Justice v. Valley Nat. Bank

• Decision Date: 15 June 1988
• Docket Number: No. 87-5339,87-5339
• Citation: 849 F.2d 1078
• Parties: , 19 Collier Bankr.Cas.2d 172, 17 Bankr.Ct.Dec. 1198, Bankr. L. Rep. P 72,362 Richard JUSTICE, et al., Appellants, v. VALLEY NATIONAL BANK, et al., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1078

849 F.2d 1078

57 USLW 2013, 19 Collier Bankr.Cas.2d 172,

17 Bankr.Ct.Dec. 1198, Bankr. L. Rep. P 72,362

Richard JUSTICE, et al., Appellants, v. VALLEY NATIONAL BANK, et al., Appellees.

No. 87-5339.

United States Court of Appeals Eighth Circuit.

Submitted Oct. 20, 1987.

Decided June 15, 1988.

David O. Carter, Sioux Falls, S.D., for appellants.

James M. Wiederrich, Sioux Falls, S.D., for appellees.

Before HEANEY, JOHN R. GIBSON and WOLLMAN, Circuit Judges.

JOHN R. GIBSON, Circuit Judge.

In July of 1986, a foreclosure judgment was entered on the farm of Richard and Bonnie Justice in South Dakota state court. Following the foreclosure sale, but before expiration of the state statutory redemption period, the Justices filed a petition and proposed a plan of reorganization under Chapter 12 of the bankruptcy code. 11 U.S.C.A. Secs. 1230-1231 (West Supp.1987). The single issue presented by this appeal is whether a bankruptcy court may confirm a Chapter 12 plan which allows the debtor to pay the redemption price over a period of time, extending beyond that limited by state law. The Justices appeal from an order of the district court ¹ affirming a bankruptcy court order which held, inter alia, that under Chapter 12 state law controls the rights of the parties regarding redemption, barring confirmation of such a plan. Because a foreclosure sale extinguishes the mortgage contract and works a substantial change in the relationship of the parties under state law, we hold that the provisions of Chapter 12 relating to the debtor's power to cure defaults and modify the rights of secured creditors are not applicable after a foreclosure sale has been held. We accordingly affirm the order of the district court.

The Justices operate and reside on a farm in Brookings County, South Dakota. On October 31, 1978, they borrowed $365,000 from the Prudential Insurance Company of America at an annual interest rate of 9.75 percent, and gave a mortgage on their farmland in return. The Justices fell behind in payments, and on April 22, 1986 Prudential commenced foreclosure proceedings in the Brookings County circuit court. See SDCL Sec. 21-47-1 (1987). On July 7, 1986, the court entered a monetary judgment for Prudential and foreclosed the Justices' rights and interests in the farmland, subject to their statutory rights of possession and redemption. See SDCL Sec. 21-47-13. The court also ordered that the land be sold at public auction. On August 11, 1986, the sheriff sold the farm to Prudential for $315,000 and awarded Prudential the certificate of sale. The Justices retained the right to redeem the property by paying Prudential $315,000 plus interest until August 11, 1987, unless they took steps to extend the redemption period. See SDCL Secs. 21-52-1, -11, -12 (1987).

On February 17, 1987, without having redeemed the property or extended the statutory redemption period, the Justices filed a petition for reorganization under Chapter 12 of the bankruptcy code. On March 23, 1987, they proposed a plan of reorganization in which they offered to pay Prudential interest on an outstanding balance of $315,000 plus a reduction in principal of $9,733 during each of the three years of the plan. Thereafter, the Justices proposed to pay the balance over a twenty year period at an interest rate of ten percent per year with the principal reduced in equal annual installments. In this manner they proposed to gradually "redeem" the property, with Prudential retaining a secured position until all payments were completed. ²

On April 3, 1987, the Justices brought a motion in bankruptcy court to permit them to use cash collateral, in which Valley National Bank held a security interest, for the purpose of operating their farm during the 1987 crop season. See 11 U.S.C. Sec. 363(c)(2)(B). On April 15, the bankruptcy court dismissed the motion. The court held that under Chapter 12 state law controlled the rights of the parties regarding redemption, and that the Justices had failed to demonstrate that they would be able to redeem the land by August 11, 1987, as required by South Dakota law. As a result the Justices could not show that they would be in possession of the land at the expiration of the redemption period and could not offer "adequate protection" for the cash collateral under 11 U.S.C. Sec. 1205. They therefore failed to qualify for use of the collateral under 11 U.S.C. Sec. 363(e).

