In re Rorie
| Decision Date | 10 April 1989 |
| Docket Number | Bankruptcy No. 88-11097F. |
| Parties | In re Mae RORIE, Debtor. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Steve P. Hershey, Community Legal Services, Inc., Philadelphia, Pa., for debtor, Mae Rorie.
Gary McCafferty, Philadelphia, Pa., for Federal Nat. Mortg. Ass'n.
Edward Sparkman, Philadelphia, Pa., Standing Chapter 13 Trustee.
The two matters currently before me are related and will be resolved by a joint record. They are: whether the Federal National Mortgage Association (FNMA) is entitled to relief from the automatic stay pursuant to 11 U.S.C. § 362(d), and whether the debtor's objection to FNMA's proof of claim should be sustained. By order dated December 21, 1988, I preliminarily denied FNMA's request for relief. 11 U.S.C. § 362(e). In the memorandum accompanying that order, I explained that I could not determine whether the secured creditor had met its burden under subsection 362(d)(2) or whether the debtor had met her burden under subsection 362(d)(1) without first determining the creditor's allowed secured claim. Therefore, I shall consider first the debtor's objection to the creditor's proof of claim and then determine whether the automatic stay should be lifted.
As I noted in my earlier resolution of the preliminary request for relief from the stay, the real property located at 5311 Chester Avenue, Philadelphia, Pa. was purchased in April, 1975 by Samuel Moore. The mortgage agreement between Mr. Moore and FNMA (Ex. M-8) was in the amount of $10,000.00, payable over a 15 year period at an interest rate of 8%. For reasons which were not explained, Mr. Moore never resided at this address. Instead, the debtor lived there, paid the taxes and utilities, and sent mortgage payments directly to FNMA.
I also noted previously that the debtor stopped sending mortgage payments, in violation of the mortgage agreement. As a result, FNMA commenced foreclosure proceedings by complaint on January 10, 1984. This complaint, Ex. M-1, requested damages in the amount of $7,202.18 based upon:
Principal Balance $6,016.83
Interest from 6/1/83
to 1/15/84 at 8% 302.28
Attorney's fee 400.00
Late charges 87.85
Escrow deficit 395.221
After years of litigation, judgment was entered in favor of FNMA on November 4, 1987 in the amount of "$7,202.18 with interest and costs." Ex. M-5.
A foreclosure sale was ultimately scheduled for April 4, 1988. On March 31, 1988, Mr. Moore transferred the realty to the debtor by special warranty deed. On April 1, 1988, the debtor filed a voluntary petition in bankruptcy under chapter 13, which stayed the foreclosure sale.2
The debtor has proposed a chapter 13 plan of reorganization which calls for monthly payments of $133.36 for 60 months; these payments, totalling $8,001.60, are to be paid to FNMA, minus the chapter 13 trustee's commission of $800.00.3 It has been stipulated that the debtor is current in her plan payments. This dispute arises, however, because FNMA filed a proof of claim demanding payment of $16,843.64 as a secured creditor. At trial on these two contested matters, FNMA offered evidence to support its belief that its allowed secured claim should be $17,901.30.4 It was stipulated that the fair market value of the real estate is $18,000.00 and that the mortgage is insured by the Veteran's Administration.
The respective positions of the parties may be quickly summarized. The debtor contends that the allowed secured claim of FNMA is limited to the amount of damages assessed by the state court in the foreclosure action, plus postjudgment interest at the Pennsylvania judgment interest rate of 6%. See 41 P.S. § 202. The creditor argues that it is entitled to receive the unpaid principal balance, plus interest at the contract rate, late charges, escrow advances, costs of suit and miscellaneous charges (as well as attorney's fees), from the date of the last monthly payment until the date this bankruptcy case commenced.5
On some of the issues presented, one or the other party is clearly correct. For example, the mortgage agreement itself contains a limit on the amount of attorney's fees that may be passed on to the mortgagor. See Ex. M-8, ¶ 13 (). Courts in this district have long held that such contractual provisions serve as a ceiling upon the attorney's fees which may be sought from the mortgagor. See, e.g., In re Schwartz, 68 B.R. 376, 379 n. 7 (Bankr. E.D.Pa.1986); In re Johnson-Allen, 67 B.R. 968, 976 (Bankr.E.D.Pa.1986); In re Cosby, 33 B.R. 949, 950-51 (Bankr.E.D.Pa. 1983). Thus, as the debtor asserts, FNMA is limited in its request for counsel fees to 5% of $6,016.83, or $300.84. As it has already been awarded $400.00 in its state court judgment, it is entitled to no more.6
The state court judgment also entitled FNMA to receive costs of suit. Such costs must include items such as the filing fee, costs of service, and the costs connected with the stayed foreclosure sale. 22 Standard Pennsylvania Practice 2d §§ 121.74, 121.76 (1984). The judgment amount does not include these costs specifically in its damage assessment and so they must be added to arrive at the mortgagee's allowed secured claim.7
The true nub of this dispute originates from the effect, if any, of the entry of judgment prepetition. The debtor argues that the judgment limits the mortgagee's proof of claim in two respects, while FNMA contends that it has no effect on its claim.
