§ 83.2     Section 1322(e): Contracts after October 22, 1994
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 83.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

In 1994, Congress acted to overrule Rake v. Wade.1 Section 305 of the Bankruptcy Reform Act of 1994 added a new § 1322(e) as follows:

        Notwithstanding subsection (b)(2) of this section and sections 506(b) and 1325(a)(5) of this title, if it is proposed in a plan to cure a default, the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.2
[2]

The effective date for new § 1322(e) was curiously worded: “The amendments [to § 1322(e)] shall apply only to agreements entered into after the date of enactment of this Act.”3 The date of enactment was October 22, 1994.

[3]

The legislative intent to overrule Rake—but only with respect to “future contracts”—is evident in this analysis by Congressman Brooks:

        This section will have the effect of overruling the decision of the Supreme Court in Rake v. Wade, [508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993).] In that case, the Court held that the Bankruptcy Code required that interest be paid on mortgage arrearages paid by the debtors curing defaults on their mortgages. Notwithstanding state law, this case has had the effect of providing a windfall to secured creditors at the expense of unsecured creditors by forcing debtors to pay the bulk of their income to satisfy the secured creditors’ claims. This had the effect of giving secured creditors interest on interest payments, and interest on the late charges and other fees, even where applicable law prohibits such interest and even when it was something that was not contemplated by either party in the original transaction. This provision will be applicable prospectively only, i.e., it will be applicable to all future contracts, including transactions that refinance existing contracts. It will limit the secured creditor to the benefit of the initial bargain with no court contrived windfall. It is the Committee’s intention that a cure pursuant to a plan should operate to put the debtor in the same position as if the default had never occurred.4
[4]

In Chapter 13 plans that rehabilitate a home mortgage entered into after October 22, 1994, the amount that must be paid to cure default will be determined by the mortgage contract and nonbankruptcy law. The impact of this new rule will gradually increase as residential mortgages entered into after October 22, 1994, surface in Chapter 13 cases. The legislative statement quoted above contemplates that a preexisting mortgage contract would fall within new § 1322(e) if refinanced after October 22, 1994.5

[5]

The rule announced in Rake—that an oversecured mortgage holder is entitled to pre- and postconfirmation interest on arrearages cured through the plan—is not likely to be the rule that emerges when the underlying agreement and applicable nonbankruptcy law control. Because of state usury laws, it is unusual for a mortgage contract to require “interest on interest” when a borrower is delinquent in payments. Instead, late charges of a fixed amount are the usual consequence. The principal amount of the underlying debt continues to accumulate interest until paid, but it is not common for a residential mortgage instrument to separately provide for interest on the interest portion of an unpaid installment.

[6]

In the decisions leading up to Rake, some courts refused to allow interest on arrearages under § 1322(b)(5) because nonbankruptcy law prohibited interest on interest in a home mortgage contract.6 Residential mortgages are often packaged into large bundles of debt that are sold in the financial markets. The existence of even a few states with laws that prohibit interest on interest can have a broader effect on the marketability of multimillion-dollar packages of mortgages. It is unlikely that interest on interest provisions will become widespread in residential mortgage agreements, notwithstanding that the absence of such a provision in a mortgage entered into after October 22, 1994, will preclude recovery of interest on interest as an element of curing default in a Chapter 13 case.

[7]

The “notwithstanding . . . sections 506(b) and 1325(a)(5)” in § 1322(e) makes clear that both prongs of Rake are overruled for mortgage contracts entered into after October 22, 1994. Rake found in § 506(b) an entitlement to preconfirmation interest on arrearages for oversecured mortgage holders, based on the Supreme Court’s earlier decision in Ron Pair. In addition, Rake held that an oversecured mortgage holder was entitled to postconfirmation interest on arrearages because of § 1325(a)(5). Section 1322(e) substitutes “the underlying agreement and applicable nonbankruptcy law” for both the preconfirmation and postconfirmation interest entitlements in Rake when the plan cures default.

[8]

In Rake, the Supreme Court footnoted that curing default included “other charges,” such as attorneys’ fees, costs and late charges.7 The pre- and postconfirmation interest on arrearages allowed by Rake applied also to those other charges. There is nothing in § 1322(e) to suggest that the new rule for calculating the amount necessary to cure default is limited to the interest component of an arrearage—by its terms, § 1322(e) also controls the allowance of “other charges” as part of an arrearage claim.8 The recovery of attorneys’ fees, costs and late charges as components of curing default with respect to a contract after October 22, 1994, will be determined by the agreement and nonbankruptcy law.9

[9]

Section 1322(e) is worded conjunctively—to be included in the amount necessary to cure default, an entitlement must be supported by both the contract and applicable nonbankruptcy law.10 That debtors willingly or unknowingly contract for greater penalties upon default will not overcome more restrictive provisions of state law. Conversely, when the contract is more restrictive than state law, curing default includes interest and other charges only to the extent allowed by the contract.

