In re Davis, Civ. A. No. 81-1435
| Decision Date | 28 October 1981 |
| Docket Number | Civ. A. No. 81-1435,Bankruptcy No. 81-10368,Adv. No. 81-0397. |
| Citation | 16 BR 473 |
| Parties | In re DeVerne Richard DAVIS and Mary Louise Davis, Debtors. MID AMERICAN CREDIT UNION, Plaintiff, v. Deverne Richard DAVIS, Mary Louise Davis, and Royce E. Wallace, Trustee, Defendants. |
| Court | U.S. District Court — District of Kansas |
Eric D. Bruce, Wichita, Kan., for plaintiff, Mid American Credit Union.
Donald B. Clark, Wichita, Kan., for defendants, Deverne Richard and Mary Louise Davis.
Royce E. Wallace, Wichita, Kan., pro se.
This is a bankruptcy appeal brought by the Mid American Credit Union (credit union). The defendant debtors filed a Chapter 13 Plan in which they sought to cure a pre-bankruptcy petition default of a secured note with the credit union after the credit union elected to accelerate the note. Whether the debtors can successfully cure such a default through their Chapter 13 Plan depends on the construction of two sections of the bankruptcy code, 11 U.S.C. § 1322(b)(2) and (b)(5). This Court heard oral argument on this appeal on October 19, 1981, and has considered the brief filed by the credit union as well as Bankruptcy Judge Morton's written memorandum opinion. After a review of the few cases relevant to this dispute and the arguments of counsel, this Court finds that the decision of the bankruptcy judge below should be affirmed.
The mortgage involved in this appeal was a second mortgage evidenced by a note to the plaintiff credit union dated June 29, 1979, with an unpaid balance of $10,319.89. The first mortgage is to the American Savings Association of Kansas, on which the balance due on February 12, 1981, was $28,747.03. The third mortgage on the debtors' residence was to the Fourth National Bank & Trust Company, and the amount due on it as of February 23, 1981, was $5,084.84. When the debtors filed their Chapter 13 Petition all three mortgage notes were in default, and their Plan provided for a monthly payment in addition to the regular monthly payment on each note to pay the arrearages accumulated on each mortgage note.
Although the first and third mortgagees took no action regarding the defaults on their notes prior to the debtors' bankruptcy petition, the credit union elected to exercise its acceleration rights under the note on January 22, 1981, by giving the debtors the appropriate notice. The credit union then initiated a state court foreclosure action, but it was automatically stayed when the debtors filed their petition in the instant case. Over the objection of the credit union, the debtors' Chapter 13 Plan was confirmed subject to the preservation of the credit union's right to appeal the stay of their state court foreclosure action.
Chapter 13 was intended to provide wage earners with the power to reorganize their debts in order to retain their property and at the same time repay their debts through a court-appointed trustee according to an approved plan. 11 U.S.C. § 1322(a) and § 1306(b). It is patterned after Chapter 11, which allows qualifying large businesses to do the same thing. Under Chapter 13 the debtor's power to modify his debt obligations to achieve the flexibility necessary for meeting all of his obligations is set forth in Section 1322(b), and the relevant paragraphs of that section are:
(Emphasis supplied).
It is clear from the legislative history that Congress intended subsection (b)(5) to be applicable to "a security interest in real property that is the debtor's principal residence" despite the language in subsection (b)(2):
Section 1322(b)(2) of the House Amendment represents a compromise agreement between similar provisions in the House Bill and Senate Amendment. Under the House Amendment the plan may modify the rights of holders of secured claims other than a claim secured by a security interest in real property that is the debtor\'s principal residence. It is intended that a claim secured by the debtor\'s principal residence may be treated . . . under Section 1322(b)(5) of the House Amendment. (Emphasis supplied).
124 Cong.Rec. H 11,106 (Sept. 28, 1978); 124 Cong.Rec. S 17,423 (Oct. 6, 1978).
The credit union's appeal is based entirely upon the argument that under state law once a creditor has elected to accelerate a note upon default and has filed a foreclosure action in state court, Section 1322(b)(5) can no longer be utilized to "cure" the default. It is clear that where a pre-petition default has occurred, without an acceleration by the mortgagee the debtor may cure the default through Section 1322(b)(5). In re Johnson, 6 B.R. 34 (Bkrtcy.N.D.Ill.1980); In re Hartford, 7 B.R. 914 (Bkrtcy.D.Me.1981). This Court agrees with the credit union's contention that in Kansas as a general rule an acceleration clause in a note can be invoked to immediately advance the maturity of the note when there is a default. Farmers & Merchants Bank v. Copple, 190 Kan. 170, 373 P.2d 219 (1962). In Matter of LaPaglia, 8 B.R. 937 (Bkrtcy.E.D.N.Y.1981), which is a case involving a home mortgage and an acceleration followed by the filing of a state court foreclosure action which was stayed, the bankruptcy court ruled that under New York state law the entire balance of the loan was due upon acceleration, and consequently the mortgage could not possibly extend beyond the final payment under the Chapter 13 Plan. However, another bankruptcy judge in the same district allowed a cure of the default after acceleration and even a state court judgment of foreclosure. In re...
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