In re Demoff, Bankruptcy No. 87-61378.

Decision Date31 August 1988
Docket NumberBankruptcy No. 87-61378.
PartiesIn re Clifford Alexander DEMOFF, Linda Joan Demoff, Debtors.
CourtUnited States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Indiana

Angelo Sabato, Merrillville, Ind., for debtors.

I.A. Woloshansky, Merrillville, Ind., for creditor.

MEMORANDUM OPINION AND ORDER1

KENT LINDQUIST, Chief Judge.

I Statement of Proceedings

Clifford and Linda Demoff (hereinafter: "Debtors") filed a chapter 13 bankruptcy on June 26, 1987. Within their plan, the Debtors attempted to cure an arrearage owed to Provident Institution for Savings (hereinafter: "Provident"). Provident is secured by a mortgage on the Debtors' principal residence. The Debtors' Plan filed October 20, 1987, provided for payments of the pre-petition arrearage over a 48 month period, and the present monthly installments. The creditor filed an objection to confirmation of the Debtors' plan on September 28, 1987 (prior to the filing of the plan), asserting that the Debtors may not "avoid" Provident's foreclosure judgment, citing, In re Britton, 35 B.R. 373 (N.D.Ind.1982).

At the prehearing conference held on November 3, 1987, on said objection, the parties stipulated that this contested matter involved a point of law and that no evidence need be submitted. The relevant facts are as follows: The Debtors executed a mortgage and note with the Alph Mortgage Company, Inc. for $44,500.00 on July 27, 1984 at a rate of 14%. Repayment of principal and interest was to be made in monthly installments of $557.27 from September, 1984 to August, 2014. An acceleration clause was included in the note in the event of any deficiency in payments of any installment. Provident was assigned the mortgage by Alph, and is now the holder thereof.

Provident filed a foreclosure action based on said note and mortgage in the Lake Circuit Court of Indiana on March 25, 1987. A judgment for foreclosure was entered on May 27, 1987 in the sum of $53,914.14, plus costs, and a sheriff's sale was set for September 18, 1987.

The Debtors filed a chapter 13 bankruptcy on June 26, 1987, or after the foreclosure judgment was entered, but before the sheriff's sale was held.

II Discussion

No objections were made by the parties to the jurisdiction of this Court and the Court finds this is a core proceeding pursuant to 28 U.S.C. § 157.

The issue before the Court is whether the Debtor may cure a pre-petition default on a note and mortgage pursuant to 11 U.S.C. § 1322(b)(5), after a judgment of foreclosure has been entered.

The Sixth Circuit in the case of In re Glenn, 760 F.2d 1428 (6th Cir.1985) listed the varying results of the different courts on this issue as follows:

The courts disagree over whether and under what circumstances section 1322(b) allows a cure once a default on a mortgage has triggered acceleration of the debt, a judgment or sale. The bankruptcy court in In re Ivory, 32 B.R. 788 (Bankr.D.Or.1983), grouped the differing viewpoints into the following general categories:
(1) Courts that hold that a debtor may not cure a default once a mortgage debt has been accelerated: In re Wilson, 11 B.R. 986 (Bkrtcy.S.D.N.Y. 1981); Matter of LaPaglia, 8 B.R. 937 (Bkrtcy.E.D.N.Y.1981); In re Allen, 17 B.R. 119, 8 B.C.D. 945 (Bkrtcy.N.D. Ohio 1981).
(2) Courts that hold that a debtor may cure a default where the mortgage debt has been accelerated provided that no foreclosure judgment has been entered: Percy Wilson Mortgage & Finance Corp. v. McCurdy, 21 B.R. 535 (Bkrtcy.S.D.Ohio W.D.1982); In re Maiorino, 15 B.R. 254 (Bkrtcy.D.Conn. 1981); In re Pearson, 10 B.R. 189 (Bkrtcy.E.D.N.Y.1981).
(3) Courts that hold that a debtor may cure a default where a state court judgment of foreclosure has been entered provided that no sale has taken place: In re Acevedo, 26 B.R. 994 (D.E.D.N.Y.1982); In re James, 20 B.R. 145, 9 B.C.D. 208 (Bkrtcy.E.D. Mich.1982); In re Brantley, 6 B.R. 178 (Bkrtcy.N.D.Fla.1980).
(4) Courts that place no express limitation on the debtor\'s right to cure a default after acceleration: In re Taddeo, 685 F.2d 24 (2nd Cir.1982); In re Sapp, 11 B.R. 188 (Bankr.S.D.Ohio E.D.1981); In re Davis, 16 B.R. 473 (D.Kan.1981). Or after a judgment has been entered: In re Young, 22 B.R. 620 (Bkrtcy.N.D.Ill.E.D.1982); In re Breuer, 4 B.R. 499, 6 B.C.D. 136 (Bkrtcy.S.D.N.Y.1980).
(5) Courts that hold that a debtor may cure a default where a foreclosure sale has been held provided that the debtor\'s right of redemption under state law has not expired: In re Johnson, 29 B.R. 104 (Bkrtcy.S.D.Fla.1983); In re Chambers, 27 B.R. 687 (Bkrtcy.S.D. Fla.1983); In re Taylor, 21 B.R. 179 (Bkrtcy.W.D.Mo.1982); In re Thompson, 17 B.R. 748 (Bkrtcy.W.D.Mich. 1982).
32 B.R. at 790. To the fourth group we add the following recent opinions by the Fifth and Seventh Circuits: Grubbs v. Houston First American Savings Association, 730 F.2d 236 (5th Cir.1984) (en banc) (holding that a debtor may cure a default after acceleration, but expressing no limit on the right); Matter of Clark, 738 F.2d 869 (7th Cir.1984) (holding that a debtor may cure a default after a judgment of foreclosure that does no more than judicially confirm the acceleration under state law, but expressing no opinion whether the right to cure survives a sale or a judgment of foreclosure in states where the effect of the judgment is different).

