In re Hurt, BAP No. OR-92-1258-ARJ
| Decision Date | 05 May 1993 |
| Docket Number | BAP No. OR-92-1258-ARJ,Bankruptcy No. 391-35495 H13. |
| Parties | In re Charles M. HURT and Peggy R. Hurt, Debtors. STATE OF OREGON, acting by and through the DIRECTOR OF the DEPARTMENT OF VETERANS' AFFAIRS, Appellant, v. Charles M. HURT and Peggy R. Hurt, Appellees. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Daniel H. Rosenhouse, Portland, OR, for State of Or.
Before ASHLAND, RUSSELL, and JONES, Bankruptcy Judges.
The State of Oregon appeals the bankruptcy court's order confirming the debtors' Chapter 13 plan. In re Hurt, 136 B.R. 859 (Bankr.D.Or.1992). The plan attempted to "cure" a default on a mortgage after foreclosure judgment, but prior to the foreclosure sale. We affirm.
The relevant facts are not in dispute. The Oregon Department of Veterans' Affairs held a note secured by a mortgage against the principal residence of the debtors Charles and Peggy Hurt. The mortgage was judicially foreclosed on June 14, 1991. Prior to the sheriff's sale, the Hurts filed a Chapter 13 petition.
The Hurts' plan proposed curing the pre-petition default during the life of the plan while maintaining the regular monthly payments under the original note. The Department of Veterans' Affairs objected to the terms of the plan maintaining that the Hurts did not have a right to cure under 11 U.S.C. § 1322(b)(5). The bankruptcy court overruled the Veterans' objection stating that "§ 1322(b)(5) allows a debtor to cure `any default' in the performance of an obligation that was secured by the property in question and maintain payments while the case is pending." In re Hurt, 136 B.R. 859, 861 (Bankr.D.Or.1992). This appeal followed.
Whether 11 U.S.C. § 1322(b)(5) permits the debtor to cure a default on a debt secured by the debtors' principal residence following the entry of the foreclosure judgment but prior to the foreclosure sale.
The interpretation of 11 U.S.C. § 1322(b)(5) is a question of law reviewed de novo. In re Quintana, 915 F.2d 513, 515 (9th Cir.1990); In re Acequia, Inc., 787 F.2d 1352, 1357 (9th Cir.1986); In re Braker, 125 B.R. 798, 799 (9th Cir. BAP 1991).
Section 1322(b)(5) enables a debtor to cure a default on a home mortgage through a Chapter 13 plan. Section 1322(b)(5) provides:
11 U.S.C. § 1322(b)(5). However, § 1322(b)(5) does not specify when this right to cure terminates: (1) at the time of the contractual acceleration; (2) upon entry of foreclosure judgment; (3) at the time of the foreclosure sale; or (4) upon expiration of the redemption period. See, In re Roach, 824 F.2d 1370, 1372 (3d Cir.1987).
All of the circuit courts that have addressed the cure provisions in § 1322(b)(5) agree that the default may be cured after the contractual acceleration of the full mortgage. See, In re Thompson, 894 F.2d 1227, 1230 (10th Cir.1990); Justice v. Valley Nat. Bank, 849 F.2d 1078 (8th Cir. 1988); In re Roach, 824 F.2d 1370, 1374-77 (3d Cir.1987); In re Metz, 820 F.2d 1495, 1497 (9th Cir.1987); In re Glenn, 760 F.2d 1428, 1431-36 (6th Cir.1985), cert. denied, 474 U.S. 849, 106 S.Ct. 144, 88 L.Ed.2d 119 (1985); In re Clark, 738 F.2d 869, 874 (7th Cir.1984); Grubbs v. Houston First Am. Sav. Ass'n, 730 F.2d 236, 237 (5th Cir.1984) (en banc) vacating 718 F.2d 694 (5th Cir. 1983); In re Taddeo, 685 F.2d 24, 26-27 (2d Cir.1982). On the other hand, none of the circuit courts have held that a home mortgage default may be cured during a redemption period following a foreclosure sale. Contra, In re Ivory, 32 B.R. 788 (Bankr.D.Or.1983). Between these polar points on the time line, however, there is substantial disparity in theory among the circuit courts attempting to delineate a definitive cutoff point for a cure. Three theories have evolved to pin point exactly when a debtor may no longer cure: (1) the pragmatic theory; (2) the state law theories; and (3) the estate theory.
