Anderson v. Hancock

• Decision Date: 27 April 2016
• Docket Number: No. 15–1505.,15–1505.
• Parties: William Robert ANDERSON, Jr.; Danni Sue Jernigan, Debtors–Appellants, v. Wayne HANCOCK ; Tina Hancock, Creditors–Appellees, John F. Logan, Trustee–Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

820 F.3d 670

William Robert ANDERSON, Jr.; Danni Sue Jernigan, Debtors–Appellants

v. Wayne HANCOCK ; Tina Hancock, Creditors–AppelleesJohn F. Logan, Trustee–Appellee.

No. 15–1505.

United States Court of Appeals, Fourth Circuit.

Argued: March 24, 2016.

Decided: April 27, 2016.

ARGUED: Cortney I. Walker, Sasser Law Firm, Cary, North Carolina, for Appellants. Theodore Adelbert Nodell, Jr., Nodell Glass & Haskell, LLP, Raleigh, North Carolina; John Fletcher Logan, Office of the Chapter 13 Trustee, Raleigh, North Carolina, for Appellees. ON BRIEF: Travis P. Sasser, Sasser Law Firm, Cary, North Carolina, for Appellants. Michael B. Burnett, Office of the Chapter 13 Trustee, Raleigh, North Carolina, for Appellee Logan.

Before WILKINSON and NIEMEYER, Circuit Judges, and DAVID C. NORTON, United States District Judge for the District of South Carolina, sitting by designation.

Affirmed in part; reversed in part; and remanded by published opinion. Judge WILKINSON

wrote the opinion, in which Judge NIEMEYER and Judge NORTON joined.

WILKINSON

, Circuit Judge:

In a case where the rate of interest on the debtors' residential mortgage loan was increased upon default, we consider whether a “cure” under § 1322(b) of the Bankruptcy Code

allows their bankruptcy plan to bring post-petition payments back down to the initial rate of interest. We hold that the statute does not allow this, as a change to the interest rate on a residential mortgage loan is a “modification” barred by the terms of § 1322(b)(2).

I.

On September 1, 2011, William Robert Anderson, Jr. and Danni Sue Jernigan purchased a home in Raleigh, North Carolina, from Wayne and Tina Hancock. The purchase was financed via a $255,000 loan from the Hancocks. In exchange for the loan, Anderson and Jernigan granted the Hancocks a deed of trust on the property and executed a promissory note requiring monthly payments in the amount of $1,368.90 based on an interest rate of five percent over a term of thirty years.

The note provided, however, that

In the event borrower has not paid their monthly obligation within 30 days of the due date, then borrower shall be in default. Upon that occurrence, the borrower's interest rate shall increase to Seven percent (7%) for the remaining term of the loan until paid in full. The increase in interest rate shall result in a new payment amount of $1696.52, which shall be due and payable monthly according to the terms stated herein, save and except the increase in rate and payment.

As an alternative to an increase in interest rate upon default occurring 30 days after the payment due date, lender may, in the lender's sole discretion either 1) require borrower to pay immediately the full amount of principal which has not been paid and all the interest that I owe on that amount. The date for the full amount of principal must be at least 30 days after the date on which notice is mailed to the borrower or delivered by other means or 2) pursue any other rights available to lender under North Carolina Law.

J.A. 27.

On April 1, 2013, Anderson and Jernigan failed to make their monthly payment. On May 4th, 2013, after continuing to receive no payment, the Hancocks notified Anderson and Jernigan that they were in default and that future payments should reflect the increased seven percent rate of interest provided for in the note. Anderson and Jernigan responded on May 6, 2013, asking for a chance to become current on arrears. They nonetheless failed to make any further payments, and on June 3, 2013, the Hancocks again informed them that they were imposing the seven percent rate of interest for the remaining term of the loan.

On August 30th, having continued to receive no payments, the Hancocks initiated foreclosure proceedings. Anderson and Jernigan in turn filed a Chapter 13 bankruptcy petition in the Eastern District of North Carolina on September 16, 2013, invoking bankruptcy's automatic stay and halting foreclosure proceedings. They also filed a proposed bankruptcy plan contemporaneous with their bankruptcy petition. Aspects of that plan are at issue here.

The bankruptcy plan proposed to pay off prepetition arrears on the Hancock loan over a period of sixty months. Arrears were calculated using a five percent interest rate. The plan also reinstated the original maturity date of the loan, and proposed that the debtors again make post-petition payments at a five percent interest rate.

