William L. Lammy and Catherine R. Lammy

UNITED S TATES B ANKRUPTCY COURT
FOR T HE E ASTERN DISTRICT O F PENNSYLVANIA
In re 	: 	Chapter 13
:
WILLIAM L. LAMMY and 	: 	Bankruptcy No. 05-19596DWS
CATHERINE R. LAMMY 	:
:
Debtors. 	:
MEMORANDUM OPINION
BY: 	DIANE WEISS SIGMUND, Chief Bankruptcy Judge
Before the court is Debtors’ Objection to Claim (the “Objection”) of Wachovia Bank
National Association as Trustee of the Security National Mortgage Loan Trust 2004-1
(“Wachovia”) and Wachovia’s Motion to Allow Claim (“Wachovia’s Motion”). Both
pleadings present the same issue, i.e., what is the amount necessary to cure the Debtor’s
default to Wachovia for the purposes of §1322(b)(5) (the “Arrearage Claim”). The parties
do not dispute the relevant facts but rather disagree on whether a §1322(b)(5) cure requires
payment of an arrearage under an original loan agreement or the loan agreement as modified
pre-bankruptcy. For the reasons stated herein, I conclude that the Arrearage Claim is the
agreed unpaid principal, interest and costs due under the loan modification. Accordingly,
the Objection is sustained, and Wachovia’s Motion is denied.
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1 True and correct copies of the Note and Mortgage are attached to Wachovia’s proof of
claim. Stipulation of Facts ¶ 2.
2 The Loan Modification consists of two documents, though they are sequentially
enumerated (“page 1 of 3”, “2 of 3”, and “3 of 3”). The first page is a letter addressed to
Debtors and titled “Payment Extension Plan (New Beginnings Program). That page contains
information specific to Debtors’ loan. The next two pages, under the title “Details of the New
Beginnings Program,” contain the general terms of the NBP with no specific identification of
Debtors’ loan information. The Payment Extension Letter expressly incorporates the attached
“Details of the New Beginnings Program.” That and the sequential pagination makes clear that
the documents are to be read as a whole, hereinafter referred to as the “Loan Modification.”
While neither is signed by the lender nor acknowledged by the Debtors, there is no contention
that it does not represent a binding agreement notwithstanding its informality.
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FACTUAL AND PROCEDURAL BACKGROUND
Debtors entered into a residential loan agreement with Contimortgage Corporation
on October 27, 1997, in the amount of $76,000 (the “Loan”) as evidenced by a Note and
Mortgage (the “Loan Documents”). Stipulation of Facts ¶¶ 1, 3.1 Debtors defaulted under
the Loan Documents by failing to make forty-six monthly payments (the “Loan Arrearage”).
Stipulation of Facts ¶¶ 4, 6. Under the terms of the Loan Documents, the lender therefore
had the right to seek acceleration and foreclosure. Exhibits 2-3 (unnumbered) to Proof of
Claim.
Those remedies were not exercised. Instead, in June of 2004, Debtors were allowed
to address the Loan Arrearage by entering into a Payment Extension Plan under the lender’s
New Beginnings Program (the “NBP”), which the parties agree resulted in a modification
of the original Loan (the “Loan Modification”). 	Stipulation of Facts ¶ 6. 	The Loan
Modification, found in Exhibit A to the Stipulation of Facts (“Exhibit A”),2 contains the
following material terms:
1. Debtors’ previous failure to make payments is a default that entitles lender
to enforce its remedies but it agrees not to exercise its remedies provided they
continue to make timely monthly payments hereafter.
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3 The documents attached to the proof of claim indicate the Loan was assigned several
times, most recently to Wachovia on February 18, 2005, i.e. after Debtors’ entry into the NBP.
However, Wachovia makes no argument that it is not bound by the terms of the NBP.
4 As Debtor proposes a cure plan, the total claim is not at issue in these contested
matters.
5 This amount represents the following stipulated amounts: (1) $ 7,829.28 for nine
(continued...)
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2. As long as Debtors make timely payments, they will be allowed to make
the same payments as under the original payment schedule and lender will
consider the loan current.
