In re DeMaggio

• Decision Date: 03 November 1994
• Docket Number: Bankruptcy No. 92-11161-JEY.
• Parties: In re Mary E. DeMAGGIO, Debtor.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of New Hampshire

175 B.R. 144 (1994)

In re Mary E. DeMAGGIO, Debtor.

Bankruptcy No. 92-11161-JEY.

United States Bankruptcy Court, D. New Hampshire.

November 3, 1994.

Raymond J. DiLucci, Concord, NH, for debtor Mary E. DeMaggio.

Mark S. Gearreald, Engel, Gearreald & Gardner, P.A., Exeter, NH, for Creditor Town of Norwood.

Lawrence P. Sumski, Chapter 13 Trustee, Amherst, NH.

MEMORANDUM OPINION

JAMES E. YACOS, Bankruptcy Judge.

Mary DeMaggio filed for chapter 13 bankruptcy relief on April 10, 1992. At the time of the filing of the petition, she owed the Town of Northwood $15,228.41 for unpaid real estate taxes and $753.64 for unpaid public assistance loans, including accrued interest at rates specified by the applicable state statutes up to the date of the filing. See Debtor's Second Amended Chapter 13 Plan of Reorganization Dated May 8, 1993 (Court Doc. No. 28). Under applicable state statutes the Town held valid lien claims against the debtor's assets as of the filing date and the parties agree that the Town is oversecured with regard to these lien claims.

The precise issue before the Court is what rate of postpetition interest should be applied to these nonconsensual oversecured state tax and general assistance liens in the context of a Chapter 13 plan. The debtor's chapter 13 plan proposes to pay the full amount of the Town of Northwood's claim, with postpetition interest calculated from the date of the petition to the effective date of the plan and over the life of the five year plan at the federal judgment rate as determined at the time of the filing of the bankruptcy petition.¹ The Town of Northwood has objected to confirmation of the chapter 13 plan contending that (1) under § 506(b) of the Bankruptcy Code the Town is entitled to postpetition interest calculated at the state statutory rate² and (2) under § 1322(b)(2) of the Code the debtor's Chapter 13 plan may not modify the interest rate on the Town's secured claim as provided for by state statute. The interest rate applied to the Town's claim will have a direct impact on the feasibility of the debtor's chapter 13 plan, i.e., this debtor cannot perform any plan within the requirements of chapter 13 if the 18 percent interest rate is used.

DISCUSSION

The basic facts are not in dispute. The Town of Northwood holds oversecured lien claims against the debtor. The parties do not dispute that some amount of interest is due. The disagreement arises as to what interest rate should be utilized. The Town of Northwood's contention that the state statutory rate of 18 percent should apply really implicates not only § 506(b) but also § 1325(a)(5)(B) of the Bankruptcy Code in the procedural context of the present case. In addition, as noted above, the Town also contends that the § 1322(b)(2) prohibition on modification of security interests in the debtor's principal residence precludes postconfirmation reduction of the interest rate from the state statutory rate to the federal judgment rate in the debtor's chapter 13 plan. Each contention shall be addressed separately but in reverse order.

Section 1322(b)(2)

Section 1322(b)(2) states that a chapter 13 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." (emphasis supplied) A "security interest" is defined by the Code as a "lien created by an agreement" 11 U.S.C. § 101(51). Thus, under § 1322(b) a plan may not modify the rights of the holder of a consensual claim secured by the debtor's principal residence.

The Town of Northwood holds a nonconsensual claim secured by the debtor's principal residence. By virtue of state statute, the Town of Northwood retains a lien for all taxes assessed against the owner of property as of the date of the assessment (April 1) until October 1 of the following year. N.H.Rev.St.Ann. 80:19. If the owner of the property does not pay the outstanding taxes by December 1 after the assessment, the tax collector may execute a lien against the property in accordance with certain notice procedures. N.H.Rev.St.Ann. § 80:59 et. seq. The Northwood tax collector executed a lien against the DeMaggio home on June 21, 1990 (for 1989 property taxes); February 5, 1991 (for 1990 property taxes) and March 13, 1992 (for 1991 property taxes). In addition, the Town of Northwood holds a lien for general assistance loans which arose by virtue of N.H.Rev.St.Ann. § 165:28.

As noted above, "security interest" is defined by the Code as a "lien created by an agreement." 11 U.S.C. § 101(51). The Town's liens, albeit secured claims, were clearly not consensual agreements between the taxpayer and the Town. Thus, the Town's tax claims fall outside the definition of a consensual "security interest" as defined by the Code. DeSarno v. County of Allegheny, 169 B.R. 329, 332-33 (Bankr.W.D.Pa. 1994) (real estate tax claims are not a "statutory interest" protected under § 1322(b)(2)); In re McDonough, 166 B.R. 9, 13 (Bankr. D.Mass.1994) (judicial lien not protected by § 1322(b)(2)); In re Seel, 22 B.R. 692 (Bankr. D.Kan.1982) (mechanic's lien, as statutory lien, is not protected from modification by § 1322(b)(2)); Cf. In re Lionel Corp., 29 F.3d 88, 94 (2nd Cir.1994). The Town's attempt to construe a nonconsensual tax lien as a security interest protected under § 1322(b)(2) is unpersuasive.