The Hancocks objected, contending that post-petition payments should continue to reflect the seven percent default rate of interest provided for in the promissory note. They also argued that arrears to be paid off over the life of the plan should be calculated using a rate of seven percent interest beginning in June, 2013.

The bankruptcy court sustained the Hancocks' objection. It held that the change to the default rate of interest ran afoul of 11 U.S.C. § 1322(b)(2)

, which prevents plans from “modify[ing]” the rights of creditors whose interests are secured by debtors' principal residences. It rejected Anderson and Jernigan's argument that the increased rate of interest was a consequence of default that bankruptcy could “cure” consistent with the allowances afforded to bankruptcy plans in § 1322(b)(3) and (b)(5). The bankruptcy court also held that arrears on the loan should be calculated using a seven percent rate of interest for the period extending from June 1 though September 16, 2013. It entered an order confirming the plan as modified according to its opinion.

Anderson and Jernigan appealed to the district court, again arguing that their bankruptcy plan should be allowed to “cure” the increased default rate of interest. The district court, like the bankruptcy court, rejected this claim. It held that setting aside the seven percent default rate of interest would be a modification that is prohibited by statute.

The district court disagreed, however, with the bankruptcy court's interpretation of the promissory note. In particular, it held that acceleration and foreclosure was a “disjunctive alternative remedy” to the default rate of interest, and that once the Hancocks accelerated the loan, the rate of interest reverted back to five percent. J.A. 71. It held that this period of acceleration (and thus only five percent interest) lasted from September 16, 2013 until December 2013 (the effective date of the plan), after which the seven percent rate of interest reactivated due to the bankruptcy plan's deceleration of the loan. In the district court's view, the rate of interest thus seesawed depending on whether the loan was in accelerated or decelerated status.

Anderson and Jernigan again appeal, contending that a cure under the Bankruptcy Code may bring the loan back to its initial rate of interest. We, however, agree with the courts below on the basic question, namely that the cure lies in decelerating the loan and allowing the debtors to avoid foreclosure by continuing to make payments under the contractually stipulated rate of interest.

II.

Evaluating Anderson and Jernigan's claim requires us to examine the language of the § 1322(b)

. Section 1322(b)(2) provides that a bankruptcy plan may “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.” Claims secured by security interests in the debtor's principal residence may be modified only if “the last payment on the original payment schedule” is due before the due date of the last payment under the plan, 11 U.S.C. 1322(c)(2), an exception which does not apply here. Plans may also “provide for the curing or waiving of any default,” 11 U.S.C. § 1322(b)(3), and may,

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.

11 U.S.C. § 1322(b)(5)

. The question is therefore whether the plan's proposed change to the debtors' rate of interest is part of a “cure” permissible under § 1322(b)(3) and (5), or alternatively, is a “modification” forbidden by the terms of paragraph (2).

The loan is secured by the debtors' principle residence, and so Section 1322(b)(2)

forbids “modification” of the Hancocks' “rights.” While “[t]he term ‘rights' is nowhere defined in the Bankruptcy Code,” the Supreme Court has held that it includes those rights that are “bargained for by the mortgagor and the mortgagee” and enforceable under state law. Nobelman v. Am. Sav. Bank, 508 U.S. 324, 329, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). Courts have accordingly “interpreted the no-modification provision of § 1322(b)(2) to prohibit any fundamental alteration in a debtor's obligations, e.g., lowering monthly payments, converting a variable interest rate to a fixed interest rate, or extending the repayment term of a note.” In re Litton, 330 F.3d 636, 643 (4th Cir.2003)

.

The language of § 1322(b)(3) and (5)

does not undo this protection of residential mortgage lenders' fundamental rights. Congress would not inexplicably make (b)(2) inoperative by means of a capacious power to cure written only a few sentences later. We interpret § 1322(b) “as a whole, giving effect to each word and making every effort not to interpret a provision in a manner that renders other provisions ... inconsistent, meaningless or superfluous.” Boise Cascade Corp. v. U.S. E.P.A., 942 F.2d 1427, 1432 (9th Cir.1991). And while (b)(3) provides that a plan may “provide for the curing or waiving of any default,” (b)(5) suggests that the core of a “cure” lies in the “maintenance of payments.” 11 U.S.C. § 1322(b)(5). One authoritative treatise, in its section explaining the purpose of § 1322(b)(5), comments that

Section 1322(b)(5)

is concerned with relatively long-term debt, such as a security interest or mortgage debt on the residence of the debtor. It permits the...