Wade v. Hannon, 92-5005

• Decision Date: 01 July 1992
• Docket Number: No. 92-5005,92-5005
• Citation: 968 F.2d 1036
• Parties: , 27 Collier Bankr.Cas.2d 675, 23 Bankr.Ct.Dec. 243, Bankr. L. Rep. P 74,736 William J. WADE, Trustee, Appellant, v. Ronnie HANNON, Rosetta Hannon, Donald Neal Rake, Linda Jean Rake, Earnest William Yell, Mary Kathryn Yell, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1036

968 F.2d 1036

61 USLW 2049, 27 Collier Bankr.Cas.2d 675,

23 Bankr.Ct.Dec. 243,

Bankr. L. Rep. P 74,736

William J. WADE, Trustee, Appellant, v. Ronnie HANNON, Rosetta Hannon, Donald Neal Rake, Linda Jean

Rake, Earnest William Yell, Mary Kathryn Yell, Appellees.

No. 92-5005.

United States Court of Appeals, Tenth Circuit.

July 1, 1992.

Lawrence, Atty. Gen., Johnson of Johnson & Swenson, Tulsa, Okl., for appellant.

David A. Carpenter and Harvey C. Carpenter of Carpenter & Carpenter, Tulsa, Okl., for appellees.

Before LOGAN, BARRETT and EBEL, Circuit Judges.

LOGAN, Circuit Judge.

This consolidated case involves the interplay between 11 U.S.C. § 506(b) (as construed by United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989)), 11 U.S.C. § 1325(a)(5)(B), and 11 U.S.C. § 1322(b). ¹ The issue before us is whether debtors under a Chapter 13 bankruptcy plan who cure a default on the mortgage of their principal residence may be required to pay interest on the arrearage to an oversecured creditor. This issue has been considered by five other circuits, which have split four to one. ² The issue has also divided the district and bankruptcy courts in this circuit. ³

Section 506(b) of the Bankruptcy Code, 11 U.S.C. § 506(b), which is applicable to Chapter 13, see id. § 103(a), provides that an oversecured creditor is entitled to "interest on such claim," as well as any reasonable fees, costs, or charges provided under the agreement from which the claim arose. In Ron Pair, the Supreme Court held that an oversecured lienholder who has no agreement with the debtor--a nonconsensual secured creditor such as the government with a lien for unpaid taxes--is entitled, under a plain reading of § 506(b), to postpetition interest on its claim.

The "cramdown" provisions of 11 U.S.C. § 1325(a)(5) provide that Chapter 13 plans must protect secured creditors' liens and give them "the value ... [that] is not less than the allowed amount of such claim." Id. § 1325(a)(5)(B)(i) and (ii). The cramdown provisions have been construed to require the payment of postpetition interest on a secured claim to prevent economic diminution of the value of that claim. See, e.g., Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir.1982).

On the other hand, a Chapter 13 plan may not "modify" a claim secured only by a security interest in the debtor's principal residence. 11 U.S.C. § 1322(b)(2). A following subsection, however, provides that notwithstanding that a residential mortgage claim may not be modified the plan may "provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending." Id. § 1322(b)(5).

I

In the case before us, debtors filed for protection under Chapter 13 of the Bankruptcy Code in three separate actions. They had mortgages on their principal residences that were in default. Each of these mortgages was oversecured. In each case, the debtors' Chapter 13 plan called for the debtors to make all future monthly payments of principal and interest in the amount specified in the loan documents. In addition the debtors were to cure the default by making payments over time to compensate for the missed monthly payments--the arrearages--and attorney's fees and default penalties owing under the respective mortgage instruments. The mortgage instruments provided for a five dollar late payment charge but did not provide for interest to be paid on arrearages or on costs and attorney's fees; the instruments provided only that these items should become due and payable immediately. ⁴

In each case, relying on 11 U.S.C. §§ 506(b) and 1325(a)(5), the mortgagee requested interest on the arrearage, attorney's fees and costs created by the debtors' default before cure, and in each case the bankruptcy court declined to order such interest. On appeal to the district court the cases were consolidated, and the district court affirmed, holding that § 506(b) and § 1325(a)(5) did not apply to these cases because of the provisions of 11 U.S.C. § 1322(b). Thus, under the district court's judgment, when approving a Chapter 13 plan to cure the default on an oversecured mortgage of a debtor's primary residence, the mortgagee is not to be awarded interest on arrearages or other amounts owed absent provision for such interest in the mortgage documents. This appeal followed.

We review this question of law de novo. Heins v. Ruti-Sweetwater, Inc. (In re Ruti-Sweetwater, Inc.), 836 F.2d 1263, 1266 (10th Cir.1988).

