771 F.2d 119 (6th Cir. 1985), 84-3557, In re Colegrove

Docket Nº:84-3557.
Citation:771 F.2d 119
Party Name:In re Harold E. COLEGROVE, Delores A. Colegrove, Debtors. CARDINAL FEDERAL SAVINGS & LOAN ASSOCIATION, Creditor-Appellant, v. Harold E. COLEGROVE; and Delores A. Colegrove, Debtors-Appellees.
Case Date:August 22, 1985
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

Page 119

771 F.2d 119 (6th Cir. 1985)

In re Harold E. COLEGROVE, Delores A. Colegrove, Debtors.



Harold E. COLEGROVE; and Delores A. Colegrove, Debtors-Appellees.

No. 84-3557.

United States Court of Appeals, Sixth Circuit

August 22, 1985

Cause Argued June 7, 1985.

Page 120

Kirk Sampson argued, Lerner, Sampson & Rothfuss Co., L.P.A., Cincinnati, Ohio, for creditor-appellant.

Wayne F. Wilke, Robert A. Goering argued, Cincinnati, Ohio, for debtors-appellees.

Before MERRITT and WELLFORD, Circuit Judges, and CELEBREZZE, Senior Circuit Judge.

WELLFORD, Circuit Judge.

On September 8, 1983, Harold E. Colegrove and Delores Ann Colegrove, the debtors, filed a voluntary petition under Chapter 13 of the Bankruptcy Code. Immediately prior to the filing, Cardinal Federal Savings and Loan Association ("Cardinal") instituted a foreclosure action in state court against the Colegroves' personal residence. Cardinal held the first mortgage on this realty and sought foreclosure because of the Colegroves' delinquency in making payments.

Under the Chapter 13 plan submitted by the Colegroves, they were to make up the arrearage owed Cardinal on the first mortgage indebtedness while at the same time continuing to pay the monthly installments due under the mortgage during the term of the plan. On October 3, 1983, Cardinal filed with the bankruptcy court a proof of claim and an application for interest on what it presented as a secured claim. Cardinal claimed an arrearage of $2,495.60. In December this was later modified to reflect all missed payments through November 1983, the new total arrearage being $2,967.60.

On November 30, 1983, the bankruptcy court confirmed the Colegroves' proposed plan, despite its failure to provide for interest on the arrearage. The bankruptcy court rejected Cardinal's application, finding Cardinal lacked any statutory or contractual right to interest, and this judgment was affirmed by the district court.

We are called upon to decide whether the bankruptcy court erred in confirming the Colegroves' proposed plan without any provision for interest on the arrearage. We find little direct precedent on this question which must arise with some frequency in the bankruptcy context. We believe several sections of the Bankruptcy code bear upon the answer to be reached.

Page 121

Section 1322 of the Code prescribes the contents of a Chapter 13 plan, providing in part that

The plan may--

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(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims;

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(5) notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim on which the last payment is due after the date on which the final payment under the plan is due;

11 U.S.C. Sec. 1322(b). The bankruptcy court relied on this section of the Code in rejecting Cardinal's application for interest. It reasoned that because a plan could not modify the terms of the mortgage, the mortgagee could not receive interest on the arrearage absent a specific clause in the loan agreement to the contrary. It then concluded that to require the payment of interest would be to modify the mortgage contrary to Section 1322.

Cardinal, on the other hand, argues that two other sections of the Bankruptcy Code dictate a contrary result. Section 506(b) states:

To the extent that an allowed secured claim is secured by property the value of which, ... 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 under the agreement under which such claim arose.

Section 1325(a) provides in part:

The court shall confirm a plan if--

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(5) with respect to each allowed secured claim provided for by the plan--

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(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and

(ii) the value, as of the effective date of the plan, of property to be distributed under the plan of such claim is not less than the allowed amount of such claim; 1

Cardinal argues that section 506(b) specifically provides that it be allowed interest. Here the Colegrove residence property securing the claim is valued at $55,000, much more than Cardinal's claim, and reflecting that the Colegroves have a substantial equity in their home. In the alternative, Cardinal urges that the "cram down" provision of section 1325 requires that interest be allowed. Cardinal's rationale is that in order to receive the true value of the arrearage, there must be interest paid over the period of repayment.

This court has twice had occasion to consider the meaning of section 1325. In Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir.1982), section 1325 was interpreted to require payment of interest at the current market rate on an arrearage due under an automobile loan agreement. More recently, in Hardy v. Cinco Federal Credit Union (In re Hardy), 755 F.2d 75 (6th Cir.1985), the court affirmed the bankruptcy court's order denying confirmation of a Chapter 13 plan because of its failure to include interest on the amount due Cinco Federal Credit Union, an...

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