Richard JUSTICE, et al., Appellants, v. VALLEY NATIONAL BANK, et al., Appellees.
No. 87-5339.
United States Court of Appeals, Eighth Circuit.
Submitted Oct. 20, 1987. Decided June 15, 1988.
849 F.2d 1078
James M. Wiederrich, Sioux Falls, S.D., for appellees.
Before HEANEY, JOHN R. GIBSON and WOLLMAN, Circuit Judges.
JOHN R. GIBSON, Circuit Judge.
In July of 1986, a foreclosure judgment was entered on the farm of Richard and Bonnie Justice in South Dakota state court. Following the foreclosure sale, but before expiration of the state statutory redemption period, the Justices filed a petition and proposed a plan of reorganization under Chapter 12 of the bankruptcy code.
The Justices operate and reside on a farm in Brookings County, South Dakota. On October 31, 1978, they borrowed $365,000 from the Prudential Insurance Company of America at an annual interest rate of 9.75 percent, and gave a mortgage on their farmland in return. The Justices fell behind in payments, and on April 22, 1986 Prudential commenced foreclosure proceedings in the Brookings County circuit court. See
On February 17, 1987, without having redeemed the property or extended the statutory redemption period, the Justices filed a petition for reorganization under Chapter 12 of the bankruptcy code. On March 23, 1987, they proposed a plan of reorganization in which they offered to pay Prudential interest on an outstanding balance of $315,000 plus a reduction in principal of $9,733 during each of the three years of the plan. Thereafter, the Justices proposed to pay the balance over a twenty year period at an interest rate of ten percent per year with the principal reduced in equal annual installments. In this manner they proposed to gradually “redeem” the property, with Prudential retaining a secured position until all payments were completed.2
On April 3, 1987, the Justices brought a motion in bankruptcy court to permit them to use cash collateral, in which Valley National Bank held a security interest, for the purpose of operating their farm during the 1987 crop season. See
The Justices appealed to the district court, which affirmed the bankruptcy court‘s decision in an order dated July 21, 1987. The Justices then filed a notice of appeal to this court and moved before the district court for a stay pending appeal. The district court denied the motion. The Justices filed a similar motion before this court, and on August 11, 1987, the date the statutory redemption period was due to expire, we granted a temporary stay to allow Valley National and Prudential to respond. We then set the case for argument to decide whether Johnson v. First National Bank of Montevideo, 719 F.2d 270 (1983), cert. denied, 465 U.S. 1012, 104 S.Ct. 1015, 79 L.Ed.2d 245 (1984), is applicable to this case and whether Chapter 12 permits a debtor to cure in these circumstances.3
The Justices do not seek relief under any of the provisions we reviewed in Johnson; their argument is based entirely on Chapter 12. Thus, although we have found Johnson instructive on general points of law, it does not control this case, and our analysis centers on the Justices’ claim that Chapter 12 authorizes bankruptcy courts to extend state redemption periods.
The Justices point to
I.
The Justices first argue that section 1222(b)(2) empowers debtors to extend a state‘s redemption period and defer the right of the buyer at a foreclosure sale to receive legal title and possession of the land. The section provides that a plan may “modify the rights” of holders of secured or unsecured claims.
For several reasons, we do not believe that the statutory right of redemption is subject to modification under section 1222(b)(2). First, the Justices’ proposed extension of the redemption period under subsection (b)(2) is barred by the express language of subsection (c), which states:
Except as provided in subsections (b)(5) and (b)(9), the plan may not provide for payments over a period that is longer than three years unless the court for cause approves a longer period, but the court may not approve a period that is longer than five years.
Second, application of section 1222(b)(2) in these circumstances would override the automatic extension provided by
We hold that section 1222(b)(2) cannot provide relief after the mortgage contract has been dissolved and a foreclosure sale has been held, except in accordance with state law.
II.
The Justices’ next argument is that a debtor‘s right to cure default under subsections (3) and (5) allows the debtor to return the obligation to pre-default status, although the debt may have been accelerated pursuant to state law. They argue that “[c]uring a default commonly means taking care of the triggering event and returning to pre-default conditions,” In re Taddeo, 685 F.2d 24, 26-27 (2d Cir.1982), and that if debtors do not have the ability to “de-accelerate” mortgages in some circumstances, the cure provisions of Chapter 12 and their rehabilitative purposes may be frustrated. See Roach, 824 F.2d at 1377. They correctly state that Chapter 12 is patterned after Chapter 13, rendering Chapter 13 cases relevant to our interpretation of Chapter 12. They point out that each court of appeals confronted with the issue under Chapter 13 has decided that a home mortgage default may be cured after contractual acceleration of the full mortgage debt. Roach, 824 F.2d at 1374-77; In re Terry, 780 F.2d 894 (11th Cir.1985); In re Glenn, 760 F.2d 1428, 1442 (6th Cir.), cert. denied, 474 U.S. 849, 106 S.Ct. 144, 88 L.Ed.2d 119 (1985); In re Clark, 738 F.2d 869, 872-74 (7th Cir.1984); Grubbs v. Houston First American Savings Association, 730 F.2d 236, 237 (5th Cir.1984) (en banc); Taddeo, 685 F.2d at 26-27.
