William Anderson, Jr. v. Wayne Hancock

Filing

PUBLISHED AUTHORED OPINION filed. Originating case number: 5:14-cv-00690-FL,13-05843-8-SWH. [999805802]. [15-1505]

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PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 15-1505

WILLIAM ROBERT ANDERSON, JR.; DANNI SUE JERNIGAN,
Debtors − Appellants,
v.
WAYNE HANCOCK; TINA HANCOCK,
Creditors - Appellees,
JOHN F. LOGAN,
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

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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.

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WILKINSON, Circuit Judge:
In

a

case

residential

where

rate

loan

mortgage

the

of

was

interest

increased

on

upon

the

debtors’

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).
I.
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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terms stated herein, save and except the increase in
rate and payment.
As an alternative to an increase in interest rate
upon default occurring 30 days after the payment due
date, lender may, in the lender’s sole discretion
either 1) require borrower to pay immediately the full
amount of principal which has not been paid and all
the interest that I owe on that amount. The date for
the full amount of principal must be at least 30 days
after the date on which notice is mailed to the
borrower or delivered by other means or 2) pursue any
other rights available to lender under North Carolina
Law.
J.A. 27.
On

April

1,

2013,

Anderson

and

Jernigan

failed

to

make

their monthly payment. On May 4th, 2013, after continuing to
receive no payment, the Hancocks notified Anderson and Jernigan
that

they

were

in

default

and

that

future

payments

should

reflect the increased seven percent rate of interest provided
for in the note. Anderson and Jernigan responded on May 6, 2013,
asking

for

a

chance

to

become

current

on

arrears.

They

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,
the

Hancocks

initiated

foreclosure

proceedings.

Anderson

and

Jernigan in turn filed a Chapter 13 bankruptcy petition in the
Eastern
invoking

District

of

bankruptcy’s

North

Carolina

automatic
4

stay

on
and

September
halting

16,

2013,

foreclosure

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proceedings.

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They

also

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filed

a

proposed

bankruptcy

plan

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.
The

Hancocks

objected,

contending

that

post-petition

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
should

be

calculated

using

a

rate

of

seven

percent

interest

beginning in June, 2013.
The bankruptcy court sustained the Hancocks’ objection. It
held that the change to the default rate
of

11

U.S.C.

“modify[ing]”

the

§ 1322(b)(2),
rights

of

of interest ran afoul

which

prevents

plans

creditors

whose

interests

from
are

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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loan should be calculated using a seven percent rate of interest
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
held

that

acceleration

and

foreclosure

was

a

“disjunctive

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 seesawed

depending

on

whether

the

decelerated status.

6

loan

was

in

accelerated

or

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Anderson and Jernigan again appeal, contending that a cure
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
the

loan

and

allowing

the

debtors

to

avoid

foreclosure

by

continuing to make payments under the contractually stipulated
rate of interest.
II.
Evaluating
examine
provides

the
that

Anderson

language
a

and

of

Jernigan’s

the

bankruptcy

claim

§ 1322(b).

plan

may

requires

Section

“modify

the

us

to

1322(b)(2)
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.” 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
due

date

of

the

last

payment

under

the

plan,

11

U.S.C.

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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11 U.S.C. § 1322(b)(5). The question is therefore whether the
plan’s proposed change to the debtors’ rate of interest is part
of

a

“cure”

permissible

under

§ 1322(b)(3)

and

(5),

or

alternatively, is a “modification” forbidden by the terms of
paragraph (2).
The loan is secured by the debtors’ principle residence,
and

so

Section

Hancocks’

1322(b)(2)

“rights.”

While

forbids
“[t]he

“modification”

term

‘rights’

of

is

the

nowhere

defined in the Bankruptcy Code,” the Supreme Court has held that
it

includes

those

rights

that

are

“bargained

for

by

the

mortgagor and the mortgagee” and enforceable under state law.
Nobelman v. Am. Sav. Bank, 508 U.S. 324, 329 (1993). Courts have
accordingly

“interpreted

§ 1322(b)(2)
debtor’s

to

the

prohibit

obligations,

no-modification

any

fundamental

e.g.,

lowering

provision

alteration
monthly

in

of
a

payments,

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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that renders other provisions . . . inconsistent, meaningless or
superfluous.” Boise Cascade Corp. v. U.S. E.P.A., 942 F.2d 1427,
1432 (9th Cir. 1991). And while (b)(3) provides that a plan may
“provide

for

the

curing

or

waiving

of

any

default,”

(b)(5)

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.
The

context

of

§

1322(b)’s

enactment

confirms

this

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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F.2d 1154, 1157-58 (7th Cir. 1990). Section 1322(b) was part of
the Bankruptcy Act of 1978. Pub. L. No. 95-598, 92 Stat. 2549.
An early Fifth Circuit opinion details its origins. The court
explains

that

“during

a

Senate

committee

hearing . . . the

secured creditors’ advocates advanced no objection to the curing
of

default

accelerations.”

