RAKE v. WADE, TRUSTEE
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
Argument of David W. Carpenter
Chief Justice Rehnquist: We'll hear argument now in No. 92-621, Donald Neal Rake v. William J. Rade... Wade, pardon me.
Mr. Carpenter: Thank you, Mr. Chief Justice, and may it please the Court:
The Tenth Circuit in this matter has just plainly missed the mark.
They have adopted a case of this term... or this Court, the Ron Pair case, United States v. Ron Pair Enterprises Inc., which only superficially bears any relationship to the facts framed here.
But having committed that mistake, the Tenth Circuit has compounded that error by misreading the Ron Pair decision so as to require the petitioners to pay interest not only on an arrearage in a Chapter 13 plan, bankruptcy plan, but also with respect to fees, costs, and other charges.
And that is found in the final paragraph of the Tenth Circuit opinion.
The Ron Pair decision of this Court specifically holds, by reason of its grammatical construction, that interest is to be paid only upon the allowed secured claim, and is grammatically separated from the contractually required fees, costs, and other charges.
So in any event, and I... the brief of the respondent and also the Government failed to rebut this point.
The Tenth Circuit court of appeals must be reversed, at least for the purpose of correcting this issue.
Otherwise, we believe that the Ron Pair decision does not even apply to the facts framed in a Chapter 13 cure scenario.
First, the case of Ron Pair dealt exclusively with whether or not there was a distinction between a consensual versus a nonconsensual lien on an oversecured claim, and if that distinction made any difference with regard to paying interest as required under section 506(b) under a Chapter 11 plan of reorganization.
Secondly, Ron Pair did not involve the specific framework of Chapter 13.
It is a Chapter 11 proceeding, and there are certain statutory limitations in Chapter 13, specifically section 1322(b)(2), that are inapplicable in every Chapter 11 proceeding.
Third, Ron Pair did not involve a long-term debt, as that term is... is not employed, but intended under Chapter 13.
Unknown Speaker: Are you to talk about the statutory provisions?
Mr. Carpenter: Yes, Justice White, as I am.
This... the statutory provision, section 506(b), requires that where a claim is oversecured the allowed secured claim must be paid interest and must also be paid its contractually provided for fees, costs, and other charges.
We feel that section 506(b), however, does not apply in the cure scenario found under Chapter 13, specifically section 1322(b)(5).
Unknown Speaker: In the what scenario?
I didn't get what adjective you used.
Mr. Carpenter: I'm sorry.
A cure scenario where a debtor in a Chapter 13 proceeding has fallen delinquent in home mortgage payments and desires to cure that arrearage, or cure that default.
Under section 1322(b)(5), the Code provides that he may... he or she may do so, and maintain regular payments.
That is the upshot of 1322(b)(5).
That particular paragraph applies only to what I have termed long-term debts; that is to say, a debt whose normal maturity date would not come to pass until completion of all Chapter 13 plan payments.
Unknown Speaker: In what... and you rely on 1322(b)(2).
Mr. Carpenter: I rely on 1322(b)(2), yes, Justice White.
I also rely on 1322(b)(3) and (b)(5).
Unknown Speaker: Well, you say... you say that 1322(b)(2) prohibits modification of the terms of the mortgage.
Mr. Carpenter: It prohibits plan modification, Justice White.
It does not prohibit Code modification of the home mortgage.
And by home mortgage I, of course, refer to a... an allowed secured claim that is secured solely by real property which constitutes the debtors principal residence.
Unknown Speaker: Well, by extending the time for payments you certainly are... are modifying the terms of the mortgage, aren't you?
Mr. Carpenter: No, Justice White.
Unknown Speaker: The plan... the plan provides for extended payments, doesn't it?
Mr. Carpenter: The plan provides that in order to effect a cure--
Unknown Speaker: Uh-hum.
Mr. Carpenter: --Under section 1322, the cure must be effected within a reasonable time.
Unknown Speaker: Uh-hum.
Mr. Carpenter: That is not further defined in the Code.
In practice, it is implied to be not longer than the length of the Chapter 13 plan, which could be anywhere from 1 month to 5 years.
Unknown Speaker: Well, certainly the acceleration clauses in the... in the mortgage... typical mortgage, then, are... are set aside.
Mr. Carpenter: Your Honor, Mr. Chief Justice, the... the... what is set aside is the right to immediately foreclose and accelerate.
This, however, is not a plan modification as petitioners view it.
It is a modification that is imposed by the Bankruptcy Code itself, section 1322(b)(5).
Unknown Speaker: You say that requires that?
Mr. Carpenter: I'm saying that if the debtors choose to avail themselves of the cure provisions of paragraph (b)(5), that it is the Code and not the plan which constitutes the modification.
It does have the... the limiting language,
"notwithstanding the provisions of section 1322(b)(2). "
Unknown Speaker: But the plan says how... how far deferred it's going to be, doesn't it?
Mr. Carpenter: The plan--
Unknown Speaker: The Code doesn't... doesn't provide for an automatic answer.
Mr. Carpenter: --No--
Unknown Speaker: So it's either done by the plan or it's not done.
Mr. Carpenter: --That is correct, Justice Scalia.
However, the treatment is not initiated by the plan per se, it is initiated by the Code.
Unknown Speaker: Well you can say that about any treatment of anything under the plan.
The Code authorizes a plan to... to adjust any indebtedness, right?
Mr. Carpenter: Uh--
Unknown Speaker: So, I mean, I don't know why this is any different from any other indebtedness under it, as far as that goes.
Mr. Carpenter: --I do acknowledge your point, Justice Scalia, and that is... that is a valid point.
However, we feel that that is not the end of the story, if you will.
Unknown Speaker: Can I ask... it seems to me that the crucial language in this is... it seems to me that the crucial language is whether... what we're really arguing about is whether this is an allowed secured claim provided for by the plan, right?
Mr. Carpenter: I do not necessarily acknowledge that as being a correct statement, Justice Scalia.