3. Lender will not demand payment of the Loan Arrearage during the term of
the Loan or at the original maturity date, but instead makes a one-time
modification of the Loan by extending the maturity date by additional months
to reamortize the current principal balance (without adding any accrued and
unpaid delinquent interest).
4. If Debtors cease payments, lender can exercise its rights under the Loan
Documents, i.e acceleration and foreclosure.
5. The letter shall not be construed as a waiver of any rights under the Loan
Documents with respect to the previous default and arrearage.
Exhibit A at 2-3.
Debtors subsequently defaulted by failing to make payments for November 2004
through July 2005 (the “NBP Arrearage”). 	Stipulation of Facts ¶ 7. 	Debtors filed this
bankruptcy case on July 14, 2005.
Wachovia, the most recent assignee of the Loan,3 has filed a proof of claim alleging
a prepetition arrearage of $ 81,264.16 (the “Arrearage Claim”).4 The parties agree that the
proof of claim accurately summarizes both the Loan Arrearage and the NBP Arrearage (the
“Total Arrearage”). That it does so, Wachovia claiming both must be paid under the Chapter
13 plan, however, is where the dispute centers. Debtors contend that the Arrearage Claim
should only include the NBP Arrearage of $14,209.75 5 whereas Wachovia takes the position
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5
(...continued)
missed payments following the Loan Modification; (2) $ 1,348 in late charges; (3) $ 3,039.72 for
sewer charges paid on Debtors’ behalf; and (4) $ 1,992.75 for legal fees and costs. Stipulation of
Facts ¶¶ 10-12.
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that Debtors must pay the Total Arrearage over the life of their Chapter 13 plan. After a
hearing on this matter and the parties having submitted supplemental memoranda, this
dispute is ripe for resolution.
DISCUSSION
A.
As this dispute involves Debtors’ objection to a proof of claim, I begin with Federal
Bankruptcy Rule of Procedure 3001(f), which provides that a proof of claim executed and
filed in accordance with the rules of procedure constitutes prima facie evidence of the
validity and amount of the claim. Amatex Corporation v. Aetna Casualty & Surety Co., 107
B.R. 856, 870 (E.D. Pa.1989); In re Wall to Wall Sound & Video, Inc., 151 B.R. 700, 701
(Bankr. E.D. Pa.1993). Even if there is an objection filed to the claim, the evidentiary effect
of Rule 3001(f) remains in force. 	In re Wells, 51 B.R. 563, 566 (D. Colo.1985). 	The
objecting party carries the burden of going forward with evidence in support of its objection
which must be of probative force equal to that of the allegations of the creditor's proof of
claim. Id. “The objector must produce evidence which, if believed, would refute at least one
of the allegations that is essential to the claims legal sufficiency.” In re Allegheny
International, Inc., 954 F.2d 167, 173 (3d Cir.1992). 	If the objecting party succeeds in
overcoming the prima facie effect of the proof of claim, the ultimate burden of persuasion
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then rests on the Claimant. Allegheny International, 954 F.2d at 174; Wall to Wall Sound,
151 B.R. at 701.
Wachovia’s submission of the Loan Documents and assignment and itemization of
the principal, interest and costs not paid under the Loan Documents meets the requirements
of Rule 3001(f). In re McKnight, 2005 WL 1313519, at *2 (Bankr. E.D. Pa. May 31, 2005).
There is no dispute that Wachovia has established the amount of missed payments and costs
incurred by the lender over the life of the Loan. As such, Debtors bear the burden of
overcoming the prima facie effect of the Claim. Keeping in mind that it is the Arrearage
Claim that is at issue not the total secured claim, Debtors seek to do by proffering the Loan
Modification that the parties agree modified their loan obligation. Stipulation ¶6. Under this
Loan Modification, the collection of the Loan Arrearage was suspended and the maturity
date of the Loan was extended to allow them to be paid through a reamortization of the
remaining principal and interest. Debtors contend that as of the date of bankruptcy, the Loan
Arrearage was not due under the Loan Modification and therefore the only payment default
to cure is the payments missed under the Loan Modification, which they plan to do pursuant
to §1322(b)(5).
