820 F.3d 670
4th Cir.2016Background
- Debtors William Anderson and Danni Jernigan bought a home financed by a promissory note at 5% interest; the note increased interest to 7% upon a post-30-day payment default and also allowed, alternatively, acceleration/foreclosure.
- Debtors defaulted in April 2013; lenders declared the 7% default rate and later initiated foreclosure; debtors filed Chapter 13 on September 16, 2013 and proposed a plan.
- The Chapter 13 plan proposed to cure arrears (calculated at 5%) over 60 months, reinstate the original maturity, and resume post-petition payments at 5%.
- Lenders objected, arguing post-petition payments and arrearage calculations must reflect the note’s 7% default rate; bankruptcy court sustained the objection and so did the district court.
- The district court held post-confirmation payments should be at 7% but erroneously found a 5% rate applied between the petition date and plan effective date; the Fourth Circuit affirmed in part, reversed in part, and remanded.
Issues
| Issue | Anderson's Argument | Hancocks' Argument | Held |
|---|---|---|---|
| Whether a §1322(b) "cure" may reduce a contractually triggered default interest rate on a primary-residence mortgage back to the pre-default rate | Cure restores parties to pre-default positions, undoing consequences of default including elevated interest | Changing the default rate alters the lender’s bargained-for rights and is a forbidden modification under §1322(b)(2) | A cure does not permit reducing the contract default rate; lowering the post-petition interest rate would be an impermissible modification of residential mortgage rights under §1322(b)(2) |
| Whether arrearages and post-petition payments after filing should reflect 5% or 7% | Arrearages and post-petition payments should be calculated at 5% consistent with plan terms | Arrearages and post-petition payments should reflect the 7% default rate provided by the note | Arrearages from June–Sept 16, 2013 and all post-petition payments (including Sep 16–Dec 2013) should use the 7% default rate; district court’s limited 5% ruling reversed |
| Whether the note’s acceleration alternative negates the earlier-imposed default rate during the period before plan effective date | Acceleration is an alternative remedy; after acceleration the rate reverts to 5% for the period until plan took effect | The default rate remains in effect unless foreclosure/acceleration unambiguously supersedes it | The court rejected the view that acceleration automatically nullified the default rate for Sep–Dec 2013 and held the 7% rate governed those payments |
| Whether §1322(b)(3)/(5) reading of "cure" abrogates §1322(b)(2)'s no-modification protection for residential mortgages | Cure authority encompasses undoing all default consequences, including reducing default interest | Cure focuses on deceleration and maintenance of contract payments, not altering bargained-for terms | §1322(b)(2) bars modifications to residential mortgage rights; cure permits decelerating and maintaining contract payments but not lowering agreed default interest |
Key Cases Cited
- Nobelman v. Am. Sav. Bank, 508 U.S. 324 (Sup. Ct.) (rights bargained for by mortgagor and mortgagee are protected from modification under §1322(b)(2))
- In re Litton, 330 F.3d 636 (4th Cir.) (§1322(b)(2) prohibits altering fundamental mortgage terms like lowering payments or changing interest structure)
- Boise Cascade Corp. v. U.S. E.P.A., 942 F.2d 1427 (9th Cir.) (statutory interpretation principle: give effect to each provision and avoid rendering others superfluous)
- Grubbs v. Houston First Am. Sav. Ass'n, 730 F.2d 236 (5th Cir.) (congressional intent distinguishes curing accelerations from modifying installment terms)
- Till v. SCS Credit Corp., 541 U.S. 465 (Sup. Ct.) (discussion of secured creditor risks and interest as compensation)
- Marrama v. Citizens Bank of Mass., 549 U.S. 365 (Sup. Ct.) (bankruptcy’s fresh-start principle cited but does not override statutory text)
- In re Witt, 113 F.3d 508 (4th Cir.) (protecting mortgagee expectations promotes availability of mortgage financing)
- In re Glenn, 760 F.2d 1428 (6th Cir.) (policy balance: homeowner protections vs. preserving lenders’ incentives to fund mortgages)