Id. at 1432. The Glenn court held that the event which is the cut-off date of the statutory right to cure defaults is the sale of the mortgaged property. The court noted that this point was picked in preference to a number of points in the progress of events beginning from the first date of default to the day the redemption period expires following sale. Id. at 1435.

The Glenn Court stated it picked that date for the following reasons:

(a) The language of the statute is, to us, plainly a compromise, as we have earlier mentioned. Picking a date between the two extremes, is likewise a compromise of sorts.
(b) The sale of the mortgaged property is an event that all forms of foreclosure, however denominated, seem to have in common. Whether foreclosure is by judicial proceeding or by advertisement, and regardless of when original acceleration is deemed to have occurred, the date of sale is a measurable, identifiable event of importance in the relationship of the parties. It is at the heart of realization of the security.
(c) Although the purchaser at the sale is frequently the security holder itself, the sale introduces a new element — the change of ownership and, hence, the change of expectations — into the relationship which previously existed.
(d) The foreclosure sale normally comes only after considerable notice giving the debtor opportunity to take action by seeking alternative financing or by negotiating to cure the default or by taking advantage of the benefits of Chapter 13. Therefore, setting the date of sale as the cut-off point avoids most of what some courts have described as the "unseemly race to the courthouse." Concededly no scheme can avoid that possibility altogether, but the time and notice requirements incident to most sales at least provide breathing room and should deter precipitate action that might be expected if the cut-off date were measured by the fact of notice of acceleration or the fact of filing suit.
(e) Any earlier date meets with the complaint that the rights conferred by the statute upon debtors to cure defaults have been frustrated.
(f) Any later date meets with the objection that it largely obliterates the protection Congress intended for mortgagees of private homes as distinguished from other secured lenders.
(g) Any later date also brings with it the very serious danger that bidding at the sale itself, which should be arranged so as to yield the most attractive price, will be chilled; potential bidders may be discouraged if they cannot ascertain when, if ever, their interest will become finalized.
In so ruling we avoid any effort to analyze the transaction in terms of state property law. Modern practice varies so much from state to state that any effort to satisfy the existing concepts in one state may only create confusion in the next. Thus, in construing this federal statute, we think it unnecessary to justify our construction by holding that the sale "extinguishes" or "satisfies" the mortgage or the lien, or that the mortgage is somehow "merged" in the judgment or in the deed of sale under state law.

Id. at 1435-36.

One decision in this Circuit as well as one in this District had been handed down regarding the issue at bar. In Matter of Clark, 738 F.2d 869 (7th Cir.1984), the Seventh Circuit held that a debtor may cure a default after judgment of foreclosure. Wisconsin law was applied in arriving at the result. The Clark court stated:

Despite the judgment of foreclosure, the Clarks still had an interest in the property at the time they filed their petition in bankruptcy, such that the property was part of the estate under 11 U.S.C. §§ 541 and 1307. Under Wisconsin law, a mortgagee has only a lien on the mortgaged property even after a judgment of foreclosure is entered. Neither equitable nor legal title passes until the foreclosure sale is held. A judgment of foreclosure "does little more than determine that the mortgagor is in default, the amount of principal and interest unpaid, the amounts due to plaintiff mortgagee for taxes, etc. . . . The judgment does not destroy the lien of the mortgage but rather judicially determines the amount thereof." Marshall & Ilsley Bank v. Greene, 227 Wis. 155, 164, 278 N.W. 425, 429 (1938).3 See also, Bank of Commerce v. Waukesha County, 89 Wis.2d 715, 723, 279 N.W.2d 237, 241 (1979) (Wisconsin follows "lien" theory of mortgages); In re Lynch, 12 B.R. 533, 534-35 (Bankr.W.D.Wis.1981) (mortgagor loses interest in property only after foreclosure sale).
* * * * * *
For these reasons, we conclude that the power to "cure" a default provided by § 1322(b)(5) permits a
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