by A “cure and maintain” plan permits deceleration of the loan but does not allow a debtor to return to the pre-default interest rate. Anderson v. Hancock (In re Hancock), No. 15-1505 (4th Cir. April 27, 2016).
The Andersons purchased residential property from the Hancocks, financed in the amount of $255,000 by the sellers. The Andersons signed a thirty year note agreeing to pay $1,368.90 per month including interest payments at 5%. In the event of a default, the note provided that the interest rate would increase to 7%. The note also entitled the Hancocks to accelerate the loan. When the Andersons defaulted on the loan, the Hancocks imposed the default interest rate, notified the Andersons of acceleration of the loan, and instituted foreclosure. The debtors filed chapter 13 bankruptcy proposing to cure the arrears and maintain payments at the 5% interest rate through the life of the plan. The Hancocks objected to the plan on two bases. First, they argued that the calculation of arrears was too low because it was based on the pre-default interest rate. Second, they maintained that all future payments on the loan should be at the 7% interest rate.
On appeal, the Fourth Circuit agreed with the lower courts on the issue of whether reverting to the pre-default interest rate, as proposed by the Andersons, was a permissible aspect of “curing” under section 1322(b)(3) and (5), or would constitute an impermissible modification under section 1322(b)(2), as argued by the lender. It found that while chapter 13 permits a debtor to avoid foreclosure and decelerate the defaulted loan, it does not otherwise alter the terms of the underlying lending agreement. Where section 1322(b)(2) forbids modification of a residential lender’s “rights,” including the interest rate, the court found that “[t]urning away from the debtors’ contractually agreed upon default rate of interest would effect an impermissible modification of the terms of their promissory note. See 11 U.S.C. § 1322(b)(2).”
In so holding, the court rejected the Andersons’ (and the trustee’s) argument, relying on In re Litton, 330 F.3d 636, 643 (4th Cir. 2003), that “cure” places the debtor in the pre-default condition thereby eliminating the increased interest rate that was activated upon default. Rather, the court held that the increased interest rate was a consequence of a missed payment and was a term of the contract that came into play pre-bankruptcy and remained unchanged upon bankruptcy. This, the court found, was in harmony with Litton’s specific prohibition against altering the payment rate or changing the interest rate from variable to fixed.
From a policy standpoint, any negative impact on the Andersons’ fresh start by enforcing the default interest rate was outweighed by the general promotion of lending to the benefit of both creditors and borrowers.
The circuit court disagreed, however, with the district court’s finding that the lending agreement provision for increased interest rate upon default and the creditor’s right to accelerate the loan and foreclose were mutually exclusive remedies. The circuit court found that the terms of the promissory note did not support the district court’s reading notwithstanding that the note listed acceleration and foreclosure as an “alternative to an increase in interest rate.” The Fourth Circuit interpreted that language to create a step-wise form of penalties for default in which the less severe—increased interest rate—would precede the more severe—acceleration and foreclosure with the established default rate remaining in place.
The court thus affirmed in part, reversed in part, and remanded.