Unknown Speaker: You don't.
Mr. Carpenter: I think that--
Unknown Speaker: Well, what do you think the crucial language is?
Mr. Carpenter: --I think that by virtue of effecting a cure under section 1322(b)(5), the debtors elects to maintain payments, and hence as to the maintained payments there is a continuation of the preexisting, prebankruptcy contract.
And therefore that contract is not provided for by the plan.
It is only the cure aspect that is dealt with inside the plan.
Unknown Speaker: Well, it... I'm... let me begin with 1325, anyway.
1325 provides that you give current value, and you make sure that current value isn't diminished as for anything... as for any... any distribution on account of the claim covered by the plan, distributed under the plan.
Mr. Carpenter: That is correct, Justice Scalia.
Unknown Speaker: And you were arguing, at least at one point in your... in your brief, that this is not a claim provided for by the plan.
You're saying it's a claim that exists on its own as a simple contractual obligation that's been preserved, right?
Mr. Carpenter: Yes.
Yes, Justice Scalia.
There's authority to that effect among the circuits.
Unknown Speaker: Well--
Mr. Carpenter: However, it is my position that section 1325 is not even invoked when a cure under section 1322(b)(5) is effected, because maintenance of the payments implies with it necessary contractual payment of interest on the allowed secured claim.
Unknown Speaker: --If that is so, how do you explain the language of 1328, which says that
"The court shall grant the debtor a discharge of all debts provided for by the plan. "
"except any debt provided for under 1322(b)(5). "
So 1328 refers to 1322(b)(5) as a debt "provided for by the plan".
Mr. Carpenter: Yes, Justice Scalia, it does.
And I believe that that... I think the congressional intent there is to... and I don't want to particularly get hung up on the phrase "provided for by the plan"--
Unknown Speaker: Well, I do.
It seems to me central to the... to the case.
Mr. Carpenter: --My belief is that Congress, in section 1328, indicated that where there will be a... a continuation of a long-term debt past the end of the plan, it would be inappropriate, whether secure or unsecured, to... to allow a discharge.
I will... I will concede that 1328 does refer to provision by the plan under 1322(b)(5).
Unknown Speaker: Do you have some interpretation of that language, of 1328, that is consistent with your argument here?
Mr. Carpenter: No, Justice... Mr. Chief-Justice, I do not.
I believe that... that the term 1325, because maintenance of the payments under 1322(b)(5) will necessarily require maintenance of the existing prefiling contractual rate of interest that would be paid on... on the allowed secured claim.
Unknown Speaker: So then you feel that 1325 may be inconsistent with that part of 1328.
Mr. Carpenter: To that extent I do believe it is, Your Honor.
Specifically, I would like to draw the Court's attention to the meaning of the word cure.
Cure is found in various places throughout the Bankruptcy Code.
It is found in section 365 dealing with executory contracts and unexpired leases.
It is also found in section 1124 dealing with prepetition defaults and various types of claims or interests.
It is found in two places in section 1322, one in paragraph (b)(3) and one in paragraph (b)(5).
(B)(5), of course, refers to debts that would mature subsequent to the final payment under a Chapter 13 plan, which leaves (b)(3), a fortiori, to apply, although not... so limited by its terms, it would not have any meaning apart from relating only to a short-term debt, one that would normally mature within the scope of the Chapter 13 plan.
The provisions in section 365 and 1124 that deal with cure both require the debtor, as a function of cure under those sections, to not only cure the default, but to compensate the claimant for any monetary loss and to assure future performance under the cured default.
That language is conspicuously absent from the two provisions in section 1322.
There is no requirement of compensation, no requirement of assurance.
There is merely either the curing or waiving of a default under section 1322(b)(3), or the curing of the default under (b)(5).
We feel that Congress' intentional elimination of the compensation and assurance language found in 365 and 1124 indicate clearly that the time value money, which would equate to the compensation factor in 365 and 1124, are specifically to be disregarded under cures either under section 1322(b)(3) or (b)(5).
There's additional language in the section 1322(b)(5) that specifically requires the cure to be effected within a, quote, reasonable time.
That is not, as I indicated, further elaborated in the Code, but is nonetheless, I believe, Congress' intention that the bankruptcy court, which is, in the best of all possible circumstances, on a case-by-case basis, to make a factual determination of what should constitute a reasonable time.
That, I believe, is consistent with the framework of the Bankruptcy Code in general and harmonizes all of the apparently and superficially conflicting sections of the Bankruptcy Code in Chapter 13.
But since there are various competing interests, the mortgagee has an interest and that competes with the interests of the debtor.
But more importantly, and perhaps more to the point, the general unsecured creditors have a very distinct interest in whether or not interest must be paid in curing arrearages.
The general unsecured creditors essentially get whatever's left over at the end of a Chapter 13 plan unless the Chapter 13 debtor is so well heeled that he may fully fund the plan, notwithstanding what objections might be raised, and pay unsecured creditors 100 percent of their face amount of their claims.
In those fairly rare instances... I do note, by the way, that petitioners Yell are in a 100 percent plan.
But in those fairly rare instances, if interest is required to be paid, then that interest is going to be essentially borne on the backs of the general unsecured creditors.
Since they have no vote in whether or not a Chapter 13 plan would be confirmed, I think the interests of the general unsecured creditors are being preserved by the bankruptcy court in allowing a cure without interest.
I think that section 506(b) does not apply to the case before the court today, for the reason that I believe section 506(b) is a general statute, one of general application.
In fact, that has been a determination found by the Third Circuit in the case of Wilson v. Commonwealth Mortgage Corporation, found at 895 Federal Reporter, Second Series, at page 128.
Chapter 5, along with chapters 1 and 2, tend to, if you will, float over the entire administration of a bankruptcy proceeding to provide a general administrative guidance, and is to give way where there are specific instances of apparent conflict between Chapter 5 and, in this case, Chapter 13.
