Landmark Financial Services v. Hall

• Decision Date: 06 December 1990
• Docket Number: Nos. 90-2312,90-2313,s. 90-2312
• Citation: 918 F.2d 1150
• Parties: , 24 Collier Bankr.Cas.2d 232, 21 Bankr.Ct.Dec. 1, Bankr. L. Rep. P 73,677 LANDMARK FINANCIAL SERVICES, Plaintiff-Appellee, v. Marvin Junior HALL; Linda Marie Hall, Defendants-Appellants, Virginia Federal Savings Bank, Amicus Curiae. LANDMARK FINANCIAL SERVICES, Plaintiff-Appellee, v. Elton MORGAN, Jr.; Linda Patricia Morgan, Defendants-Appellants, Virginia Federal Savings Bank, Amicus Curiae.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1150

918 F.2d 1150

59 USLW 2387, 24 Collier Bankr.Cas.2d 232,

21 Bankr.Ct.Dec. 1,

Bankr. L. Rep. P 73,677

LANDMARK FINANCIAL SERVICES, Plaintiff-Appellee, v. Marvin Junior HALL; Linda Marie Hall, Defendants-Appellants, Virginia Federal Savings Bank, Amicus Curiae.

LANDMARK FINANCIAL SERVICES, Plaintiff-Appellee, v. Elton MORGAN, Jr.; Linda Patricia Morgan, Defendants-Appellants, Virginia Federal Savings Bank, Amicus Curiae.

Nos. 90-2312, 90-2313.

United States Court of Appeals, Fourth Circuit.

Argued June 7, 1990.

Decided Nov. 16, 1990.

As Amended Dec. 6, 1990.

Richard G. Poinsett, Hampton, Va. (argued), for defendants-appellants.

Robert Bruce Hill, Hill & Rainey (argued), Petersburg, Va., for plaintiff-appellee.

Paul K. Campson, Ellen C. Carlson, Kaufman & Canoles, P.C., Norfolk, Va. (on brief), for amicus curiae.

Before POWELL, Associate Justice, Retired, United States Supreme Court, sitting by designation, HALL, Circuit Judge, and BUTZNER, Senior Circuit Judge.

K. K. HALL, Circuit Judge:

In each of these cases, the debtors appeal the district court's order reversing the bankruptcy court and holding that the wage earner plans submitted by the debtors in their respective Chapter 13 proceedings must include provisions for the payment of postpetition interest on mortgage arrearages. Finding that the district court erred, we reverse and remand for further proceedings.

I. ¹

In 1986, Elton Morgan and his wife, Linda Patricia Morgan, borrowed $25,547.08 from Landmark Financial Services ("Landmark") and executed a second deed of trust on their residence to secure repayment of the loan. On February 14, 1989, the Morgans filed a petition for relief under Chapter 13 of the Bankruptcy Code (11 U.S.C. Secs. 1301 et seq.). Their petition admitted that they were eight payments in arrears to Landmark as of the date of filing. Each payment in arrears included principal and interest. Their wage-earner plan proposed to pay Landmark the accrued prepetition arrearage, including the interest component of the missed payments, in full over the 36-month life of the plan, while also providing for the resumption of regular monthly payments to Landmark outside the plan. At issue is the plan's provision to cure the default to Landmark without the payment of interest on the prepetition arrearages.

Landmark objected to confirmation of the plan because the plan did not provide for interest on the delinquent payments. The bankruptcy court ruled that such interest on mortgage arrearages was not required for confirmation of a wage-earner plan "unless the additional interest is provided for by the loan documents." In re Morgan, 106 B.R. 449, 450 (Bankr.E.D.Va.1989). The court found that the Morgans' loan agreement with Landmark did not so provide. Accordingly, the objection was overruled and the plan was confirmed. Id. Landmark appealed, and the district court reversed, holding that "Landmark is entitled to recover interest on the mortgage payments in arrears from the time they became due until the time of actual payment." Landmark Financial Servs. v. Hall, CA-89-166-NN, CA-89-167-NN (E.D.Va. Dec. 29, 1989), slip op. at 3. The debtors appeal from this order.

II.

On appeal, the debtors contend that because the mortgage agreement with Landmark makes no provision for interest on missed payments, to require such interest would amount to a prohibited modification of the agreement. Landmark makes a two-pronged argument. First, postpetition interest is required for all oversecured claims. Second, interest on the arrearages does not modify the mortgage agreement but, rather, is incidental to the cure and necessary to give Landmark full value for its claim. Amicus curiae adds the additional argument that federal and state contract law mandates the payment of interest on the arrearages. We turn first to the concept of "cure."

III.

The district court relied upon several sources to find an entitlement to interest on the mortgage arrearages: state and federal contract law, 11 U.S.C. Sec. 506(b), and 11 U.S.C. Sec. 1325(a). The district court's decision treats each missed payment as if it had been reduced to a money judgment on the date it became due. This misconstrues the concept of cure embodied in Sec. 1322(b).

