CHAPTER 13
ORDER
This matter came before the court on the objection of RBS Citizens, N.A., successor-in-interest to COO Mortgage Corporation f/k/a American Home Funding, Inc. (collectively “RBS Citizens”) to John
At the conclusion of the hearing, the court took the matter under advisement and afforded the parties the opportunity to file post-hearing memoranda of law outlining their respective positions. The court also indicated that it would first determine whether the interest rate on RBS Citizens’ claim could be modified pursuant to § 1322(c)(2) of the Bankruptcy Code.
BACKGROUND
On July 25, 1986, Phillip Flores and his wife, Sue Flores, executed a promissory note in favor of RIHT Mortgage Corporation (“RIHT Mortgage”) in the original principal amount of $57,609 with interest accruing at 9.5% per annum (“promissory note”). By its terms, the promissory note became due and payable in full on August 1, 2016. The promissory note contained an acceleration clause, which provided as follows:
If default be made in the payment of any installment ... and if the default is not made good prior to the due date of the next such installment, the entire principal sum and accrued interest shall at once become due and payable without notice at the option of the holder.... Failure to exercise this option shall not constitute a waiver of the right to exercise the same in the event of any subsequent default.
To secure repayment of the promissory note and ensure their pеrformance of all the obligations thereunder, Mr. and Mrs. Flores executed a deed of trust encumbering real property located at 141 Carriage House Trail, Garner, North Carolina and more particularly described as “all of Lot 23, Georgetown Manor according to map entitled ‘Property of Georgetown Manor, Phase III, Section D,’ recorded in Book of Maps 1985, Page 1037, Wake County Registry.” (“real property”). On April 12, 1990, the dеbtor acquired the real property subject to the promissory note and deed of trust. The promissory note, deed of trust and all rights thereunder were assigned to RBS Citizens’ predecessor-in-interest, American Home Funding, Inc., on January 31,1991.
The debtor filed a voluntary petition seeking relief under chapter 13 of the Bankruptcy Code on June 8, 2012. RBS Citizens filed a proof of claim,
The debtor’s proposed chapter 13 plan, as modified by the trustee in his motion for confirmation (hereinafter “proposed plan”), provides for the payment of $800 per month for five months, followed by monthly payments of $810 for fifty-three months “or until all unsecured creditors have received an amount sufficient to satisfy the requirements of § 1325(a)(4) or § 1325(b)(l)(B)[,] whichever is greater.” The proposed plan treats RBS Citizens’ claim as fully secured by thе real property and proposes to pay it in full over fifty-eight months with interest accruing at 5.25% per annum. As a result, the estimated monthly payment with respect to RBS Citizens’ claim is $226.02.
RBS Citizens filed the objection currently before the court on December 5, 2012, asserting that the proposed plan cannot be confirmed because it violates § 1322(b)(2) of the Bankruptcy Code by modifying the interest rate on its claim. In support of this assertion, RBS Citizens relies оn Witt v. United Companies Lending Corp. (In re Witt),
The debtor and the trustee contend that § 1322(c)(2), when read in conjunction with § 1325(a)(5), permits modification of the payment terms of RBS Citizens’ claim, including the interest rate. Relying on In re Joyner, No. 08-05647,
DISCUSSION
The issue before the court is whether § 1322(c)(2), which was added by the Bankruptcy Reform Act of 1994, permits modification of the interest rate accruing on a claim secured by a lien on real property serving as a debtor’s principal residence.
Section 1322(b)(2), coined the “anti-modification” provision, provides that a “plan may ... 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....” 11 U.S.C. § 1322(b)(2). This provision, “allows modification of the rights of both secured and unsecured creditors, subject to special protection for creditors whose claims are secured only by a
Section 1322(c)(2), however, carves out a rare exception to the anti-modification provision by stating that “the plаn may provide for the payment of the claim as modified pursuant to section 1325(a)(5)” where “the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor’s principal residence is due before the date on which the final payment under the plan is due....” 11 U.S.C. § 1322(c)(2); In re Young,
Congress obviously believed that debtors with such mortgages needed additional protection. Short-term and balloon payment mortgages often have high rates or terms that are particularly unfavorable, which Congress has deemed deserving of close scrutiny. And debtors nearing the end of a long-term mortgage often have large amounts of equity that could be lost in a foreclosure.
8 Collier on Bankruptcy ¶ 1322.17 (internal footnote and citations omitted).
A claim secured by a debtor’s principal residence may be modified under the provisions of § 1322(c)(2), only if the proposed modification complies with § 1325(a)(5). See, e.g., 11 U.S.C. § 1322(c)(2); Crickmore I, No. 07-01350-5-ATS, at 2. Section 1325(a)(5) requires that each allowed secured claimant, absent their acceptance of the plan or the debtor’s surrender of the collateral, retain the lien securing their claim and receive distributions whose “value, as of the effective date of the plan, ... is not less than the allowed amount of such claim.” 11 U.S.C. § 1325(a)(5)(B); see, e.g., Witt,
Provided that § 1325(a)(5) is satisfied, courts have consistently permitted claims subject to modification under § 1322(c)(2) to be restructured “at an interest rate more favorable to the debtor than the rate on the original note.” Joyner,
Courts in this district have addressed and concluded that the Bankruptcy Code permits modification of the interest rate on claims secured by a debtor’s principal residence in Joyner, Crickmore I, and Crick-more II. The court in Joyner, addressing whether to impose the automatic stay as to a secured creditor under § 362(c)(4)(D), opined that the claim, which was fully secured by a deed of trust on the debtor’s principal residence and called for a final balloon payment almost two years prior to the date that the final chapter 13 plan payment was due, could be modified under § 1322(c)(2).
