Opposition Brief — Shearson Lehman Mortgage Corp. v. Laguna

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FILED

No. 91-1032 | FER pa 1892

IN THE GFRCE OF THE CLERK |

Supreme Court of the Gnited States

OCTOBER TERM, 1991

Inre: EMILIO J. LAGUNA, JR.

and CYNTHIA LAGUNA,

Debtors,

SHEARSON LEHMAN MORTGAGE CORPORATION,

Petitioner,

VS.

EMILIO J. LAGUNA, JR.

and CYNTHIA LAGUNA, Debtors;

LAWRENCE J. LOHEIT, Trustee,

Respondents.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

W. SCOTT deBIE

Counsel of Record

LAW OFFICES OF MAX CLINE

510 Bercut Drive, Suite J

Sacramento, Califomia 95814

(916) 442-4186

Attorneys for Respondents

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QUESTION PRESENTED

FOR REVIEW

Did the Ninth Circuit Court of

Appeals err in affirming the Bankruptcy

Court’s Order which confirmed a Chapter

13 plan over the objection of a secured

creditor/home-mortgage lender where the

plan failed to provide postpetition

interest on a prepetition oversecured

claim?

PARTIES TO THE PROCEEDING

Petitioner and all Respondents are

named in the caption and were also

parties before the United States Ninth

Circuit Court of Appeals.

ii

TABLE OF CONTENTS

CONTENTS PAGE

QUESTION PRESENTED FOR REVIEW....i

PARTIES TO THE PROCEEDING........ ii

TABLE OF AUTHORITIES.............. Vv

BRIEF IN OPPOSITION TO PETITION

FOR WRIT OF CERTIORARI........... 1

a. STATEMENT OF JURISDICTION........ 2

II. CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED...........ec-. 2

III. STATEMENT OF THE CASE.......ccccs 2

A. Nature of the Case

and Procedural Background...2

B. Statement of Facts......... we

IV. REASONS FOR DENYING THE WRIT..... 3

a THERE IS INSUFFICIENT CONFLICT

AMOUNG THE CIRCUIT COURTS

REGARDING WHETHER OR NOT A

SECURED CREDITOR IS ENTITLED

TO POSTPETITION INTEREST ON A

PREPETITION SECURED CLAIM TO

JUSTIFY THE ISSUANCE OF WRIT

GP Gee ce ccc cc cceeececee 3

B. THE NINTH CIRCUIT COURT OF

APPEALS PROPERLY INTERPRETED

iii

AND APPLIED THE RELEVANT

STATUTES... . ccc cccccecccvees S

THE NINTH CIRCUIT CORRECTLY

CONSIDERED THE PLAIN LANGUAGE

OF THE STATUTE AND LEGIS-

LATIVE HISTORY OF CHAPTER 13

AND SECTION 1322 (b)(2) IN

PARTICULAR, WHEN IT RULED

SECURED CREDITORS WERE NOT

ENTITLED TO POSTPETITION

INTEREST ON PREPETITION

THE ONLY IMPACT OF DIS-

ALLOWING POSTPETITION

INTEREST ON PREPETITION

ARREARAGES OF SECURED

CREDITOR HOME MORTGAGE

LENDERS IS CONFIRMATION OF

THE RULE THAT PARTIES TO A

CONTRACT ARE HELD TO THEIR

iv

TABLE OF AUTHORITIES

United States Supreme Court Cases

United States v. Ron Pair

Enterprises, Inc.

483 U.S. 235, 109 8S. Ct.

1026, 1030, i03 L.E.D.

2G 290 (1989). ccccccccccecs 8,9,10

Dewsnup v. Timm

No. 90741 (Jan. 1992)

92 Daily Journal D.A.R. 690..... 18

Circuit Court Cases

In re Capps,

S36 F.ae t7S €3GA Cis... 1967)... 63; hi

In re Colgrove,

771 F.2d 119 (6th Cir. 1985)...5,6,7

In re Delaney

$34 FP. 2g 645 (Sth Cir., 1976)....i14

Hallenbeck v. Penn Mutual Life

Insurance Co.

