In re Smith

• Decision Date: 01 November 1988
• Docket Number: Bankruptcy No. 87-03859S,Adv. No. 88-0965S.
• Citation: 92 BR 127
• Parties: In re Patricia SMITH, Debtor. Patricia SMITH, Plaintiff, v. The KISSELL COMPANY, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

92 B.R. 127 (1988)

In re Patricia SMITH, Debtor Patricia SMITH, Plaintiff, v. The KISSELL COMPANY, Defendant.

Bankruptcy No. 87-03859S, Adv. No. 88-0965S.

United States Bankruptcy Court, E.D. Pennsylvania.

October 28, 1988.

As Amended November 1, 1988.

Irwin Trauss, Community Legal Services, Inc., Philadelphia, Pa., for debtor/plaintiff.

Jonah D. Levin, Norristown, Pa., for defendant.

Edward Sparkman, Philadelphia, Pa.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

A. INTRODUCTION AND PROCEDURAL HISTORY

The instant adversary proceeding involves an Objection filed by PATRICIA SMITH, the Debtor-mortgagor (hereinafter referred to as "the Debtor"), to a Proof of Claim filed by the Defendant, her mortgagee, THE KISSELL COMPANY (hereinafter "the Mortgagee"). We follow our own recent previous decisions in disallowing that portion of the claim seeking post-judgment interest at the contract rate and permitting the Debtor to recoup a penalty for violations of the federal Truth-in-Lending Act, 15 U.S.C. § 1601, et seq. (hereinafter "the TILA"), in the loan documents. Absence of precision on the part of the Mortgagee and apparent duplication of amounts already included in its judgment in itemizing its costs cause us to reduce the amount sought by the Mortgagee for such matters from $1,525.00 to $623.50. We therefore allow the Mortgagee's Proof of Claim in the amount of $21,394.28, less whatever post-petition payments were made by the Debtor to the Mortgagee as of the Confirmation date.

The Chapter 13 case underlying this controversy was filed on July 31, 1987. Because of a delay by the Debtor in filing her requisite Chapter 13 Statement and Plan, the scheduling of the meeting of creditors pursuant to 11 U.S.C. § 341 in this case was delayed until June 1, 1988. Shortly thereafter, on June 16, 1988, the Mortgagee filed a motion seeking relief from the automatic stay in order to continue to pursue a state-court foreclosure proceeding against the Debtor, pursuant to 11 U.S.C. § 362(a). A hearing was conducted on this motion on July 14, 1988. During the course of this hearing, the Debtor expressed an intention to file an adversary proceeding challenging certain aspects of the Mortgagee's claim, and advised us that it was her intention to liquidate the entire mortgage balance by means of her Plan, rather than seeking to cure arrearages in her mortgage payments in the Plan.

At the close of the hearing, we indicated our intention to enter the Order which we ultimately did enter on July 15, 1988. Stating that no more delays could be tolerated, we directed the Debtor to make payments of at least $425.00 monthly to the Mortgagee as of August, 1988, as well as payments to the Trustee, and file the projected adversary proceeding on or before July 20, 1988. We also scheduled the trial on the adversary proceeding and the Confirmation hearing on September 8, 1988.

In response thereto, this proceeding was filed, albeit two days late, on July 22, 1988. It did, however, come to trial on August 25, 1988. The only witness was the Debtor, and her principal undertaking on the stand was identifying a series of documents admitted into the record. At the close of the hearing, we established a briefing schedule projecting completion of briefing by October 17, 1988, and a continuance of the Confirmation hearing for the last time, on November 10, 1988. Delays in submissions of all of the briefs occurred, which was particularly disappointing in light of the fact that no aspect of this proceeding sought to break new ground. We are nevertheless drafting and filing this Opinion rapidly, in order to allow the parties to prepare themselves for the November 10, 1988, Confirmation hearing, which we specifically stated we would be unwilling to continue further.

Since the facts are largely undisputed, we believe that we can properly prepare our Opinion in narrative form.

B. THE MORTGAGEE SHALL BE ALLOWED INTEREST AT ONLY THE LEGAL RATE ON ITS FORECLOSURE JUDGMENT

The parties agree that, on May 21, 1987, the Mortgagee entered a judgment in mortgage foreclosure against the Debtor in state court in the amount of $21,523.08. However, they disagree as to how this fact is properly applied in computing the Mortgagee's Proof of Claim. The Debtor, citing to our recent decision in In re Herbert, 86 B.R. 433, 436-38 (Bankr.E.D.Pa.1988), contends that we can add only interest at six (6%) percent to this figure between May 21, 1987, and July 31, 1987, which yields a result of $247.70 additional interest.¹ Accord, In re Roach, 824 F.2d 1370, 1377 (3d Cir.1987) (applying New Jersey law); In re Cole, 89 B.R. 433, 439 (Bankr.E.D.Pa.1988); and In re Coleman, 82 B.R. 15, 17 (Bankr. D.N.J.1988) (applying New Jersey law). The Mortgagee, without citing Herbert despite the Debtor's reference to Herbert and its obvious pertinence, apparently contends that it should be able to keep accruing the contract rate of fourteen (14%) percent through the date of the bankruptcy filing and perhaps through the date that the mortgage balance is liquidated.²

