Matter of LaPaglia

• Decision Date: 11 February 1981
• Docket Number: Bankruptcy No. 180-03711.
• Citation: 8 BR 937
• Parties: In the Matter of Carmelo A. LaPAGLIA, also known as Carmen A. La Paglia and Nancy M. La Paglia, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of New York

8 B.R. 937 (1981)

In the Matter of Carmelo A. LaPAGLIA, also known as Carmen A. La Paglia and Nancy M. La Paglia, Debtors.

Bankruptcy No. 180-03711.

United States Bankruptcy Court, E.D. New York.

February 11, 1981.

Hession, Halpern & Bekoff, P.C., Mineola, N.Y., for the debtors by Kenneth Halpern, Mineola, N.Y., of counsel.

Aaron, Mattikow & Lorenz, P.C., Jericho, N.Y., for Reliance Funding Corp. by Philip Irwin Aaron, Roslyn Estates, N.Y., of counsel.

MANUEL J. PRICE, Bankruptcy Judge.

This is an objection by a secured creditor, the Reliance Funding Corporation ("RELIANCE"), to the confirmation of a debtor's Chapter 13 plan filed pursuant to Section 1321 of the Bankruptcy Reform Act of 1978 ("THE CODE"), 11 U.S.C. § 1321, by Carmelo and Nancy La Paglia (the "DEBTORS") on July 1, 1980. The creditor's objection raises a question concerning the effect of the acceleration of a mortgage debt on a debtor's right to cure a mortgage default under a Chapter 13 repayment plan as provided in Section 1322(b)(5) of the Code, 11 U.S.C. § 1322(b)(5).

The facts are conceded and are as follows:

Reliance holds a mortgage dated April 5, 1977 on the Debtor's residence purchased by them in 1964. By the terms of the mortgage, the Debtors covenanted:

"18. That the whole of the said principal sum and of any other sums of money secured by this mortgage shall, forthwith or thereafter, at the option of the Mortgagee, become due and payable upon the happening of either of the following events, irrespective of whether or not the same be remedied by the Mortgagee: (a) Failure to pay in full any aggregate monthly payment provided for in paragraph 2 of the mortgage prior to the due date of the next such monthly payment."

(Mortgage between Carmelo La Paglia and Nancy La Paglia and Reliance Funding Corp., dated April 5, 1977.) Similarly, the mortgage bond signed by the Debtors states:

"The whole of the principal sum or any part thereof, and of any other sums of money secured by the mortgage given to secure this bond, shall, forthwith or thereafter, at the option of the obligee, become due and payable if default be made in any payment under this bond or upon the happening of any default which, by the terms of the mortgage given to secure this bond, shall entitle the mortgagee to declare the same, or any part thereof, to be due and payable. . . . "

(Mortgage Bond, dated April 5, 1977.)

The mortgage went into default when the Debtors failed to pay the monthly installment which became due on August 1, 1979. The Debtors attribute this default to the husband's loss of income due to a three and one-half month strike at his place of employment and medical expenses stemming from the wife's illness. The Debtors likewise did not make the seven subsequent monthly payments from September, 1979 through March, 1980, when Reliance, acting through its servicing agent the Ninth Federal Savings and Loan Association ("NINTH FEDERAL"), elected to accelerate the mortgage debt pursuant to the terms of the mortgage and bond by formal notice dated March 26, 1980. The said notice read:

"As you have been previously advised, you are in default on your mortgage loan with Ninth Federal Savings and Loan Association of New York.

In accordance with the provisions of the mortgage note and mortgage executed by you, the Association hereby demands immediate payment in full of the outstanding balance of principal in the amount of $33,058.08; interest at 8% from July 1st, 1979 to this date of $1,943.00; late charges of $172.96 and $251.20 representing an overdraft in your escrow account for a total amount due and owing of $35,425.24."

(Plaintiff's Exhibit 1.)

The Debtors made no attempt to rectify the arrearage which, at the time of the acceleration letter, amounted to approximately $4,000. Reliance took no further action pursuant to the acceleration letter for almost three months when it filed a Notice of Pendency of Action against the Debtors with the Nassau County Clerk's Office on June 13, 1980. Thereafter, on June 17, 1980, the Debtors were served with a summons and complaint in a foreclosure action brought by Reliance in the Supreme Court of the State of New York, County of Nassau (Plaintiff's Exhibit 2). The filing of the Debtors' Chapter 13 petition on July 1, 1980 stayed further proceedings in the foreclosure action pursuant to the automatic stay provision found in Section 362(a) of the Code, 11 U.S.C. § 362(a).

