Rake v. Wade

• Decision Date: 07 June 1993
• Docket Number: No. 92-621,92-621
• Citation: 508 U.S. 464,124 L.Ed.2d 424,113 S.Ct. 2187
• Parties: Donald Neal RAKE, et al., Petitioners v. William J. WADE, Trustee
• Court: U.S. Supreme Court

508 U.S. 464

113 S.Ct. 2187

124 L.Ed.2d 424

Donald Neal RAKE, et al., Petitioners

v William J. WADE, Trustee.

No. 92-621.

Argued March 22, 1993.

Decided June 7, 1993.

Syllabus ^*

At the time they initiated separate Chapter 13 bankruptcy proceedings, petitioners, two pairs of debtors, and another married couple were in arrears on long-term promissory notes held by respondent Wade, which were secured by the debtors' home mortgages and did not provide for interest on arrearages. The value of the residence owned by each pair exceeded each note's outstanding balance, making Wade an oversecured creditor. In their Chapter 13 plans, the debtors proposed to make all future payments due on the notes and cure the default on the mortgages by paying off the arrearages without interest. Wade objected to each plan on the ground that he was entitled to interest and attorney's fees, but the Bankruptcy Court overruled the objections, and the District Court affirmed. The Court of Appeals reversed, holding that § 506(b) of the Bankruptcy Code entitled Wade to postpetition interest on the arrearages and other charges, even if the mortgage instruments were silent on the subject and state law would not require interest to be paid.

Held: Wade is entitled to preconfirmation and postconfirmation interest on the arrearages that were paid off under petitioners' plans. Pp. ____.

(a) Three interrelated Bankruptcy Code provisions determine whether Wade is entitled to interest. Section 506(b) provides holders of oversecured claims with an unqualified right to postpetition interest, regardless of whether the agreement giving rise to the claim provides for interest, United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290, until a plan's confirmation date. Section 1322(b)(2) prohibits debtors from modifying the rights of home mortgage lenders, while § 1322(b)(5) authorizes debtors to cure any defaults on a long-term debt and maintain payments on the debt for the life of the plan. Finally, § 1325(a)(5) states that "with respect to each allowed secured claim provided for by the plan," a plan may be confirmed if, inter alia, the holder of the claim retains the lien, § 1325(a)(5)(B)(i), and the value of the property distributed under the plan on account of such claim is not less than the claim's present dollar value as of the confirmation date, § 1325(a)(5)(B)(ii). Pp. ____.

(b) Under § 506(b)'s clear language, Wade is entitled to preconfirmation interest on the arrearages. That section directs that postpetition interest be paid on all oversecured claims, Ron Pair, supra, at 245, and the parties have acknowledged that such interest accrues from the petition date until a plan is confirmed. Section 1322(b)(5) does not operate to the exclusion of § 506(b). While it authorizes a plan to provide for payments on arrearages to effectuate a cure after the plan's effective date, it does not dictate the cure's terms. Specifically, it gives no indication that the arrearages cured under the plan may not include interest otherwise available under § 506(b). This construction of the provisions gives effect to both. Pp. ____.

(c) Wade is also entitled to postconfirmation interest under § 1325(a)(5). There is no support for petitioners' claim that § 1325(a)(5)(B)(ii) applies only to secured claims that have been modified by a Chapter 13 plan and thus does not apply to home mortgages which, under § 1322(b), are exempt from modification. The plans essentially split each of Wade's claims into two claims the underlying debt and the arrearages. While payments on the underlying debt were simply "maintained," each plan treated the arrearages as a distinct claim to be paid off within the life of the plan pursuant to its repayment schedule. Thus, the arrearages, which are part of Wade's home mortgage claims, were "provided for" by the plans, and he is entitled to interest under § 1325(a)(5)(B)(ii). Other provisions of Chapter 13 containing the phrase "provided for by the plan" make clear that petitioners' plans provided for Wade's claims. See United Savings Assn. of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 371, 108 S.Ct. 626, 630, 98 L.Ed.2d 740 (1988). Pp. ____.

968 F.2d 1036 (CA10 1992), affirmed.

THOMAS, J., delivered the opinion for a unanimous Court.

David A. Carpenter, Tulsa, OK, for petitioners.

Lawrence A.G. Johnson, Tulsa, OK, for respondent.

Ronald J. Mann, Washington, DC, for the U.S. as amicus curiae, by special leave of the Court.

Justice THOMAS delivered the opinion of the Court.

This case requires us to decide whether Chapter 13 debtors who cure a default on an oversecured home mortgage pursuant to § 1322(b)(5) of the Bankruptcy Code, 11 U.S.C. § 1322(b)(5), must pay postpetition interest on the arrearages. We conclude that the holder of the mortgage is entitled to such interest under §§ 506(b) and 1325(a)(5) of the Code.

