In re Landrum

• Decision Date: 03 August 2001
• Docket Number: No. 00-12590.,00-12590.
• Citation: 267 BR 577
• Parties: In re Richard L. LANDRUM, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

267 B.R. 577 (2001)

In re Richard L. LANDRUM, Debtor.

No. 00-12590.

United States Bankruptcy Court, S.D. Ohio, Western Division.

August 3, 2001.

Patrick J. Conway, Cincinnati, OH, for Debtor.

Margaret A. Burks, Cincinnati, OH, trustee.

MEMORANDUM OF DECISION

JEFFERY P. HOPKINS, Bankruptcy Judge.

The matter on for decision in this case is one of first impression in our district. It requires the Court to rule on the Debtor's objection (Doc. 12) to the claim of Homeside Lending, Inc. (Homeside), the holder of a first mortgage on the Debtor's residence. The issue presented is whether Homeside is entitled to attorney's fees as part of its claim for arrears. The Debtor argues that 11 U.S.C. § 1322(e) limits the fees that a mortgagee may recover as part of a claim for arrears to the extent, inter alia, such fees are prohibited by state law. The mortgagee, Homeside, contends that § 1322(e) limits only the recovery of interest on arrears. In the alternative, Homeside argues that Ohio law does not preclude the recovery of attorney's fees, pursuant to the terms of a promissory note, in the context of a mortgagor's reinstatement of a defaulted loan. Because a contractual stipulation for the payment of attorney's fees contained in a non-commercial promissory note between parties of unequal bargaining power is void under Ohio law, we hold that § 1322(e) precludes Homeside from recovering attorney's fees as part of its claim for arrears.

I

On August 16, 1996, the Debtor executed a $73,275.00 promissory note and a mortgage to secure the same. Sometime thereafter, Homeside initiated a prepetition foreclosure action against the Debtor in the Hamilton County Court of Common Pleas. Homeside obtained a judgment and the residence was appraised at $90,000.00 for a sheriff's sale. The sale, however, did not occur as a result of the filing of this Chapter 13 case. Thereafter, Homeside filed a timely proof of claim (Claim No. 2) reflecting a principal balance of $71,405.54 and a $9,503.07 arrearage. Homeside classified the entire claim as fully secured.¹ Exhibit A to the proof of claim reflects that the arrearage includes, inter alia, attorney's fees for the foreclosure action and the bankruptcy case.²

II

Homeside takes the position that, as an oversecured creditor, it is entitled to its attorney's fees pursuant to 11 U.S.C. § 506(b). See In re Brunswick Apartments of Trumbull County, Ltd., 215 B.R. 520, 524 (6th Cir. BAP 1998) (§ 506(b) permits an oversecured creditor to recover its attorney's fees where they are reasonable and contemplated by contract between the parties), aff'd, 169 F.3d 333 (6th Cir.1999). The Debtor, however, argues that § 506(b) is trumped in this proceeding by § 1322(e) since the fees are included in a claim for arrears. Section 1322(e) provides:

Notwithstanding subsection (b)(2) of this section and sections 506(b) and 1325(a)(5) of this title, if it is proposed in a plan to cure a default, the amount necessary to cure the default, shall be determined in accordance with the underlying agreement, and applicable nonbankruptcy law.

The Debtor contends that § 1322(e) bars the allowance of Homeside's arrearage claim for attorney's fees because Ohio law renders void the attorney's fee provision of the promissory note. Homeside advances two arguments in opposition. First, Homeside argues that § 1322(e) precludes only the allowance of interest on an arrearage claim and that it has no application to the allowance of attorney's fees as part of such claim. Alternatively, Homeside takes the position that Ohio law does not prohibit the recovery of its fees under the circumstances before the Court.

APPLICABILITY OF § 1322(E) TO ATTORNEY'S FEES

In Rake v. Wade, 508 U.S. 464, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993), the United States Supreme Court held that an oversecured mortgagee is entitled to postpetition interest on arrears paid through a Chapter 13 plan. Homeside argues that § 1322(e), added to the Bankruptcy Code as part of the Bankruptcy Reform Act of 1994 shortly after the Supreme Court rendered its decision in Rake, serves the exclusive purpose of legislatively overruling Rake so as to prohibit the payment of postpetition interest on arrears unless provided by contract and allowed under state law. Therefore, Homeside concludes, § 1322(e) has no application to the collection of the attorney's fees portion of an arrearage claim. In support of this argument, Homeside refers the Court to the legislative history of § 1322(e).

Section 305. Interest on interest.

This section will have the effect of overruling the decision of the Supreme Court in Rake v. Wade, 508 U.S. 464, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993). In that case, the Court held that the Bankruptcy Code required that interest be paid on mortgage arrearages paid by debtors curing defaults on their mortgages.

