Thompson, In re

• Decision Date: 30 January 1990
• Docket Number: No. 89-6016,89-6016
• Citation: 894 F.2d 1227
• Parties: , 22 C.B.C. 250, 20 Bankr.Ct.Dec. 213, Bankr. L. Rep. P 73,225 In re Wayne D. and Annie M. THOMPSON, Debtors-Appellees. JIM WALTER HOMES, INC., Creditor-Appellant, v. Ann SPEARS, Trustee-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1227

894 F.2d 1227

58 USLW 2465, 22 C.B.C. 250, 20

Bankr.Ct.Dec. 213,

Bankr. L. Rep. P 73,225

In re Wayne D. and Annie M. THOMPSON, Debtors-Appellees.

JIM WALTER HOMES, INC., Creditor-Appellant, v. Ann SPEARS, Trustee-Appellee.

No. 89-6016.

United States Court of Appeals, Tenth Circuit.

Jan. 30, 1990.

Lawrence A.G. Johnson, Tulsa, Okl., for creditor-appellant.

James A. Conrady of James A. Conrady & Associates, Inc., Okmulgee, Okl., for debtors-appellees.

Before LOGAN, SEYMOUR, and BALDOCK, Circuit Judges.

LOGAN, Circuit Judge.

Jim Walter Homes, Inc. (Walter Homes) appeals from the district court's order affirming the bankruptcy court's denial of its motion to lift the automatic stay imposed by 11 U.S.C. Sec. 362. Walter Homes seeks to foreclose the mortgage it holds on the debtors' principal residence and complete sale of the property. ¹ This appeal raises the issue of the scope of the debtors' right to cure mortgage defaults under 11 U.S.C. Sec. 1322(b). ²

After Wayne and Annie Thompson (debtors) defaulted, Walter Homes filed an action in an Oklahoma state court to foreclose the mortgage and received a foreclosure judgment and an order of sale. The foreclosure sale was scheduled for November 13, 1986. On November 10, 1986, however, debtors filed a bankruptcy petition under chapter 13 of the Bankruptcy Code, thereby staying the foreclosure sale under the automatic stay of 11 U.S.C. Sec. 362.

In the bankruptcy court, Walter Homes moved for relief from the stay in order to proceed with the foreclosure sale. The bankruptcy court denied this motion and affirmed debtors' plan of reorganization, which provided for cure of the default on the Walter Homes mortgage debt and reinstatement of the original payment schedule pursuant to 11 U.S.C. Sec. 1322(b)(3) & (5). Walter Homes appealed to the district court, which affirmed. It now appeals to this court. Because the relevant facts are undisputed and we consider only legal issues, our review is plenary. First Bank v. Mullet (In re Mullet), 817 F.2d 677, 679 (10th Cir.1987).

Walter Homes contends that because debtors filed their bankruptcy petition after the Oklahoma foreclosure judgment, they no longer had a right to invoke the chapter 13 cure provisions. We disagree. Section 1322(b) provides a right to cure any default, but provides no express time limitation for the exercise of this right. ³ After a mortgagor's default, the mortgagee must initiate an often long and cumbersome mortgage foreclosure process in order to have its collateral applied toward the mortgage debt. Thus we must consider at what point during this state mortgage foreclosure process the federal bankruptcy right to cure terminates. As a practical matter, this determines the deadline by which debtors must file a bankruptcy petition in order to avail themselves of the bankruptcy cure provisions.

The courts have struggled with this problem and have adopted various approaches. See generally Federal Land Bank v. Glenn (In re Glenn), 760 F.2d 1428, 1432 (6th Cir.) (summarizing the various approaches), cert. denied, 474 U.S. 849, 106 S.Ct. 144, 88 L.Ed.2d 119 (1985); Annotation, Right of Debtor to "De-Acceleration" of Residential Mortgage Indebtedness Under Chapter 13 of Bankruptcy Code of 1978 (11 U.S.C. Sec. 1322(b)), 67 A.L.R.Fed. 217 (1984 & Supp.1989). Even so, all circuits that have addressed the issue have agreed that contractual acceleration of mortgage debt upon default does not end the debtor's right to cure the mortgage default in bankruptcy by paying the amount of the original default, rather than the entire accelerated debt. See In re Roach, 824 F.2d 1370, 1374-77 (3d Cir.1987); Downey Sav. & Loan Assoc. v. Metz (In re Metz), 820 F.2d 1495, 1497 (9th Cir.1987); Foster Mortgage Corp. v. Terry (In re Terry), 780 F.2d 894, 896 (11th Cir.1986); Glenn, 760 F.2d at 1431-36; In re Clark, 738 F.2d 869, 872 (7th Cir.1984); Grubbs v. Houston First Am. Sav. Ass'n, 730 F.2d 236, 241-42 (5th Cir.1984) (en banc), vacating 718 F.2d 694 (5th Cir.1983) (panel); Di Pierro v. Taddeo (In re Taddeo), 685 F.2d 24, 26-27 (2d Cir.1982); In re Nelson, 59 B.R. 417, 419 (9th Cir. BAP 1985). ⁴ Beyond this point, however, there is little agreement between the circuits on when the right to cure ends.