[10]

Section 1322(e) substitutes nonbankruptcy law for the federal standard in § 506(b). With respect to agreements prior to October 22, 1994, an oversecured creditor is entitled by § 506(b) to “interest . . . reasonable fees, costs, or charges provided for under the agreement.”11 Section 506(b) has been interpreted to establish a federal standard that allows contract interest, attorney fees and charges to be added to an oversecured claim notwithstanding contrary state law.12 This would still be the rule with respect to an oversecured creditor’s entitlement to postpetition interest, fees and other charges when the plan does not propose to cure default.

[11]

For agreements after October 22, 1994, when the Chapter 13 plan cures default, even an oversecured creditor’s contract right to interest, fees and other charges is controlled by nonbankruptcy law—a significant change, especially when state law is more restrictive than the agreement with respect to some component of curing default.13

[12]

Section 1322(e) will also change the cure rights of undersecured creditors. With respect to agreements prior to October 22, 1994, when an undersecured creditor seeks postpetition interest, fees or other charges, it runs into § 506(b), which allows such additions only with respect to oversecured claims.14 Section 1322(e) is not so limited: when the plan cures default with respect to an undersecured claim, § 1322(e) allows postpetition interest, fees and other charges if provided for in the agreement and not prohibited by nonbankruptcy law.15

[13]

“Applicable nonbankruptcy law” may be state or federal law and may require some choice-of-law considerations.16 The state law “applicable” to a contract may be specified in the contract, may be determined by the nature of the collateral (if any), or, by default, may be the law of the state in which the bankruptcy court sits. Applicable nonbankruptcy law could be federal law for a government-guaranteed student loan or the law of the state where real property is located for a home mortgage.

[14]

Diverse nonbankruptcy laws and the undisciplined language of contracts are redefining the landscape of curing default in Chapter 13 cases. For example, in In re Bumgarner,17 the mortgage was entered into in October of 1996. South Carolina law supplied a presumption in favor of interest on interest when a contract was otherwise silent. The note and mortgage contract stated that interest was due “until ‘paid in full’ and ‘interest accrues on the unpaid balances of the principal remaining from time to time, until paid in full.’”18 The bankruptcy court concluded that “because the underlying agreement does not specifically provide for interest on arrearage, the test under § 1322(e) is not met even though state law might permit better treatment.”19

[15]

The bankruptcy court in In re Koster20 stated a more forgiving rule for determining whether interest was required by § 1322(e): Section 1322(e) “does not require language specific to the treatment of interest on an arrearage in a bankruptcy case”; rather, language in the note or deed of trust “which identifies those items that are included in the mortgage debt and which specifies an interest rate, is sufficient to require the debtor to provide for interest on those portions of the arrearage that are entitled to such treatment in the plan.”21 Applying this rule to documents not unlike those in Bumgarner, the Koster court allowed interest:

[T]he note and deed of trust in this case have provided for the payment of interest on the principal amount of the loan until paid, and specifically provided for interest on principal after default. . . . The agreement also provided that amounts advanced for items such as insurance, taxes, costs, and attorney fees were to be added to the arrearage debt and accrue interest at the rate in the underlying agreement. . . . [A]rrearage items that may accrue interest are the principal component of the missed payments, and the attorney fees and costs advanced by Fairbanks.22
[16]

Late charges may or may not be allowable by contract or nonbankruptcy law as an element of curing default under § 1322(e).23 Late charges sometimes substitute for interest on some or all of the components of curing default. In In re Bagne,24 the mortgage contract provided a 21 percent interest rate applied to the “unpaid balance of the amount financed.” Elsewhere the contract assessed a 6 percent “late charge” on a missed installment. The bankruptcy court found that “there is no provision in the contract for interest on interest. Accordingly, the contract rate of interest (21 percent) must be paid on the portion of the arrearage which constitutes unpaid principal. To the extent the arrearage also includes accumulated interest, no interest on that interest is required.”25

[17]

