In re Stamper

• Decision Date: 13 April 1988
• Docket Number: Bankruptcy No. 87 B 14915.
• Parties: In re Thomas & Kathleen STAMPER, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

84 B.R. 519 (1988)

In re Thomas & Kathleen STAMPER, Debtor.

Bankruptcy No. 87 B 14915.

United States Bankruptcy Court, N.D. Illinois, E.D.

April 13, 1988.

Bennett Kahn, Chicago, Ill., for debtors.

Laura Wardinski, Codilis & Assoc., Oak-brook Terrace, Ill., for Com. Mortg.

MEMORANDUM AND OPINION

ROBERT E. GINSBERG, Bankruptcy Judge.

This matter comes to be heard on the debtors' objection to a portion of the arrears claim filed by Commonwealth Mortgage Company ("Commonwealth") in the debtors' Chapter 13 case. Commonwealth's claim includes interest on arrearages. The debtors contend that the agreement between the parties does not provide for interest on arrearages and that requiring the payment of such interest would violate 11 U.S.C. § 1322(b)(2). Commonwealth argues that both 11 U.S.C. § 1325(a)(5)(B)(ii) and the mortgage contract itself require the payment of interest.

FACTS

Thomas and Kathleen Stamper, (the "debtors"), are the owners of a single family home which they use as their principal residence. The home is subject to a first mortgage in favor of Commonwealth. The debtors encountered financial difficulties, fell behind on their mortgage payments, and on October 13, 1987 the debtors filed a Chapter 13 petition. The debtors' Chapter 13 plan was approved by this Court on December 10, 1987. It provided, inter alia, for the payment of the prepetition mortgage arrears, without interest on the arrears, plus current mortgage payments to Commonwealth. Commonwealth filed a claim for mortgage arrears which included an amount labeled "discount to present value" in the amount of $923. The $923 is, of course, simply interest on the mortgage arrears. On December 2, the debtors filed an objection to Commonwealth's claim for interest on the arrears. The parties agree that there are no issues of fact and have submitted the dispute to the Court on briefs.

DISCUSSION

The issue presented in this case is whether Commonwealth, whose claim against the debtor is secured only by a security interest in the debtors' principal residence, is entitled to receive interest on prepetition arrearages either on account of language in its mortgage agreement with these debtors or as a matter of law.¹ For the following reasons, this Court holds that Commonwealth is not entitled to interest on arrearages either based on the language of the agreement or as a matter of law under 11 U.S.C. § 1325(a)(5)(B)(ii).

I Commonwealth's Mortgage Contract Does Not Provide For Interest On Arrears

Commonwealth contends that the terms of its mortgage agreement with these debtors require the payment of interest on arrears in a cure situation such as that effected by the debtors' Chapter 13 plan. The mortgage contract provides:

". . . in case of any other suit, or legal proceeding, wherein the Mortgagee shall be made a party thereto by reason of this mortgage, its costs and expenses, and the reasonable fees and charges of the attorneys or solicitors of the Mortgagee, shall be a further lien and charge upon the said premises . . . "

Commonwealth argues that because the default in question is to be cured over time, it is incurring an additional carrying "expense". As Commonwealth sees it, the interest on the arrears is one of the "expenses" the clause in question entitles it to recover as part of its costs of collection. This Court does not agree.

The clause upon which Commonwealth rests its claim for interest refers to "costs and expenses" related to any legal proceeding. No mention is made of interest on arrears. Expense is defined as "that which is expended, laid out or consumed". Black's Law Dictionary 518 (5th ed. 1979). Applying this definition of "expense" to the mortgage contract, the Court concludes that the loss of the use of the arrears due during the cure period does not constitute an additional "expense" to Commonwealth within the meaning of the mortgage clause. Instead, the clause clearly refers to legal expenses incurred in connection with legal proceedings under the mortgage. Interest on the arrears is clearly not a recoverable legal expense. Instead, it is an additional claim against the debtors on the loan.

The language of the contract is unambiguous. The right to interest on arrears is not mentioned in the contract in haec verba. Under Illinois law, where a contract is plain and unambiguous, a court must enforce the contract as written and not attempt to read into it by construction any covenant not expressed therein. Anheuser-Busch Brewing Ass'n v. Kalthoff, 189 Ill.App. 38 (1914). Assuming arguendo that the contract is ambiguous, it is a well established principle of contract law that the instrument is to be strictly construed against the drafter. Gothberg v. Nemerovski, 58 Ill.App.2d 372, 208 N.E.2d 12 (1965).

