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«No. 15-1505 WILLIAM ROBERT ANDERSON, JR.; DANNI SUE JERNIGAN, Debtors − Appellants, v. WAYNE HANCOCK; TINA HANCOCK, Creditors - Appellees, JOHN F. ...»

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No. 15-1505


Debtors − Appellants,



Creditors - Appellees,


Trustee - Appellee.

Appeal from the United States District Court for the Eastern District of North Carolina, at Raleigh. Louise W. Flanagan, District Judge. (5:14-cv-00690-FL) Argued: March 24, 2016 Decided: April 27, 2016 Before WILKINSON and NIEMEYER, Circuit Judges, and David C.

NORTON, United States District Judge for the District of South Carolina, sitting by designation.

Affirmed in part; reversed in part; and remanded by published opinion. Judge Wilkinson wrote the opinion, in which Judge Niemeyer and Judge Norton joined.

ARGUED: Cortney I. Walker, SASSER LAW FIRM, Cary, North Carolina, for Appellants. Theodore Adelbert Nodell, Jr., NODELL GLASS & HASKELL, LLP, Raleigh, North Carolina; John Fletcher Logan, OFFICE OF THE CHAPTER 13 TRUSTEE, Raleigh, North Carolina, for Appellees. ON BRIEF: Travis P. Sasser, SASSER LAW FIRM, Cary, North Carolina, for Appellants. Michael B. Burnett, OFFICE OF THE CHAPTER 13 TRUSTEE, Raleigh, North Carolina, for Appellee Logan.


WILKINSON, Circuit Judge:

In a case where the rate of interest on the debtors’ residential mortgage loan was increased upon default, we consider whether a “cure” under § 1322(b) of the Bankruptcy Code allows their bankruptcy plan to bring post-petition payments back down to the initial rate of interest. We hold that the statute does not allow this, as a change to the interest rate on a residential mortgage loan is a “modification” barred by the terms of § 1322(b)(2).


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 purchase was financed via a $255,000 loan from the Hancocks. In exchange for the loan, Anderson and Jernigan granted the Hancocks a deed of trust on the property and executed a promissory note requiring monthly payments in the amount of $1,368.90 based on an interest rate of five percent over a term of thirty years.

The note provided, however, that In the event borrower has not paid their monthly obligation within 30 days of the due date, then borrower shall be in default. Upon that occurrence, the borrower’s interest rate shall increase to Seven percent (7%) for the remaining term of the loan until paid in full. The increase in interest rate shall result in a new payment amount of $1696.52, which shall be due and payable monthly according to the

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nonetheless failed to make any further payments, and on June 3, 2013, the Hancocks again informed them that they were imposing the seven percent rate of interest for the remaining term of the loan.

On August 30th, having continued to receive no payments,

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contemporaneous with their bankruptcy petition. Aspects of that plan are at issue here.

The bankruptcy plan proposed to pay off prepetition arrears on the Hancock loan over a period of sixty months. Arrears were calculated using a five percent interest rate. The plan also reinstated the original maturity date of the loan, and proposed that the debtors again make post-petition payments at a five percent interest rate.

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payments should continue to reflect the seven percent default rate of interest provided for in the promissory note. They also argued that arrears to be paid off over the life of the plan

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secured by debtors’ principal residences. It rejected Anderson and Jernigan’s argument that the increased rate of interest was a consequence of default that bankruptcy could “cure” consistent with the allowances afforded to bankruptcy plans in § 1322(b)(3) and (b)(5). The bankruptcy court also held that arrears on the

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for the period extending from June 1 though September 16, 2013.

It entered an order confirming the plan as modified according to its opinion.

Anderson and Jernigan appealed to the district court, again arguing that their bankruptcy plan should be allowed to “cure” the increased default rate of interest. The district court, like the bankruptcy court, rejected this claim. It held that setting aside the seven percent default rate of interest would be a modification that is prohibited by statute.

The district court disagreed, however, with the bankruptcy court’s interpretation of the promissory note. In particular, it

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alternative remedy” to the default rate of interest, and that once the Hancocks accelerated the loan, the rate of interest reverted back to five percent. J.A. 71. It held that this period of acceleration (and thus only five percent interest) lasted from September 16, 2013 until December 2013 (the effective date of the plan), after which the seven percent rate of interest reactivated due to the bankruptcy plan’s deceleration of the loan.

In the district court’s view, the rate of interest thus see

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under the Bankruptcy Code may bring the loan back to its initial rate of interest. We, however, agree with the courts below on the basic question, namely that the cure lies in decelerating

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principal residence.” Claims secured by security interests in the debtor’s principal residence may be modified only if “the last payment on the original payment schedule” is due before the

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1322(c)(2), an exception which does not apply here. Plans may also “provide for the curing or waiving of any default,” 11 U.S.C. § 1322(b)(3), and may, notwithstanding paragraph (2) of this subsection, 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.

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converting a variable interest rate to a fixed interest rate, or extending the repayment term of a note.” In re Litton, 330 F.3d 636, 643 (4th Cir. 2003).

The language of § 1322(b)(3) and (5) does not undo this protection of residential mortgage lenders’ fundamental rights.

Congress would not inexplicably make (b)(2) inoperative by means of a capacious power to cure written only a few sentences later.

