In re Chavez
| Decision Date | 15 April 1992 |
| Docket Number | Bankruptcy No. 13-91-12434 RA. |
| Citation | 138 BR 979 |
| Parties | In re Mike and Carmen Angela CHAVEZ, Debtors. |
| Court | U.S. Bankruptcy Court — District of New Mexico |
James Nye, Albuquerque, N.M., for debtor.
Michael Daniels, Albuquerque, N.M., for Talman Mortg.
Steve Mazer, trustee.
This matter is before the Court on an objection by the creditor, Talman Mortgage Company (Talman) to confirmation of the debtors' Chapter 13 plan. The debtors' plan is intended primarily to save their home. The debtors propose to pay the first, second, and third mortgagees usual and regular payments called for by the mortgages outside the plan, and treat the arrearages owed to the mortgagees under the plan.1 The debtors plan provides for payments of $109.00 per month for fifty-four months to cure arrearages owed to the mortgagees which total $4,213.00. The house in question is valued at $109,000 and the three mortgages equal $80,101.90. Talman, the first mortgagee, is fully secured.
The plan does not propose to pay interest on the arrearages, and Talman objects to confirmation on this basis, asserting that as a fully secured creditor it is entitled to interest on the arrearage, based on 11 U.S.C. § 506(b) and § 1325(a)(5)(B)(ii) (1979). The debtors contend that payment of interest on arrearages is an impermissible modification of the mortgage contract prohibited by 11 U.S.C. § 1322(b). Finally, the Chapter 13 trustee agrees with the debtors that interest should be denied but for a different reason. The Trustee asserts that the allowance of interest on arrearages is controlled by the underlying mortgage contract, and in this case presumably there is no contract provision for interest on arrearages. The Court finds Talman's objection is well taken, and that to confirm their plan the debtors must provide Talman with interest on its arrearage.
The Court gingerly approaches this opinion because of the split of authority in the circuit courts, and an even more unsettled flux of reasoning in the bankruptcy courts. Further, a recent Supreme Court decision, United States v. Ron Pair Enterprises Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) provides guidance on this issue which has thus far been widely overlooked. Each of these problems will be addressed below, and for the reasons following, the Court follows the Sixth Circuit's decision in In re Colegrove, 771 F.2d 119 (6th Cir.1985) which requires interest to be paid on arrearages.
The question presented is whether a fully secured creditor is entitled to interest on an arrearage treated under a Chapter 13 plan. Analysis of this issue involves three sequential sections of the Bankruptcy Code which are interrelated.
Starting at the beginning, one must determine the nature of Talman's claim. The answer is found in Chapter 5 of the Bankruptcy Code, which as an "omnibus" chapter applies to Chapters 7, 11, 12, and 13. 11 U.S.C. § 103(a), see also, 11 U.S.C. § 1325(a)(1) (). Before delving into Chapter 13 it is necessary to interpret Chapter 5 which defines Talman's Chapter 13 claim. In bankruptcy a creditor is entitled to its "allowed" claim, and a claim will be deemed allowed unless objected to. 11 U.S.C. § 502(a). An allowed claim is only secured to the extent of its value, and is unsecured to the extent the value "is less than the amount of such allowed claim". 11 U.S.C. § 506(a).2 Claims are routinely valued in bankruptcy and bifurcated into secured and unsecured portions. See, Ron Pair, 109 S.Ct. 1026, 1029 at n. 3. In this case no bifurcation is necessary because the value of the property exceeds Talman's claim. Finally, because Talman is fully secured, 11 U.S.C. § 506(b) is triggered which mandates for fully secured claims there "shall be allowed . . . interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose." 11 U.S.C. § 506(b).
The Supreme Court addressed § 506(b) in Ron Pair, 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). At issue in Ron Pair, was whether the IRS, an oversecured creditor, was entitled to postpetition interest on its nonconsensual claim. Id., 109 S.Ct. at 1028. The Court granted certiorari to resolve a conflict among the circuits over distinctions between consensual and nonconsensual liens. Id. at 1029.
The Court held that an oversecured creditor was entitled to postpetition interest regardless of the consensual or nonconsensual nature of its claim. Id. at 1031. In doing so the Court resolved the circuit conflict, and clarified the plain meaning of § 506(b). The Court found that the determination of the § 506(b) dispute "begins where all such inquiries begin: with the language of the statute itself." Id. at 1030 (citing Landreth Timber Co. v. Landreth, 471 U.S. 681, 685, 105 S.Ct. 2297, 2301, 85 L.Ed.2d 692 (1985)). The Court deciphered the phrase "there shall be allowed to the holder of such claim, interest on such claim," and held that "such claim" referred to an oversecured claim, and in these claims "recovery of postpetition interest is unqualified." Id.3 Further, the Court held that the language and punctuation of Congress could not be read any other way." Id., 109 S.Ct. at 1031.
