by Contrary to the principle that “cure and maintain” permits a residential loan debtor to return to status quo ante, the Bankruptcy Court for the Eastern District of North Carolina found that while operation of section 1322(b)(5) reverses a loan acceleration, it does not reverse other contractual consequences of default; specifically an increased interest rate. In re Anderson, No. 13-5843 (Bankr. E.D. N.C. Sept. 5, 2014).
Section 1322(b)(2) permits modification of the rights of secured lenders except in the case of residential loans. Section 1322(b)(5), however, creates a limited exception under which: “notwithstanding paragraph (2) of this subsection, [the plan may] 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.”
Most courts addressing the application of section 1322(b)(5) have found that the cure permits a debtor to roll back the clock to pre-default stage. In re Frazer, 377 B.R. 621, 630 (B.A.P. 9th Cir. 2007) (“to cure means to restore matters to the way they were prior to default”); Olsen v. Habitat for Humanity (In re Olsen), 363 B.R. 908, 910 (B.A.P. 8th Cir. 2007) (citing Di Pierro v. Taddeo (In re Taddeo), 685 F.2d 24, 26-27 (2d Cir. 1982), for the rule that “[c]uring a default returns the situation to pre-default conditions and nullifies the consequences of that default.”); In re Clark, 738 F.2d 869, 872 (7th Cir. 1984) (“[cure] refers to [] the restoration of the way things were before the default.”).
Frequently, returning the loan to the pre-default status has the practical effect of reversing an acceleration clause. See, e.g., Frazer, 377 B.R. 621 (“Acceleration of a debt is a common consequence of a default”). But that is not the only consequence of default reversed upon application of section 1322(b)(5). In Olsen, 363 B.R. 908, for example, the debtor had two Notes with Habitat for Humanity, the second of which only became due upon default on the first. When the debtor filed for bankruptcy and sought to cure the default on the first Note, the court found that the effect was to “unfix” the amount due under Note 2.
In finding that an increased interest rate upon default applies to a claim which is being cured under the chapter 13 plan, the court in Anderson acknowledged that section 1322(b)(5) reverses acceleration, but found that did not reverse other consequences of the default. Rather, the court, found that the “default rate, as an alternative to acceleration, was a negotiated and agreed condition of the loan. Nobelman discourages tampering with that agreement.” In support of this finding the court quoted Nobelman’s enumeration of non-bankruptcy contractual rights: “They include the right to repayment of the principal in monthly installments over a fixed term at specified adjustable rates of interest, the right to retain the lien until the debt is paid off, the right to accelerate the loan upon default and to proceed against petitioners’ residence by foreclosure and public sale, and the right to bring an action to recover any deficiency remaining after foreclosure.” Nobelman v. American Savings Bank, 508 U.S. 324, 330 (1993). From this, the court concluded that rates of interest cannot be returned to status quo ante. But it is clear, and the Anderson court agrees, that this entire enumerated bundle of rights is not immune from modification under section 1322(b)(5). Where an acceleration clause may be modified, there is no justification for not extending that benefit to other rights that are based entirely upon the debtor’s default.
Some courts have found that post-default terms may be relevant to calculation of the arrearages that need to be cured through the plan under section 1322(e). In In re Lighty, 513 B.R. 489 (Bankr. S.C. 2014) and In re Alvarez, 458 B.R. 645 (Bankr. P.R. 2011), for instance, the lending contracts called for a defaulting debtor to pay attorney fees resulting from the lender’s having to institute legal action. Both courts upheld the fee clause (though at a reduced rate in Alvarez) as adding to the arrearage amount to be cured through the plan. Where section 1322(b)(5) permits a residential debtor to cure arrearages in the mortgage and maintain payments according to the pre-default contractual terms, section 1322(e) goes only to amount of arrearages to be repaid rather than the maintenance aspect of the plan. See also In re Campbell, 513 B.R. 846 (Bankr. S.D. N.Y. 2014) (noting that default interest goes to pre-petition arrears).
Cases in which the courts have found that default interest rates apply even where the debtor is curing the default typically involve commercial property. See, e.g., In re Campbell, 513 B.R. 846 (Bankr. S.D. N.Y. 2014) (default interest rates negotiated terms rather than “penalties”); In re Lamelas, No. 12-26067 (Bankr. S.D. Fla. Jan. 25, 2013); In re Sagamore Partners, No. 11-37867 (Bankr. S.D. Fla. July 10, 2012) (interpreting section 1123(d)); In re Adejobi, 404 B.R. 78 (Bankr. E.D. N.Y. 2009) (relied on by the Anderson court).
As a general rule, it may behoove debtors to include a provision in their proposed chapter 13 plans that the default is “waived” under section 1322(b)(3).
The debtor in Anderson filed a notice of appeal to the District Court on September 19, Case No. 14-cv-00690.
Campbell-Bankr.-SD-NY-July-2014