Bagne illustrates that when late charges are the contractually allowed cost or penalty for missing an installment, allowing interest on arrearages as an element of curing default adds a second measure of recovery for the mortgage holder. Put another way, late charges are a form of liquidated damages governed by contract, and bankruptcy courts should not enhance the agreed upon remedy by adding interest on unpaid installments as an element of curing default absent a clear contract entitlement. The bankruptcy court in In re Hoover26 applied § 1322(e) to conclude that a mortgage holder was entitled to interest on advances for insurance included in its arrearage claim27 but was not entitled to interest on unpaid installments because the contract imposed a late charge on unpaid installments. Applying the “nonbankruptcy law” element of § 1322(e), the bankruptcy court in In re Guarnieri28 held that late charges were not an element of curing default because the contract had been accelerated before the petition and under Connecticut law, late charges are not recoverable after acceleration. Applying the “underlying agreement” prong, the bankruptcy court in Koster allowed late charges to cure default but because “the underlying agreement between the parties does not indicate an agreement to pay interest on ‘late charges,’”29 interest on late charges was precluded.

[18]

Many contracts that Chapter 13 debtors will manage by curing default contain provisions for recovery of attorney fees, expenses, costs and the like. Discussed in more detail below,30 for contracts after October 22, 1994, the allowance of these other charges and the allowance of interest on these other charges will be controlled by § 1322(e). Again, the combination of state law and the language of contracts will make for interesting and very case-specific outcomes.

[19]

For example, when state law declares that contract provisions for attorney fees are not enforceable, attorney fees will not be recoverable as an element of curing default in a Chapter 13 case controlled by § 1322(e).31 When state law imposes a reasonableness requirement or fixes a cap on attorney fees or other charges, those state law standards and limitations will apply when a Chapter 13 debtor cures default.32 When the contract says advances for legal fees, insurance and other charges must be repaid with interest, and state law is not contrary, § 1322(e) will require payment of all charges and interest to cure default.33

[20]

The language of § 1322(e) could have some confusing interactions with other provisions of Chapter 13. The “notwithstanding” at the beginning of § 1322(e) cross-references “subsection (b)(2) of this section.”34 Subsection (b)(2) is 11 U.S.C. § 1322(b)(2), which contains the general power to modify secured claims and the important exception to that power for a security interest in real property that is the debtor’s principal residence.35 What does “notwithstanding subsection (b)(2)” in § 1322(e) mean?

[21]

The cross-reference might mean that notwithstanding the power to modify secured claims, the original mortgage terms and nonbankruptcy law control the amount necessary to cure default through a Chapter 13 plan. This interpretation would be consistent with the legislative history quoted above. “Notwithstanding subsection (b)(2)” could be read like the similar phrase in § 1322(b)(5)36 to mean that the antimodification language in § 1322(b)(2) does not trump the power to cure mortgage defaults through the plan, so long as the underlying agreement and nonbankruptcy law are respected in the calculation of the amount necessary to cure defaults. Less likely, the phrase could be interpreted to mean that the power to cure default is broader or different with respect to the debtor’s principal residence than was true before the 1994 amendments. One reported decision has already rejected the notion that § 1322(e) signals a departure from the antimodification provisions of § 1322(b)(2).

[22]

In In re Good,37 the plan provided that payments on arrearages on a home mortgage would be applied first to principal and then to interest. The mortgage in Good was protected from modification by § 1322(b)(2). The note and trust deed required that accrued interest was payable before principal. The bankruptcy court rejected the argument that § 1322(e) permitted the plan to redirect the payment of arrearages first to principal and then to interest:

[M]ost terms of a home mortgage loan may not be modified in a Chapter 13 plan, but such a plan may propose to cure a default on the mortgage debt over a reasonable period of time, while the debtor maintains the current payments. However, the right to cure a default does not include the power to alter other contract provisions concerning how payments on the mortgage should be applied. . . . [Section 1322(e)] does not address how a debtor’s payments are to be applied in curing a default. If anything, this new provision highlights Congress’ intent that except where specifically authorized by the Bankruptcy Code, the contracts, not the Code, should govern the rights of parties to a home mortgage loan in Chapter 13. . . . The note and trust deed are consistent in requiring that accrued interest is payable before application of payments to principal. Therefore, Creditor’s right to insist upon interest before principal may not be modified under Debtor’s Chapter 13 plan.38
[23]

What happens when § 1322(b)(2) and § 1322(e) directly conflict? Assume, for example, the contract allows attorney fees and state law does not.39 Under § 1322(b)(2), the debtor cannot modify the contract right of the mortgage holder to collect attorney fees. But, under § 1322(e), the debtor can cure default “notwithstanding § 1322(b)(2)” without paying attorney fees because fees allowed by contract but not permitted by nonbankruptcy law are not required to cure default.

