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In re Capps

argued: October 7, 1987.

IN RE: LYNWOOD G. CAPPS, BARBARA J. CAPPS, COMMONWEALTH EASTERN MORTGAGE CORPORATION APPELLANT


On Appeal from the United States District Court For the Eastern District of Pennsylvania, Civil Action No. 87-0056.

Weis and Stapleton, Circuit Judges, and Diamond, District Judge.*fn*

Author: Stapleton

STAPLETON, Circuit Judge.

This appeal requires us to determine whether the Bankruptcy Code provides that a Chapter 13 debtor who seeks to cure a home mortgage default must pay interest on mortgage arrearages, even though the mortgage contract does not itself provide for such payments. Both the bankruptcy court and the district court concluded that the debtor need not make interest payments. We reach the same conclusion.

I.

Lynwood and Barbara Capps filed a Chapter 13 bankruptcy petition in the Bankruptcy Court for the Eastern District of Pennsylvania. Appellant Commonwealth Eastern Mortgage Corp. (Commonwealth), whose claim arose from a note secured by a mortgage on the debtors' principal residence, was the Capps' largest single creditor.

The final installment on Commonwealth's mortgage was not due for nearly 29 years. The Capps' reorganization plan proposed that the mortgage be cured and reinstated pursuant to 11 U.S.C. § 1322(b)(5),*fn1 which governs cures of long term mortgages.

Under the plan, the Capps would pay their arrearages over a period of five years. They also would pay the monthly installments of their mortgage, outside the plan, as they came due. Commonwealth objected to the Capps' plan.

Shortly after the Capps filed their plan, Commonwealth filed a proof of claim. $6,564.41 of the claim related to arrearages. Of the $6,564.41, $1755.97 was attributable to interest that would accrue on the arrearages during the course of the Capps' Chapter 13 plan. The Capps objected to Commonwealth's contention that they should pay interest on the arrearages.

The bankruptcy court held a hearing to determine whether interest would be required. Commonwealth acknowledged at that time, as it has throughout, that its interest claim has no contractual basis. As recorded in "Statement of Evidence and Proceedings" agreed to by both parties, Commonwealth "[conceded at the hearing] that the mortgage and note contained no provision with reference to the claims for interest on arrearages, but offered the argument that such was required to be included to make the present value of the future plan payments equal to the mortgage arrearages due on the bankruptcy." App. at 3. The bankruptcy court declined to require the payment of interest.

In reviewing the bankruptcy court's order, the district court focused on 11 U.S.C. § 1322(b). Section 1322(b) reflects Chapter 13's permissive approach to reorganization by individual debtors. In particular, § 1322(b)(2)*fn2 enables a Chapter 13 debtor to modify any creditor's claim, except that of a mortgagee whose claim is secured only by a security interest in the debtor's principal residence. Section 1322(b)(5) makes clear that the prohibition against modification of residential mortgages does not preclude their cure:

(5) notwithstanding paragraph (2) of this subsection, [the plan may] 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;

The district court concluded that the Capps' proposed cure satisfied § 1322(b)(5).*fn3 Because the contract did not provide for interest on arrearages, the district court, like the ...


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