In any event, I would note that there is no language in section 506 which would tend to determine anything relative to what is necessary under a cure.
I would like to point out that the... of course, the position of the petitioners is supported by the majority of the circuits that have ruled on this issue, as well as the leading treatise in the bankruptcy field, that of Collier's, and, to the view of the petitioners, is the only way to harmonize all of the various competing sections in Chapter 13.
We feel that the respondent's view cannot harmonize both 506(b) and 1325 with the nonmodification rule of section 1322(b)(2).
We also feel that the respondent is seeking here to expand his contractual rights in a way that is not authorized under section 1322(b)(2).
The respondent's own contract is a form drawn up by his assignor for the purpose of determining the relative rights of the parties at its inception.
It specifically dealt with the issue of default and delinquency by providing for late payment penalties.
We feel that this amounts to a private remedy, and is... if section 506(b) does apply, is the functional equivalent to the interest requirement under section 506(b).
We have a very strong feeling that the Tenth Circuit opinion has skewed inappropriately the very delicate balance struck by Congress in dealing with the competing interests that I've previously mentioned.
The home mortgage contract, by and large in this country, is a contract of adhesion.
Debtors, mortgagors, have virtually no power to effect change in the language drawn up by the mortgagee on its form contract.
The mortgagee has the ability to protect itself from the application of section 1322(b)(2) by merely requiring that delinquent installments shall continue to bear interest at a specified rate or at the contract rate, until paid.
That is not what was done.
What was done is that the mortgagee determined that a late payment should bear with it a penalty of either $5 or 5 percent of the penalty, whichever payment was less.
We also feel that the opinion of the--
Unknown Speaker: And would you say that if they adopted such a provision and such a provision provided for 10 percent interest, and the legal rate of interest that would otherwise apply under the Bankruptcy Code was less than that, that they'd get the higher amount of interest?
Mr. Carpenter: --I do, Your Honor.
Unknown Speaker: In bankruptcy?
Mr. Carpenter: Yes, Justice Scalia, I believe that it would by reason of section 1322(b)(2).
Unknown Speaker: Uh-hum.
Mr. Carpenter: And I believe the... the courts that have followed the position of the petitioners here have determined that where the contract of the parties calls for interest, interest must be paid on those arrearages.
Where the contract is silent, it should stay silent.
Unknown Speaker: Well, if you're going to follow just the contract, certainly if the mortgagee here had been allowed to accelerate, the accelerated principal would have borne interest, would it not?
Mr. Carpenter: Yes.
Yes, sir, Mr. Justice... Mr. Chief Justice, it would.
Unknown Speaker: So to that extent, the mortgagee is being deprived of something that he would have had under the contract.
Mr. Carpenter: Yes, Mr. Chief Justice, that is correct.
And virtually every creditor is denied something in the bankruptcy scenario.
In the case of the home mortgage, it is the right to accelerate and foreclose.
Unknown Speaker: Yes.
But I thought your argument was that we ought to hold these people to the terms of their contract.
Mr. Carpenter: With respect to whether or not interest should be paid.
Unknown Speaker: But not to the other provisions.
Mr. Carpenter: Not to the other provision.
That would require congressional enactment to overrule, or to repeal, rather, section 1322(b)(5).
If it please the Court, I would like to defer my additional time for rebuttal.
Unknown Speaker: Very well, Mr. Carpenter.
Mr. Johnson, we'll hear from you.
Argument of Lawrence A.G. Johnson
Mr. Johnson: Mr. Chief Justice, and may it please the Court:
One of the confusions has been the lack of attention to text in the interpretation of the Bankruptcy Code.
Ron Pair was singular in breaking that, in that the courts looked at the text and said we're going to follow the text, that legislative history is not relevant where there's no ambiguity, this is a clear statute.
506(b) only provides for interest postpetition.
It doesn't have any... really, any relevance to the fact of what's going to be after confirmation.
1322(b)... I mean (b)(5) calls for a cure.
In my research, cure was first found in Louisville v. Radford.
Cure says, "cure the default".
In most instances in Chapter 13 bankruptcies, there's a race to the court.
The mortgagee has accelerated, he's filed foreclosure and obtained a valid judgment in the State court.
When the Chapter 13 is filed, 362 stays his right to accelerate, to foreclose, to take possession, as you will.
These are serious modifications that are found under 362.
506(b) only provides pre-Code recognition under Vanston Bondholders to his right of interest postpetition, whereas any other creditors, under secured creditors, unsecured creditors, are not entitled to interest.
So (b)(5) only has that application.
It's when you get to section 1322(b)(2) that it calls for interest upon the allowed claim.
Unknown Speaker: Excuse me.
(B)(5) only has that application, or 506(b) only has that application.
Mr. Johnson: 506(b).
Unknown Speaker: (B) only has that application.
Mr. Johnson: 506(b), Justice Scalia, gives you interest under Vanston, pre-Code, from postpetition up to the time of confirmation.
Unknown Speaker: When you concluded that, you said so (b)(5) only has that application, and I thought you were talking about 1322(b)(5).
Mr. Johnson: I'm talking about... 1325(b)(2) is the time value statute that applies to the forced loan that is brought upon the mortgagee.
We are forced to endure delay in payment for a period of 3, now getting more and more, 5 years.
Now, when we talk about the approved claim that we're talking about, or the allowed claim, one must look at official form 10 of the bankruptcy forms for filing a claim in a Chapter 13 case.
You file for what your balance is due, then you file for what your arrearages are.
Depending upon the nature of acceleration, your arrearages may not include anything but interest.
However, if you filed a foreclosure action and you had to advance insurance, had to advance title report, court costs, endure... incur attorney fees; sometimes in a... in a contested case they can be quite substantial.
Those are part of the arrearage claim.
There are two claims when you... when you have this term 13.
You have an allowed claim for the balance due upon the mortgage.
Then if you have $5,000 or $6,000 in arrearages that you incurred prepetition in acceleration in the State court, those are part of what comes under 1322(b)(5), cure.