This case, however, involves more than a default and contractual acceleration clause. A judgment of foreclosure has been entered against the Justices, and their land has been sold pursuant to the judgment. Acceleration of the debt is a result of the statutory redemption provision, rather than a contractual clause. Thus far, no court of appeals confronting the issue under Chapter 13 has held that a home mortgage default may be cured during a redemption
Our analysis is governed by certain general principles of bankruptcy law. The Constitution empowers Congress to establish nationally uniform bankruptcy laws, and when Congress has chosen to exercise its authority, contrary provisions of state law must give way. However, state laws are suspended only to the extent of actual conflict with the federal bankruptcy system. Johnson, 719 F.2d at 273. In the absence of any conflict or unless some federal interest requires a different result, the law of the state where the property is situated governs questions of property rights. Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 917-18, 59 L.Ed.2d 136 (1979); Johnson, 719 F.2d at 273-74.
We initially examine the cure provisions of section 1222(b) in the context of South Dakota law. See Butner, 440 U.S. at 54-55, 99 S.Ct. at 917-18. In South Dakota, “a foreclosure by action of a mortgage upon real estate operates as a complete extinguishment, satisfaction and payment of the debt secured by the mortgage.”
To apply the relevant provisions of section 1222(b) in this context, we “begin with the language employed by Congress and the assumption that the ordinary meaning of that language accurately expresses the legislative purpose.” Park N’ Fly, Inc. v. Dollar Park & Fly, Inc., 469 U.S. 189, 194, 105 S.Ct. 658, 661, 83 L.Ed.2d 582 (1985). The terms “cure” and “default” are nowhere defined in the bankruptcy code. However, as the Third Circuit recently emphasized, these terms are commonly understood to presuppose a contractual relationship. Roach, 824 F.2d at 1377. See also Clark, 738 F.2d at 872. In the context of South Dakota law, the debtor‘s right to cure a mortgage default under sections 1222(b)(3) and (5) would therefore expire when the mortgagee (or a third party) purchases the property at a foreclosure sale.
The Justices have not shown any “actual conflict” between these provisions of South Dakota law and section 1222(b) which would require us to override the state redemption scheme. See Johnson, 719 F.2d at 273. They argue that section 1222(b) contains no provisions limiting the right to cure, whereas under South Dakota law the right of redemption generally expires one year after a foreclosure sale. In fact, the right to cure under subsection (3) is limited to a maximum period of five years,
A distinction must be drawn, however, between the contractual right to cure and the statutory right of redemption. As we have said, a foreclosure judgment and sale extinguish the contractual mortgage relationship, and a debtor who attempts to “cure default” after that time actually seeks modification of the state court judgment and sale. The arguments advanced against this position with respect to section 1222(b)(2) apply here, as well. See supra p. 1083. In our view, by using the terms “cure” and “default” without special definitions, Congress evidenced its intent to provide additional relief for defaulting mortgagors only as long as the contractual relationship continues, and to allow state law to control when that relationship is dissolved. Extinguishment of the mortgage contract works a substantial change in the relationship of the parties, and its significance is simply too great for us to presume that Congress overlooked this in drafting Chapter 12. The bankruptcy code generally distinguishes between contractual obligations and rights arising from judicial proceedings or by operation of statute, indicating congressional awareness of the differences between them.7 We therefore see no conflict between the cure provisions of section 1222(b) and South Dakota‘s redemption scheme.
The Justices have also failed to identify any federal interests served by Chapter 12 which would allow us to read sections 1222(b)(3) and (5) as preempting provisions. See Butner, 440 U.S. at 55, 99 S.Ct. at 918. They argue that Chapter 12 evinces a strong federal interest in providing more powerful remedial legislation for family farmers who were having difficulty reorganizing under the restrictions of Chapters 11 and 13. They correctly point out that Chapter 12 “alters those provisions [of Chapter 13] that are inappropriate for family farmers,” including the home mortgage restriction of section 1322(b)(2), and omits several of the more complex and time-consuming provisions of Chapter 11. H.R. Conf.Rep. No. 958, 99th Cong., 2d Sess. 48, reprinted in 1986 U.S.Code Cong. & Admin. News 5246, 5249. From this they argue that Chapter 12 generally should be interpreted more liberally than its predecessors, and that the right to cure in particular should be more expansively construed.