[24]

So, the debtor “cures default”; but what happens to the contract right to attorney fees that cannot be modified under § 1322(b)(2) and Nobelman v. American Savings Bank?40 Can the mortgage holder add those unpaid fees to the balance due on the contract that is now “not in default” because the debtor cured the default under § 1322(e)? Or is § 1322(e) an “exception” to § 1322(b)(2), at least to the extent the contract and nonbankruptcy law are inconsistent? In other words, does curing default under § 1322(e) forever bar the mortgage holder from recovering any contract default that was not supported by both the contract and nonbankruptcy law? Makes sense that it would.

[25]

The “notwithstanding subsection (b)(2)” at the beginning of § 1322(e) could cause some confusion when the mortgage is not protected from modification by § 1322(b)(2), but the debtor is financially unable to manage the allowed secured claim other than by curing default under § 1322(b)(3) or § 1322(b)(5).41 The combination of remedies sometimes available in this situation—the use of § 1322(b)(2) to modify the claim, for example, by claim splitting under § 506(a); then the use of § 1322(b)(5) to cure default and maintain payments on the stripped down allowed secured claim42—may be upset by the wording of § 1322(e). The “notwithstanding subsection (b)(2)” could be overread to preclude modification of a claim with respect to which the plan proposes to cure default. This would be a strained interpretation of § 1322(e). There is nothing in the 1994 legislative history to suggest that Congress intended to preclude modification of mortgages that are not protected by § 1322(b)(2) when the debtor also proposed to cure default under § 1322(b)(3) or (b)(5).

[26]

One bankruptcy court has applied § 1322(e) to define a mortgage holder’s rights in an unexpected context. Section 1322(e) provides that the underlying agreement and nonbankruptcy law determine the amount necessary to cure default “if it is proposed in a plan to cure a default.”43 When is it “proposed in a plan to cure a default”? The obvious Code sections to which § 1322(e) would apply would be “curing or waiving of any default” under § 1322(b)(3)44 and “curing of any default within a reasonable time and maintenance of payments” under § 1322(b)(5).45 It might be argued that § 1322(e) applies when the debtor “cures . . . default” in an executory contract or unexpired lease under § 365(b)(1)(A).46 But in Bagne, the bankruptcy court applied § 1322(e) to a plan that paid a short-term mortgage in full with interest under § 1322(c)(2).

[27]

Section 1322(c)(2) was enacted in 1994 to empower Chapter 13 debtors to use § 1325(a)(5) to manage a home mortgage when the last payment on the original payment schedule is due before the final payment under the plan.47 Section 1322(c)(2) is an exception to the antimodification provision of § 1322(b)(2). Although somewhat controversial, the new section contemplates that the plan can modify a home mortgage within its reach and pay the allowed secured claim during the plan consistent with § 1325(a)(5).48

[28]

In Bagne, the second mortgage was a five-year line of credit payable before the completion of payments under the plan. The plan proposed to pay the entire loan, including installments in arrears at the petition, with interest at the rate of 10 percent. The contract interest rate was 21 percent. The mortgage holder objected to the lower rate of interest through the plan.

[29]

The bankruptcy court held that § 1325(a)(5) required a “market rate” of interest on the payment of the short-term home mortgage through the plan. But the court went further. Because the five-year line of credit was entered into after October 22, 1994, the court concluded that the plan was also governed by § 1322(e). The court found and then resolved an apparent conflict between § 1322(e) and § 1322(c)(2):

Section 1322(e), however, in its introductory clause uses the phrase “notwithstanding . . . § 1325(a)(5)” . . . . At first glance, then, there is an apparent conflict between § 1322(c)(2) and 1322(e): the former sanctions a debtor’s use of § 1325(a)(5) to modify a short-term home equity loan, while the latter expressly prohibits its use. Upon closer inspection, the sections are easily reconciled. Section 1322(e) only applies to the arrearage. . . . [I]n a situation where both § 1322(c)(2) and § 1322(e) apply to a loan, the loan is bifurcated into two components—the arrearage and the unmatured principal payment. The unmatured principal payment is subject to § 1325(a)(5) which mandates a market rate of interest, whereas the cure of the default amount must provide interest on the claim in accordance with the contract. . . . Turning to the contract in this case, . . . there is no provision in the contract for interest on interest. Accordingly, the contract rate of interest (21%) must only be paid on the portion of the arrearage which constitutes unpaid principal. To the extent the arrearage also includes accumulated interest, no interest on that interest is required.49
[30]