The modifications proposed by the debtors in Crickmore I and Crickmore II included reducing the interest rate, lowering the monthly payment amount, extending its term and imposing a final balloon payment prior to completion of the plan. Crickmore I, No. 07-01350-5-ATS, at 1. The secured claimant, Wells Fargo Financial North Carolina 1, Inс. (“Wells Fargo”), objected to confirmation of the debtors’ chapter 13 plan, arguing that these proposed modifications were prohibited by 1325(a)(5). Id. at 1-2. In Crickmore I, the court sustained Wells Fargo’s objection and, after setting forth the requirements for confirmation, afforded the debtors ten days to amend their plan to comply with § 1325(a)(5)(B). Id. at 2-4. Although it sustained the objection, the court observed the following:
While § 1322(b)(2) of the Bankruptcy Code prohibits bifurcation of Wеlls Fargo’s claim, other modifications of the claim (such as extension of payment terms) are permissible in this case under § 1322(c)(2). Since the last payment on the mortgage loan becomes due prior to the end of the debtors’ chapter 13 plan, the debtors may modify Wells Fargo’s claim in accordance with the requirements of § 1325(a)(5).
Crickmore I, No. 07-10350-5-ATS, at 2 (citation omitted). Following submission of the debtors’ amended plan and in accordance with Crickmore I, the court considered the appropriate interest rate for Wells Fargo’s mortgage claim in Crickmore II, No. 07-01350-5-ATS, at 1. After determining that the current national prime rate (7.5%) was the appropriate interest rate under the formula adopted in Till v. SCS Credit Corp.,
RBS Citizens, relying exclusively on Witt, opposes confirmation on the grounds that the proposed treatment of its сlaim— modification of the contractual interest rate — violates § 1322(b)(2) and is not permitted under § 1322(c)(2). This reliance on Witt, however, is misplaced. After recognizing § 1322(c)(2) was an exception to the anti-modification provision, the Fourth Circuit in Witt held that it “does not permit the bifurcation of an underse-cured loan into secured and unsecured claims if the only security for the loan is a lien on the debtor’s principal residence.” Id. at 513-14 (refusing to rеcognize that § 1322(c)(2) overruled Nobelmari). The chapter 13 plan in Witt proposed to bifurcate the claim of United Companies Lending Corporation (“United”), totaling $22,561.02, into secured and unsecured components. Id. at 509.
Witt has been heavily criticized
The court finds, based on the record, that the facts of the instant case compel application of § 1322(c)(2) and allow the debtor to restructure the interest rate on RBS Citizens’ claim. The promissory note and deed of trust forming thе basis of RBS Citizens’ claim will mature on August 1, 2016, which is prior to the due date of the final payment under the fifty-eight month plan.
CONCLUSION
Based on the foregoing, RBS Citizens’ objection is OVERRULED and the trustee’s motion for confirmation is ALLOWED.
Notes
. Hereinafter and unless indicated otherwise, all statutory references are to the Bankruptcy Code, 11 U.S.C. §§ 101, et seq.
. RBS Citizens did not contest the interest rate set forth in the proposed plan, opting to oppose only the ability to modify that rate. On the other hand, the debtor did contest the interest rate at the hearing, but and after the hearing, debtor’s cоunsel notified the court, the trustee, and counsel for RBS Citizens by email that he did not intend to object to the proposed interest rate of 5.25%. He proffered that the difference between an interest rate of 5.25% and the rate originally proposed by the debtor (3.75%) would only result in an $8.00 per month increase in her monthly plan payments. Because there is no longer a dispute over the interest rate, a subsequent proceeding to determine the appropriate interest rate is not necessary.
.The initial proof of claim, filed on September 5, 2012, was in the amount of $11,555.72 and included prepetition arrearages totaling $1,286.18.
. Schedule A, which was filed along with the debtor's voluntary petition, lists the fair market value of the residence as $85,000.
. The “rights” that are protected from modification by § 1322(b)(2) are “those ... bargained for by the mortgagor and the mortgagee.” Home Funds Direct v. Monroy (In re Monroy),
. The parties in Joyner stipulated that the amount of the secured creditor's claim was $54,323 and the value of the debtor’s residence was $64,816.
. The secured portion ($13,100) was equal to the fair market value of the debtors’ principal residence and would be paid in full over five years plus interest of 10% per annum, whereas the remainder ($9,461.02) would be classified and treated as unsecured. Witt,
. The difference between Witt and Paschen is fundamental. The Fourth Circuit, in Witt, interpreted § 1322(c)(2) as only allowing modification of the payment terms of a mortgage claim, whereas Paschen held the same provisiоn permits all the modifications of a claim allowed by § 1325(a)(5), including the ability to bifurcate the claim into secured and unsecured portions. See, e.g., Witt,
. Witt has been described as "makfing] a mess of several other well-settled provisions of the Code” by "trumpfing] the plain language of the statute with the ambiguous silence of legislative history.” In re Tekavec,
. Additionally, RBS Citizens invoked an acceleration clause in the promissory note and, as a result, it could be argued that the remaining balance thereunder became immediately due and payable approximately one month prior to the petition date.