We are not persuaded by these arguments. To the extent that Chapter 12 seeks to provide more powerful relief to family farmers by simplifying federal reorganization procedure, its success cannot be affected by state law, but will depend on the extent to which it improves on Chapters 11 and 13. The procedural simplicity of Chapter 12 cannot be used as a basis for crediting it with more preemptive power than its predecessors. We recognize that Chapter 12 has a broad objective of helping the family farmer adjust his debts and keep his land, but such a general goal is of little help in our attempt to ascertain the precise meaning of sections 1222(b)(3) and (5), and it “certainly [does] not dictate that we stray from the natural reading” of those provisions. Wisconsin Educ. Ass‘n Ins. Trust v. Iowa State Bd., 804 F.2d 1059, 1064 (8th Cir.1986).
The somewhat limited legislative history of Chapter 12 is consistent with this conclusion. The Justices emphasize that
Nor can we ignore the fact that the relevant provisions of sections 1222(b)(3) and (5) are identical to those found in section 1322. We are therefore reluctant to dismiss the unanimous opinion of the circuit courts that no federal interest served by Chapter 13 justifies allowing a debtor to cure default after a foreclosure sale. See, e.g., Roach, 824 F.2d at 1377. In this regard, the distinction between sections 1222(b)(2) and 1322(b)(2) is not material. We have explained why the authority to modify the rights of home mortgagees under section 1222(b)(2) should not extend to the rights of a lender who has foreclosed upon and repurchased the property, see supra p. 1083, and those principles apply here, as well.8
Most importantly, we do not believe that allowing state law to control the rights of debtors to redeem their land under Chapter 12 would significantly impede the family farmer‘s access to or use of this reorganization procedure. In South Dakota, a mortgagee commences a foreclosure action by filing a complaint and serving it upon the debtor, as in other civil actions.
We conclude that the authority conferred on debtors and bankruptcy courts by sections 1222(b)(3) and (5) to cure or waive “any default” does not preempt state statutory redemption periods. In the absence of any conflict between these provisions or any federal interest which requires a contrary result, we must conclude that South Dakota law controls the rights of the parties regarding redemption, see Butner, 440 U.S. at 55, 99 S.Ct. at 918, and that the cure provisions of section 1222(b) are not applicable after a foreclosure sale has been held.
The Justices’ final argument is that the “right to cure” under Chapter 12 is a federal right, the parameters of which should be determined entirely by federal law. Cf. Glenn, 760 F.2d at 1436 (reaching similar conclusion under Chapter 13); Grubbs, 730 F.2d at 241 (same), Taddeo, 685 F.2d at 28-29 (same). With this argument, they again challenge our conclusion that by using the terms “cure” and “default” in sections 1222(b)(3) and (5), Congress intended to refer to the contractual mortgage relationship, as defined by state law, and to allow state law to control when that relationship is dissolved. See supra p. 1085. The Justices acknowledge that Chapter 12 nowhere defines the scope of this right, or its operative terms. In essence, their position is that section 1222(b) authorizes the federal courts to create a federal common law governing the cure of mortgage defaults in the family farm context.
To determine whether a provision of the bankruptcy code empowers the federal courts to create federal common law, we apply much the same analysis used to decide whether preemption is necessary. See United States v. Landmark Park & Associates, 795 F.2d 683, 684 (8th Cir.1986). The question is essentially one of congressional intent, and a debtor must show that some identifiable federal interest promoted by the statute requires a result different from that obtained by application of state law. Wallis v. Pan American Petroleum Corp., 384 U.S. 63, 68, 86 S.Ct. 1301, 1304, 16 L.Ed.2d 369 (1966). See also Butner, 440 U.S. at 54-55, 99 S.Ct. at 917-18. The Justices argue that the remedial purposes of Chapter 12 cannot be met if the rights of family farmers to redeem their land are governed by state law. They believe this court should create a nationally uniform rule, under which a debtor retains the right to cure default at least until the relevant state redemption period has expired, regardless of any state law provisions limiting that right.
