William Anderson, Jr. v. Wayne Hancock
2016 U.S. App. LEXIS 7634, 76 Collier Bankr. Cas. 2d 1, 820 F.3d 670 (2016)
Rule of Law:
A Chapter 13 bankruptcy plan's "cure" of a default on a residential mortgage loan under 11 U.S.C. § 1322(b)(3) and (b)(5) does not permit the reduction of a contractually agreed-upon default interest rate, as such a change constitutes an impermissible "modification" of a secured claim on a debtor's principal residence prohibited by 11 U.S.C. § 1322(b)(2).
Facts:
- On September 1, 2011, William Robert Anderson, Jr. and Danni Sue Jernigan purchased a home in Raleigh, North Carolina, from Wayne and Tina Hancock.
- The Hancocks financed the $255,000 purchase, and Anderson and Jernigan granted them a deed of trust on the property and executed a promissory note.
- The promissory note required monthly payments of $1,368.90 based on a five percent interest rate over a term of thirty years.
- The note explicitly provided that if Anderson and Jernigan did not make a monthly payment within 30 days of the due date, they would be in default, and the interest rate would increase to seven percent for the remaining term of the loan, resulting in new monthly payments of $1,696.52.
- The note also stated that as an alternative to the interest rate increase upon default, the Hancocks, at their sole discretion, could require immediate payment of the full principal and interest or pursue other rights under North Carolina law.
- On April 1, 2013, Anderson and Jernigan failed to make their monthly payment.
- On May 4, 2013, after receiving no payment, the Hancocks notified Anderson and Jernigan of their default and stated that future payments should reflect the increased seven percent interest rate.
- Anderson and Jernigan made no further payments, and on June 3, 2013, the Hancocks again informed them that the seven percent interest rate was being imposed for the remaining term of the loan.
- Having continued to receive no payments, the Hancocks initiated foreclosure proceedings on August 30, 2013.
Procedural Posture:
- On September 16, 2013, William Robert Anderson, Jr. and Danni Sue Jernigan filed a Chapter 13 bankruptcy petition and a proposed bankruptcy plan in the United States Bankruptcy Court for the Eastern District of North Carolina.
- Wayne and Tina Hancock objected to the proposed plan, contending that post-petition payments and arrears should reflect the seven percent default interest rate.
- The bankruptcy court sustained the Hancocks' objection, holding that the proposed change to the interest rate was an impermissible modification under 11 U.S.C. § 1322(b)(2) and that arrears should be calculated using the seven percent rate from June 1, 2013, confirming the plan as modified by its opinion.
- Anderson and Jernigan appealed the bankruptcy court's decision to the United States District Court for the Eastern District of North Carolina.
- The district court affirmed the bankruptcy court's holding that setting aside the seven percent default rate would be a prohibited modification, but it disagreed with the bankruptcy court's interpretation of the promissory note regarding a specific interim period, applying a five percent interest rate for payments calculated between September 16, 2013, and December 2013.
- Anderson and Jernigan, as appellants, appealed the district court's judgment to the United States Court of Appeals for the Fourth Circuit.
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Issue:
Does a Chapter 13 bankruptcy plan's "cure" of a default on a residential mortgage loan allow a debtor to reduce the contractually stipulated default interest rate back to the original non-default rate, or does such a change constitute an impermissible "modification" of the mortgagee's rights under 11 U.S.C. § 1322(b)(2)?
Opinions:
Majority - Wilkinson, Circuit Judge
No, a Chapter 13 bankruptcy plan's "cure" of a default on a residential mortgage loan does not allow a debtor to reduce the contractually stipulated default interest rate back to the original non-default rate, because such a change constitutes an impermissible "modification" of the mortgagee's rights under 11 U.S.C. § 1322(b)(2). The court reasoned that § 1322(b)(2) specifically prohibits modification of claims secured solely by a debtor's principal residence, and "rights" encompasses those bargained for by the parties and enforceable under state law, including the interest rate. While § 1322(b)(3) and (b)(5) permit the "curing of any default" and "maintenance of payments," the court clarified that the core of a "cure" involves decelerating an accelerated loan and continuing to make payments under the contractually stipulated terms, not altering fundamental obligations like the interest rate. Reducing the interest rate from seven percent to five percent would directly lower monthly payments, which existing precedent, such as Nobelman and Litton, explicitly identifies as an impermissible modification. The legislative history of § 1322(b) supports this interpretation, indicating Congress's intent to provide special protection to residential mortgage lenders against modification to encourage capital flow into the home lending market. The court emphasized that default interest rates serve as legitimate compensation for increased risk revealed by a default and are a crucial component of the original agreement. Finally, the court clarified that the Hancocks' alternative remedy of acceleration did not nullify the earlier, less severe remedy of the default interest rate increase, holding that all post-petition interest payments must reflect the seven percent default rate.
Analysis:
This case significantly reinforces the robust protection extended to residential mortgage lenders under 11 U.S.C. § 1322(b)(2) against modification in Chapter 13 bankruptcy. It narrowly defines the scope of a permissible "cure" under § 1322(b)(3) and (b)(5), asserting that it primarily entails decelerating an accelerated loan and resuming payments according to the original contract terms, even when those terms include a higher default interest rate. The decision effectively prevents debtors from unilaterally altering fundamental economic aspects of their mortgage, such as interest rates or payment amounts, which could otherwise undermine the legislative balance between debtor relief and creditor protection and potentially discourage future home lending. This ruling provides crucial clarity for bankruptcy courts within the Fourth Circuit regarding the treatment of default interest rates on residential mortgages in Chapter 13 plans.