The resolution in Bagne of the proper interest rate to cure default under a contract controlled by § 1322(e) is interesting and creative. But it is not obvious from the opinion why § 1322(e) applies. The plan modified the short-term mortgage and proposed to pay the allowed secured claim in full with interest under § 1325(a)(5). This treatment was authorized by § 1322(c)(2). There is no “curing default” language in § 1322(c)(2). Ironically, the Bagne court cites Key Bank of New York v. Harko (In re Harko),50 in support of its holding that § 1322(e) applies when a Chapter 13 plan uses § 1322(c)(2) to pay in full a short-term home mortgage. In dicta in Harko, the Second Circuit BAP observed, “Cure under § 1322(e) is conceptually distinct from cramdown. The cure provisions allow the debtor to keep the original contract in place and bring it up to date: they do not proscribe, and are not inconsistent with, prospective modification under the plan.”51

[31]

It seems unlikely that Congress intended § 1322(e) to apply when a debtor modifies a short-term home mortgage under § 1322(c)(2). The legislative history quoted above demonstrates that § 1322(e) was intended to overrule Rake. Section 1322(c)(2) was enacted in 1994, a year after Rake, and § 1322(c)(2) is not modeled after the curing default language in §§ 1322(b)(3) or (b)(5). Section 1322(c)(2) does not put the debtor “in the same position as if default had never occurred” as described by Congressman Brooks;52 rather, § 1322(c)(2) permits the debtor to resolve a short-term home mortgage through the plan in ways never contemplated by the original contract. The payment of interest (and other charges) when a debtor uses § 1322(c)(2) should be controlled by § 1325(a)(5), not by the special rules for curing defaults under § 1322(e).

[32]

Sometimes calculating the amount in default that must be cured through the plan requires investigating the debtor’s relationship with the mortgage holder(s). It is common for debtors to come into Chapter 13 having defaulted several times and having negotiated various solutions to those defaults. Particularly with respect to mortgages insured by HUD, sometimes the amounts in default have been set aside and “securitized.” Typically memorialized in a forbearance agreement, this means that arrearages were added together and the sum rolled up into a separate balance due. For bookkeeping purposes, the mortgage servicing company keeps track of this “segregated securitized arrearage.” By the time the debtor visits bankruptcy counsel, there may also be current defaults that have not yet been securitized. It has been held for § 1322(b)(5) purposes that the amount necessary to cure default does not include segregated securitized arrearages but only includes the current amount in default.53

[33]

Don’t forget: With respect to all agreements entered into before October 22, 1994, § 1322(e) is not applicable and Rake retains vitality.54


 

1  508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993).

 

2  11 U.S.C. § 1322(e), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 305, 108 Stat. 4106 (1994). Section 305 of the 1994 Act added similar language to Chapters 11 and 12. See 11 U.S.C. § 1123(d) and 11 U.S.C. § 1222(d), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 305, 108 Stat. 4106 (1994).

 

3  Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 702(b)(2)(D), 108 Stat. 4106 (1994).

 

4  140 Cong. Rec. H10,770 (section-by-section analysis by Congressman Brooks). See also 140 Cong. Rec. S14,462 (remarks by Sen. Grassley) (“[S]ection 305 will prevent mortgage lenders from imposing interest on interest when mortgage arrearages are cured, even when the mortgage instrument is silent on the subject. This section will affect all future mortgages unless the mortgage expressly retains the lender’s right to impose such interest on interest.”).

 

5  See In re Harding, 274 B.R. 173, 175–76 (Bankr. D. Md. 2002) (Section 1322(e) controls mortgage holder’s entitlement to interest, not Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993), when modification agreement after October 22, 1994, extended maturity date and changed interest rate and monthly payment. Deed of trust was dated July 22, 1986. Modification agreement occurred in February 1995. “[R]efinancings entered into after October 22, 1994, are included in the definition of agreements to which 11 U.S.C. § 1322(e) applies. . . . [A] refinance occurs where, as here, the interest rate and the terms of repayment are altered. . . . 11 U.S.C. § 1322(e) and not Rake v. Wade controls the Bank’s right to interest on the prepetition arrearage as a component of cure of the default.”).

 

6  See § 134.1 [ In General: Rake and Contracts before October 22, 1994 ] § 83.1  In General: Rake and Contracts before October 22, 1994. See, e.g., Guiccione v. First Fed. Sav. & Loan, 41 B.R. 289 (Bankr. S.D.N.Y. 1984) (New York law prohibits the payment of interest upon past-due interest in a home mortgage; therefore, creditor cannot claim interest on arrearage.).