We need not decide today whether the right to cure under sections 1222(b)(3) and (5) is a federal right, because we are satisfied that even if it is, state law should be adopted in these circumstances as the federal rule of decision. Cf. United States v. Kimbell Foods, Inc., 440 U.S. 715, 727-28, 99 S.Ct. 1448, 1458, 59 L.Ed.2d 711 (1979) (controversies governed by federal law “do not inevitably require resort to uniform federal rules“); United States v. Yazell, 382 U.S. 341, 357, 86 S.Ct. 500, 509, 15 L.Ed.2d 404 (1966) (applying state law without deciding whether state law governed of its own force or should be adopted as federal rule).
To resolve this issue, we apply a balancing test. We first determine whether there is any significant need for uniformity on the interstate level and assess the extent to which application of state law would “frustrate specific objectives” of the federal statute. Kimbell, 440 U.S. at 728, 99 S.Ct. at 1458. Against these considerations we weigh the values of intrastate uniformity, Butner, 440 U.S. at 55, 99 S.Ct. at 918, of adopting a pre-existing and well-articulated body of law in which the states traditionally enjoy greater expertise, Yazell, 382 U.S. at 352-53, 86 S.Ct. at 507, and of avoiding disruption of commercial relationships predicated on state law, Kimbell, 440 U.S. at 728-29, 99 S.Ct. at 1458-59.
In this case the Justices have not offered any concrete reasons why Chapter 12 requires us to fashion a uniform federal rule regarding the right to cure under section 1222(b). It is well-settled that “bankruptcy acts of Congress may recognize the laws of the State * * * although such recognition may lead to different results in different States.” Butner, 440 U.S. at 54 n. 9, 99 S.Ct. at 918 n. 9 (quoting Stellwagen v. Clum, 245 U.S. 605, 613, 38 S.Ct. 215, 217, 62 L.Ed. 507 (1917)). See also Yazell, 382 U.S. at 356-57, 86 S.Ct. at 509. Federal bankruptcy practice generally incorporates state substantive law regarding property interests, Butner, 440 U.S. at 54-55, 99 S.Ct. at 917-18, and we must reject “generalized pleas for uniformity as substitutes for concrete evidence” that use of state law would undermine the effectiveness of a federal statute, Kimbell, 440 U.S. at 730,
Nor would application of South Dakota law to this case frustrate any of the objectives of Chapter 12. We have fully discussed our reasons for reaching this conclusion in analyzing the Justices’ preemption claims. We recognize, of course, that if a state “imposes unreasonable conditions” on the right to cure, Wallis, 384 U.S. at 70, 86 S.Ct. at 1305, or adopts cure provisions which discriminate against family farmers in an effort to evade Chapter 12, see Kimbell, 440 U.S. at 736 n. 37, 740, 99 S.Ct. at 1464-65, we would be faced with a different argument. The issue here, however, involves “commercial rules of general applicability,” id. at 736 n. 37, 99 S.Ct. at 1462 n. 37, which were debated and ratified well before Chapter 12 was conceived.
Finally, substantial state interests support the application of local law in this context. In addition to the general values promoted by uniform intrastate treatment of property interests, see Butner, 440 U.S. at 55, 99 S.Ct. at 918, each state has its own well-developed system of real property law, which “reflect[s] important and carefully evolved state arrangements designed to serve multiple purposes.” Yazell, 382 U.S. at 353, 86 S.Ct. at 507. These systems have no federal counterpart, and we are therefore reluctant to “invent one and impose it upon the states.” Id. See also Auto Workers v. Hoosier Cardinal Corp., 383 U.S. 696, 701-04, 86 S.Ct. 1107, 1110-13, 16 L.Ed.2d 192 (1966). Lenders and borrowers depend on local property law “to provide the stability essential for reliable evaluation of the risks involved” in mortgage transactions. Kimbell, 440 U.S. at 739, 99 S.Ct. at 1464. Absent a clear congressional directive, we should not create new rules and generate additional uncertainties whose ultimate consequences may be difficult to foresee. Id.10
We conclude that sections 1222(b)(3) and (5) do not authorize the federal courts to create a federal common law right to cure which includes authority to extend state redemption periods.
IV.
In summary, we hold that South Dakota law controls the rights of the Justices and Prudential regarding redemption of the Justices’ farm.
We vacate the temporary stay granted on August 11, 1987, and remand the cause to the bankruptcy court for further proceedings. The judgment of the district court is affirmed.
HEANEY, Circuit Judge, dissenting.
Although I agree with much of the majority opinion, I respectfully dissent from that portion of it which holds that the right to cure does not extend beyond the foreclosure sale.