That cure was dealt with by Congress in the 10 years that the committee was to undergo the modernization of the Bankruptcy Code.
They came across with a sweeping statement that the Bankruptcy Code could modify... and that term is likewise first used in Louisville v. Radford.
They could modify secured claims.
Well, that's not really clear what that term "modify" means, except that Radford said "modify" means modify substantive claims, and that includes many factors.
For instance, the very essence of a mortgage is full payment with interest.
That was discussed at length in the Radford case.
And whether or not the payment of interest is a substantive right subject to modification was not clear.
But when this committee report was approved by the House and sent to the Senate, it still contained this... this broad sweeping power of Congress under the Code to be able to modify secured claims.
Mr. Vaughn from the American Bankers' Association and Mr. Wies from the American Mortgage Bankers' Association appeared at the Senate hearings and objected not to the deacceleration clause of 1322(b)(5).
They objected to two things: the bifurcation and the modification of the home mortgage.
So the Senate then had a compromise amendment that went back, and that was what is now the present Code provision, that you can modify secured claims under (b)(2), but not secured claims where you have a first lien upon the principal residence of the debtor.
Now, that says nothing about whether you're an unsecured creditor or an oversecured creditor.
It means that because of the social purpose, the good acts that the mortgage association does in encouraging homeownership and protecting mortgage... mortgages, that we're going to protect mortgages, these particular mortgages, against modification.
And as I set out in my brief, there are all sorts of violence that's being performed under the excuse that we're not modifying.
As Justice... Chief Justice Rehnquist said, when you're deaccelerating, you're certainly modifying a right.
You're modifying the right to accelerate, you're modifying the right to proceed to foreclosure.
But then, what other things can be modified?
Well, here we have a right to be paid in full, to have our lien pass through bankruptcy, as in Dewsnup v. Timm.
We have a right to full payment with interest, and we believe that these are substantive rights.
Yet, as you will hear next month, if I have a mortgage for $50,000 on a $100,000 piece of property, I can be stripped $50,000.
In other words, my mortgage is there unsecured as to $50,000 and secured to $50,000, but the courts say that that's not modification.
Hence the confusion and hence why we are here in this particular case, dealing with interest on arrearages.
This Court has had a long-standing rule that was started back in the thirties where in Billings v. United States, at 232 U.S. 261, it said,
"It was long ago here decided, in view of the true conception of interest, that a statute was not necessary to compel its payment where, in accordance with the principles of equity and justice and enforcement of an obligation, interest should be allowed. "
It was strange that in the history of the world, in the law of Moses, the 12 tablets of Rome, even the Church of England found that the exaction of interest was ungodly.
And it wasn't until the common law in the United States that interest was allowed by the courts, and certainly a departure from the common law of England at the time the Constitution was written.
So interest, in the Federal context, has always been allowed by the courts in the breach of an obligation where you had an expectation of payment.
Now, 1322(b)(5) really says to the debtor pay what you owe now if you have an arrearage, and it's equivalent to pay what you owe over a period of time with time value interest.
But if you pay in full what you owe over a period of time without time value interest, it's not equivalent to, quote, pay what you owe now.
There is a question begging in this case as to what rate of interest.
Are we going to have the State law application of interest or are we going to have a Federal application of interest?
Unknown Speaker: What section do you rely on specifically to give you a right to interest?
Mr. Johnson: 1325(b)(2).
Unknown Speaker: You don't think 506(b)'s got anything to do with it.
Mr. Johnson: 506(b).
Unknown Speaker: (b).
Mr. Johnson: 506(b) is the oversecured creditor postpetition right to be paid interest.
That is a general statute.
However, it would be illogical, I think, to say that 506(b) could not be used as justification for payment over a period of 5 years to an oversecured creditor.
But I feel that the explicit language of Congress in 1325(b)(2) provides for time value interest.
Unknown Speaker: Do you... do you accept the Government's argument in its footnote 7, I guess, that 506(b) wouldn't apply after confirmation because it has the effect of, in effect, allowing a claim, and the time for that has then passed?
Mr. Johnson: I adopt the Government's interpretation that 506(b)... (b)(2) provides only for interest postpetition.
Unknown Speaker: Of course, they say the opposite on page 15, so you can... you can... you can adopt their view without losing anything.
Mr. Johnson: Thank you.
Unknown Speaker: Do you... will you tell me again the section that you say you rely on?
You said 1325(b)(2).
Mr. Johnson: 1325(b)(2) is found at page A-5 of the petitioners' petition for certiorari, set out in full there on page A-5.
It says that the...
"Except as provided in subsection (b), the court shall confirm a plan if, (A), the holder of such claim has accepted the plan. "
Unknown Speaker: Wait... wait a minute.
Where are you reading from?
Mr. Johnson: A-5 of the petition for certiorari.
Unknown Speaker: Well, whereabouts on A-5?
Mr. Johnson: (ii) under... under (B) on A-5, where it starts "the value".
Unknown Speaker: Yes, okay.
Mr. Johnson: "As of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim. "
Unknown Speaker: That's... that would be section 1325(a)(B)(ii).
Mr. Johnson: (a)(B)(ii).
That is also synonymous with 1129 under Chapter 11 plans, which in the legislative history Congress said is to be identical to the Chapter 13 provision.
The difference being, however, that in a Chapter 11 plan, a creditor can propose a plan.
However, in a Chapter 13 plan a creditor cannot propose a plan, and 1322(b)(2) is meant to protect the creditor.
Unknown Speaker: So, for what period or periods of time are you asking interest?
Mr. Johnson: Well, actually, since I'm an oversecured creditor.
Unknown Speaker: Yes.
Mr. Johnson: I'm entitled to that minimal amount of interest from the time the petition is filed until the plan is confirmed, which is normally a month or two.
If there are amendments, it might run as far as 3 months.
That's not much money.
The big money is where I'm forced to make a loan to the debtor for 5 years, and so that's the basis of which we are asking for interest.