We interpret § 1322(b) “as a whole, giving effect to each word and making every effort not to interpret a provision in a manner

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suggests that the core of a “cure” lies in the “maintenance of payments.” 11 U.S.C. § 1322(b)(5). One authoritative treatise, in its section explaining the purpose of § 1322(b)(5), comments that Section 1322(b)(5) is concerned with relatively longterm debt, such as a security interest or mortgage debt on the residence of the debtor. It permits the debtor to take advantage of a contract repayment period which is longer than the chapter 13 extension period, which may not exceed five years under any circumstances, and may be essential if the debtor cannot pay the full allowed secured claim over the term of the plan.

The debtor may maintain the contract payments during the course of the plan, without acceleration based upon a prepetition default, by proposing to cure the default within a reasonable time.

8-1322 Collier on Bankruptcy P 1322.09 (15th 2015). The meaning of “cure” thus focuses on the ability of a debtor to decelerate and continue paying a loan, thereby avoiding foreclosure.

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understanding. While “the text is law,” legislative history that “shows genesis and evolution” can sometimes give a “clue to the meaning of the text.” Cont'l Can Co. v. Chicago Truck Drivers, Helpers & Warehouse Workers Union (Indep.) Pension Fund, 916

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Ass'n, 730 F.2d 236, 245 (5th Cir. 1984). Instead, “their attack concentrated upon provisions that permitted modification of a secured claim by reducing the amount of periodic installments

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“reduc[e] installment payments.” Id. at 246.

Congress has thus drawn a clear distinction between plans that merely cure defaults and those that modify the terms of

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interest would effect an impermissible modification of the terms of their promissory note. See 11 U.S.C. § 1322(b)(2).

Anderson and Jernigan object, citing one of our cases for the proposition that a cure is anything that “reinstates a debt

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increased interest rate requires decreasing the interest rate back to its pre-default amount.” Appellants’ Br. at 16.

But Litton’s invocation of “pre-default conditions” again contemplates the deceleration of otherwise accelerated debt. It

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rate.” Litton, 330 F.3d at 643. Here, by reducing the interest rate from seven percent back to five percent, the debtors would lower their monthly payments from $1,696.52 to $1,368.90 for the remaining life of the loan. Contrast Litton, where the plan “did not propose the reduction of any installment payments.” 330 F.3d at 644-45. And while a default rate of interest may not be a variable interest rate in the classic sense – it does not vary with any underlying index – it is a rate that varies upon the lender’s invocation of default.

The debtors’ position would eliminate the possibility of this variance for at least some period preceding bankruptcy.

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other decisions using interest rates as a prime example of what a residential mortgage debtor may not modify in bankruptcy. See, e.g., Nobelman, 508 U.S. at 329 (rights safe from modification

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change.” Id. In order to cure and maintain payments, the debtors must, as the district court put it, “mak[e] the same principal and interest payments as provided in the note.” J.A. 70 (quoting In re Martin, 444 B.R. 538, 544 (Bankr. M.D.N.C. 2011)).

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the time value of money.” Dean Pawlowic, Entitlement to Interest Under the Bankruptcy Code, 12 Bankr. Dev. J. 149, 173 (1995).

They are “the price or exchange rate that is paid to compensate

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power.” Id. at 174. Second, interest rates serve as compensation for taking on risk – the uncertainty regarding “actual return.” Id.

The portion of an interest rate that compensates for risk is known as the “risk premium.” Id. While unsecured creditors face the obvious risk of principal loss, secured creditors like the Hancocks also face a variety of risks. First, there is the risk of collateral depreciation. “If the debtor defaults, the creditor can eventually repossess and sell the collateral,” but

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collateral may not be able to achieve the price it might wish to demand. Id. at 502-03. The administrative expense of foreclosure would likely also cause various losses. Id. at 503.

When debtors like Anderson and Jernigan miss payments or

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ability to “cure their default and obtain a true fresh start.” Appellants’ Br. at 18. Instead we mean only to enforce the text of the statute and to allow the mortgage market to continue to

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creditors might cover their risk on the front end and require “a higher rate throughout the life of the loan.” See Ruskin v.

Griffiths, 269 F.2d 827, 832 (2d Cir. 1959); see also In re Vest

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because [the debtor] has the benefit of a lower rate until an event triggering default occurs.”).

Inability to impose default rates of interest might also

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mortgage lenders might benefit the debtors before us in this case, but “it could make it more difficult in the future for those similarly situated... to obtain any financing at all.” In re Witt, 113 F.3d 508, 514 (4th Cir. 1997).

Anderson and Jernigan are thus incorrect to suggest that the “legislative history and guiding principles of bankruptcy,”

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§ 1322(b) “had to face the reality that in a relatively free society, market forces and the profit motive play a vital role in determining how investment capital will be employed.” In re Glenn, 760 F.2d 1428, 1434 (6th Cir. 1985). “Every protection Congress might grant a homeowner at the expense of the holders

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“modification of the rights of home mortgage lenders.” First Nat. Fid. Corp. v. Perry, 945 F.2d 61, 64 (3d Cir. 1991). It made this choice in the hopes that protection from modification

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creditors nor debtors would benefit. We accordingly reject the view that the spirit of bankruptcy requires tampering with the debtors’ agreed-upon interest rate, and we hold Anderson and Jernigan to the text of the statute and to the terms of their bargain.

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While we agree with the district court that payments after the December 2013 effective date of the plan should reflect a seven percent rate of interest, we disagree with its holding that a five percent rate of interest should apply to payments calculated between September 16, 2013, and December 2013. The district court based this conclusion on the premise that the default rate of interest was a “disjunctive alternative remedy” to acceleration and foreclosure. J.A. 71. That, however, is not a plausible construction of the promissory note.

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