 

7  See § 134.1 [ In General: Rake and Contracts before October 22, 1994 ] § 83.1  In General: Rake and Contracts before October 22, 1994.

 

8  See In re Landrum, 267 B.R. 577 (Bankr. S.D. Ohio 2001) (Section 1322(e) is not limited to the interest issue addressed in Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993), but also controls whether oversecured mortgage holder can include attorney’s fees in arrearage claim.); In re Lake, 245 B.R. 282, 287 (Bankr. N.D. Ohio 2000) (“Because there is nothing in the statute to suggest that § 1322(e) is limited to interest charges, the Court finds that it also applies to determine whether attorney fees must be paid as part of ‘the amount necessary to cure’ this default.”).

 

9  See below in this section, and see § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges.

 

10  In re Guarnieri, 297 B.R. 365 (Bankr. D. Conn. 2003) (To be allowable as part of an arrearage claim under § 1322(b)(5) and 1322(e), a charge must be allowed by the underlying contract and enforceable under state law.); In re Hatala, 295 B.R. 62, 64 (Bankr. D.N.J. 2003) (“11 U.S.C. § 1322(e) directs that the amount necessary to cure default under a chapter 13 plan is determined in accordance with both the underlying agreement and applicable non-bankruptcy law.”); In re Koster, 294 B.R. 737, 739 (Bankr. E.D. Mo. 2003) (When plan cures default under § 1322(b)(5), § 1322(e) requires a two-part analysis: “First, as a threshold matter, the amount necessary to cure must be in accordance with the parties’ agreement. Second, the amount sought to be included must not otherwise be forbidden by applicable, non-bankruptcy law.”); In re Coates, 292 B.R. 894 (Bankr. C.D. Ill. 2003) (Mortgage arrearage claim is allowed under § 1322(e) by applying the note and state law.); In re Plant, 288 B.R. 635, 643 (Bankr. D. Mass. 2003) (“[I]nterest and other charges on arrearages cured through a Chapter 13 plan are allowed only if they are (1) required under the original agreement and (2) not prohibited by state law.”).

 

11  11 U.S.C. § 506(b). See § 116.1 [ Oversecured Claim Holders ] § 78.5  Oversecured Claim Holders.

 

12  See § 116.1 [ Oversecured Claim Holders ] § 78.5  Oversecured Claim Holders. See, e.g., In re Shaffer, 287 B.R. 898, 900 (Bankr. S.D. Ohio 2002) (“Generally, an oversecured creditor’s preconfirmation fees are recoverable under § 506(b), notwithstanding state law to the contrary, so long as the fees are reasonable and contemplated by the parties’ agreement.”).

 

13  For examples, see below in this section and see § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges.

 

14  But see § 137.1 [ Undersecured Mortgage and Interest to Cure Default ] § 83.5  Undersecured Mortgage and Interest to Cure Default for discussion of undersecured mortgages and interest to cure default, including whether Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993) affects an undersecured mortgage holder’s contract right to interest on arrearages.

 

15  See, e.g., In re Taylor, No. 02-10695, 2003 WL 22282173, at *3–*4 (Bankr. D. Vt. Oct. 1, 2003) (unpublished) (Section 1322(e) controls allowance of postpetition attorney fees when § 506(b) is not applicable. “[A]s of the date of the bankruptcy filing, VHFA was not an oversecured creditor. . . . Only an oversecured creditor is entitled, as a matter of right, to include reasonable attorney’s fees as a part of its secured claim. See § 506(b). . . . [T]hat VHFA was not an oversecured creditor does not disqualify it from collecting attorney’s fees under § 1322(e). . . . [T]he Mortgage unequivocally requires the borrower to ‘pay all expenses incurred in enforcing this [Mortgage], including but not limited to, reasonable attorney’s fees’ . . . . [T]he attorney’s fees incurred to ‘cure the default,’ for purposes of § 1322(e), would include the reasonable attorney’s fees incurred herein in connection with the reinstatement of the Mortgage.”); In re Plant, 288 B.R. 635, 643 (Bankr. D. Mass. 2003) (“By enacting § 1322(e), Congress expressly overruled the [Rake v. Wade, 508 U.S. 494, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993),] holding, disconnecting in this respect § 506(b)’s application where a debtor cures a default through a Chapter 13 plan. . . . [Section] 1322(e) applies with respect to interest, fees and costs to every contract effective after October 22, 1994, regardless of whether a particular claim is secured or unsecured, oversecured or undersecured.”).

