loan files — the Manns for attorney fees and inspection fees

incurred postpetition.

Following discovery, Chase submitted its motion for

summary judgment and the Manns submitted a motion to amend their

complaint, claiming that Chase improperly included a $2.00

surcharge in each of its prepetition inspection charges. The

motion to amend also sought to delete the Manns' earlier allegation

that Chase improperly had charged postpetition inspection fees.

Subsequently, the Manns submitted another motion to amend their

complaint so as to include Raul and Jo-Ann Rodrigues as

coplaintiffs. The second amended complaint asserted that Chase

recently had billed the Rodrigueses for $2,756.55 in postpetition

attorney fees, notwithstanding its stated policy (reiterated in the

instant appeal) that it does not attempt to collect such

postpetition attorney fees from its mortgagors, provided they

4
complete their chapter 13 plan payments and occasion no further

mortgage-payment defaults.

The district court, in an unpublished opinion, directed

summary judgment against the Manns on their section 362 claim, then

denied their motions to amend the complaint.

II

DISCUSSION

A. The Automatic Stay

The Manns first contend that the mere recordation of

postpetition, preconfirmation attorney fees incurred by Chase, on

its internal books, violated the automatic stay, in that it

constituted either (i) “an[] act to obtain possession of the

property of the estate or of property from the estate or to

exercise control over property of the estate,” 11 U.S.C. §

362(a)(3), or (ii) “an[] act to create, perfect, or enforce any

lien against property of the estate,” id. § 362(a)(5). Of course,

acts undertaken in violation of the automatic stay are not only

void, see Soares v. Brockton Credit Union (In re Soares), 107 F.3d

969, 976 (1st Cir. 1997), but may expose the violator to monetary

sanctions as well, see 11 U.S.C § 362(h).

Generally speaking, the automatic stay prescribed in

Bankruptcy Code § 362(a) serves the salutary purpose of deterring

creditors from jockeying for advantage by, for instance: (i)

seeking to convert an unsecured prepetition claim into a secured

5
claim; (ii) obtaining actual possession of property of the chapter

13 estate; or (iii) attempting to perfect a judicial, statutory or

other lien in such property. See In re Soares, 107 F.3d at 975-76.

Thus, the automatic stay provision is designed to forfend against

the disorderly, piecemeal dismemberment of the debtor's estate

outside the bankruptcy proceedings. See id.

Viewed in this light, these postpetition bookkeeping

entries by Chase did not implicate Bankruptcy Code § 362(a)(3),

since such unilateral accruals of amounts assertedly due, but in no

manner communicated to the debtor, the debtor's other creditors,

the bankruptcy court, nor any third party, plainly are not the sort

of “act” Congress sought to proscribe. See, e.g., In re Sims, 278

B.R. 457, 471 (Bankr. E.D. Tenn. 2002) (noting that "creditor could

produce all kinds of paperwork which if communicated to a debtor or

a third party would violate the stay, but absent that

communication, some overt act, or resulting effect on the debtor,

no [§ 362] violation has occurred”) (collecting cases; emphasis

added). Thus, the Manns' property, presently revested in them

following the confirmation of their chapter 13 plan, remains

unaffected by the internal bookkeeping entries initiated by Chase.

As a consequence, absent any overt attempt by Chase to recover

these fees from the chapter 13 estate in the future, as (i) by

instituting collection proceedings which the Manns or the chapter

13 estate would be forced to defend against, or (ii) by

6
transmitting “harassing” communications to the Manns, the Chase

bookkeeping entries represent mere unilateral notations regarding

attorney fees which it assertedly incurred, thereby according it no

identifiable legal advantage over other creditors.

Nor did these mere bookkeeping entries, albeit effected

postpetition and preconfirmation, violate Bankruptcy Code §

362(a)(5). The security agreement states that Chase may include

certain attorney fees in the Manns' loan balance. Consequently,

these postpetition entries do indeed pose the prospect that the

amount due Chase, hence subject to its security interest, may

increase. Nevertheless, a mere potentiality of future liability

reasonably cannot be considered the “creation” of a new and

enlarged lien. The Manns have made no evidentiary proffer that

Chase has undertaken any action to modify its original record lien.

