Daily Development for
Wednesday, October 22, 1997

by Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

The Reporter for today's DD is Jim Stillman of Murphy, Weir & Butler, Los Angeles.

BANKRUPTCY; CHAPTER 13; DEBTS SECURED BY PERSONAL RESIDENCE; MODIFICATION: The chapter 13 debtor may modify reorganization plan to include reinstatement of postpetition defaults on payments owed to home mortgagee notwithstanding prohibition on modification of rights of mortgagee on such mortgages.

In re Mendoza, 111 F.3d 1264 (5th Cir. 1997).

Under her original plan, debtor arranged for repayment of six months in arrearages under her home mortgage. As her chapter 13 plan was being confirmed, the debtor fell ill and lost her job. As a result, she skipped two payments owed on her home mortgage, but thereafter made them all.

The Court of Appeals upheld a lower court ruling permitting her to modify the plan to include reinstatement of these payments (albeit by payments directly to the creditor rather than through the Trustee.) It interpreted the U.S. Supreme Court's decision in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2107 (1993), to permit such cures notwithstanding section 1322(b)(2), which prohibits modification of the rights of mortgagees of mortgages secured by a personal residence. "There is a distinction between modifying the rights of a mortgagee, ...and modifying a plan of reorganization to include postpetition mortgage payments which are in arrears."

Notwithstanding its generosity to the debtor regarding the home mortgage, the appeals court upheld the bankruptcy's judge's imposition of a drop dead remedy in favor of the creditor, should a further delinquency occur. This clause permits a creditor to exercise its state law remedies without seeking bankruptcy court permission should there be a further default from the debtor.

The debtor argued that such a clause cannot be included over the debtor's objection. All judges in the appeals court disagreed with this argument, but one dissenter argued that there was insufficient cause in the present case to impose so draconian a provision. The dissent found the drop dead clause "too harsh," explaining that the delinquencies were minimal, the creditor was well secured, and the debtor's "sickness and termination from employment was not something she could predict..."

Reporter's Comments: There comes a point at which countenancing post-petition loan delinquencies in chapter 13 is the same as "modifying the rights of" the home lender. The reporter concludes that the Court of Appeals' approval of the drop dead order in this case demonstrates its belief that chapter 13 plan modifications of this kind are to be the exception.

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