To a certain extent, the effect of the judgment depends upon the content of the debtor's chapter 13 plan. Pursuant to 11 U.S.C. § 1321, which permits only a chapter 13 debtor to propose a plan, and § 1322(b)(5), the debtor may seek to cure a prepetition mortgage default in her plan. The debtor may also choose to provide for an allowed secured claim as part of her plan. 11 U.S.C. § 1325(a)(5). These choices may only be made by the debtor, not the mortgagee, because the mortgagee may not propose any plan. See In re Bender, 86 B.R. 809, 812 (Bankr.E.D.Pa. 1988).
If the debtor proposes to cure the mortgage arrearage, she has decided to deaccelerate the mortgage default. See Matter of Roach, 824 F.2d 1370 (3d Cir. 1987). Upon the successful completion of her plan, her mortgage is reinstated as if there had been no prior default and the effect of the prepetition judgment is extinguished. See In re Smith, 92 B.R. 127, 130 (Bankr.E.D.1988); In re Bertsch, 17 B.R. 284 (Bankr.N.D.Ohio 1982). Any attempt to cure the prepetition mortgage arrearage requires that all missed prepetition payments be made along with late charges and other costs permitted to be assessed by the mortgage agreement; in essence, the debtor is choosing to repay the loan under the terms of the mortgage contract, including its interest rate. Id. However, if the debtor proposes to pay the creditor's allowed secured claim in full, the judgment does affect the amount of that claim. The entry of judgment merges the obligation on the mortgage into the judgment. See In re Smith; In re Herbert, 86 B.R. 433 (Bankr. E.D.Pa.1988). See also In re Ocasio, 97 B.R. 825, 826 n. 1 (Bankr.E.D.Pa., 1989) (Twardowski, C.J.); In re McKillips, 81 B.R. 454 (Bankr.N.D.Ill.1987) (discussing Illinois law).
Unless the mortgage agreement provides otherwise, postjudgment interest accrues at the "lawful" rate, 42 Pa.C.S.A. § 8101, which is defined by 41 P.S. § 202 as 6% in Pennsylvania when the contract is silent. See Ball v. Rolling Hill Hospital, 359 Pa.Super. 286, 518 A.2d 1238, 1245-46 (1986); In re Smith; In re Herbert. As the debtor here has proposed to pay the entire allowed secured claim of FNMA, and as the mortgage instrument does not provide for the contract rate to continue after judgment, I agree with the debtor that prepetition interest runs here at the rate of 6% from the entry of judgment until the commencement of this chapter 13 case. In re Herbert.8
The more difficult question is whether contract interest continued to accrue after the foreclosure suit was initiated up to the time judgment was entered, and whether it may be assessed as part of FNMA's secured claim. The debtor argues that the entry of judgment in foreclosure assessed damages, Landau v. Western Pennsylvania Nat'l Bank, 445 Pa. 217, 282 A.2d 335 (1971), and this damage assessment is binding as a final judgment upon this court. FNMA contends that damages may be reassessed in foreclosure, after judgment, pursuant to a state court's general power to amend its judgments. Chase Home Mortgage Corporation v. Good, 370 Pa.Super. 570, 537 A.2d 22 (1988). See also Stephenson v. Butts, 187 Pa.Super. 55, 142 A.2d 319 (1958). Thus, FNMA argues that prejudgment interest is a proper element of its secured claim.
The issue of prejudgment interest in Pennsylvania has been the subject of much discussion. Generally, Pennsylvania follows the common law as articulated in the Restatement (Second) of Contracts at § 3549. In an action on a contract (such as a mortgage), prejudgment interest "is awardable as of right . . . where the damages are liquidated and certain, and the interest is readily ascertainable through computation." Daset Mining Corp. v. Industrial Fuels Corp., 326 Pa.Super. 14, 473 A.2d 584, 595 (1984). Accord, e.g., Peterson v. Crown Financial Corp., 661 F.2d 287, 293 (3d Cir.1981); Gold & Co. v. Northeast Theater Corp., 281 Pa.Super. 69, 421 A.2d 1151 (1980). See Comment, Prejudgment Interest and Delay Damage Awards on Breach of Contract and Related Damages: A Comparative Analysis of New York, Ohio and Pennsylvania Law, 23 Duq.L.Rev. 1097 (1985). Interest runs from date of demand, see Verner v. Shaffer, 347 Pa.Super. 206, 500 A.2d 479 (1985), and accrues at the legal rate of interest unless the contract specifies otherwise. See Daset Mining Corp. v. Industrial Fuels Corp.; ...
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