The Sixth Circuit's approach in Glenn, 760 F.2d at 1435-36, was to draw a bright line cutoff, as a matter of federal law, at the date of sale of the property under state foreclosure proceedings. The Third and Seventh Circuits, Roach, 824 F.2d at 1377-79, and Clark, 738 F.2d at 871, make the cutoff date depend upon the court's interpretation of the effects of the particular state law. Of course, if a mechanical application of state law were to be used in all respects, the right to cure would end at the time the mortgage debt is accelerated, a result which all circuits have disapproved as conflicting with 11 U.S.C. Sec. 1322(b).

The courts that purport merely to apply state law have themselves had difficulty fitting state mortgage and foreclosure concepts to the bankruptcy power to cure. For example, the Roach court thought that the right to cure should end on the date of the judgment of foreclosure because "even if a mortgage survives the entry of judgment in New Jersey, the mortgagee possesses independent rights by virtue of its judgment." 824 F.2d at 1378. The Clark court, applying Wisconsin law, permitted cure beyond the foreclosure judgment date, because "[n]either equitable nor legal title passes until the foreclosure sale is held." 738 F.2d at 871. In Justice v. Valley Nat'l Bank, 849 F.2d 1078 (8th Cir.1988), interpreting analogous provisions in chapter 12 and purporting to apply South Dakota law, the Eighth Circuit allowed cure only up until sale under the foreclosure judgment, not during a longer redemption period during which the mortgagor retained legal title, because it thought Congress intended to allow debtors to cure only until "[e]xtinguishment of the mortgage contract [which] works a substantial change in the relationship of the parties." Id. at 1084-85 & n. 6. Approaching the problem from a purely state law point of view, therefore, has yielded several distinctly different cutoff events. In fact, it is often hard to determine exactly which state law event these courts consider to be controlling.

The "state law" courts find themselves bogged down in formalistic notions of title and merger which survive more as a matter of history than as a matter of practical significance. See generally G. Nelson & D. Whitman, Real Estate Finance Law Secs. 1.1-1.5, 4.1-4.3, 6.15-6.17 (2d ed. 1985 & Supp.1989) [hereinafter Real Estate Finance Law ]. This is illustrated by decisions attempting to apply the Seventh Circuit's Clark holding that transfer of title determines the cutoff date for the bankruptcy cure provisions. Federal courts applying Illinois law have not been able to agree on when the mortgagor loses title. In re Schnupp, 64 B.R. 763, 765-66 (Bankr.N.D.Ill.1986), held that title passes at the end of the statutory redemption period, in spite of at least three prior cases holding that title passes at the date of the foreclosure judgment. Goldberg v. Tynan (In re Tynan), 773 F.2d 177, 178 (7th Cir.1985); First Fin. Sav. & Loan Ass'n v. Winkler, 29 B.R. 771, 773 (N.D.Ill.1983); In re Jenkins, 14 B.R. 748, 749-50 (Bankr.N.D.Ill.1981). ⁵

A more useful starting point would seem to be the concept of property of the bankruptcy estate. 11 U.S.C. Sec. 541. In the context of property of the estate, the current Bankruptcy Code rejected the requirement of the former act that property be transferrable or reachable by creditors under state law in order for it to pass into the estate. These notions were overly formalistic and resulted in arbitrary line drawing. The Bankruptcy Code, therefore, settled on an expanded concept encompassing any interest under state law, legal or equitable. 4 Collier on Bankruptcy p 541.02 (L. King 15th ed. 1989). At the very least, a mortgage debtor must have some legal or equitable interest in property which enters the bankruptcy estate if he hopes to retain it through the bankruptcy cure provisions. See Clark, 738 F.2d at 871; In re Ivory, 32 B.R. 788, 791 (Bankr.D.Or.1983). No court has held that debtors can use the bankruptcy cure provisions to recover property in which they no longer have any interest under state law.

Somewhere on the continuum of the mortgagor's interests under state foreclosure law we must draw a line beyond which there can be no cure of default. We hold that this issue is as much one of federal law, the proper construction of 11 U.S.C. Sec. 1322(b), as is the determination that this section gives the debtor the right to reverse contractual acceleration of a mortgage in default. Our problem is that we have little help from the words of the statute or its legislative history, so we must try to reconcile the policies of Sec. 1322(b) and state mortgage foreclosure law. Of all the various incidents of property ownership the mortgagor enjoys under state law, the most significant in considering the scope of the right to avoid foreclosure and retain mortgaged property through bankruptcy cure would seem to be redemption rights--the right to avoid foreclosure and retain mortgaged property by paying a specified sum of money.

All states apparently permit redemption of mortgaged property, not simply until the date of the foreclosure judgment, but until a foreclosure sale. Real Estate Finance Law Sec. 7.1, at 478. Oklahoma is no exception. See Lincoln Mortgage Investors v. Cook, 659 P.2d 925, 928 (Okla.1982); In re Snow, 94 B.R. 198, 199 (Bankr.N.D.Okla.1988). About half of the states go beyond that, to allow a statutory period of redemption after sale. Real Estate Finance Law Sec. 7.1, at 479. The concept of property of the bankruptcy estate is broad enough to include statutory or equitable rights of redemption. 4 Collier on Bankruptcy p 541.07.

After default and...