A Chapter 13 debtor is able to modify the rights of any secured creditor except one whose claim is secured by a mortgage on the debtor's principal residence. 11 U.S.C. Sec. 1322(b)(2). With regard to long-term debts, i.e., debts on which the last payment is due beyond the life of the wage-earner plan, the debtor may propose to cure any existing default. 11 U.S.C. Sec. 1322(b)(5). The mortgage debt to Landmark is such a long-term debt; in addition, because the claim involves a mortgage on the debtor's principal residence, Landmark's rights under the contract may not be modified. The only requirements imposed by the Code are that the cure be accomplished "within a reasonable time" and that the regular mortgage payments be maintained. The Morgans' plan elected to take advantage of the cure provisions by proposing to (1) resume making regular monthly mortgage payments of $404, and (2) have the trustee pay off the accrued arrearage, at face value, out of the approximately $300 excess of income over expenses. ² Landmark's first argument is that one of the Code's cramdown provisions, Sec. 1325(a)(5), requires that the plan provide Landmark with the present value of its arrearage claim. This argument, however, is flawed because it fails to recognize the distinctions between cure and cramdown.

In a cramdown, the Code requires that the secured creditor receive the present value of his secured claim within the life of the plan. This provision, plus the additional requirement that the creditor retain its lien on the collateral, is the means by which the Code compensates secured creditors for any modifications of their rights. The present value test of Sec. 1325 is designed to factor in the time value of the deferred payments in order to assure full satisfaction of secured claims.

The cure of a mortgage or other long term debt is a distinct means of treating the claims of some secured creditors. ³ Like a cramdown, it may be imposed on creditors without their consent. It operates, however, in an entirely different manner. Instead of assuring that the creditor receives the full value of his secured claim during the life of the plan, a cure reinstates the original pre-bankruptcy agreement of the parties. Moreover, within the limited class of claims which are subject to cure, a mortgagee's rights may not be modified in any way. 11 U.S.C. Sec. 1322(b)(2). A cure under Sec. 1322(b)(5) is not a modification of the mortgagee's rights. 5 Collier on Bankruptcy, p 1322.09 (15th ed.1986). "Cure by its very nature assumes a regime where debtors reinstate defaulted debt contracts in accordance with the conditions of their contracts." Appeal of Capps, 836 F.2d 773, 777 (3d Cir.1987). Unless contractually provided for or payable under applicable nonbankruptcy law, interest on defaulted payments is not required under Sec. 1322(b)(5). Id.; In re Terry, 780 F.2d 894 (11th Cir.1985); In re Brown, 91 B.R. 19 (Bankr.E.D.Va.1988); contra In re Colegrove, 771 F.2d 119 (6th Cir.1985) (criticized in Collier, supra).

To summarize, the principal components of a Sec. 1325 cramdown are retention of the lien by the secured creditor and provision for the payment, during the life of the plan, i.e., 3-5 years, of the full value of the secured claim. The cramdown route necessarily involves a modification of the creditor's rights with regard to such factors as number of payments and the rate of interest. ⁴ Capps, 836 F.2d at 776. The rights of a creditor whose claim is secured by a mortgage on a debtor's principal residence, however, may not be modified. A debtor whose regular payments under the mortgage agreement are due beyond the life of the wage earner plan, as is the case in the instant appeal, may propose to cure the default. A cure essentially involves (1) satisfying any arrearages currently due, within a reasonable time, and (2) maintaining regular mortgage payments as they come due. The present value test of the cramdown section, Sec. 1325(a)(5), is irrelevant because the creditor's rights have not been modified. Collier, p 1322.09. Whereas the cramdown route compensates the secured creditor with the present value of his collateral, the cure route reinstates the initial agreement which is the basis of the claim regardless of the value of the collateral.

Landmark also points to Sec. 506(b) and a recent decision, United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), as authority for the proposition that the bank, as an oversecured creditor, is entitled to postpetition interest on its arrearage claim during the pendency of the case, i.e., after filing but prior to confirmation. Ron Pair erased the consensual/nonconsensual distinction which some courts had used to deny Sec. 506(b) interest on claims based on nonconsensual liens such as tax liens. Despite some broad language in Ron Pair, however, we think Sec. 506(b) is inapplicable in the context of mortgage cures.

Section 506(b) provides the means by which the extent of a creditor's secured claim is established. In re Hall, 117 B.R. 425 (Bankr.S.D.Ind.1990). In the case of an oversecured creditor, the secured claim may include, up to the value of the collateral itself, two additional components: (1) fees, such as late charges, under the agreement giving rise to the claim, and (2) interest, regardless of whether the agreement provides for it or whether the claim was even created by an agreement. Ron Pair, 489 U.S. at 240, 109 S.Ct. at 1030. By accretion, the value of the secured claim grows by the agreed charges and by interest from the date of filing through the confirmation date. A mortgage cure, in a sense, occurs outside the ambit of the Code. Any charges such...