The "pragmatic" theory suggests that the foreclosure sale is the cutoff date for § 1322(b)(5) cure provisions. In re Glenn, 760 F.2d 1428, 1435 (6th Cir.1985). The Sixth Circuit adopted the pragmatic time period primarily because it "works the least violence to the competing concerns evident in the language of the statute. . . ." Glenn, 760 F.2d at 1435. The court's frustration in attempting to establish a specific cutoff point is evident in the following passage:
We despair of finding any clear-cut statutory language or legislative history that points unerringly to a construction of the statute that is free from challenge. Each of the cases and each result reached therein is subject to some objection either in theory or in practice.
The theory looks at a specific state's statute to delineate the cutoff point for cure. This theory, however, is divided into two subcategories: the title/lien theory and the mortgage contract theory.
The Seventh Circuit looked at state law to determine whether or not the mortgagor retained legal title in the property after filing the bankruptcy petition, such that the property was part of the estate under 11 U.S.C. §§ 541 and 1306. In re Clark, 738 F.2d 869, 871 (7th Cir.1984). In Clark, the debtor attempted to cure after foreclosure judgment, but before the foreclosure sale. The court determined that "the power to `cure' a default provided by § 1322(b)(5) permits a debtor to de-accelerate the payments under a note secured by a residential property mortgage," even though a judgment of foreclosure had been entered on the property. Clark, 738 F.2d at 874. The court noted that under Wisconsin law the homeowners retained an interest in the property after the judgment of foreclosure is entered which they could seek to protect as part of the bankruptcy. Clark, 738 F.2d at 871.
Within a year after Clark, the Seventh Circuit decided a case based on similar facts. See, In re Tynan, 773 F.2d 177 (7th Cir.1985). However, in Tynan the debtor was an Illinois resident attempting to cure after the foreclosure sale occurred and during the period of redemption. The court held that "this section 1322(b)(5) is inapplicable because there was no default to cure after judgement of foreclosure was entered." Tynan, 773 F.2d at 178. The Tynan court apparently overstated its intentions by stating that the cutoff point for cure is at foreclosure judgment. See, In re Kohler, 107 B.R. 167, 169 n. 2 (Bankr. S.D.Ill.1989) ().
Prior to the enactment of the new Illinois Mortgage Foreclosure Law, the Supreme Court of Illinois established that the title to the property remained with the mortgagor after the foreclosure of a mortgage until the expiration of the redemption period. Kling v. Ghilarducci, 3 Ill.2d 454, 455, 121 N.E.2d 752, 756 (1954). More recently, the Illinois legislature enacted a new foreclosure law which affirmed the holding in Kling. See, Ill.Ann.Stat. ch. 110, paras. 15-1404 & 15-1506(i)(1); Kohler, 107 B.R. at 169. Section 15-1404 specifically states that "the interest in the mortgaged real estate of (i) all persons made a party in such foreclosure . . . shall be terminated by the judicial sale of the real estate. . . ." Ill.Ann.Stat. ch. 110, para. 15-1404.
It is readily apparent that the Seventh Circuit does not establish the cutoff point at the foreclosure judgment. Tynan involved a situation that questioned the cure provisions after the sale occurred. It is clear the Seventh Circuit continues to support the proposition originally stated in Clark that the debtor's interests, as defined by state law, determine the cutoff point for cure under § 1322(b)(5).
Both the Eighth and Third Circuits have adopted the "mortgage contract" theory. Essentially, this theory states that after a certain point in the foreclosure process, the mortgage contract ceases to exist. Nevertheless, the two circuits disagree on when the contract is extinguished.
The Eighth Circuit determined that the cure provisions "have particular reference to contractual mortgage rights and are not applicable after a foreclosure sale has been held." Justice v. Valley Nat. Bank, 849 F.2d 1078, 1084 (8th Cir.1988) (emphasis added). The Justice court reached its conclusion interpreting analogous "cure" provisions in Chapter 12. The court concluded that "Congress evidenced its intent to provide additional relief for defaulting mortgagors only as long as the contractual relationship continues, and to allow state law to control when the relationship is dissolved." Justice, 849 F.2d at 1085. Interpreting South Dakota law, the court found that the mortgage contract was extinguished after both the foreclosure judgment and the sale. Justice, 849 F.2d at 1084 (citing American Fed. Sav. & Loan Ass'n v. Kass, 320 N.W.2d 800, 804 (S.D. 1982)).
The Third Circuit determined that the cure provisions expire when the mortgagee obtains a foreclosure judgment. In re Roach, 824 F.2d 1370, 1377 (3d Cir.1987). The Roach court concluded that "after the entry of a foreclosure judgment, no contractual relationship remains and the mortgagee's rights are those that arise from its judgment." Roach, 824 F.2d at 1377. Interpreting New...
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