The Justices appealed to the district court, which affirmed the bankruptcy court's decision in an order dated July 21, 1987. The Justices then filed a notice of appeal to this court and moved before the district court for a stay pending appeal. The district court denied the motion. The Justices filed a similar motion before this court, and on August 11, 1987, the date the statutory redemption period was due to expire, we granted a temporary stay to allow Valley National and Prudential to respond. We then set the case for argument to decide whether Johnson v. First National Bank of Montevideo, 719 F.2d 270 (1983), cert. denied, 465 U.S. 1012, 104 S.Ct. 1015, 79 L.Ed.2d 245 (1984), is applicable to this case and whether Chapter 12 permits a debtor to cure in these circumstances. ³

The Justices do not seek relief under any of the provisions we reviewed in Johnson; their argument is based entirely on Chapter 12. Thus, although we have found Johnson instructive on general points of law, it does not control this case, and our analysis centers on the Justices' claim that Chapter 12 authorizes bankruptcy courts to extend state redemption periods.

The Justices point to 11 U.S.C. Sec. 1222(b) as supporting their treatment of Prudential's claim. ⁴ The Justices argue that the power to "modify the rights" of claim-holders under subsection (2) includes authority to extend South Dakota's redemption period and defer Prudential's right to receive legal title and possession of the land. They also contend that the right to cure default under subsections (3) and (5) includes the ability to reverse the statutory acceleration of debt and return to pre-default conditions, at least until the state redemption period has expired. In both cases they claim that contrary state law provisions are preempted by section 1222(b). They argue more generally that in enacting Chapter 12, Congress intended to provide farmers with a uniform system of reorganization, and that sections 1222(b)(3) and (5) empower federal courts to create a federal right to cure default in these circumstances. We consider these arguments in turn.

I.

The Justices first argue that section 1222(b)(2) empowers debtors to extend a state's redemption period and defer the right of the buyer at a foreclosure sale to receive legal title and possession of the land. The section provides that a plan may "modify the rights" of holders of secured or unsecured claims. 11 U.S.C. Sec. 1222(b)(2). Unlike section 1322(b)(2) of Chapter 13, upon which it is based, section 1222(b)(2) does not prohibit debtors from modifying the rights of holders of "claims secured only by a security interest in real property that is the debtor's principal place of residence." 11 U.S.C. Sec. 1322(b)(2). The Justices argue that by omitting this restriction from section 1222(b)(2), Congress deleted the only language limiting a debtor's ability to cure default and redeem property through a reorganization plan, and indicated its intent to provide home mortgage lenders with somewhat less protection under Chapter 12 than they enjoy under Chapter 13. On this basis the Justices argue that even though debtors may not extend statutory redemption periods in similar circumstances under section 1322(b)(2), see, e.g., In re Roach, 824 F.2d 1370, 1377-79 (3d Cir.1987), they should be allowed to do so under Chapter 12.

For several reasons, we do not believe that the statutory right of redemption is subject to modification under section 1222(b)(2). First, the Justices' proposed extension of the redemption period under subsection (b)(2) is barred by the express language of subsection (c), which states:

Except as provided in subsections (b)(5) and (b)(9), the plan may not provide for payments over a period that is longer than three years unless the court for cause approves a longer period, but the court may not approve a period that is longer than five years.

11 U.S.C. Sec. 1222(c). The Justices' payment plan extends over a period of twenty-three years, well beyond the five-year limit established for subsection (b)(2). The only relevant provision which might be read to authorize such a lengthy payment period is subsection (b)(5), which we examine below.

Second, application of section 1222 (b)(2) in these circumstances would override the automatic extension provided by 11 U.S.C. Sec. 108(b), rendering that section superfluous. See Johnson, 719 F.2d at 277-78. Section 108(b) incorporates "applicable nonbankruptcy law" which "fixes a period within which the debtor * * * may * * * cure a default, or perform any other similar act." 11 U.S.C. Sec. 108(b)(1). We have held that section 108(b) is applicable to state statutory redemption periods. Johnson, 719 F.2d at 277-78. Section 108(b) provides an extension when the petition for reorganization is filed less than 60 days before expiration of the redemption period. 11 U.S.C. Sec. 108(b)(2). The Justices do not qualify for this extension, however, because they filed their petition nearly six months before expiration of South Dakota's redemption period. In such circumstances, section 108(b) expressly remits the debtor to state law. We have said that "where one section of the Bankruptcy Code explicitly governs an issue, another section should not be interpreted to create an irreconcilable conflict." Johnson, 719 F.2d at 278. Nothing in the language or history of Chapter 12 indicates that section 1222(b)(2) was intended to override section 108(b).

Finally, we do not believe the absence of a restriction in section 1222(b)(2...