Matter of Stratton, Bankruptcy No. HK 82 00187.

• Decision Date: 04 May 1983
• Docket Number: Bankruptcy No. HK 82 00187.
• Citation: 30 BR 44
• Parties: In the Matter of Scott Alan STRATTON, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Michigan

30 B.R. 44 (1983)

In the Matter of Scott Alan STRATTON, Debtor.

Bankruptcy No. HK 82 00187.

United States Bankruptcy Court W.D. Michigan.

May 4, 1983.

Paul Davidoff, Kalamazoo, Mich., for debtor.

Steven Rayman, Kalamazoo, Mich., for First Federal Sav. and Loan Ass'n.

OPINION

OBJECTION TO CLAIM—§ 1322(b)(2)— § 1325(a)(5) TREATMENT OF MORTGAGE ARREARAGE ON DEBTOR'S PRINCIPAL RESIDENCE

LAURENCE E. HOWARD, Bankruptcy Judge.

This matter is before the court on debtor's objection to a claim filed by First Federal Savings & Loan. The debtor, Scott Alan Stratton, and his wife have a mortgage on their principal residence with First Federal. The mortgage note provides for interest at the rate of 9% per annum and monthly payments of $174. Several payments were missed, and the debtor filed a Chapter 13 petition on January 22, 1982. First Federal has filed an amended proof of claim in the amount of $2,115.93 for mortgage arrearages. This sum includes principal and interest, tax escrow and late charges. First Federal requests interest at the rate of 14% on this arrearage. The debtor, while not objecting to the amount of the claim, objects to the higher interest rate, and to the alleged "interest on interest." The matter was argued before this court, and briefs were submitted.

First Federal relies on § 1325(a)(5) of the Bankruptcy Code for their right to receive an interest rate higher than that provided for in the mortgage note. That section provides, in part, that the court shall confirm a plan if:

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

(A) the holder of such claim has accepted the plan;

(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and

(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; . . .

The Sixth Circuit has recently analyzed the general treatment of a secured claim under this section of the Code. In Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir.1982), the Court set forth the procedure to follow in treating a secured claim, and addressed the issue of what interest rate should be applied. The Court stated that since the law requires a creditor to make, in effect, a new loan in the amount of the collateral, the interest rate used should be the current market rate for similar loans. Supra, at 431. However, the Court went on to note that "special circumstances" may justify deviating from the current market rate. Supra, at 431.

The debtor points to § 1322(b)(2) for authority that First Federal cannot modify the interest rate on its arrearage. That section provides that a plan may:

(2) 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;

After reviewing the sections involved, I conclude that First Federal is limited to their contract interest rate on any arrearage. Sec. 1322(b)(2) controls the interest to be charged on a claim secured, as herein, only by the debtor's principal residence.

When the Bankruptcy Reform Act was passed, mortgages on debtors' principal residences were singled out for special treatment. Section 1322(b)(2) specifically says that the rights of these mortgage holders cannot be modified. Therefore, a debtor cannot "cram down" a different valuation as he can with other types of secured claims. The claim must be paid in full as a secured claim. The debtor does have the right to cure a default by maintaining regular payments and paying off the arrearage in a reasonable time, but this right does not go so far as to permit a reduction in payments or a change in interest rates. See, In re Taddeo, 685 F.2d 24 (2d Cir.1982).

The gist of First Federal's argument is that where the mortgage rate is lower than current market rates, they should be entitled to modify the rate up to achieve "present value" on the arrearage under § 1325(a)(5). They would further argue that if the mortgage rate is higher than current market rates, the arrearage could not be treated with a lower interest factor since that would be an improper modification of their rights under § 1322(b)(2). This argument, however, cannot be supported by such a strained interpretation of § 1322(b)(2). That section prohibits modification of a mortgage holders rights, whether the modification is to the creditor's advantage or to its detriment.

The bankruptcy court in In re Neal, 10 B.R. 535 (Bkrtcy.S.D.Ohio 1981), extensively analyzed this issue and reached the opposite conclusion. That court held that despite § 1322(b)(2), a Chapter 13 debtor could vary the length of a mortgage, and change the interest rate. Support for this view was found in Congress's intent to make Chapter 13 relief available to a wide range of financially distressed debtors. The Court stated,

While a conclusion can be drawn that Congress intended to treat specially the rights of a creditor secured only by an interest in residential real estate of the debtor, where a blind application of a clause or word in the statute would result in an undermining

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