323 F. 20 566 (4th Cir., 1963)....14

In re Howard

344 F. Supp. 1138(E.D. Ark, 1971).14

In re 0’Dell

198 F. Supp. 389 (D. Kan., 1961)..14

In re Landmark Financial Services

918 F.2d 894 (4th Cir. 1990)....5,11

In re Terry

766 F. 26 694 (1ith Cir. 3969)..3,1i

United States of America v. Arnold

S78 F.24¢ 925 (6th Cir. 19609). 6,7

Bankruptcy Court Cases

In re Adams

120 B.R. $17

(Bawer. BS. DiNO. LHe cevevevetsees 5

In re Penick

108 B.R. 776

(Bankr. W.D. Geies, THER) ccc cees 5

In re Siegfried

114 B.R. 358

(Heaney. B.D. Bi Tuy BOGS) vc es vee‘ 5

vi

UNITED STATES CONSTITUTION

Fifth AmOnGmOnt ..6s.<cce cece Py

Statutes

23 O60. Sia eee 20

$1 O.6:0. SOBER. oiesis eee eee 23

11 U.S.C. 1322(b)(2) and (5)..2,4,6,8,9,

10,11,12,13,15,17

11 U.S.C. 1322(b)(5)..2,4,10,11,12,13,18

43 G.8.C. 1900Cas (650i. os dss ee 2,11

Other

124 Cong. Rec. H. 11, 106

(Sept. 28, 1978); S. 17, 423

(Oct 6, 1978) ccccccccccuceesvenes 13

Hearings Before the Subcommittee on

Civil and Constitutional Rights of the

House Committee on the Judiciary, 94th

Cong. 18t Sess. 1027... ccc cccccccccves 14

No.

Im THE

SUPREME COURT OF THE UNITED STATES

October Tera, 1991

In re: EMILIO J. LAGUNA, JR.

and CYNTHIA LAGUNA

Debtors,

SHEARSON LEHMAN MORTGAGE CORPORATION,

Petitioner,

vs.

EMILIO J. LAGUNA, JR.

and CYNTHIA LAGUNA, Debtors;

LAWRENCE J. LOHEIT, Trustee

Respondents.

BRIEF IN OPPOSITION TO PETITION

FOR WRIT OF CERTIORARI

Respondents, EMILIO J. LAGUNA and

CYNTHIA LAGUNA, respectfully submit a

Brief in Opposition to a Writ of

Ceriorari to review the judgement of

the United States Court of Appeals for

the Ninth Circuit.

I

STATEMENT OF JURISDICTION

This court has jurisdiction

pursuant to 28 U.S.C. Section 1254(1) to

review the final decision of the Ninth

Circuit Court of Appeals, filed on

September 11, 1991 and officially

reported at 944 F.2d 542 (9th Cir. 1991)

II

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

This case involves the following

constitutional provisions, statutes and

QO

a

be-

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2)

16)

regul 11 U.S.C. Sections 109(e),

1322(b)(2),1322(b)(5),1325(a)(5)(B) (ii)

and the Fifth Amendment of the United

States Constitution.

Iitl

STATEMENT OF THE CASE

A. Nature of the Case and

Procedural Background

Respondents adopt Petitioner's

description of the Nature of the Case

and Procedural background.

B. Statement of Facts

The relevant facts are not in

dispute and Respondents adopt

Petitioner’s Statement of Facts.

IV

REASONS FCR DENYING THE WRIT

A. THERE IS INSUFFICIENT CONFLICT

AMONG THE CIRCUIT COURTS REGARDING

WHETHER OR NOT A SECURED CREDITOR IS

ENTITLED TO POSTPETITION INTEREST ON A

PREPETITION SECURED CLAIM TO JUSTIFY THE

ISSUANCE OF A WRIT OF CERTIORARI.

All Circuits, save one, who have

dealt with the question at bar have

determined that 11 U.S.C. Sections

1322(b)(2) and (5)’ prohibit the payment

of the interest on arrearages to a

creditor holding solely a= security

interest in the debtors’ principal

residence unless the contract between

the parties provides such interest.

1

c..8,.¢€. Sections 1322(b)(2) and (5)

provide in pertinent part:

The plan may---

* * *

(2) Modify the rights of holders of

security claims, other than a claim

secured only by a security interest in

the real property that is the debtor’s

principal residence, or of holders of

unsecured claims;

* * *

(5) notwithstanding paragraph (2) of

this subsection, provide for the curing

of any default within a reasonable time

and maintenance of payments while the

case is pending....

