In re Campbell

• Court: U.S. Bankruptcy Court — Southern District of New York
• Writing for the Court: Allan L. Gropper
• Citation: In re Campbell, 513 B.R. 846 (Bankr. S.D.N.Y. 2014)
• Decision Date: 29 July 2014
• Docket Number: Case No. 13–40003 (ALG)
• Parties: In re: Marcia Campbell, Debtor.

513 B.R. 846

In re: Marcia Campbell, Debtor.

Case No. 13–40003 (ALG)

United States Bankruptcy Court, S.D. New York.

Signed July 29, 2014

H. Bruce Bronson, Jr., Bronson Law Offices, P.C., Harrison, NY, for Debtor.

Jeffrey L. Sapir-13, White Plains, NY, for Trustee.

Chapter 13

DECISION

Allan L. Gropper, United States Bankruptcy Judge

Marcia Campbell (the “Debtor”) has objected to the proofs of claim filed by WPR 3939 Funding LLC (“WPR”) and Ninel Baker (“Baker”), both of whom assert they are secured creditors. There have been myriad filings by these parties, including objections to the Debtor's proposed chapter 13 plan, an objection to the Debtor's discharge, as well as a motion by the Debtor seeking to avoid the lien of the junior secured creditor. The Debtor and the creditors rely on wildly disparate appraisal reports as to the value of the collateral the creditors claim. A central issue in all of the motions and objections concerns the creditors' entitlement to default interest. While certain of the matters at issue require further evidentiary support for resolution, at a hearing on June 17, 2014, the Court determined that providing the parties with guidance on the question of default interest would aid in resolution of this matter. This Decision and Order will therefore deal with the issue of entitlement to default interest. Proceedings to determine all other issues will be deferred until after an adjourned chapter 13 hearing on August 7, 2014 at 2:00 p.m.

Facts

On December 8, 2013, the Debtor filed a petition under chapter 13 of the Bankruptcy Code, and a plan (as subsequently amended, the “Plan”), pursuant to which she seeks to retain a commercial, mixed-use property that she owns located in the Bronx, New York (the “Property”). She does not reside in the Property but rents out part of the Property and has a business that occupies rental space in the Property.

Opposition to the Plan was filed by WPR and Baker. WPR claims to be the holder of a first priority lien on the Property as assignee of a mortgage and note executed by the Debtor on April 13, 2005 to secure a $400,000 loan. ¹ On February 5, 2014, WPR filed a proof of claim, as amended (Claim # 7),² in the Debtor's bankruptcy case in the amount of $479,428.08, representing $351,888.42 for principal due on the note “plus non-default and default interest, escrow advances, legal fees and other charges allowable under the Note and Mortgage.” WPR's predecessor in interest had filed a foreclosure action on the note and mortgage in the Supreme Court, Bronx County (the “NY Court”) on February 6, 2013, alleging that on October 1, 2012, the Debtor ceased making monthly payments required under the terms of her note and mortgage; the foreclosure action was stayed by the Debtor's bankruptcy filing in December 2013.

Baker purports to hold a secured lien on the Property, junior to the WPR lien, based upon a mortgage and note executed by the Debtor on August 15, 2009 as security for a $45,000 loan to the Debtor.³ On January 11, 2013, Baker commenced a mortgage foreclosure action in the N.Y. Court, alleging that the Debtor had failed to make a single monthly mortgage payment under the terms of the agreement. On February 7, 2014, Baker filed a proof of claim, which she amended on April 28, 2014 (as amended, Claim # 8), in the amount of $88,314.53.⁴

The Debtor objected to certain parts of both secured claims, including the imposition of pre- and post-petition default interest. Originally, the Debtor also opposed WPR's request for a pre-payment premium and late payment charges, but WPR has since waived any pre-payment charges and concedes that any late charges would be duplicative if default interest is granted. See In re 785 Partners LLC, 470 B.R. 126, 137 (Bankr.S.D.N.Y.2012). Relying on an appraisal that attributes a market value of $380,000 to the Property, the Debtor also argues that WPR's secured claim should be capped at the appraised value of the Property and that Baker's junior lien should be avoided entirely. Baker commissioned a separate appraisal that valued the Property at $700,000, which she argues is sufficient to secure her claim even if both the first and second lien claims are awarded default interest; WPR also relies on this higher value. The value of the Property is an issue for later determination.

Cure Defaults and Reinstate Mortgage

In the Plan, it appears that the Debtor proposes to reinstate the WPR mortgage and cure defaults.⁵Section 1322(b) of the Bankruptcy Code provides 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;

(3) provide for the curing or waiving of any default;

...