Unknown Speaker: And there's no question, at repetition you would have a right to interest.
Mr. Johnson: There's no question as to that.
And, again, we get another question begging, what if I'm an undersecured creditor?
Unknown Speaker: Yes, yes.
Mr. Johnson: I think under 1325, an undersecured creditor is likewise entitled to interest, even though... and, see, it's not even mentioned whether you're an oversecured creditor or an undersecured creditor in 1325.
Unknown Speaker: You say there's no question about your right to it if... prepetition interest, but under State law you wouldn't get interest on the arrearage, would you?
Mr. Johnson: --Oh, yes.
Under State law I would get Treasury plus 4 points.
Unknown Speaker: On the... on the arrearage.
Mr. Johnson: On the arrearage.
Unknown Speaker: Even though it's not provided for in the contract.
Mr. Johnson: Right.
It's not in the contract, but in Oklahoma, if you apply State law... and I don't want to get into that trap.
I don't think that State law interest would apply in this case, nor do I think this Court should apply a rule of State law application of interest.
The reason why is because it would encourage forum shopping, it would cause windfalls.
Unknown Speaker: But you can't forum shop for your home mortgage.
You can't move the home around.
Mr. Johnson: Well, if you move out of State and you get another venue and they don't object--
Unknown Speaker: It has to be the principal residence, doesn't it.
Mr. Johnson: --Principal residence of the debtor.
Unknown Speaker: You have to... you filed a claim in this case.
Mr. Johnson: Yes.
Unknown Speaker: And you asked for... you asked for interest on the arrearages, I suppose.
Mr. Johnson: Yes.
Unknown Speaker: Was it allowed as a secured claim?
Mr. Johnson: It's an allowed claim.
Yes, sir, it's an allowed claim.
Unknown Speaker: All right, all right.
And at what rate?
Mr. Johnson: That was not handled in the lower court.
I kick myself that we didn't raise this question--
Unknown Speaker: Yeah.
Mr. Johnson: --Because I hate to come back on what interest rate.
Unknown Speaker: That's all right.
Mr. Johnson: Is it going to be State law, is it going to be Federal law?
I think it should be Federal law.
If it's Federal law, then I think there should either be one of two rules.
Unknown Speaker: So what... 506... 506 gives you interest postpetition.
Mr. Johnson: Yes.
Unknown Speaker: At what rate?
Mr. Johnson: Quiet.
Unknown Speaker: All right.
Mr. Johnson: Commonly, it's market rate, 8 percent.
Unknown Speaker: --All right, all right.
And that's what you're asking for your... in this case, for all of the interest you claim.
Mr. Johnson: Yes.
But, I'm again... I want to urge in the 5 minutes I have, I want to urge that there's nothing cutting across any State interest by applying a Federal rule of interest in this case--
Unknown Speaker: Right.
Mr. Johnson: --Where Congress has been silent.
I ask that there be a Federal rule and that the Federal Court here apply a uniform interest rate under the bankrupt... under the constitutional uniformity.
Unknown Speaker: Now, do you support the judgment of the Tenth Circuit?
Mr. Johnson: Yes, I do.
Unknown Speaker: And the rationale?
Mr. Johnson: No.
The rationale is a little shady under 506(b).
I'm sorry, but I'm here under 1325.
Unknown Speaker: So you want it affirmed on another... on another basis.
Mr. Johnson: Yes.
Unknown Speaker: I think... fees and expenses, was there interest allowed on those too?
Mr. Johnson: Yes, because that's part of my, quote, allowed claim.
Unknown Speaker: That's part of your allowed.
Mr. Johnson: That's something that really should be hammered across, is that when I file a claim, I file a claim for interest, I file a claim for $35,000 due on the mortgage, then if... I file a claim also for the arrearages, which can be interest, taxes advanced, insurance advanced, court costs, and attorney fees.
And interest is allowed on attorney fees under Federal law.
Unknown Speaker: So you think if we just... if we followed the rationale of the Tenth Circuit we would be in error.
Mr. Johnson: I don't want to say that, Justice White.
I want to say that you would pick another, more rational ground to establish the rule of law.
Unknown Speaker: But you wouldn't mind... you wouldn't mind if we agreed with the Tenth Circuit.
Mr. Johnson: No, sir, no.
Unknown Speaker: But you do... but under the Tenth Circuit rationale you wouldn't get interest on the fees, would you?
Mr. Johnson: Yes, I would.
Unknown Speaker: I thought they relied on 506(b).
Mr. Johnson: Well, but under 506(b)... and I don't want to trample on Justice O'Connor's comma.
Unknown Speaker: But the fees are after the comma.
Mr. Johnson: But in 506(b) they all go together.
Unknown Speaker: Oh, no, the comma--
Mr. Johnson: Interest is an unqualified right.
Unknown Speaker: --You ignore the comma in 506(b) for your purposes, then.
That's not what the Court did in Ron Pair.
Mr. Johnson: Well, in Ron Pair the comma was not ignored, no.
It set it off as a separate clause and says
"and if the agreement so provides. "
attorney fees and so on.
Unknown Speaker: Yeah, I understand.
Mr. Johnson: No, I got interest on all of that and I think I'm entitled to interest under it, and would be under the Federal rule.
Unknown Speaker: Mr. Johnson, I don't see anywhere in your... either of the questions presented by the petitioner for certiorari, where any question regarding the rate of interest is presented.
Mr. Johnson: No, but in deciding this case, I believe that the Court should grab that one feature, because it's a very integral part of the question.
It doesn't give a full and complete disposition of the case unless you say we're going to apply a Federal rule of evidence in this case.
Unknown Speaker: You mean a Federal rule of interest.
Mr. Johnson: Yeah, the Federal rule of interest, and you're going to apply a uniform rate of interest, and it will either be, one, contract rate, market rate... the contract rate is, after all, what the parties bargain for... or you will apply a Treasury bill rate over--
Unknown Speaker: Did you brief the... did you brief the question of the rate of interest?