See, e.g. In re Capps, 836 F.2d 774 (3rd

Cir., 1987); In re Terry, 780F.2d 894

(11th €2e; 1985); In re Landmark

Financial Services,918 F. 2d 1150 (4th

Cirl, 1990). Additionally, bankruptcy

courts in other circuits have ruled such

prohibition is in line with preceding

decisions by their circuit courts. See

e.g. In re Adams, 120 B.R. 517 (Bankr.

E.D. Mo., 1990); In re Penick, 108 B.R.

776 (Bankr. W.D. Okla., 1989); and In re

Siegfried, 114 B.R. 358 (Bankr. N.D.

N.Y., 1990)

In contrast, only the Sixth Circuit

In re Colgrove,771 F.2d 119 (6th Cir.,

1985) has held that interest may be

payable to an over secured creditor on

prepetition mortgage arrearages even

absent a provision for such in the loan

agreement and even in light of 11 U.S.C.

Section 1322 (b)(2) which bars

modification of such loan agreements.

This seemingly aberrant decision by the

Sixth Circuit is insufficient to justify

the granting of a writ of certiorari.

In dilution of the impact of the

Colgrove decision are the facts that

Senior Judge Celebrezze expressed a

diametrically opposed view in dissent,

no other circuit has adopted the

Colgrove majority’s reasoning, and the

decision has been strongly criticized by

the leading bankruptcy treatise (See

Collier, paragraph 1322.09, at 1322-22

and 1322-23). Even the Colgrove court

itself indicated a retreat in its

subsequent decision in United States of

America v. Arnold 878 F.2d 925 (6th

Cit., 2983), In Arnold, the Sixth

Circuit seemingly contradicted itself by

indicating that while the contract

cannot be modified to alter an agreed to

interest rate, it could be modified to

allow interest. The court further

quoted a Michigan bankruptcy court’s

statement that "Colgrove creates a

narrow exception to the general

rule...". (In re Arnold at 930).

Thus, the Sixth Circuit’s Colgrove

decision stands alone and unsupported

even by its own subsequent decisions.

This singular departure from the clearly

accepted rule is of insufficient

conflict to merit the issuance of a writ

of certiorari.

B. THE NINTH CIRCUIT COURT OF

APPEALS PROPERLY INTERPRETED AND

APPLIED THE RELEVANT STATUTES.

The citing of this Court’s deci-

sion in United States v. Ron Pair En-

terprises, Inc. 489 U.S. 235, 109 S.

Ct. 1026, 103 L.E.D. 2d 290 (1989) is a

red herring which was properly distin-

guished by the Ninth Circuit. While it

has never been contested that 11 U.S.C.

Section 506(b)* applies in Chapter 13

cases, this section must be viewed in

the different context of Chapter 13 and

its unique provision, 11 U.S.C. Section

1322(b). This view was the one taken

by the Ninth Circuit and this is why

its decision is neither in conflict

with Ron Pair nor a failure to follow

that ruling.

The Ninth Circuit emphasized rather

than ignored the ruling of Ron Pair.The

2

11 U.S.C. Section 506(b) provides

in pertinent part:

To the extent that an

allowed secured claim is secured by

property the value of which,..., is

greater then the amount of such clain,

there shall be allowed to the holder of

such claim, interest on such claim,...

8

Ninth Circuit properly noted the cau-

tious approach of this Court to the

allowance of charges which could work to

thwart the purpose of reorganization

type bankruptcy proceedings. The court

noted the purpose of 11 U.S.C. Section

1322 (b)(2) was to serve as a shield for

creditors from the cram down and write

down provisions otherwise available in

Chapter 11 cases like Ron Pair and

therefore refused to allow it to be used

as a sword against Chapter 13 debtors to

force a windfall of interest not part of

the original bargain.

The Ninth Circuit properly followed

this Court’s directive as contained in

Ron Pair and merely applied such within

the context of a Chapter 13 proceeding

and the applicable requirements of 11

U.S.C. Sections 1322(b) and 1325(a).

Thus a review is unnecessary as there is

no departure from this Court’s ruling.