(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....

Section 1322(b) allows “the curing ... of any default” under a chapter 13 plan. Even if there is a contractual acceleration clause,⁶ the power to cure a default allows chapter 13 debtors to “first cure their default under (b)(3) and then maintain payments under (b)(5).” In re Taddeo, 685 F.2d 24, 28 (2d Cir.1982). See also11 U.S.C. § 1325(a)(5) (setting forth the confirmation requirements with respect to each “allowed secured claim provided for by the plan”).

Interest Rate

Pre-petition

While the Second Circuit in Taddeo recognized a debtor's right to cure a default, it did not indicate how to determine the proper amount required for cure. The issue has been settled by the addition of § 1322(e) to the Bankruptcy Code, adopted to overrule the Supreme Court's decision in Rake v. Wade, 508 U.S. 464, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993). In re Adejobi, 404 B.R. 78, 80 (Bankr.E.D.N.Y.2009). Section 1322(e) of the Bankruptcy Code provides as follows:

Notwithstanding subsection (b)(2) of this section and sections 506(b) and 1325(a)(5) of this title, if it is proposed in a plan to cure a default, the amount necessary to cure the default, shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.⁷

Thus, “the amount necessary to cure a default is the same as would be required to cure if the debtor were not in bankruptcy.” Adejobi, 404 B.R. at 81, quoting 8 Collier on Bankruptcy, § 1322.18 at 1322.67 (15th ed. rev. 2006). To qualify as a cure amount, the interest and charges proposed must be both (1) required under the original agreement, and (2) not prohibited by state law. Id. As stated by the Adejobi court,

The general rule in bankruptcy is that contractual interest on a debtor's obligation accrues up to the date of the bankruptcy filing. If unpaid, all contractually accrued interest, including default interest, becomes an integral component of a creditors' claim in bankruptcy. 404 B.R. at 83.

Thus, if the parties' agreement provides for a default rate of interest, if such rate has become due and payable and if such rate is permitted by state law, the amount necessary to cure the Debtor's pre-petition arrears is the default rate. 404 B.R. at 79, 83.

There is no reason to believe the default interest rate provided in either the WPR or Baker instruments would be void under New York Law. Although the 24% default rate in the WPR mortgage is exceedingly high, and 18.625% higher than the non-default rate of 5.37%, similar rates have been enforced by New York courts. See Emigrant Funding Corp. v. 7021 LLC, 25 Misc.3d 1220(A), 901 N.Y.S.2d 906, (Sup.Ct. Queens Co. Oct. 26, 2009) (enforcing 24% default interest rate where original rate was 7.25%). See also several chapter 11 cases in which this Court has held that where the parties to the agreement are sophisticated and there are no issues of overreaching, such higher rate is not considered a “penalty.” See 785 Partners, 470 B.R. at 131–32; In re 243 rd Street Bronx R & R LLC, 2013 WL 1187859 (Bankr.S.D.N.Y.2013). In the case at bar, there is no assertion that the Debtor, who runs a business from the Property, is the victim of overreaching. In 785 Partners, the bankruptcy court noted that “[e]ven where the default rate strikes the judge as high, a court cannot rewrite the parties' bargain based on its own notions of fairness and equity.” Id. Thus, the secured creditors in this case appear entitled to prepetition default interest if it was due and payable prepetition, and the underlying agreements provided therefor.

There is no dispute that the WPR and Baker notes and mortgages provided for default interest, and no dispute that the Baker debt was accelerated. ⁸ There is, however, no notice of acceleration of the WPR debt in the record, and the parties dispute whether default interest became payable prepetition. We turn to that issue next.

The WPR Note and Mortgage

The WPR Note provides that “after any stated or accelerated maturity hereof, the Loan shall bear interest, payable on demand, at the default rate ... set forth in the [M]ortgage....” The Note is therefore very clear that default interest is only payable on demand. There is nothing in the record to reflect that WPR conveyed to the Debtor, after the alleged October 2012 default, and prior to filing its foreclosure action in the N.Y. Court, its election to treat the default in the payment of a mortgage installment as a default under the Mortgage. Nor is there any indication in the record that WPR's predecessors started charging the Debtor default interest in 2012. WPR in fact has never placed in the record a notice of default or notice of acceleration.

Instead, WPR argues that the debt automatically accelerated, relying on ¶ 32(a) of the Mortgage under the heading “Defaults,” which provides that “after default in the payment of any installment...