Although a secured creditor may record a lien indicating an

original amount certain (e.g., the original loan balance), the

amount of a lien typically fluctuates during the term, as the

debtor repays the mortgage debt or other senior indebtedness, or as

additional charges accrue to their loan account. Thus, until such

time as Chase initiates some external effort, either to fix or

recover upon, the amount of its secured or in rem indebtedness, the

7
lien subsists simply as a recorded prepetition lien of

indeterminate value.4

The case authority cited by the Manns is plainly

distinguishable. For instance, in In re Stark, 242 B.R. 866

(Bankr. W.D.N.C. 1999), the bankruptcy court imposed subsection

362(h) sanctions against a secured creditor on the grounds that (i)

the loan documents accorded the secured creditor no express

authority to assess postpetition inspection fees; and (ii) the

creditor nonetheless “attempted to collect” the inspection fees by

mailing the debtors monthly statements reflecting the postpetition

inspection fees. Id. at 869, 872.5 Chase, on the other hand,

never communicated the attorney-fee charges to anyone; indeed, the

Manns would not have learned of these charges but for their

subsequent discovery proceedings before the district court. Cf. In

re Soares, 107 F.3d at 975 (noting that automatic stay is designed

4
The proof of claim submitted by Chase in the chapter 13
proceeding valued the secured claim at only $124,743.32. There is
no indication that Chase included any postpetition attorney fees.
5
Similarly, in Fessenden v. Maine Savs. Bank (In re Nield), 95
B.R. 259 (Bankr. D. Me. 1989), the secured creditor unilaterally
removed funds deposited in an escrow account, in the bank's
possession, and which had been set aside to defray the insurance
premiums and taxes on the mortgaged property as due. Id. at 260-
61. And the court in In re Megan-Racine Assocs., Inc., 203 B.R.
873 (Bankr. N.D.N.Y.), aff’d, 102 F.3d 671 (2d Cir. 1996), noted
that the creditor had “engaged in [the type of] self-help”
prohibited under § 362 by unilaterally withdrawing sums from an
escrow account in its possession. Id. at 878, 883.

8
to afford debtors “breathing room” free from creditor

“harassment”).

B. Bankruptcy Code § 506(b)

Next, the Manns assert that Chase violated the automatic

stay by failing to submit a preconfirmation request, pursuant to

Bankruptcy Code § 506(b),6 that any postpetition attorney fees be

included in its allowed secured claim. Chase contends, on the

other hand, that the Manns waived any “claim” based on a § 506(b)

violation, by failing to include it in their several complaints.

Although Chase correctly states that the Manns failed to

assert a § 506(b) “claim” in their various complaints,7 their

argument was squarely raised and adequately preserved — as a

theoretical adjunct to their section 362 claim — in their

6
Bankruptcy Code § 506(b) provides: “To the extent that an
allowed secured claim is secured by property the value of which,
after any recovery under subsection (c) of this section, is greater
than the amount of such claim, there shall be allowed to the holder
of such claim, interest on such claim, and any reasonable fees,
costs, or charges provided for under the agreement under which such
claim arose.” 11 U.S.C. § 506(b). Subsection 506(b) applies
exclusively to postpetition fees accrued prior to confirmation of
the plan. See 4 Lawrence P. King, Collier on Bankruptcy ¶
506.05[3] (15th rev. ed. 2001).
7
The Manns never mentioned § 506(b) in their complaint, but
simply noted that Chase had made its postpetition internal
bookkeeping entries “without obtaining court approval . . . [which]
violates the automatic stay.” These references reasonably could
not have placed the district court on fair notice that the Manns
were claiming a § 506(b) violation. Instead, the reference more
plausibly implied simply that Chase was required to seek approval
from the court for relief from the automatic stay pursuant to §
362(d).

9
opposition to summary judgment. Citing five cases, the Manns

asserted: “The proper procedure for [Chase] to follow if it

desires to be compensated for post-petition charges, is to request

Court approval of those charges, pursuant to § 506 of the Code, and

Bankruptcy Rule 2016.” In other words, the Manns contended that

any unilateral imposition of postpetition fees by Chase must be

violative of § 362(a), given that the Code establishes specific

prerequisites and a particular mechanism for imposing such fees,

viz., § 506(b).

Nevertheless, the Manns' simple citation to Bankruptcy

Code § 506(b) is insufficient to advance their § 362 claim on the

merits. As a “significant exception” to the general rule that

creditors cannot recover postpetition fees in bankruptcy

proceedings, Bankruptcy Code § 506(b) permits an oversecured

creditor to request that the bankruptcy court permit postpetition

fees to be included in its oversecured claim, provided that the

postpetition fees were (i) contemplated by the underlying contract;

and (ii) “reasonable” in amount. See 4 Lawrence P. King, Collier

on Bankruptcy ¶ 506.04[3] (15th rev. ed. 2001). Since there are

numerous circumstances in which a chapter 13 discharge would not

extinguish a secured claim, see Doral Mort. Corp. v. Echevarria (In

re Echevarria), 212 B.R. 185, 187 (B.A.P. 1st Cir. 1997), § 506(b)

accords secured creditors an advantageous prospect of recovering

full payment of their postpetition attorney fees.