B.
Section 1322(b)(5) states that:
(b) . . . the [Chapter 13] plan may:
(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 on any unsecured claim or secured claim on which the last
payment is due after the date on which the final payment under the plan is due.
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6 This holding of Capp was abrogated by the United States Supreme Court in Rake v.
Wade, 508 U.S. 464, 113 S.Ct. 2187 (1993), which allowed federal law to determine interest
included in the cure amount under a mortgage loan. Congress responded in 1994 by adding
§ 1322(e) which codified the reasoning of the Third Circuit, namely that the underlying contract
and state law should determine the amount of the arrearage.
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11 U.S.C. § 1322(b)(5). The concept of curing a default was addressed years ago by the
Second Circuit Court of Appeals in Pierro v. Taddeo (In re Taddeo), 685 F.2d 24 (2d Cir.
1982):
When Congress empowered Chapter 13 debtors to “cure defaults,” we think
Congress intended to allow mortgagors to “de-accelerate” their mortgage and
reinstate its original payment schedule. We so hold for two reasons. First, we
think that the power to cure must comprehend the power to “de-accelerate.”
This follows from the concept of “curing a default.” A default is an event in
the debtor-creditor relationship which triggers certain consequences-here,
acceleration. Curing a default commonly means taking care of the triggering
event and returning to pre-default conditions. The consequences are thus
nullified. This is the concept of “cure” used throughout the Bankruptcy Code.
Id. at 26-27. See also Sapos v. Provident Inst. of Sav. in Town of Boston, 967 F.2d 918, 926
(3d Cir. 1992) (“the plain meaning of “cure,” as used in § 1322(b)(2) and (5), is to remedy
or rectify the default and restore matters to the status quo ante”).
At issue in this case is the parties’ respective views of the default to be cured to
reinstate pre-default conditions. When a debtor seeks to cure a prepetition payment default
over the life of a Chapter 13 plan pursuant to § 1322(b)(5), “the amount necessary to cure
the default shall be determined in accordance with the underlying agreement and applicable
nonbankruptcy law.” 11 U.S.C. § 1322(e). “Cure by its very nature assumes a regime where
debtors reinstate defaulted debt contracts in accordance with the conditions of their
contracts.” 	Appeal of Capps, 836 F.2d 773, 777 (3d Cir. 1987). 6 In adding §1322(e)’s
directive that the parties’ contracts determine the amount of arrearage, the intent of Congress
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7 The Mortgage has a choice of law provision incorporating the law of the state where
the subject property is located, here Pennsylvania. The NBP does not change that choice. I
therefore turn to the NBP, Mortgage, and Note as construed under Pennsylvania law.
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was “that a cure pursuant to a plan should operate to put the debtor in the same position as
if the default had never occurred.” 	140 Cong. Rec. H10752-01, H10770 (Oct. 4, 1994)
(section-by-section analysis by Congressman Brooks).
The controlling contract in this case is the Loan Documents as modified by the Loan
Modification. Under Pennsylvania law, “[a] modification does not displace a prior valid
contract; rather, the new contract acts as a substitute for the original contract, but only to the
extent that it alters it.” Melat v. Melat, 602 A.2d 380, 385 (Pa. Super.,1992).7 The parties
specifically agree that the terms of the original Note and Mortgage are modified to move
forty-six delinquent payments to the end of the Note and the payment period was extended
by forty-six months. Stipulation of Facts ¶ 6. 	However, as Wachovia notes, the Loan
Modification expressly retains all the lender’s rights under the Loan Documents, ie.
acceleration of the entire Loan and foreclosure. Moreover it states that “the terms of this
letter shall not be construed as a waiver of our rights under the Note and other Loan
Documents with respect to your previous defaults and the Arrearages.” Exhibit A at 3. 	A
fair reading of the terms of the Loan Modification is that the original payment default has
not been waived. Rather so long as Debtors remain current on future payments, the Loan
is considered current and the lender will forebear from exercising its contractual remedies
and will permit the payments to be made through a reamortization of the outstanding
principal portion of the Loan Arrearage over an extended maturity date.