Mr. Johnson: --No, sir, I did not.
Unknown Speaker: And you're asking... so you're asking us to decide it without it being raised in the petition for certiorari, without your having briefed it.
Mr. Johnson: I'm doing it under the equity powers of this Court, that in order to decide a case you will decide it completely.
Because it is leaving a very rough ground behind.
In other words, when we go back--
Unknown Speaker: Well, you say on the provisions of the Bankruptcy Code, which is Federal law.
Mr. Johnson: --But the Bankruptcy Code is silent as to the rate.
The Bankruptcy Code is silent as to whether State law will apply or Federal law will apply as to interest.
If it's silent, I think that this Court should fill that gap, and I don't think that's asking too much, because there's going to be extensive litigation.
There's already extensive litigation in the lower courts as to what the rate it.
Unknown Speaker: Thank you, Mr. Johnson.
Mr. Mann, we'll hear from you.
Argument of Ronald J. Mann
Mr. Mann: Thank you, Mr. Chief Justice, and may it please the Court:
This case considers the availability of interest for oversecured creditors in Chapter 13 bankruptcy cases.
In our view, the problem is resolved by the precise wording of three related statutory provisions, sections 506(b), 1322(b)(5), and 1325(a)(5) of the Bankruptcy Code.
I'd like to look first at the language of the statute and then address a number of points raised by petitioner.
The first part of the question is whether interest is available, what I'll call preconfirmation interest, from the date the petition is filed until the effective date of the plan.
In our view, that's governed by section 506(b) of the Bankruptcy Code.
I understand from Justice Scalia there may have been some ambiguity in our brief, but I don't think that there's... I did not mean anything in our brief to suggest that that provision would apply after the date of confirmation.
I'm somewhat puzzled as to what in my brief might suggest that view, but that's certainly not our view.
Unknown Speaker: Well, you say... well, never mind.
Mr. Mann: In our view, section--
Unknown Speaker: You seem to say that on page 15.
"and thus the interest provided under section 506(b) must be paid to compensate creditors for the delay occasioned by a cure permitted-- "
Mr. Mann: --Occasioned by the pendency of the bankruptcy case, by which I refer to the pendency--
Unknown Speaker: --That's not what you say on 15.
You say it
"must be paid to compensate creditors for the delay occasioned by a cure permitted by 1322(b)(5). "
that's what you say on 15.
You stick with footnote 7, though, anyway.
Mr. Mann: --I stick with footnote 7 and I meant the portion--
Unknown Speaker: Okay.
Mr. Mann: --That sentence referred to the portion of the cure that occurs before the plan is confirmed.
1325 covers the portion after the plan.
But looking at the preconfirmation interest, the relevant statute is section 506(b), and this is on page 1a of our appendix.
The first operative clause of that statute provides that there shall be allowed to the holder of an oversecured claim interest on such claim; it states that without qualification.
As the Court explained in Ron Pair, this section should be read as having two different clauses.
The first provides for interest in all cases and the second clause, after the comma, provides for reasonable fees, costs, and charges, but only to the extent that they're provided for under the agreement under which the claim arose.
Now, this case involves a claim for interest.
Therefore, the bankruptcy courts should have allowed the claim for interest without regard to the terms of the agreement under which the claim arose.
Now, there's been some discussion as to how that works with respect to fees, costs, and other charges.
If there was an allowed secured claim for something that would be a fees, costs, or other charges provided for under the agreement, section 506(b) would allow interest on that claim, because it provides for interest on your allowed secured claim.
You would look to the agreement and determine that he might have an allowed secured claim, for example, if he had been required to advance taxes on the real property.
And then under 506(b) he would be entitled to interest if he was oversecured and had an allowed secured claim for that.
Unknown Speaker: But why... I don't... isn't that always the case?
Everything after the comma will always... will always bring you back to before the comma.
Mr. Mann: But the question of the part after the comma is that if the agreement does not provide that you're entitled, for example, to collect compensation from a debtor for a certain type of fee, for example title searches.
If under State law, under their mortgage they have not asked to be compensated for that, Federal law does not grant them a right to that.
The only way that they could collect compensation for attorney fees, insurance advances, advances to pay taxes, is if the agreement under which the claim arose provides for that.
Unknown Speaker: But if it does provide for that, it is part of the claim anyway.
Mr. Mann: It is part of their allowed secured claim.
Unknown Speaker: So it's a strange provision.
Mr. Mann: It is a strange provision, and I think the Court's opinion in Ron Pair reflected that.
Turning to the availability of interest for the period after the plan, which as petitioner and respondent both agree, is really the important monetary aspect of the case.
We agree with Justice Scalia that this really turns on the language of section 1325(a)(5), and that's at page 2a of our appendix.
And what it says is
"with respect to each allowed secured claim provided for by the plan. "
the debt... the creditor is entitled to present value payments.
In this case, it's acknowledged that the claim is an allowed secured claim, and it seems to us quite clear that the claim was provided for by the plan.
The plans are set forth in the joint appendix, and they state that the arrearages will be paid out over specified monthly periods and stated monthly installments.
Under any natural reading of the phrase 1325(a)(5).
I'd like to address two other points that have come up.
The first one is with respect to the suggestion that in other provisions of the Bankruptcy Code, specifically sections 1124 and 365, Congress expressly provided for compensation for delay, but somehow in this case the statute is any less clear.
The argument is made at some length in the amicus brief filed in support of petitioners that the problem with that argument is that it looks solely to section 1322(b)(5).
The place where Congress provides for compensation for delay in this context is 1325(a)(5), and as I've mentioned, this claim is clearly covered by that section, and it just as clearly provides for compensation for delay as any of the other provisions.
Unknown Speaker: If it is so clear that it covers the compensation for delay in payment, why do you suppose they didn't tell us how to figure out the interest rate?