The Debtors filed a proposed repayment plan (the "PROPOSED PLAN") with their petition for relief which provided for payments of $275 monthly for 36 months starting in August, 1980, plus lump sum payments of $2,000 per year from their 1980 and 1981 tax refunds (Debtors' Proposed Plan, filed July 1, 1980). With a portion of those funds, the Trustee was to pay the mortgage arrears. approximated in the petition to be $6,500, until they were brought current, while the Debtors were to pay the current monthly mortgage installments directly to Ninth Federal plus an additional $1,000 upon confirmation of the Proposed Plan. Id.

Reliance's Proof of Claim filed on September 9, 1980, indicated that its claim amounted to $38,361.21 which included the mortgage principal still owing of $33,058.08, plus $5,303.13 in additional charges consisting of interest at 8%, advances for taxes and insurance, and expenses of foreclosure. The Debtors estimate the value of their home to be $47,000 and claim an equity of approximately $13,900 when the principal balance on the mortgage, exclusive of interest, advances and expenses, is subtracted from that figure.

The question herein involves two paragraphs of Section 1322 of the Code, 11 U.S.C. § 1322, which section describes the permissible contents of a Chapter 13 debtor's plan. Section 1322(b)(2) provides that a 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, or of holders of unsecured claims,. . . . "

Section 1322(b)(5), however, states that a plan may:

"notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due. . . . "

Reliance objects to the Debtors' Proposed Plan on the ground that it does not take into the account the acceleration of the mortgage debt but only provides for payment of the arrears. It is Reliance's position that questions concerning a debtor's right to cure a default, as permitted under Section 1322(b)(5), must be answered with reference to applicable state law. It asserts that under New York State law, once there has been an acceleration of a mortgage debt, the debtor must tender the entire amount due on the mortgage under the plan in order to cure a default; merely repaying the arrears under the plan is insufficient. It contends that even under Section 1322(b)(5), the Debtors' ability to cure their default by payment of merely the arrears was cut off at the time the mortgage was accelerated. Reliance argues that the provisions of the Proposed Plan would alter its right to collect the full mortgage debt over the life of the plan rather than only a portion of that debt, in direct contravention of the protection afforded holders of home mortgages under Section 1322(b)(2). Thus, it argues that the Proposed Plan should not be confirmed.

The Debtors argue that the controlling law in this case is not New York State law, but rather the Bankruptcy Code. They rely on Section 1322(b)(5) which provides specifically for the curing of any default within a reasonable time and which states that it is to control notwithstanding Section 1322(b)(2). Their position is that although a bankruptcy court may not modify the rights of a holder of a security interest secured by real property that is a debtor's home, it may permit the curing of a default on such a debt within a reasonable time where the last payment is due after the date on which the final payment under the plan is due. The Debtors observe that in the present case the default is on a mortgage bond which calls for monthly payments until May, 2007 secured by a mortgage. This situation, they contend, must be distinguished from a default on a mortgage in conjunction with a demand note, on which, admittedly, a default could only be cured by payment of the full amount demanded. The Debtors argue that their default can be cured by the payment of the arrears only, with the mortgage agreement remaining in full effect. They thus submit that the only question for this court's determination is whether the default can be cured within a reasonable time as required by Section 1322(b)(5). During oral argument, counsel for the Debtors expressed concern over the ramifications of accepting Reliance's argument. The apprehension is that all mortgagees would take a ruling in its favor as license to accelerate mortgages upon even insignificant defaults and thereby defeat the cure provisions of Section 1322(b)(5).

A review of the applicable provisions of the Bankruptcy Code does not reveal a definitive answer to the question whether the acceleration of a mortgage debt precludes cure under Section 1322(b)(5). Likewise, research has failed to uncover any case under the new Code in which a mortgagee has raised this precise issue. Several cases which superficially seem related must be distinguished on the issues addressed or the factual situations under which they arose. See, e.g., In re Breuer, 4 B.R. 499 (Bkrtcy., S.D.N.Y.1980) (Court refused to lift stay where mortgagee was adequately protected and debtor had offered to cure default within 10 days; court did not address acceleration issue); In re Coleman, 2 B.R. 348, 5 B.C.D. 1300 (Bkrtcy., W.D.Ky.1980), aff'd 5 B.R. 812 (W.D.Ky.1980) (Decision based on reasonableness...