Even if there were some question or ambiguity about the statutory language, the legislative history of the section supports the foregoing construction of the statute. It is well settled that the legislative intent behind § 1322(b)(2) was specifically to provide special protection to home lenders and establish stability and encourage the making of home loans in the residential housing lending market. In re Wetherbee, 164 B.R. 212, 215 (Bankr.D.N.H.1994); In re Boisvert, 156 B.R. 357, 358 (Bankr.D.Mass.1993). The legislative history reveals a Congressional intent to protect those lenders who provide home mortgage financing and not lenders engaged in other areas of financing who took a security interest in the residence to secure other debts. Id. The protective legislation and its rationale therefore has no meaningful connection to nonconsensual liens that arise simply by operation of law. The Town of Northwood's objection under § 1322(b)(2) accordingly cannot be sustained.

Sections 506(b) and § 1325(a)(5)(B)

As a general rule, interest on prepetition claims stops accruing as of the date of the filing of the bankruptcy petition. In re D.C. Sullivan & Co., Inc., 929 F.2d 1, 2 (1st Cir.1991). The exception to this rule is the oversecured creditor who holds a claim with a "security cushion" in the collateral sufficient to cover both the principal and postpetition interest. United Savings Assn. v. Timbers of Inwood Forest, 484 U.S. 365, 372, 108 S.Ct. 626, 631, 98 L.Ed.2d 740 (1988). Under 506(b), the oversecured creditor is entitled to postpetition interest on their claim until payment of their claim or until the effective date of the plan. Rake v. Wade, ___ U.S. ___, ___, 113 S.Ct. 2187, 2190, 124 L.Ed.2d 424 (1993); In re Laguna, 944 F.2d 542, 544 (9th Cir.1991), cert. denied, ___ U.S. ___, 112 S.Ct. 1577, 118 L.Ed.2d 219 (1992).³

The Supreme Court has held that the language of § 506(b) entitles holders of both consensual and nonconsensual oversecured claims to postpetition interest on their claim. U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). In Ron Pair, the Court held that the language of the Bankruptcy Code mandated the application of postpetition interest for both voluntary secured claims arising under a security agreement and involuntary claims which arise by operation of law such as a judicial or statutory lien. Id. at 240, 109 S.Ct. at 1029. The question of what rate of interest applies, which is the question before the Court today, has not been addressed by the Supreme Court. Likewise, there is no consensus among the courts as to what the § 506(b) rate of interest should be based upon. It needs to be emphasized that the § 506(b) issue deals only with the question of accrual of postpetition interest from the date of the chapter 13 filing to the effective date of a confirmed plan.⁴ Rake v. Wade, ___ U.S. at ___, 113 S.Ct. at 2190.

The determination of whether the creditor is entitled to postpetition interest is a question of federal law, Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 67 S.Ct. 237, 91 L.Ed. 162 (1946); Debentureholders, Protective Committee v. Continental Inv. Corp., 679 F.2d 264 (1st Cir. 1982), cert. denied, 459 U.S. 894, 103 S.Ct. 192, 74 L.Ed.2d 155 (1982), albeit the federal court will normally enforce a contractual rate of interest agreed to by the parties in the absence of any strong and unique countervailing factors. Vanston, 329 U.S. at 159, 163, 165, 67 S.Ct. at 238, 240, 241; In re W.S. Sheppley & Co., 62 B.R. 271 (Bankr. N.D.Iowa 1986). In the Sheppley case, the undersigned Judge, sitting by designation, held that a contractual provision for default rate of interest in a consensual security agreement would not be enforced post-bankruptcy based upon the particular facts there involved. This flexible approach was followed with regard to contractual default interest rate provisions in In re D.W.S. Investments, Inc., 121 B.R. 845 (Bankr.C.D.Cal. 1990) (court "chooses to adopt a flexible approach initially set forth in Vanston and later adopted . . . in Sheppley").

Even if a secured claim arises by operation of state law and the state statute imposes a predetermined rate of interest on the claim, the Bankruptcy Court is not necessarily bound by the rate of interest imposed by the state statute. The Bankruptcy Code is the "genesis of an oversecured creditor's entitlement to interest out of estate assets, regardless of the source of the lien." In re Kelton, 137 B.R. 18, 20 (Bankr.W.D.Tex. 1992). The Bankruptcy Court accordingly may...