First, I agree with the majority that Johnson v. First National Bank of Montevideo, 719 F.2d 270 (8th Cir.1983), cert. denied, 465 U.S. 1012, 104 S.Ct. 1015, 79 L.Ed.2d 245 (1984), does not control this case. It would be a mistake to hold that Johnson renders state created redemption periods inviolate in the bankruptcy courts. Cf. In re Maanum, 838 F.2d 991, 992 (8th Cir.1988) (Heaney J. dissenting from denial of rehearing en banc) (“If a party is entitled to relief under a specific provision of the Bankruptcy Code, it should not be prejudiced by the fact that a state deadline has
Second, I agree with the majority that, pursuant to
Third, I agree with the majority that
Accordingly, courts have interpreted section 1322(b) as authorizing plans which propose to cure a default on a home mortgage obligation despite the fact that section 1322(b)(2), unlike section 1222(b)(2), prohibits modification of the rights of a holder of a claim secured only by a security interest in real property which serves as the principal residence of the debtor. See, e.g., In re Roach at 1376; In re Glenn at 1434. They have done so on the ground that the right to cure does not sufficiently interfere with the rights of the home mortgagee to work a modification. See id. Similarly, sections 1222(b)(2) and 1222(b)(5) are not cumulative or overlapping. Rather, they are distinct provisions designed to serve very different purposes. Given these distinct functions, modification of a claim should not in any way interfere with the running of a state redemption period.
Notwithstanding my agreement with the majority in the above respects, I cannot concur in the majority‘s holding that “the cure provisions of section 1222(b) are inapplicable after a foreclosure sale has been held.” Majority Opinion at 14-15. Instead, I would hold that the clear and strong rehabilitative purposes of Chapter 12 require application of the cure provisions of section 1222(b) to the fullest extent. That is, a debtor should be allowed to propose a Chapter 12 plan of reorganization which remedies any default within a reasonable time and maintains payment during the term of the plan and thereafter.
The majority argues that once a foreclosure judgment and sale occur, the mortgage is extinguished. Thus, in attempting to exercise its rights under section 1222(b)(5), the debtor actually seeks to modify the state court judgment and sale. Yet, to the extent the judgment conflicts with specific rights granted the debtor under the Bankruptcy Code, contrary provisions of the state court judgment must give way. Much of the Bankruptcy Code involves modification of state created property rights. Such modifications are not prohibited merely because the rights involved are embodied in a state court judgment. Moreover, it is unlikely that the limited authority to cure granted in section
In addition, the majority argues that the terms “cure” and “default” are commonly understood to presuppose a contractual relationship. From this, it is inferred that Congress intended to provide relief for defaulting mortgagors only as long as the contractual relationship continues. Yet, the language of section 1222(b)(5) does not limit the right to cure to those debts arising out of an existing contractual relationship. The majority‘s point that Congress was aware of the differences between contractual obligations and rights arising by operation of statute is hardly helpful to its case. One would think that if Congress had been aware of such an important distinction, it would have clearly expressed its intention to limit the debtor‘s right to cure a default to a time before acceleration, judgment, or sale. It did not. I see no reason for the Court to impose a limitation on the right to cure that is not supposed by the broad language of section 1222(b)(5).
In addition, the specific rehabilitative goals of Chapter 12 also require a broader right to cure than that adopted by the majority. Contrary to the view of the majority opinion, Chapter 12 was intended to and does offer family farmers more than procedural changes aimed at simplifying federal reorganization procedure. Majority Opinion at 12. In passing Chapter 12, Congress enacted substantive changes in the laws affecting family farm reorganizations. See, e.g.,
Moreover, Chapter 12 is specifically intended to benefit family farmers. Therefore, it is appropriate to take into account the peculiar nature of a family farm enterprise in interpreting it. Ordinarily, the largest and most important productive asset and source of collateral of a family farm operation will be the land that is farmed. Thus, for a plan of reorganization under Chapter 12 to succeed, retention of the land is a necessity. Without it, liquidation, and the loss it imposes on all creditors will, in all probability, be the only viable course. A broad view of the right to cure under section 1222(b)(5), therefore, is most in keeping with the purposes of Chapter 12 because it increases the likelihood that family farmers facing bankruptcy will be able to retain the single most important element in an effective reorganization.
In light of the specific purposes of Chapter 12 and the broad language of section 1222(b)(5), I would hold that at any time prior to final divestment of the debtor‘s interest, the debtor may appropriately propose a plan of reorganization that will, within a reasonable time, cure any default.
No. 87-2317.
United States Court of Appeals, Eighth Circuit.
Submitted May 12, 1988. Decided June 16, 1988. Rehearing Denied July 18, 1988.
849 F.2d 1090
Notes
(b) Subject to subsections (a) and (c) of this section, the plan may—
(2) modify the rights of holders of secured claims, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;
(3) provide for the curing or waiving of any default;
*
(5) 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 * * *