In re Brown
| Decision Date | 26 September 1988 |
| Docket Number | Bankruptcy No. 88-00199-AB. |
| Citation | 91 BR 19 |
| Parties | In re John T. BROWN, Lydia Brown, Debtors. |
| Court | U.S. District Court — Virgin Islands, Bankruptcy Division |
Mitchell J. Singer, Alexandria, Va., for debtors.
Andrew C. Meehan, Alexandria, Va., for creditor.
Gerald M. O'Donnell, Alexandria, Va., trustee.
MARTIN V.B. BOSTETTER, Jr., Chief Judge.
The issue for determination is whether the curing of a default on a debtor's residential mortgage under chapter 13 merely should restore the parties to their previous positions under non-bankruptcy law, or whether the curing of a default requires that interest be paid on the arrearages.
John and Lydia Brown, debtors, filed a petition for relief under chapter 13 on February 3, 1988. The debtors' personal residence, provided for in the Browns' second amended plan, is secured by A.E. Landvoight, Inc. ("Landvoight/mortgagee"). The mortgagee objects to confirmation of the chapter 13 plan because it does not provide for costs plus interest on the debtors' arrearages, plus pre- and post-petition attorneys' fees.
At the crux of the parties' dispute is the applicability of sections 1322, 1325 and 506(b) of the Bankruptcy Code to the facts at hand. In view of their importance to our discussion below, we set forth the relevant subsections. Section 1322 provides in part that a chapter 13 plan may:
11 U.S.C. § 1322 (emphasis added). Section 1325(a)(5)(B)(ii) provides that the court shall confirm a plan, if with respect to allowed secured claims the plan provides that:
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim.
11 U.S.C. § 1325. Finally section 506(b) of the Code provides that:
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.
Relying on the "plain language" of § 1322(b), the debtors contend that an award of interest on arrearages, plus pre-and post-petition attorneys' fees in the case at bar would constitute an impermissible modification of the mortgage contract, as neither are provided for in the mortgage instruments. Also relying on the "plain language" of § 1322, Landvoight contends that an award of interest on arrearages while perhaps a modification is merely incident to the "cure" provided for under § 1322(b)(5). Landvoight then cites § 1325 and § 506(b) as explicit indications that a mortgagee, as a holder of a secured interest under the debtors' plan, is entitled to post-petition interest on arrearages.
We note here that relevant to the issue of interest on arrearages under § 506 is the value of the security, which must exceed the amount of the claim. No evidence was adduced on this issue at the hearing, the only indications of value being the debtor's schedules and Landvoight's proof of claim. Thus, we do not address whether interest on arrearages is due under § 506 at this time.
The issue of whether § 1325 read in connection with § 1322 requires the application of interest on arrearages has been addressed by three Courts of Appeal. The first circuit to attempt to reconcile the seemingly contradictory Code sections was the Sixth Circuit in In re Colegrove, 771 F.2d 119 (6th Cir.1985). In Colegrove, the court determined that the allowance of interest on arrearages would not constitute a modification of the loan agreement because an award of interest was "merely incident to the `cure', which is excepted from the rule of section 1322(b)(2)." 771 F.2d at 122. The Colegrove court then noted that sections 506(b) and 1325(a) in guaranteeing interest for oversecured creditors, and ensuring secured creditors the receipt of the present value of their claim, respectively, supported the court's conclusion that the application of interest to the mortgagee's claim was permissible.
The Eleventh Circuit in In re Terry, reached the opposite conclusion based upon a more literal interpretation of § 1322 and its prohibition against altering the rights of residential mortgage lenders. 780 F.2d 894, 896 (11th Cir.1985) (); see 11 U.S.C. § 1322(b)(5). The Terry court concluded that the only permissible "modification" allowed under section 1322 was the curing of a default and the reinstatement of regular installment payments under § 1322(b)(5). See id. at 896.
While acknowledging that § 1325 required the payment of interest to over-secured creditors for the time value of money, the Eleventh Circuit noted that § 1325 was inapplicable to residential mortgages.
The legislative history indicates that section 1322(b) was intended to create a special exception to section 1325(a)(5)(B). The latter section, intended for those creditors whose rights may be modified or whose collateral is subject to rapid depreciation, is irrelevant to a claim such as this one.
780 F.2d at 897. Consequently, the Terry court held that "under Chapter 13 of the Bankruptcy Code, a secured creditor who holds a security interest in the debtor's principal residence is not entitled to receive interest on arrearages, unless the mortgage contract so provides, when the debtor seeks to cure default and reinstate the mortgage." Id. at 895.
In Appeal of Capps, the Third Circuit provided additional insight into the issue of whether a Chapter 13 debtor who seeks to cure a home mortgage default must pay interest on mortgage arrearages. 836 F.2d 773 (3rd Cir.1987). While reaching the same conclusion as the Eleventh Circuit in Terry, the Third Circuit's opinion differs slightly in that it begins its analysis with the proposition that Congress did not consider the curing of a default as effecting a modification of creditors' interests. See id. at 775. Relying primarily upon the then recent decision of the Third Circuit in Matter of Roach, 824 F.2d 1370 (3rd Cir.1987), the Capps court claimed that support for this conclusion could be found in the legislative history of § 1322 and analagous provisions in the Code. Id.; see Roach, 824 F.2d at 1374-77. Accordingly, the court determined that section 1325(a)(5)(B)(ii), a "cramdown" provision applicable only to situations in which a chapter 13 plan has modified the loan contract, was irrelevant to situations involving cure and reinstatement. See 836 F.2d at 776. The court in Capps conceded that creditors certainly are affected by bankruptcy and a debtor's plan, but noted that Congress regarded the incidental adverse effect inherent in cures to be insignificant. Id.
As the Senate Report concerning the cure provision under Chapter 11 indicates, Congress felt that `the holder of a claim . . . who under the plan is restored to his original position, when others receive less or get nothing at all, is fortunate indeed and has no cause to complain.\'
836 F.2d at 777 (quoting S.Rep. No. 989, 95th Cong., 2d Sess. 120 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5906, reprinted in Collier App. 3).
As the Eleventh Circuit in Terry has observed, "there is simply no right or wrong to this argument." 780 F.2d at 895. In struggling to ascertain what Congress actually intended and to harmonize seemingly contradictory Code sections, courts have come to various conclusions. Compare In re Van Gordon, 69 B.R. 545, 547 (Bankr.D.Mont.1987) () and In re Trigwell, 67 B.R. 808, 810 (Bankr.C.D.Calif.1986) () with In re Stamper, 84 B.R. 519, 521 (Bankr.N.D.Ill.1988) () and In re Harmon, 72 B.R. 458, 461 (Bankr.E.D. Pa.1987) (). While recognizing that determinations of Congressional intent are inherently problematic, we must strive to reach a logical and fair conclusion until such time as Congress addresses the need for clarification of this issue.
Therefore, we conclude in accordance with Terry and Capps that subsections (b)(2) and (b)(5) of section 1322 of the Code provide for the unique treatment of claims held by residential mortgage lenders. Section 1322(b)(2) states that a debtor's plan...
To continue reading
Request your trial