Notwithstanding State law, this case has had the effect of providing a windfall to secured creditors at the expense of unsecured creditors by forcing debtors to pay the bulk of their income to satisfy the secured creditors\' claims. This had the effect of giving secured creditors interest on interest payments, and interest on the late charges and other fees, even where applicable laws prohibits such interest and even when it was something that was not contemplated by either party in the original transaction. This provision will be applicable prospectively only, i.e., it will be applicable to all future contracts, including transactions that refinance existing contracts. It will limit the secured creditor to the benefit of the initial bargain with no court contrived windfall. It is the Committee\'s intention that a cure pursuant to a plan should operate to put the debtor in the same position as if the default had never occurred.

H.R.Rep. No. 103-835 at 55 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3364.

Section 310

This section is in response to the recent U.S. Supreme Court decision of Rake v. Wade 508 U.S. 464, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993) (No. 92-621, decided June 7, 1993). The Court decided that an oversecured home mortgage lender has the right to receive both preconfirmation and postconfirmation interest on arrearages and other charges in order to be cured under a chapter 13 bankruptcy plan. The court further held that the home mortgage loan must also pay interest to the mortgagee on the arrearages even if the mortgage instruments are silent on the point and such payment is not required under applicable State law. This provision would still allow the collection of interest on the arrearages; however, it dictates that the mortgage instruments contain language specifically to this end, thereby placing the mortgagor on notice. This provision is prospective in its application.

S.Rep. No. 103-168 at 53 (1993).

The Debtor, on the other hand, relies upon the decision of In re Lake, 245 B.R. 282 (Bankr.N.D.Ohio 2000). In a very thoughtful opinion by Judge Morgenstern-Clarren, the court sustained an objection by the debtor to the payment of attorney's fees under identical circumstances to the case at bar.³ Beginning with the language of the statute, the court found "nothing . . . to suggest that § 1322(e) is limited to interest charges." Lake, 245 B.R. at 285. Instead, the court concurred with the plain language construction of § 1322(e) set forth in In re Bumgarner, 225 B.R. 327 (Bankr.D.S.C. 1998):

"Two conditions must be met before interest or other charges can be required as part of the bankruptcy cure. First, the interest or charges must be required under the original agreement, and second, they cannot be prohibited by state law."

Id. at 328 (quoting 8 Collier on Bankruptcy ¶ 1322.18 (15th ed. rev.1998)). Judge Morgenstern-Clarren also thoroughly analyzed the legislative history of the subsection and concluded that "there is no indication in the legislative history that Congress intended to restrict the default amount analysis to the interest component." Lake, 245 B.R. at 285-86. This Court agrees with Lake that § 1322(e) is not limited to interest on arrears.

The Supreme Court of the United States has repeatedly stated that statutory interpretation begins with the language of the statute. See e.g., Williams v. Taylor, 529 U.S. 420, 431, 120 S.Ct. 1479, 146 L.Ed.2d 435 (2000). The unambiguous language of § 1322(e) does not limit the statute's scope to a particular component of arrearage claims such as interest.⁴ Homeside does not argue to the contrary. Instead, like the mortgagee in Lake, it contends that: (1) the legislative history establishes a Congressional intent to limit only interest on arrears; and (2) this alleged intent should be incorporated into the Court's construction of the statute.

Based on our reading of the legislative history, we agree with Lake in concluding that Congress did not intend to limit the scope of § 1322(e) to interest on arrears exclusively. It is clear that the 1994 amendment was intended to overrule Rake v. Wade. However, Congress did not go so far as to say that § 1322(e) was intended to accomplish this purpose alone. As a result, Homeside's argument prevails only if congressional silence as to matters beyond the scope of Rake manifests an intent to limit § 1322(e) exclusively to the overruling of Rake.⁵

The Supreme Court has long held that silence is rarely, if ever, an effective barometer of legislative intent. Zuber v. Allen, 396 U.S. 168, 185, 90 S.Ct. 314, 24 L.Ed.2d 345 (1969) ("Legislative silence is a poor beacon to follow in discerning the proper statutory route."); Girouard v. United States, 328 U.S. 61, 69, 66 S.Ct. 826, 90 L.Ed. 1084 (1946) ("It is at best treacherous to find in Congressional silence alone the adoption of a controlling rule of law."). On the other hand, "the language of the statutes that Congress enacts provides `the most reliable evidence of its intent.'" Holloway v. United States, 526 U.S. 1, 6, 119 S.Ct. 966, 143 L.Ed.2d 1 (1999) (quoting United States v....