Grubbs

v.

Houston

First

Am.

Sav.

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
due

thereupon.”

Id.

The

Senate

subsequently

amended

(b)(2),

which in its prior version would have allowed modification of
any secured claim, to exclude modifications of claims “wholly
secured

by

mortgages

reconciliation
security
principal

with

interest

on
the

in

residence.”

real

property,”

House,

real
Id.

at

claims

and

later,

“secured

only

after
by

a

property

that

is

the

debtor’s

245-46.

This

language

survives

today. The implication, then, is that while Congress meant to
allow debtors to decelerate and get a second chance at paying
their

loans,

“home-mortgagor

lenders,

performing

a

valuable

social service through their loans, needed special protection
against

modification,”

including

modifications

that

would

“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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residential mortgage loans. Understanding that the meaning of
“cure” focuses upon the “maintenance” of pre-existing payments,
see 11 U.S.C. § 1322(b)(5), we therefore hold that turning 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).
Anderson and Jernigan object, citing one of our cases for
the proposition that a cure is anything that “reinstates a debt
to

its

pre-default

creditor

to

position,

their

or

respective

[]

returns

positions

the

before

debtor

the

and

default.”

Appellants’ Br. at 10-11 (quoting Litton, 330 F.3d at 644). In
the debtors’ view, a cure thus unravels every consequence of
default,

and

“[r]eturning

to

pre-default

conditions

for

an

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
speaks

of

a

cure

as

a

reinstatement

of

“the

original

pre-

bankruptcy agreement of the parties,” or “a regime where debtors
reinstate

defaulted

debt

contracts

in

accordance

with

the

conditions of their contracts.” Litton, 330 F.3d at 644. And
“the

original

specified

a

pre-bankruptcy

higher,

default

agreement
rate

payment.
11

of

of

the

interest

parties”
upon

here

missing

a

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Even

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more

problematic

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for

appellants

is

Litton’s

disapproval of plans that attempt to “lower[] monthly payments”
or

“convert[]

a

variable

interest

rate

to

a

fixed

interest

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.
This

again

contravenes

Litton.

It

also

contravenes

numerous

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
include

“the

right

to

repayment

of

the

principal

in

monthly

installments over a fixed term at specified adjustable rates of
interest”); In re Varner, 530 B.R. 621, 626 (Bankr. M.D.N.C.
2015)

(“The

Debtors’

current

plan

proposes

to

modify

CitiFinancial’s claim by lowering the interest rate to 5.25%,
which violates § 1322(b)(2).”).
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Litton and other cases’ rejection of plans that tamper with
residential

mortgage

interest

rates

is

altogether

sound.

The

interest rate of a mortgage loan is tied up with the “payments”
that

a

U.S.C.

legitimate

cure

§ 1322(b)(5).

debtors

would

$1,696.52
Reducing
monthly

Absent

have

been

month

per
the

requires

based

interest

amount

to

must

foreclosure

required
on

rate

be

a

to

$1,368.90.

to

seven

five
That

“maintain[ed].”

and

make

bankruptcy,
payments

percent

percent
would

“hardly

the

totaling

interest

would

11

rate.

lower

this

constitute[]

‘maintenance of payments.’” In re McGregor, 172 B.R. 718, 721
(Bankr.

D.

Mass.

1994).

“The

phrase

connotes

an

absence

of

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)).
We
terms

therefore

of

Congress’s

their

reject

the

residential

prescription

in

debtors’

mortgage

attempt

loan.

§ 1322(b)(2).

It
The

to
is

modify

the

contrary

to

post-petition

payments here should reflect the parties’ agreed upon default
rate of interest – seven percent.
III.
Anderson

and

Jernigan

view

this

as

an

unfair

result,

stressing that “[t]he principal purpose of the Bankruptcy Code
is to grant a fresh start to the honest but unfortunate debtor.”
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Appellants’

Br.

Mass.,

U.S.

549

assumes

that

at

18

(quoting

365,

a

Pg: 14 of 20

367

Marrama

(2007)).

textually

sound

But

v.

Citizens

such

reading

a

of

Bank

view

of

wrongly

§ 1322(b)

must

perforce be inimical to the welfare of mortgage debtors.
That
default

need

not

interest

purposes.

