First Nat. Fidelity Corp. v. Perry

• Decision Date: 08 October 1991
• Docket Number: No. 90-5928,90-5928
• Citation: 945 F.2d 61
• Parties: 25 Collier Bankr.Cas.2d 731, 22 Bankr.Ct.Dec. 88, Bankr. L. Rep. P 74,289 FIRST NATIONAL FIDELITY CORP. v. Ruth PERRY, Appellant, Robert M. Wood, Trustee.
• Court: U.S. Court of Appeals — Third Circuit

Page 61

945 F.2d 61

25 Collier Bankr.Cas.2d 731, 22 Bankr.Ct.Dec. 88,

Bankr. L. Rep. P 74,289

FIRST NATIONAL FIDELITY CORP. v. Ruth PERRY, Appellant Robert M. Wood, Trustee.

No. 90-5928.

United States Court of Appeals Third Circuit.

Argued April 16, 1991.

Decided Sept. 11, 1991.

Rehearing Denied Oct. 8, 1991.

David Paul Daniels, P.A. (argued), Jeannette M. Amodeo, Camden, N.J., for appellant.

William V. Eisenberg (argued), Janet L. Gold, Eisenberg & Gold, P.C., Haddonfield, N.J., for appellee.

Peter J. Broege, Wood, Broege & Fischer, Manasquan, N.J., for Trustee.

Frank Max Salinger, Robert E. McKew, American Financial Ass'n, Washington, D.C., for American Financial Services Ass'n.

Eric L. Frank, Community Legal Services, Inc., Philadelphia, Pa., for Consumers Educ. and Protective Ass'n and Jeffrey Helveston.

Jack K. Miller, Miller and Miller, Philadelphia, Pa., for Helen Baker.

Neil J. Fogarty (argued), Hudson County Legal Services Corp., Timothy K. Madden, Director, Jersey City, N.J., Professor Philip Shuchman, Rutgers Law School, Newark, N.J., for Hudson County Legal Services Corp.

E. Robert Levy, Edward A. Bertele, Levy & Lybeck, P.C., Union, N.J., for Mortgage Council of New Jersey.

Before STAPLETON, GREENBERG and HIGGINBOTHAM, Circuit Judges.

OPINION OF THE COURT

STAPLETON, Circuit Judge:

Recognizing that "state laws are ... suspended only to the extent of actual conflict with the system provided by the Bankruptcy [Code]," Stellwagen v. Clum, 245 U.S. 605, 613, 38 S.Ct. 215, 217, 62 L.Ed. 507 (1918), this court has held that Chapter 13 does not authorize a debtor to reinstate his New Jersey home mortgage after a foreclosure sale and before the time for redemption has expired. In re Roach, 824 F.2d 1370, 1373 (3d Cir.1987). Our analysis in Roach led to the conclusion that such a mortgage cannot be reinstated at any time after a foreclosure judgment has been entered. Id. at 1373. Today we hold that after a foreclosure judgment has been entered on a New Jersey home mortgage, Chapter 13 does not authorize a plan calling for payment of that judgment over the three to five years of the plan. To permit confirmation of such a plan would be to modify the rights of a claim secured only by the debtor's principal residence. Although the Bankruptcy Code ("Code") generally allows debtors to pay claims over the life of a Chapter 13 plan, it specifically excepts home mortgages from the general authorization to modify claims. 11 U.S.C.

                § 1322(b)(2).   Accordingly, federal bankruptcy law does not preempt a New Jersey creditor's state law right to immediate payment of the foreclosure judgment entered as a result of a default on a home mortgage
                

I.

The facts are not in dispute. ¹ First National Fidelity Corporation ("First National") held a mortgage in the face amount of $11,844.22 on the residence of Ruth Perry that called for 20.99% interest. After Perry defaulted, First National obtained a foreclosure judgment. Before the foreclosure sale, however, Perry filed a Chapter 13 petition and a plan that proposed paying First National $13,562, plus the judgment interest rate of ten percent for a total of $17,292, over five years. First National moved to vacate the automatic stay, arguing, inter alia, that the proposed plan was not authorized by Chapter 13 and, alternatively, that the ten percent interest provided under the plan was inadequate because the original mortgage had provided interest of over twenty percent. The bankruptcy court denied that motion and confirmed Perry's plan. A formal order was entered March 28, 1990. On appeal, the district court found that § 1322(b)(2) barred payment of the foreclosure judgment over the life of the plan, reversed the bankruptcy court's order, and denied confirmation of Perry's plan. Perry has appealed from that judgment.

The district court has jurisdiction over an appeal from a final order of the bankruptcy court pursuant to 28 U.S.C. § 158(a), and this court has jurisdiction over a final order of the district court pursuant to 28 U.S.C. § 158(d). "[W]e exercise plenary review of the legal standard applied by the district and bankruptcy courts", In re Abbotts Dairies, 788 F.2d 143, 147 (3d Cir.1986), which is the sole issue in this appeal.

