# Opposition Brief — Shearson Lehman Mortgage Corp. v. Laguna

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1992
- **Citation:** 503 U.S. 966

## Text

aaa

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

Lawyers Brief Service * Appellate Brief Printers * (213) 613-1013 * (714) 720-1510

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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

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be-
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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_2238%3A2. Public record. Not legal advice.