Commonwealth, as drafter of the contract, had it wanted (or even thought of) the right to interest on the arrearages in the event of an installment cure of a default in payment (in or out of bankruptcy) could have simply included language in the contract specifically providing for such. It would have been a simple clause to draft. Had the contract so provided this Court would have been required to give that provision effect, pursuant to 11 U.S.C. § 1322(b)(2). In re Terry, 780 F.2d 894, 897 (11th Cir.1986). Commonwealth's failure to specify a right to interest on arrears indicates that the parties to the mortgage agreement did not intend that interest on arrears was required. Whether the omission was by oversight or intentional is irrelevant. This Court will not rewrite the mortgage to give the lender more rights than provided in the bargain between Commonwealth and these debtors.

II Section 1325(a)(5)(B)(ii) of the Bankruptcy Code Is Inapplicable To Residential Mortgages

Commonwealth's fallback position is that even if its contract is insufficient to give it interest on the arrears, it is entitled to such as a matter of law under 11 U.S.C. § 1325(a)(5)(B)(ii). Section 1825(a)(5)(B)(ii) provides,

(a) The court shall confirm a plan if . . .

(5) with respect to each allowed secured claim provided for by the plan.

(B)(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim;. . . . ²

Commonwealth contends that 11 U.S.C. § 1325(a)(5)(B)(ii) requires the payment of interest on mortgage arrears in order to give it the present value of its money. See In re Nesmith, 57 B.R. 348 (Bankr.E.D.Pa. 1986). Commonwealth argues that "a plan that pays a secured claim over time must provide an amount in excess of the dollar amount of the claim in order to compensate the creditor for not recovering the full value of its claim immediately." This proposition is not without support.³

The debtors counter that the problem with Commonwealth's argument is that it overlooks another provision of the Bankruptcy Code, 11 U.S.C. § 1322(b)(2), which must be read together with 11 U.S.C. § 1325(a)(5)(B)(ii). Section 1322(b)(2) of the Bankruptcy Code provides in pertinent part that a Chapter 13 plan may "modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence. . . ." However, paragraph (5) of § 1322(b) modifies paragraph (2) by stating: "notwithstanding paragraph (2) . . . the plan may provide for the curing of any default within a reasonable time. . . ."

Thus, "residential mortgage lenders receive unique treatment in the Bankruptcy Code." In re Terry, 780 F.2d 894, 896 (11th Cir.1985). The Bankruptcy Code provides only one instance in which a Chapter 13 plan may alter the mortgage contract between the debtor and the principal residence mortgagee. That right arises when the debtor defaults, the contract permits the lender to accelerate the debt and the lender has accelerated the loan prepetition. In such a case, the Chapter 13 plan may modify the contract so as to deaccelerate and reinstate the original installment payments. See, e.g., In re Clark, 738 F.2d 869, 872 (7th Cir.1984) ("De-acceleration . . . is not a form of modification banned by (b)(2) but rather is permissible and necessary concomitant of the power to cure defaults.").

Section 1325(a)(5)(B)(ii) of the Bankruptcy Code, on the other hand, clearly is intended for the benefit of secured creditors whose rights have been modified by a Chapter 13 plan. In such a case, a creditor is entitled to receive an additional amount for the time value of money. See Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir.1982). Section 1325(a)(5)(B)(ii) of the Bankruptcy Code has no application to a creditor whose only security is the debtor's home because it is also clear that under 11 U.S.C. § 1322(b)(2) the contractual rights of the principal residence mortgagee may not be modified involuntarily by a Chapter 13 plan. However, the debtor can force even the home mortgagee to accept a cure. Because the Bankruptcy Code permits an involuntary deacceleration and cure, the mortgagee's rights are not modified by such. In re Capps, 836 F.2d 773 (3d Cir.1987); In re Clark, 738 F.2d 869 (7th Cir.1984). Instead, the effect of the "cure" is to place the parties in their respective positions prior to the default. The contract terms remain in force other than for the right to accelerated payments, and the mortgagee will receive all of the interest, charges, and costs to which it is entitled under the contract. 5 Collier on Bankruptcy ¶ 1322.094 (15th ed. 1988). Because the cure does not work a modification of the mortgagee's rights, "the time value of money is irrelevant", In re Simpkins, 16 B.R. 956, 965 (Bankr.E.D.Tenn. 1982), unless the contract specifically provides for interest on the arrears in the event of a cure. See In re Capps, 836 F.2d 773 (3d Cir.1987). In fact, under this analysis, to require a Chapter 13 debtor to pay interest on the arrears when the home mortgage...