 

16  This issue is discussed further with respect to interest rates in § 136.2 [ Rate of Interest to Cure Default: Contracts after October 22, 1994 ] § 83.4  Rate of Interest to Cure Default: Contracts after October 22, 1994.

 

17  225 B.R. 327 (Bankr. D.S.C. 1998).

 

18  225 B.R. at 328.

 

19  225 B.R. at 328. Accord In re Harding, 274 B.R. 173, 176 (Bankr. D. Md. 2002) (Section 1322(e) controls mortgage holder’s entitlement to interest and arrearages as an element of curing default: “No evidence has been offered nor assertion made by the Bank that the language of the loan documents, including the Modification, provides a right to interest on the arrearages. Accordingly, the court concludes that the Bank is not entitled to interest on the prepetition arrearage as a part of the cure of the prepetition default contained in the debtor’s plan.”).

 

20  294 B.R. 737 (Bankr. E.D. Mo. 2003).

 

21  294 B.R. at 740.

 

22  294 B.R. at 740–41.

 

23  See § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges for discussion of late charges as an element of curing default.

 

24  219 B.R. 272 (Bankr. E.D. Cal. 1998).

 

25  219 B.R. at 278.

 

26  254 B.R. 492 (Bankr. N.D. Okla. 2000).

 

27  See below in this section, and see § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges.

 

28  297 B.R. 365 (Bankr. D. Conn. 2003).

 

29  294 B.R. at 741.

 

30  See § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges.

 

31  See, e.g., In re Shaffer, 287 B.R. 898, 900–01 (Bankr. S.D. Ohio 2002) (Ohio law prohibits recovery of attorney fees in connection with postconfirmation stay relief request as part of mortgage arrearage claim under § 1322(e). “Ohio law, made applicable in this context pursuant to § 1322(e), renders fee stipulations void as a matter of public policy. . . . Because Altegra’s fee stipulations are unenforceable under Ohio law, § 1322(e) precludes the addition of Altegra’s preconfirmation attorney’s fees to its arrearage claim pursuant to § 506(b).”); In re Landrum, 267 B.R. 577, 582 (Bankr. S.D. Ohio 2001) (Bankruptcy court looks to Ohio law to determine the amount necessary to cure default under § 1322(e): “‘It is the settled law of this state that stipulations incorporated in promissory notes for the payment of attorney fees, if the principal and interest be not paid at maturity, are contrary to public policy and void.’”); In re Lake, 245 B.R. 282, 285 (Bankr. N.D. Ohio 2000) (Mortgage holder cannot recover attorneys’ fees as an element of curing default under § 1322(e) because, under Ohio law, “contract stipulations for the payment of attorney fees included in notes and mortgages are invalid and unenforceable based on public policy.”).

 

32  See § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges. See, e.g., In re Hatala, 295 B.R. 62, 64 (Bankr. D.N.J. 2003) (“[B]ecause New Jersey law on foreclosures caps attorney’s fees at the amount allowed in the New Jersey Court Rules, the lender is limited to the fees allowed in the foreclosure judgment.”); In re Coates, 292 B.R. 894 (Bankr. C.D. Ill. 2003) (Under federal and Illinois law, proof of the reasonableness of attorney fees and expenses is the creditor’s burden.); In re McMullen, 273 B.R. 558 (Bankr. C.D. Ill. 2001) (Under § 1322(e), state law “reasonableness” standard determines whether attorney fees in mortgage arrearage claim are allowable. Six-hundred-dollar fee for prepetition foreclosure was unreasonable because only part of foreclosure was completed. Four hundred fifty dollars for representing mortgage holder in Chapter 13 case was reasonable when a proof of claim was filed, there were objections to the plan and to the proof of claim and a hearing was necessary.).

 