Mr. Mann: There are no provisions in the Bankruptcy Code that discuss the topic of exactly what the rate of interest should be.
And I... I do agree with respondent that it is quite an important question.
It also seems quite clearly not to be before the Court in this case.
The lower courts are struggling with it, and there are quite a number of approaches that could be taken.
But I do think it's fair to say that under any reading of the statute after Ron Pair, there are clearly some cases in which interest is going to be paid under the Bankruptcy Code to oversecured creditors, and the statute simply does not state what the interest rate is.
Unknown Speaker: Of course, if we'd ignored the common interest rule in... after interest in Ron Pair, we wouldn't have this problem, because the interest would have been set by the instrument itself then.
Mr. Mann: If Ron Pair had been decided the other way, that would deal with the problem for pre... preconfirmation.
Unknown Speaker: We wouldn't have this problem, yeah.
Mr. Mann: But it seems quite clear... I think you would agree that under section 1325(a)(5), somebody is going to be receiving compensation for delay under that provision.
The opinion in Inwood of Timbers... Timbers of Inwood Forest strongly suggests that's the purpose of the provision, and I think all the people that have looked at that provision understand that it provides compensation for delay.
The question in this case is simply whether the claim at issue here is covered.
And finally, one thing I would like to... to add to emphasize the reasons why it makes sense for there to be interest created by these various provisions, we have to remember that section 502(b)(2) of the Bankruptcy Code disallows all claims for interest after the petition has been filed.
So the availability of interest before the petition under the contract of the parties is not particularly relevant to the issues that are before the Court here, because the Code has expressly disallowed those claims.
So the only way that a creditor, in our view, would be entitled to interest after the bankruptcy petition has been filed is if he can identify a provision in the Bankruptcy Code that entitles him to compensation for delay.
It's a uniform bankruptcy law and Congress has enacted uniform provisions to compensate people for delay during the pendency of bankruptcy proceedings.
Unknown Speaker: Tell me, what is the provision that disallows interest generally again?
Mr. Mann: It's section 502(b)(2).
Unknown Speaker: 502(b)(2).
Mr. Mann: If there are no further questions, I thank the Court.
Unknown Speaker: Thank you, Mr. Mann.
Mr. Carpenter, you have 10 minutes remaining.
Rebuttal of David W. Carpenter
Mr. Carpenter: Thank you, Mr. Chief Justice, and may it please the Court:
Interest on an arrearage of a home mortgage in the early years of that mortgage is essentially interest on interest.
Very little of the monthly payment made to a mortgagee constitutes a reduction of principal or an allocation to an escrow for insurance or taxes, where those are escrowed in a monthly mortgage payment.
There's been a great deal of discussion by respondent with respect to the legislative history giving rise to the current status of the Bankruptcy Code.
I assert that there are no provisions of the Bankruptcy Code present before this Court today that are unambiguous... or, excuse me, that are ambiguous, and therefore resort to legislative history is without merit and should not be indulged in by the Court, and this Court has so determined on several occasions.
Unknown Speaker: Does that mean you think the legislative history is against you?
Mr. Carpenter: No, Justice Stevens, I do not.
I think that the legislative history, however, is not particularly instructive or enlightening in light of the actual language used by Congress in enacting the various chapters... or sections of the Bankruptcy Code with which we're dealing today.
Other than deacceleration of a home mortgage and the right to foreclose pending continuation or maintenance of payments under a Chapter 13 plan, there is no modification of a home mortgage, and that is consistent with the interaction of sections 1322(b)(2) and (b)(5).
There just may not be any modifications of the home mortgage except to allow a cure.
Therefore, the respondent's argument with respect to what else can be modified in his mortgage, and especially raising the specter of the Fifth Circuit case of Nobelman which is currently pending before this Court, are irrelevant to the issues today.
Unknown Speaker: Excuse me.
Gee, if you take that position, strictly speaking, to allow a cure is simply to allow you, right now, to pony up all the money that's due.
That's allowing a cure.
Mr. Carpenter: That--
Unknown Speaker: You--
Mr. Carpenter: --I disagree, Justice Scalia, I'm sorry.
Unknown Speaker: --What?
Mr. Carpenter: I disagree for this reason.
Section 1322(b)(5) specifically limits the application of 1322(b)(2).
It permits cure within a reasonable time, and that is what I believe Congress intended for the bankruptcy courts on a specific case-by-case basis, fact-specific case, to determine.
In certain cases it would be 36, perhaps even as many as 60 months, a 5-year plan.
In certain cases it might only be 10 months.
In fact, if there's not a very extensive arrearage, the... I believe the bankruptcy rules, as they relate to distributions by a Chapter 13 trustee, prohibit payments of less than $15.
And so if there's a $150 arrearage that is due as of the date of filing of the petition, it could not be stretched out past 6 months, unless there's an exorbitant amount of interest that this Court would ultimately determine is appropriate.
Unknown Speaker: May I ask you a question on this modification issue?
As I understand the claim here, it's just for the arrearages, it's not for the balance due on the entire note.
And the... if... in your view, if they fail to make... comply with the plan, covering... making the cure in monthly payments over a period of time, would the mortgagee retain the right to accelerate the basic note and foreclose?
Mr. Carpenter: Only upon application to the bankruptcy court, Mr. Justice Stevens, relating to relief from the automatic stay under section 362.
Unknown Speaker: I see.
And what if--
Mr. Carpenter: And--
Unknown Speaker: --But after... I'm assuming after confirmation of the plan, and they go... makes payments say... I think under this it's 5 years, wasn't it, to pay this off, or whatever period.
Mr. Carpenter: --I don't--
Unknown Speaker: But 2 or 3 years later he misses a payment, and then the mortgagee would still have the right to accelerate, wouldn't they, to foreclose.
Mr. Carpenter: --He would have the right, yes, Justice--
Unknown Speaker: Subject to approval of the bankruptcy court.
Mr. Carpenter: --Yes, Justice Stevens.
He would have to file an application for relief from the automatic stay.