Cc. THE NINTH CIRCUIT CORRECTLY

CONSIDERED THE PLAIN LANGUAGE OF THE

STATUTE AND LEGISLATIVE HISTORY OF CHAP-—

TER 13 AND SECTION 1322(b)(2) IN PARTIC-

ULAR, WHEN IT RULED SECURED CREDITORS

WERE NOT ENTITLED TO POSTPETITION INTER-

EST ON PREPETITION ARREARAGES.

The plain language of the applica-

ble statues as well as analysis of the

legislative intent behind such statutes

justifies the Ninth Circuit’s decision.

It has always been Respondents’ conten-

tion that only a plain reading of Sec-

tions 1322(b) and 1325 (a) is all that

is necessary to properly decide the

issue at bar. The courts in In re Terry

780 F. 2d 24 (2nd (Cir. 1982),—In_re

Capps 836 F. 2d 119 (6th Cir. 1985), In

re Landmark Financial Services 918 F. 2d

894 (4th Cir., 1985) joined the Ninth

Circuits decision in Laguna in properly

10

concluding that the cure provision of

Section 1322(b)(5) stands alone and does

not implicate other sections of the

code.

To require that interest be paid on

arrears when the contract does not call

for such would be to impermissably modi-

fy the mortgage contract adversely to

the Debtor in violation of 11 U.S.C.

Section 1322(b)(2). If 11 U.S.C. Sec-

tion 1325(a)(5)(B)(ii) is read as being

applicable in the context of an ll

U.S.C. 1322(b)(5) cure, requiring inter-

est on arrearages where the mortgage

contract fails to provide for such, the

secured creditor would get a benefit for

which it never bargained. The Bankruptcy

Code should not be read to provide

either Debtors or Creditors with wind-

falls.

ll

EE

The legislative history supports

this view that the only "modification"

allowed under 11 U.S.C. Section

1322(b)(2)’‘s bar was a “cure” under 11

U.S.C. Section 1322(b)(5). While it is

true that Section 1322(b)(5)’'s preface

"not-withstanding paragraph (2)," seems

to treat the power to cure in (b)(5) as

a subset of the power to modify set

forth in (b)(2), that superficial read-

ing of the statute must fall in the

light of legislative history and legis-

lative purpose. The “not with-standing"

clause was added to Section 1322(b)(5)

to emphasize that defaults in mortgages

could be cured notwithstanding Section

1322(b)(2), not to dilute the restric-

tion of 1322(b)(2) nor to open mortgage

contracts to modifications. See 124

Cong. Rec. H 11,106 (Sept. 28, 1978); S.

12

17,423 (Oct. 6, 1978).

In fact, earlier Senate bills along

with House bills and the present statute

listed the power to cure and the power

to modify in different paragraphs, indi-

cating that the power to cure is differ-

ent from the power to modify. Testimony

submitted on behalf of secured creditors

distinguished between modifying a claim

(by reducing payments due thereon) and

curing a default (and maintaining those

payments). See Hearings before the

Subcommittee on Civil and Constitutional

Rights of the House Committee on the

Judiciary, 94th Cong. lst Sess. 1027.

Finally, the few cases under Chap-

ter 13 of the old Bankruptcy Act distin-

guished between modifying a claim and

maintaining payments thereon, see

Hallenbeck v. Penn Mutual Life Insurance

13

Co. 323 F.2d 566 (4th Cir., 1963); In re

O'Dell, 198 F.Supp. 389, 391 (D. Kan.

1961) and indicate that curing a default

and maintaining payments on a claim did

not modify that claim. See

In re Delany, 534 F. 2d. 645, 646, (5th

Cir. 1976) (per curiam); In re Howard,

344 F. Supp. 1138 (E.D. Ark. 1971).

Thus, clearly the Ninth Circuit

observed both the plain language of 11

U.S.C. Section 1322(b)(2) and the histo-

ry which produced it. What the Ninth

Circuit failed to do was thwart the

congressional intent of the statute

through an interpretation blurring the

Clear distinction between cure and modi-

fication of the rights of either debtors

Or creditors.

No further reading of the statute

is necessary through a review of the

14

Ninth Circuit’s decision. Its plain

meaning is clear as found in that deci-

sion.

D. THE ONLY IMPACT OF DISALLOWING

POSTPETITION INTEREST ON PREPETITION

ARREARAGES OF SECURED CREDITOR HOME

MORTGAGE LENDERS IS CONFIRMATION OF THE

RULE THAT PARTIES TO A CONTRACT ARE HELD

TO THEIR BARGAIN.