First,

be

the

case.

rates,

serve

interest

rates

Interest

at

rates,

least

two

“represent[]

including

recognizable

compensation

for

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
a

lender

who

foregoes

current

spending

or

investment

opportunities to make a loan.” Id. Compensation for the time
value

of

inflation

money
and

also
the

includes

compensation

principal’s

“expected

for

loss

the
in

risk

of

purchasing

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
depreciation

may

make

the

collateral
14

less

valuable

than

the

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principal balance on the loan. Till v. SCS Credit Corp., 541
U.S. 465, 502 (2004) (Scalia, J., dissenting). Second, there is
the risk of incurring losses in foreclosure. “Collateral markets
are

not

perfectly

liquid”;

a

secured

creditor

liquidating

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
otherwise
secured

default,
creditors

statisticians
outcome

they

reveal

will

realize

update

whenever

their

they

an

increased

these

probability

receive

new

likelihood

risks.

But

estimates

information,

just

of

see

that

a

as

given

generally

Enrique Guerra-Pojol, Visualizing Probabilistic Proof, 7 Wash.
U. Juris. Rev. 39 (2014), lenders may use default interest rates
to

increase

debtors

may

risk
be

premiums

riskier

whenever

than

the

events

lenders

reveal
might

that

have

their

thought

initially.
By
interest,

enforcing
we

Anderson

therefore

do

and
not

Jernigan’s
mean

to

default

rate

“compromise[]”

of

their

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
correct

for

imperfect

information

on

debtor

risk.

Default

interest rates allow creditors to adjust upward for increased
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risk (rather than immediately foreclose and exit the loan) when
the

initial

risk

premium

is

revealed

to

have

been

too

low.

Eliminating this tracking ability when debtors are revealed to
be more risky than ever – when they have gone bankrupt – would
practically

compromise

much

of

the

default

interest

rate’s

utility.
Inability to impose a practically useful default rate of
interest would have predictable negative effects upon the home
mortgage

lending

market.

Without

a

less

drastic

alternative

remedy for default, creditors might be more likely to push for
early foreclosure. And rather than give “[t]he debtor [] the
benefit

of

the

lower

rate

until

the

crucial

event

occurs,”

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
Associates,
inclusion

217

of

B.R.

a

696,

default

701

rate

(Bankr.

actually

S.D.N.Y.
may

1998)

benefit

a

(“The
debtor

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
motivate
first

fewer

place.

lenders

to

“[F]avorable

engage

in

treatment

mortgage
of

lending

residential

in

the

mortgagees

was intended to encourage the flow of capital into the home
lending

market.”

Nobelman,

508
16

U.S.

at

332

(Stevens,

J.,

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concurring).

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Undermining

§

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1322(b)’s

protections

for

home

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,”
Appellants’
mortgage

Br.

loan’s

at

17,

default

allow

them

rate

of

to

modify

interest.

a

The

residential
drafters

of

§ 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
of

security

interests

on

those

homes

would

decrease

the

attractiveness of home mortgages as investment opportunities,”
thereby “shrink[ing]” the “pool of money available for new home
construction

and

finance.”

Id.

In

the

face

of

this

dilemma,

Congress chose to allow mortgage debtors to cure defaults and
maintain

payments

on

their

loans,

but

also

to

prohibit

“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
would

“make

home

mortgage

money
17

on

affordable

terms

more

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accessible

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to

homeowners

by

Pg: 18 of 20

assuring

lenders

that

their

expectations would not be frustrated.” Id.
Anderson and Jernigan’s attempt to undermine § 1322(b)(2)’s
protections

would

upset

this

deliberative

balance.

Neither

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.
IV.
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.
Under the district court’s view, the debtors might incur
the default rate of interest, maintain payments thereon for a
decade or more, and then suddenly experience a five percent rate
of

interest

doubtful

that

upon

further

default

the

parties

would
18

and

have

acceleration.
expected

this

We

are

outcome.

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While the text of the note admittedly labels acceleration “[a]s
an alternative to an increase in interest rate,” J.A. 27, that
does not answer the question. In our view, the “alternative” of
acceleration was a more-severe sanction that would likely be
invoked only after the less-severe default rate of interest had
failed.

Nothing

in

the

contract

indicates

that

the

parties

intended for its invocation to unravel the earlier, less-severe
remedy.
All post-petition interest payments, including those from
September

16,

2013

through

December

2013,

should

therefore

reflect the parties’ negotiated seven percent default rate of
interest.
modified

The
to

bankruptcy
reflect

a

court,
seven

which

percent

affirmed

the

rate

interest

of

plan

as
for

arrearage accrued from June 1, 2013 through September 16, 2013,
and

which

required

that

all

post-petition

mortgage

payments

reflect the seven percent default interest rate, had it right.
We accordingly affirm the judgment of the district court
insofar as it required that post-petition interest payments be
calculated using the seven percent default rate of interest, but
we reverse that part of the judgment which applied only a five
percent rate of interest to payments calculated “for the period
between September 16, 2013 and the December 2013, effective date

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of the plan.” J.A. 72. We remand the case to the district court
for further proceedings consistent with this opinion.

AFFIRMED IN PART; REVERSED IN PART; AND REMANDED

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