Having determined that Talman is fully secured and entitled to interest under § 506(b) and the Supreme Court's interpretation thereof, the next step is to turn to Chapter 13. Under Chapter 13 a wage earner who owes not more than $100,000 in unsecured debts and $350,000 in secured debts may propose a "plan" to pay off those debts. 11 U.S.C. § 109(e). Section 1322 of the Bankruptcy Code specifies the "Contents of Plan". Subsection 1322(a) sets forth what a plan "shall" contain, and subsection 1322(b) states what a plan "may" contain. At issue in this case is what the debtors' plan may do to the creditor's claim for interest under 11 U.S.C. § 1322(b)(2) and (b)(5).
Section 1322(b)(2) allows a debtor to modify the rights of some secured claims, "other than a claim secured only by a security interest in real property that is the debtor's principal residence. . . ." 11 U.S.C. § 1322(b)(2). Thus, claims secured by the debtor's primary residence are excepted from modification under the Code. Despite this, the debtor may also "provide for the curing of any default within a reasonable time" of a secured claim where the last payment falls due beyond the life of the plan. 11 U.S.C. § 1322(b)(5). Often mortgages secured by the debtor's primary residence extend beyond the life of the plan, as is the case here. See supra note 1. Therefore, the debtors cannot "modify" this mortgage but they can "cure" it. As explained below, an entire body of law dances around the apparent inconsistency of these two terms with little direction, agonizing over whether a debtor's cure is an "impermissible modification".
The last Code provision in this tripartite analysis is 11 U.S.C. § 1325 which provides for "Confirmation of the Plan." This sets forth what the court "shall" confirm "if" the debtor complies with certain requirements. 11 U.S.C. § 1325(a). A court can only confirm a plan if the debtor meets the essential elements specified in § 1325. Particular to this case is 11 U.S.C. § 1325(a)(5) which addresses allowed secured claims. Three alternatives are possible. The allowed secured creditor can accept the plan. 11 U.S.C. § 1325(a)(5)(A). The debtor can surrender the property. 11 U.S.C. § 1325(a)(5)(C). In the absence of acceptance or surrender, the final possibility is "cram down" which forces a plan on an allowed secured creditor. 11 U.S.C. § 1325(a)(5)(B). Cram down contains two elements. First, the secured creditor is entitled to retain the lien on its claim. 11 U.S.C. § 1325(a)(5)(B)(i). Second, the Code provides that "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(a)(5)(B)(ii). This requires the court to "ascertain the then present value of the property to be distributed." 5 Collier on Bankruptcy, ¶ 1325.06 (emphasis in original). Property to be distributed under the plan may include deferred payments from the future earnings or income of the debtor. Id. Under the Chapter 13 plan Talman is to receive deferred payments from the debtor's future earnings to pay off the arrearage. Therefore, Talman claims it is entitled to interest under § 1325(a)(5)(B)(ii) as well as § 506(b).
In the bankruptcy courts a disparity of opinion exists over the resolution of this issue and it is impossible to find a clear line of authority. Some courts look to the underlying mortgage contract to determine if interest is allowed. See e.g., In re Thompson, 127 B.R. 717 (Bankr.D.Conn.1991); In re Murray, 116 B.R. 307 (Bankr.M.D.Ga. 1990); In re Penick, 108 B.R. 776 (Bankr. W.D.Okla.1989); In re Stamper, 84 B.R. 519 (Bankr.N.D.Ill.1988). In direct contradiction, other courts hold that interest should be allowed independent of the contract. See e.g., In re Parker, 125 B.R. 479, 483 (Bankr.W.D.Tex.1991); In re Hall, 117 B.R. 425 (Bankr.S.D.Ind.1990); In re McCall, 57 B.R. 642 (Bankr. E.D.Penn.1986); In re Webb, 29 B.R. 280 (Bankr.E.D.N.Y.1983). To add to the confusion, where interest is allowed, other courts too numerous to mention, haggle over which rate of interest, contract, market or statutory should be used. Not surprising one court threw up its hands and held that no Bankruptcy Code provision was applicable to this issue and decided the matter based entirely on Pennsylvania state law. In re Small, 65 B.R. 686 (Bankr.E.D.Pa.1986).
The Tenth Circuit has not addressed this issue. Other circuit courts have cast varying interpretations on the three-part analysis set forth above but the lines are more clearly drawn than in the bankruptcy courts. Given the flux in the bankruptcy courts the...
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