The impact of the Ninth Circuit’s

decision on home mortgage lenders de-

cried by Petitioner is merely a mental

one. As the Ninth Circuit indicated in

resolving the Fifth Amendment argument

of Petitioner, the mortgage company is

not being deprived of its property,

either in principal or interest, since

the cure merely reinstates the parties’

Original agreement. The creditor re-

ceived what it originally bargained to

receive and accepted in the loan agree-

ment. It could have bargained for in-

Le

terest on arrearages, but failed to do

so. Thus, it cannot now complain is not

receiving something it did not expect to

receive.

Petitioner on one hand argues that

Congress could not have intended for

mortgage lenders to be excluded from the

class of creditors entitled to interest

On arrearages and yet on the other hand

argues that mortgage lenders are unique

and thus entitled to unique protection.

Petitioner would have this Court empha-

Size the protection of creditors under

11 U.S.C. Section 1322(b)(2) and ignore

the plain language and protection of

debtors under the same statute. No

other secured creditors are protected

from modification of their contracts.

They are instead subject to cram downs

and write downs. If mortgage lenders

16

wish to be treated as other secured

creditors in terms of interest, let them

waive their unique protection under 1322

(b)(2) and be treated to modification of

their contracts as well. Petitioner

wishes to have its cake and eat it too.

The intention of Congress to pro-

tect mortgage lenders from cram downs

and to preserve, but not enhance the

bargained expectations of the parties

was affirmed by this Court recently in

Dewsnup v. Timm No. 9-741 (Jan. 1992) 92

Daily Journal D.A.R. 690. Similarly

protection against modification pertains

to interest charges as well and needs no

further affirmation. Section 1322(b)(5)

requires that defaults must be cured

within a “reasonable time". Thus the

bankruptcy judge has discretion to de-

termine if the length of repayment pro-

17

posed is reasonable in light of the lack

of interest and delayed cure. The bar-

gain of the parties need not be modi-

fied.

The increased number of bankrupt-

cies cited by Petitioner is certainly

appalling, but a review of the Ninth

Circuit’s decision and a reversal or

affirmation of that decision would not

reverse this trend. Affirmation would

continue the status quo keeping existing

contracts in place and limiting the

parties to their bargains. It could

cause adjustments to the bargains being

negotiated on home loans from here on,

but would not adversely affect the terms

of existing contract and expectations of

the parties thereto. A reversal would

likely cause an increase in Chapter 7

filings in relation to Chapter 13’s as

18

fewer home owners would be able to pro-

pose reasonable and affordable plans

when interest is added to the require-

ment for cure. This would directly de-

feat the purpose of Chapter 13.

Legislative intent makes clear that

Congress did not want the most common

secured creditor and generally the only

oversecured creditor in Chapter 13 cas-

es, the mortgage holder, to be deprived

of the benefits of its bargain. Howev-

er, it is equally clear that such credi-

tor was not intended to receive

unbargained for benefits at the expense

of debtors already burdened by plan

requirements of maintaining on going

payments and curing delinquencies simul-

taneously.

Unlike Chapter 11 proceedings where

the debtors are savvy commercial con-

i9

cerns, and cram downs are common, the

debt limit restrictions of 11 U.S.C.

Section 109(e) indicate that Congress

recognized that Chapter 13’s would be

utilized by homeowning consumers. Chap-

ter 13 debtors are individuals or small

business owners willing and able to pay

what they owe, but unable to wheel and

deal their way to complicated, struc-

tured reorganization.

The loss of “millions of dollars"

referred to by Petitioner is the loss of

fictional dollars--dollars not bargained

for nor anticipated by either party when

the loans were made. A reversal of the

Ninth Circuit would make these fictional

dollars real as the Chapter 13 debtors

would have to come up with these dollars

to pay the mortgage lenders. This is

the real impact and a reason for not

20

reviewing the lower court’s decision.

To leave the decision stand preserves

the status quo actual and realistic

expectations of the parties.

CONCLUSION

For the foregoing reasons, Respon-

dents respectfully submit this Court

should deny the Petition for Writ of

Certiorari.

February 18, 1992

Respectfully submitted,

W. SCOTT deBIE

Counsel of Record

LAW OFFICES OF MAX CLINE

Attorneys for Respondents

21