II.

Section 1322(b) of the Bankruptcy Code provides in relevant part that a Chapter 13 plan may,

(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 ...

* * * * * *

(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 or secured claim on which the last payment is due after the date on which the final payment under the plan is due;

(emphasis added). Thus, home mortgage lenders are to be treated differently from other claimants. Although a Chapter 13 plan may provide for "cure" of a default, it may not "modify" the rights of a home mortgage lender.

In re Roach, supra, presented the issue of "whether 11 U.S.C. § 1322(b) evidences a congressional intent to authorize cure of a default on a home mortgage after there has been a contractual acceleration of the full mortgage debt, a foreclosure judgment, and a foreclosure sale, so long as the state law redemption period has not expired." 824 F.2d at 1371-72. We stressed at the outset that we were required to approach the task of ascertaining congressional intent with two things in mind:

we must approach that task with the realization that the Bankruptcy Code was written with the expectation that it would be applied in the context of state law and that federal courts are not licensed to disregard interests created by state law when that course is not clearly required to effectuate federal interests.

824 F.2d at 1374.

Examining the text of § 1322 and its legislative history from this perspective, we concluded that § 1322(b)(5) preempts state Applying Roach to plans such as Perry's, which propose paying a foreclosure judgment on a home mortgage in a Chapter 13 plan, New Jersey bankruptcy and district courts have reached three different results. In re Coleman, 82 B.R. 15, 18 (Bankr.D.N.J.1988), found that § 1322(b)(2) does not apply to such plans because a foreclosure judgment is not a lien "created by an agreement", and therefore is not a security interest. In re Brunson, 87 B.R. 304, 309 (Bankr.D.N.J.1988), found that § 1322(b)(2) does not prohibit such plans because Congress only intended to prohibit "alteration[s] of the terms of the [home lender's] security interest", particularly reduction of the secured claim to the value of the collateral pursuant to § 506(a). Finally, In re McKeon, 86 B.R. 350 (Bankr.D.N.J.1988), found that § 1322(b)(2) did apply and that paying a foreclosure judgment over the life of a Chapter 13 plan "affect[s] an unauthorized modification of the respective creditors' rights created by the final state court foreclosure judgment." Id. at 385. For the reasons that follow, we agree with that interpretation.

                law to the extent of authorizing debtors to "cure" mortgage defaults after acceleration and before foreclosure, by paying the arrearage in a Chapter 13 plan and restoring the original mortgage relationship.   At the same time, we noted that upon entry of a foreclosure judgment, New Jersey establishes a new relationship between the mortgagor and mortgagee which includes a right on the part of lender to immediate payment of the debt from the proceeds of a sale of the property.   We concluded that in the context of this new relationship, § 1322(b)(5)'s authorization of a cure and return to the pre-default status quo was inapposite.   Since the change which the Roaches' plan sought to make in the rights of their home mortgage lender was not a "cure" within the meaning of § 1322(b)(5) and since § 1322(b)(2) prohibited any material alteration in the rights of such a lender other than those effected in a "cure," we found no federal authorization for preempting the state rights created upon the entry of the foreclosure judgment.   Accordingly, we affirmed the district court's refusal to confirm the Roaches' plan. 2
                

III.

"The purpose of chapter 13 is to enable an individual, under court supervision and protection, to develop and perform under a plan for the repayment of his debts over an extended period." H.R.Rep. No. 595, 95th Cong., 1st Sess. 118 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6079. To achieve this purpose, Chapter 13 generally allows modification of creditors' claims to allow debtors the necessary time to repay their debts. This power of modification was extended in Chapter 13 to claims secured by real estate that had been excluded from plans under the old Chapter XIII. But testimony by representatives of secured creditors resulted in § 1322(b)(2)'s exception of home mortgages from that general power of modification. Congress apparently accepted predictions by representatives of secured creditors' interests that

savings and loans will continue to make loans to individual homeowners, but they will tend to be ... extraordinarily conservative and more conservative than they are now in the flow of credit. [Home mortgage lenders] will have to recognize that there is an additional business risk presented [if a bill is passed] providing for the possibility of modification of the rights of the secured creditor in the residential mortgage area.

Bankruptcy Reform Act of 1978: Hearings on S. 2266 and H.R. 8200 Before the Subcomm. on Improvements in Judicial Machinery of the Senate Comm. on the Judiciary, 95th Cong., 1st Sess. 707, 715 (1977) (statement of Robert E. O'Malley). As the Court of Appeals for the Sixth Circuit has observed,

Congress had to face the reality that ... [e]very protection Congress might grant In re Glenn, 760 F.2d 1428, 1434 (6th Cir.1985);...