33  See § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges. See, e.g., In re Trabal, 254 B.R. 99, 103–04 (D.N.J. 2000) (Mortgage contract and New Jersey law permit mortgage holder to recover arrearage claim for legal fees, property inspection fees, NSF fees and escrow advances together with interest at contract rate through the Chapter 13 plan. “[T]he Chase mortgage . . . provides that disbursements made by Chase to protect the property and Chases’ rights in the property become part of the mortgage debt and bear interest at the note rate (8.625%). Given the specificity of this language, no additional reference to bankruptcy or bankruptcy arrears is needed to make it evident that as part of its arrearage claim, Chase may include interest on the disbursements it made pursuant to paragraph seven of the mortgage. . . . The first page of the mortgage agreement expressly provides for ‘the payment of all other sums, with interest.’ Similarly, paragraph seven of the mortgage agreement states that if the mortgagee disburses any amounts to protect the value of the property, these amounts shall become additional security for the outstanding debt and shall bear interest from the date of disbursement. . . . The requirement of § 1322(e) that applicable nonbankruptcy law permit the charges and interest is also satisfied. . . . New Jersey law permits interest on advances to be collected as long as the parties contemplated it in the original agreement and as long as it is not usurious. . . . [T]here was nothing in § 1322(e) to preclude the recovery of attorney fees. . . . Where taxes on property are the responsibility of the mortgagor, but paid by the mortgagee for the benefit of the mortgaged property, the mortgagee is entitled to be reimbursed and can add any uncollected monies to the mortgage debt.”); In re Koster, 294 B.R. 737 (Bankr. E.D. Mo. 2003) (When note and deed of trust provide that advances for insurance, taxes, costs and attorney fees are added to the debt and accrue interest at the contract rate, these arrearage items are elements of curing default under § 1322(e) and accrue interest during the period of repayment under the plan.); In re Hoover, 254 B.R. 492 (Bankr. N.D. Okla. 2000) (Applying § 1322(e), because contract provided for interest on advances, mortgage holder was entitled to interest on an advance for insurance included in its arrearage claim.).

 

34  11 U.S.C. § 1322(e).

 

35  11 U.S.C. § 1322(b)(2) is discussed in detail in §§ 104.1 [ The Power to Modify ] § 74.11  The Power to Modify and 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.

 

36  11 U.S.C. § 1322(b)(5) begins, “Notwithstanding paragraph (2) of this subsection.” See § 129.1 [ Overview: General Rules for Saving Debtor’s Home ] § 81.1  Overview: General Rules for Saving Debtor’s Home.

 

37  207 B.R. 686, 688 (Bankr. D. Idaho 1997).

 

38  207 B.R. at 690–92.

 

39  This inconsistency between the contract and state law has already been reported in § 1322(e) cases. See above in this section, and see § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges.

 

40  508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993).

 

41  See also §§ 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4  Curing Default, Waiving Default, Maintaining Payments and Combinations and 128.2 [ Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations ] § 80.14  Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations.

 

42  See §§ 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4  Curing Default, Waiving Default, Maintaining Payments and Combinations and 128.2 [ Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations ] § 80.14  Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations.

 

43  11 U.S.C. § 1322(e).

 

44  See § 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4  Curing Default, Waiving Default, Maintaining Payments and Combinations.

 

45  See § 129.1 [ Overview: General Rules for Saving Debtor’s Home ] § 81.1  Overview: General Rules for Saving Debtor’s Home.

 

46  See § 173.1 [ Debtor Must Cure Defaults and Assure Future Performance ] § 102.2  Debtor Must Cure Defaults and Assure Future Performance.

 

47  See § 143.1 [ Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994 ] § 85.2  Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994.

 

48  See §§ 143.1 [ Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994 ] § 85.2  Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994 and 144.1 [ Prepetition Foreclosure Judgment: Curing Default, Payment in Full or Modification under § 1322(c)(2)? ] § 85.3  Prepetition Foreclosure Judgment: Curing Default, Payment in Full or Modification under § 1322(c)(2)?.

 

49  219 B.R. at 274–78.

 

50  211 B.R. 116 (B.A.P. 2d Cir. 1997), aff’d sub nom. Key Nat’l Bank v. Milham (In re Milham), 141 F.3d 420 (2d Cir.), cert. denied, 525 U.S. 872, 119 S. Ct. 169, 142 L. Ed. 2d 138 (1998).

 

51  211 B.R. at 122.

 

52  See above in this section.

 

53  In re Gellerman, 263 B.R. 691, 693–94 (Bankr. D.R.I. 2001) (“The Debtors argue that the arrearage required to be cured under Section 1322 is the amount in current default, $10,128, and not the older, segregated securitized arrearage, $31,474. . . . Prior to the assignment [to Salomon], HUD and the Debtors agreed to separate the securitized arrearage, and HUD did not require ongoing payments against this segregated, past due balance, and Salomon continued to treat the securitized arrearage as a separate and distinct item. . . . Given this course of dealing between the parties, I find and conclude that the intent of HUD and the Debtors was to place the securitized arrearage at the end of the Note, and not to require current payments on that amount. . . . [F]or purposes of Section 1322(b)(5) the arrearage to be cured under the Salomon Note is $10,128.”).

 

54  See § 134.1 [ In General: Rake and Contracts before October 22, 1994 ] § 83.1  In General: Rake and Contracts before October 22, 1994.