Unknown Speaker: So there has not been a modification that included a surrender of the right to accelerate.
Mr. Carpenter: Not a complete and total surrender for all purposes.
Unknown Speaker: Just a postponement of it, if they--
Mr. Carpenter: Postponement pending maintenance of the payments under section (b)(5), 1322(b)(5), yes, sir.
Unknown Speaker: --Mr. Carpenter, I had... I had understood that the purpose of 1322(b)(2) was to give some special status to home mortgages, to make that an especially attractive investment.
But... but what you propose makes it an especially unattractive investment.
It's the only one in which you can make a modification to the plan and not provide for present value, isn't that right?
Mr. Carpenter: That is correct, Justice Scalia.
Unknown Speaker: Why would Congress want to single out home mortgages for that special disability?
I mean it makes it an especially unattractive investment.
Mr. Carpenter: I don't know that it makes it unattractive.
There is certainly no evidence before the Court, at any of the levels bringing this matter to a head today, that would reflect that position.
Section 1322(b)(2) is a two-edged sword, and that's exactly what Judge Ginsberg, in the in re Stamper case cited in our authorities, held.
That there is... there is no right to modify either in favor of the creditor or in a manner detrimental to the creditor.
It just cannot be modified other than the interplay of section 1322(b)(5).
Unknown Speaker: Well, it can be modified, but only in one way, to the advantage... to the advantage of the... of the debtor.
Mr. Carpenter: I think--
Unknown Speaker: By... by extending the payments and allowing no interest on those payments, whereas every other oversecured creditor, you have to allow interest on the payments.
Mr. Carpenter: --That is correct, Justice Scalia.
The difference here is that I believe Congress has struck a very delicate balance among the various competing interests, as I said.
What drives a Chapter 13 bankruptcy, that it does not... does not have sufficient revenues to pay all creditors in full, are the claims of the general unsecured creditors.
To the extent that they must bear the burden of paying the interest... because it is not money that goes back to the debtor under any scenario.
It is paid to the general unsecured creditors, and where they can only receive less than 100 percent of their allowed claims, then they pay that interest.
Congress has struck this delicate balance among all the competing interests.
The amount of debt--
Unknown Speaker: But why should Congress... you're saying Congress may favor the general creditors, but why should Congress single out the home mortgagee for disfavorable treatment as compared to other secured claimants?
Mr. Carpenter: --Well, Mr. Chief Justice, they were singled out for especially beneficial treatment under section 1322(b)(2) because under a Chapter 13 plan a ny claim of any sort, other than a home mortgage, may be modified, and that is usually to the... to the detriment of the creditor.
And so they are protected to the extent that their underlying claim cannot be modified other than the... the--
Unknown Speaker: Well, other than the ways you say it can be.
Mr. Carpenter: --The deacceleration and the... and the holding off of foreclosure, yes, sir.
Again, I would... I would remind the Court that it is within the strict power of mortgagees generally, and the respondent here specifically, to modify their underlying documents.
There is no question that... the well reasoned circuit opinions and Judge Ginsberg opinion specifically state that where the contract would provide for interest on an arrearage, that that must be honored under a cure of... under section 1322(b)(5), because of its interplay with (b)(2).
But where a creditor, for whatever reason, elects not to, you know, place that particular provision in his contract, he is stuck with his bargain.
What is happening today is the respondent is asking for this Court to expand his contractual rights, and that is what Congress has closed the door on.
Congress has said you may not expand the rights of the home mortgage.
You may not contract them, but you may not expand them.
Unknown Speaker: Mr. Carpenter, your adversary says that they would get this interest as a matter of State law, so it wouldn't be expansion.
Mr. Carpenter: That is... that statement was made, Mr. Justice Stevens, but in actuality the... the interest that was provided... that was mentioned, the Treasury rate plus 4 points, is the State judgment rate, not a default rate.
It is... there is no judgment rate, or there's no interest rate that would be provided prior to a State court judgment.
Only upon completion of a foreclosure proceeding, pending the sheriff's sale at a foreclosure, would there be any postjudgment T-bill plus or Treasury rate plus 4.
Unknown Speaker: No, but if they did foreclose and you got a judgment, then they would get this interest, wouldn't they?
Mr. Carpenter: Yes, for the brief period of time until such time as the sheriff was able to appraise, sell--
Unknown Speaker: Right.
Mr. Carpenter: --The property and the court confirmed it, under Oklahoma procedure.
That's a fairly brief period of time.
Unknown Speaker: Well maybe so, but at least conceptually it does compensate them for the delay.
Mr. Carpenter: Under that scenario, yes.
That is, however, fairly late in the foreclosure procedures.
We are asking that this Court specifically overturn, reverse the Tenth Circuit.
Their reliance upon section 506(b) is not applicable.
They even misread this Court's opinion in Ron Pair in requiring interest on costs, fees, and other charges, and specifically the--
Unknown Speaker: Do you agree... let me just be sure I understand.
You argue, of course, that 1325(a)(5)(a)(2) is not applicable.
Mr. Carpenter: --It is not applicable because, Your Honor--
Unknown Speaker: Now, do you agree, though, that if it were applicable, it would compel a payment of interest on the arrearage?
Mr. Carpenter: --No, sir, I do not believe that it would be applicable even--
Unknown Speaker: Well, I know... don't say it's not applicable.
That's not my question.
Mr. Carpenter: --Yes, sir.
Unknown Speaker: If it were applicable, would you agree that interest was due?
Mr. Carpenter: No, Mr. Justice Stevens, I would not, for the simple reason that section 1322(b)(2) prohibits that modification and a maintenance of payments under 1322(b)(5) maintains the existing payment structure that existed prefiling, repetition, and does not extend to... and does not even invoke section 1325.
Chief Justice Rehnquist: Thank you, Mr. Carpenter.
Mr. Carpenter: Thank you, Mr. Chief Justice.
Chief Justice Rehnquist: The case is submitted.