We reaffirm our holding in Herbert, underscoring the argument made there, in response to the Mortgagee's contention that 41 P.S. § 404 does or should alter the common law of Pennsylvania, that a mortgage is merged in a foreclosure judgment. 86 B.R. at 436-37. Cf. Cole, supra, 89 B.R. at 436 (setting aside a sheriff's sale has no impact on foreclosure judgment). A more thoughtful consideration of the issues addressed in Herbert than is presented by the Mortgagee are raised in an article which recently appeared in THE LEGAL INTELLIGENCER, H. Ominsky, Does Postjustment Interest Have Life After Death, LEGAL INTELL., Pg. 21, col. 1 (Aug. 22, 1988). In light of the points made therein, we note some additional refinements and explanations of our Opinion in Herbert.

The Herbert holding and our decision here are rendered in the context of a bankruptcy proceeding in which the Debtor's plan was to liquidate the mortgage balance in full, as opposed to effecting a cure of arrearages. In Herbert, the Debtor had effected a post-petition sale of her premises, and the only dispute was over how much of the proceeds were payable to the mortgagee as its legitimate proof of claim. Clearly, that case presented a situation where the debtor-mortgagor contemplated an immediate full pay-off of her mortgage balance.

Here, the Debtor similarly intends to pay off her mortgage balance in full through her bankruptcy Plan. Therefore, as in Herbert, a full pay-off of the mortgage balance is contemplated. However, the full pay-off is deferred until the Plan is completed. When a debtor seeks to defer payment of an obligation which will be liquidated in a Chapter 13 plan, interest may be demanded by the obligee over the period of such a deferral. See In re Jordan, 91 B.R. 673, 677-678 (Bankr.E.D.Pa. 1988); In re Mitchell, 75 B.R. 593, 598-99 (Bankr.E.D.Pa.1987); and In re Crompton, 73 B.R. 800, 806-07 (Bankr.E.D.Pa.1987). The rate at which interest is allowed for such a deferral is the lower of the contract rate or the "market rate" of interest. In re Mitchell, 77 B.R. 524, 529 (Bankr.E.D. Pa.1987). It is not necessarily the contract rate.

Our means of calculating interest which a debtor must pay in a Plan that seeks to merely cure arrearages on a mortgage by means of a Chapter 13 Plan, and the mortgagee's "proof of claim" represents arrearages only, would undoubtedly be different. See In re Small, 65 B.R. 686, 689-91 (Bankr.E.D.Pa.1986), aff'd, 76 B.R. 390 (E.D.Pa.1987). ("claim" for arrearages is not the equivalent of a "claim," for purposes of § 506(b)). There, the debtor is seeking to cure delinquent mortgage payments which have the contract rate of interest built into them.

The Herbert holding follows, at least in part, from the principle of bankruptcy law that collection of post-petition interest by a creditor in bankruptcy is generally impermissible, because it provides particular creditors with a disproportionate share of the debtor's assets. See Herbert, 86 B.R. at 438 n. 3; and In re Shaffer Furniture Co., 68 B.R. 827, 830 (Bankr.E.D.Pa.1987). The principles set forth in Herbert therefore may not be applicable out of the context where a debtor in a Chapter 13 bankruptcy seeks to pay off a mortgage balance in full under a Plan.

We note that the article mentioned above cites only one Pennsylvania case, a Common Pleas Court decision, as a source of reasoning at variance from that in Herbert, Sicari v. Barua, 43 Pa.D. & C.3d 647 (Somerset Co. C.P.1986). That decision, moreover, holds that the legal rates should be applied to calculate interest on a judgment unless the parties expressly agree to the contrary. See also Dunbar v. Dunbar, 9 Pa.D. & C.3d 214, 218 (Allegheny Co.C.P. 1977). The decision in Sicari, even given its facts, seems strongly influenced by the court's critique of the purportedly low rate of legal interest in Pennsylvania.

However, the six (6%) percent legal rage of interest was re-enacted by the Pennsylvania legislature, as recently as 1974, 41 P.S. § 202, and therefore is hardly attributable to archaic legislation. Moreover, the "fairness" of this rate would not appear to us to be a factor that courts can second-guess in deciding cases before us. The Mortgagee here may have the Sicari decision in mind when it argues that it is significant that the parties' mortgage in issue provides that the interest rate recited therein must apply until it is "fully paid." However, clearly, this is not an express provision that the contract interest rate remains payable after judgment. Furthermore, it must be recalled that the reasoning of Herbert is based upon the principle that the mortgage merges with the judgment upon entry of a foreclosure judgment, a principle reaffirmed by, inter alia, the Court of Appeals, in Roach, supra. When such merger occurs, the provisions of the mortgage are no longer relevant.

We do not consider the Herbert holdi...