10
 As support for their contention, however, the Manns rely

exclusively upon a series of unpublished bankruptcy court decisions

which hold that a creditor’s failure to disclose, during the

chapter 13 proceedings — e.g., by filing a proof of claim — its

internal recordation of such postpetition, preconfirmation attorney

fees on its internal books violates § 506(b), in that such

nondisclosure frustrates the “fresh start” policy underlying the

Bankruptcy Code by precluding chapter 13 debtors from availing

themselves of a reasonable opportunity to satisfy (viz., discharge)

such attorney fees through their chapter 13 plan. See, e.g., In re

Slick, No. 98-14378 (Bankr. S.D. Ala. May 10, 2002). Assuming,

arguendo, the correctness of its holding, a matter we expressly

refrain from resolving, the Slick series of cases is readily

distinguishable. That is to say, Slick directly holds that the

creditor’s nondisclosure violated § 506(b), rather than § 362, and

that the creditor’s fees were thus discharged. Id., slip op. at

12-13.

By contrast, the Manns neither contended before the

district court that Chase violated § 506(b), nor requested that the

district court declare the attorney fees discharged under their

chapter 13 plan, but instead simply cited to § 506(b) as an adjunct

to their § 362 claim asserting a violation of the automatic stay,

viz., by way of statutory evidence informing the meaning of the

term “act” under § 362(a). It is not surprising, therefore, that

11
the district court opinion did not rely upon § 506(b) as a discrete

basis for its decision. Whatever the legal effect of the failure

to submit an application or proof of claim under § 506(b), a matter

which we need not resolve here,8 any such omission or waiver

plainly would not constitute the sort of overt, affirmative act

stayed by § 362(a). Thus, the § 362 claim, as submitted by the

Manns, was properly dismissed by the district court.

8
Nevertheless, it is important to note that there is a serious
question as to whether a discrete § 506(b) claim would be
sufficiently ripe for adjudication at the present juncture.
Normally, a claim is unripe where there are too many contingencies
which might moot the claim. See, e.g., Bowen v. First Family Fin.
Servs., Inc., 233 F.3d 1331, 1340 n.7 (11th Cir. 2000). Chase has
never billed the Manns for these fees, nor communicated to any
third party its putative entitlement to the fees. Moreover, Chase
represents on appeal that it will never seek to collect the fees
unless the Manns were to default on their mortgage once again. See
Chamber of Commerce v. Reich, 57 F.3d 1099, 1100 (D.C. Cir. 1995)
(in assessing ripeness, court should consider, inter alia, the
hardship upon the parties were the court to withhold immediate
review of the claim). Although we might be reluctant to accept
mere bald assurances regarding the latter contingency, it cannot be
said with any confidence that its collection efforts are
inevitable.
Second, although plainly not determinative on its own, we
note that the Manns have not yet completed their payments under the
confirmed plan. Unlike a chapter 11 debtor, which receives its
discharge upon plan confirmation, chapter 13 debtors obtain a
discharge only upon the successful completion of their required
payments under the confirmed plan. See In re Roberts, 279 F.3d 91,
93 n.1 (1st Cir. 2002). Should the Manns fail to do so, none of
their debts would be discharged, let alone their putative
contractual obligation to Chase for its postpetition,
preconfirmation attorney fees. Cf. In re Echevarria, 212 B.R. at
188 (noting that creditor which waived recourse to § 506(b), until
completion of confirmed plan, thereby waived right to collect §
506(b) postpetition interest).

12
C. The Motions to Amend the Complaint

Finally, we affirm the district court ruling rejecting

the motions to amend the Manns' complaint to plead new facts

allegedly disclosed during discovery. The Manns sought (i) to

allege that Chase, absent any contractual authorization, added a

$2.00 “surcharge” for each prepetition inspection charge posted to

their mortgage loan account, and (ii) to add, as coplaintiffs, the

Rodrigueses, whom Chase recently had billed for the same type of

postpetition, preconfirmation fees following the entry of the

Rodrigueses’ chapter 13 discharge, even though the Rodrigueses had

not defaulted again on their mortgage payments.

Trial court rulings on motions to amend a complaint are

reviewed for abuse of discretion. See Invest Almaz v. Temple-

Inland Forest Prods. Corp., 243 F.3d 57, 71 (1st Cir. 2001). Of

course, the trial court may deny leave to amend, as a matter of

law, where a proposed amendment would not cure the deficiencies in

the original complaint. See Grant v. News Group Boston, Inc., 55

F.3d 1, 5 (1st Cir. 1995). So it is here.

The first proposed amendment was defective due to the

fact that the Manns failed to file timely objection to the

inclusion of the subject surcharges in their chapter 13 plan. The

second amendment was deficient in that (i) the Manns submitted an

insufficient Rule 56 proffer regarding their § 362 claim for the

postpetition, preconfirmation attorney fees, and (ii) even

13
assuming, arguendo, that the Rodrigueses held a viable claim under

either § 362 or § 506(b), their standing did not confer standing

upon the Manns.

Accordingly, the district court judgment is affirmed.

The parties shall bear their own costs. SO ORDERED.

14