I

Petitioners Donald and Linda Rake, petitioners Earnest and Mary Yell, and respondents Ronnie and Rosetta Hannon ¹ initiated three separate Chapter 13 bankruptcy proceedings in the Northern District of Oklahoma. In each case the debtors were in arrears on a long-term promissory note assigned to respondent William J. Wade, trustee (hereinafter respondent). The notes allowed a $5 charge for each missed payment but did not provide for interest on arrearages. Payment on the notes was secured by a first mortgage on the principal residence owned by each pair of debtors. The mortgage instruments provided that in the event of a default by the debtors, the holder of the note (now respondent as assignee) had the right to declare the remainder of indebtedness due and payable and to foreclose on the property. Because the value of the residence owned by each pair of debtors exceeded the outstanding balance on the corresponding notes, respondent was an oversecured creditor.

In their Chapter 13 plans the debtors proposed to pay directly to respondent all future payments of principal and interest due on the notes. The plans also provided that the debtors would cure the default on the mortgages by paying off the arrearages, without interest, over the terms of the plans. Respondent objected to each plan, on the ground that he was entitled to attorney's fees and interest on the arrearages. The Bankruptcy Court overruled respondent's objections, and respondent appealed to the District Court for the Northern District of Oklahoma, which consolidated the cases and affirmed. The District Court held that the Chapter 13 provisions relating to the "curing of defaults"—11 U.S.C. §§ 1322(b)(2) and 1322(b)(5) —"do not alter the contract between the parties governing such matters as interest, if any, to be paid on arrearage," and that allowing interest on arrearages would be "improper," since the notes did not provide for it. App. to Pet. for Cert. A-24.

The United States Court of Appeals for the Tenth Circuit reversed. Wade v. Hannon, 968 F.2d 1036 (1992). The court held that § 506(b) of the Bankruptcy Code, as interpreted in United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), entitles an oversecured creditor to postpetition interest on arrearages and other charges paid off under a Chapter 13 plan, "even if the mortgage instruments are silent on the subject and state law would not require interest to be paid." 968 F.2d, at 1042. The Tenth Circuit relied in part on the Sixth Circuit's decision in In re Colegrove, 771 F.2d 119 (1985), which reached the same result but rested its decision on § 1325(a)(5) as well as § 506(b) of the Bankruptcy Code. Four other Courts of Appeals have held that under the "cure" and "modification" provisions of § 1322(b) a mortgagee is not entitled to interest on home mortgage arrearages.² We granted certiorari to resolve the conflict. 506 U.S. ----, 113 S.Ct. 459, 121 L.Ed.2d 367 (1992).

II

Petitioners' Chapter 13 plans proposed to "cure" the defaults on respondent's oversecured home mortgages ³ by establishing repayment schedules for the arrearages. Three interrelated provisions of the Bankruptcy Code determine whether respondent is entitled to interest on those arrearages: §§ 506(b), 1322(b), and 1325(a)(5).

Section 506(b), which applies to Chapter 13 proceedings pursuant to 11 U.S.C. § 103(a), provides that holders of oversecured claims are "allowed" postpetition interest on their claims.⁴ In Ron Pair we held that the right to postpetition interest under § 506(b) is "unqualified" and exists regardless of whether the agreement giving rise to the claim provides for interest. 489 U.S., at 241, 109 S.Ct., at 1030. It is generally recognized that the interest allowed by § 506(b) will accrue until payment of the secured claim or until the effective date of the plan. See 3 Collier on Bankruptcy ¶ 506.05, p. 506-43, and n. 5c (15th ed. 1993) (hereinafter Collier). Respondent concedes, and his amicus the United States agrees, that because § 506(b) "has the effect of allowing a claim to the creditor, . . . the rights granted under Section 506(b) are relevant only until confirmation of the plan." Brief for United States as Amicus Curiae 11, n. 7. Accord, Tr. of Oral Arg. 24, 34. Petitioners also agree that § 506(b) applies only from the date of filing through the confirmation date. Brief for Petitioners 10, 13.

Two paragraphs of § 1322(b) are relevant here: §§ 1322(b)(2) and 1322(b)(5). Section 1322(b)(2) authorizes debtors to modify the rights of secured claim holders, but it provides protection for home mortgage lenders by creating a specific "no modification" exception for holders of claims secured only by a lien on the debtor's principal residence.⁵ Section 1322(b)(5) expressly authorizes debtors to cure any defaults on a long-term debt, such as a mortgage, and to maintain payments on the debt during the life of the plan.⁶ Under § 1322(b)(5), a plan may provide for the curing of any defaults and the...