II

In the first circuit court decision to consider this interest-on-arrearages issue, Cardinal Fed. Sav. & Loan Ass'n v. Colegrove (In re Colegrove), 771 F.2d 119 (6th Cir.1985), the Sixth Circuit ruled that interest is payable, holding that "[b]y ordering that interest be paid on the arrearage, there is no modification of the loan agreement. Instead, the interest requirement is merely incidental to the 'cure,' which is excepted from the rule of section 1322(b)(2)." 771 F.2d at 122. The court relied upon the fact that secured creditors (and in one of its prior cases an unsecured creditor) received such interest under § 1325; it reasoned that it would be "anomalous" to hold that § 1322(b) was intended to prohibit allowing such interest to a mortgagee on a principal residence. Id. Denying interest would prevent the creditor from realizing the "full present value of the amount owed." Id. at 121.

Judge Celebrezze, dissenting in Colegrove, would have denied interest, 771 F.2d at 123, and the four other circuits addressing the issue since have held that no interest is payable on arrearages and other charges paid over time in these Chapter 13 "cure" plans absent language requiring it in the underlying mortgage contract or under state law. See Shearson Lehman Mortgage Corp. v. Laguna (In re Laguna), 944 F.2d 542 (9th Cir.1991), cert. denied, --- U.S. ----, 112 S.Ct. 1577, 118 L.Ed.2d 219 (1992); Landmark Fin. Servs. v. Hall, 918 F.2d 1150 (4th Cir.1990); Appeal of Capps, 836 F.2d 773 (3d Cir.1987); Foster Mortgage Corp. v. Terry (In re Terry), 780 F.2d 894 (11th Cir.1986). We think it important to review the analysis in those opinions.

Dissenting in Colegrove, Judge Celebrezze reasoned that interest on arrearages is not part of "curing" the mortgage default unless an interest provision is in the mortgage contract; therefore allowing interest when there is no interest provision in the contract modifies the contract in contravention of § 1322(b)(2). 771 F.2d at 123-24. Judge Celebrezze thought that Congress did not intend to place the mortgagee in a better position under Chapter 13 than it would be under the mortgage contract. He asserted that the analogies to § 506(b) and § 1325 missed the point, because the mortgagee does not have a "claim," instead it has a "security interest" governed by § 1322(b)(2) and (5). Id. at 124. He acknowledged that as "a matter of economics" interest might be necessary to permit the creditor to realize the full value of the debt. Id. at 125. But, reviewing the legislative history, Judge Celebrezze was convinced Congress intended "to treat security interests in principal residences different from all other claims." Id.

The opinion in the next circuit court case, In re Terry, acknowledged the lender's argument about the "time value of money and the loss of income to lenders if interest is not allowed on arrearages," and declared there is "simply no right or wrong" to the argument. 780 F.2d at 895. The Eleventh Circuit panel stated that the issue turns on the language of the Code sections and what Congress intended. The Terry court mentioned that the statute "modified" mortgage contracts, which otherwise would allow the lender to declare the entire debt due, to permit curing the default and reinstatement of regular installment payments. Id. at 896. The court held § 1325 inapplicable to residential mortgages based on legislative intent of § 1322(b) "to create a special exception to § 1325(a)(5)(B)," and reasoned that to allow interest on arrearages would constitute a "modification" prohibited by § 1322(b)(2). Id. at 896-97. "In any event, the benefits for the special treatment of home mortgages which both prohibits discharge of the long term portion of the mortgage debt ... and prevents modification except as to cure and reinstatement, and the reasons therefor militate against permitting the mortgagee to receive more cash from the debtors than is provided in the contract." Id. at 897. The court declared that lenders could protect themselves by specific provisions in their contracts.

The Third Circuit in Appeal of Capps, relying upon legislative history and analogous Code provisions, concluded that Congress intended to distinguish between "cure" and "modification." 836 F.2d at 775-76. The Capps court considered § 1325 as involving modification, because under cramdown provisions secured creditors' rights can be " 'modified by reductions in payments, interest charges or the total amount due,' " id. at 776 (quoting 5 Collier on Bankruptcy p 1322.09 (15th ed. 1986) (hereinafter Collier )), as long as the present value is maintained. The opinion acknowledged that under the cure of § 1322(b) the secured creditor's position is "adversely affected," id., because the Chapter 13 plan abrogates contract limitations on the cure period and eliminates the creditor's right to collect arrearages by foreclosure. But the Capps panel believed Congress regarded these "incidental adverse effects" as "insignificant when compared with the adverse effects of modifications." Id. The court declared that

[c]ure by its very nature assumes a regime where debtors reinstate defaulted debt contracts in accordance with the conditions of their contracts. Usually the terms for cure are provided in the contracts themselves; Section 1322(b)(5) preserves such arrangements with respect to long-term mortgages by ensuring that debtors will not be prevented from...