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8 Both parties had been asked to brief this legal issue but provided only broad statements
and authority that did not shed real light on the subject. After a directive to supplement its
submission with more thoughtful analysis and relevant case law, Wachovia submitted the
unpublished Russo case as the only case it could find on point.
-8-
Debtors’ corresponding obligation under the Loan Modification was to make current
monthly payments, an obligation which they did not fulfill. 	Wachovia argues that its
preservation of the original default requires Debtors to cure by paying both the new missed
payments and the payments missed before the modification was permitted. I do not read the
Loan Modification to so provide. A preservation of the original default allows the lender to
exercise its contractual remedies of acceleration and foreclosure upon default of the Loan
Modification. However, a new payment default under the Loan Modification provides
Wachovia with the same remedies without regard to the original default. 	There does not
appear to be a purpose of preserving the original default since those remedies are available
by reason of the new default. 	As the contractual document offers no clue to what was
intended by the preservation of the original default and makes absolutely no mention of a
cure of either default, I cannot agree with Wachovia that the preservation of the default
suggests the parties’ intentions regarding a cure, especially one available in a Chapter 13
case where cure would be available.
The cases to consider the legal question posed by these facts are surprisingly few.
In re Russo, case no. 01-24624 (Bankr. W.D.N.Y. June 21, 2002), an unpublished decision
proffered by Wachovia,8 involved an objection to a lender’s arrearage claim that was
calculated under the original note and mortgage and not the forbearance agreement in
default. The facts bear a striking similarity to the circumstances here. The debtors defaulted
under the original note and mortgage which resulted in a foreclosure judgment. Rather than
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9 Upon default of the forbearance agreement, a judgment was secured and a foreclosure
sale was pending when bankruptcy was filed.
10 In that connection, it noted that the forbearance agreement provided as here for the
payment of all of the amounts due under the note and mortgage after a default was declared; it
did not simply provide for a cure of the arrearage over a short time and a return to the terms of
the original note. Slip op. at 6.
11 This conclusion may have been influenced by the fact that the lender’s attorneys had
advised the Debtors after default but pre-bankruptcy that the loan could be reinstated by paying
the amounts due under the forbearance agreement rather than what would have been due under
the original note. Id. at 7-8.
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take the property to sale, the mortgagee entered into a forbearance agreement with the
debtors which required repayment of the arrearage and the escrow advance over time and
the maintenance of current payments. 	Upon default the foreclosure judgment would be
enforced and a sale would follow. The debtors filed a petition under Chapter 13 and
proposed a plan that would cure the arrearage under the forbearance agreement. The court
determined that the once the mortgage was deaccelerated pursuant to §1322(b)(5),9 the
debtors were required to make post-petition payments to the lender equal to the amounts due
under the forbearance agreement, not the original mortgage and note. 	The court was
persuaded that the payments obligations evidenced by the note and mortgage had been
modified and restructured by the forbearance agreement which stated that the payment
modifications were an exception to its preservation of the terms of the note and mortgage.10
Slip op. at 7. The court noted that the forbearance agreement contained no language that
upon default the payments would be those required under the note and mortgage and
appeared not to find the ripening of the right to foreclose upon default to evidence the
lender’s intentions about payment. 11 Id.
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12 However, Russo does belie the contention advanced by Wachovia that the amendment
of the Bankruptcy Code to overrule the Third Circuit’s holding in In re Roach, 824 F.2d 1370
(3d Cir. 1987) to allow a cure until the residence is sold at sheriff’s sale under applicable state
law suggests that Congress only contemplated cures of all amounts in default under the note and
not amounts in default under a modification or forbearance agreement. Aside from the fact that
the cases to consider the issue have concluded under the facts of those cases that a cure could be
accomplished by paying solely the arrearage under the modified agreement, the statute appears
to support that result. The plain language of §1322 (b)(5) states that a plan may provide for the
curing of any default on a long-term debt contract. See Lawrence P. King, et al., 3 Collier on
Bankruptcy ¶ 1322.09[2] at 1322-35 to 1322-36 (15th ed. 2005) (right to cure applies to all long-
term debt contracts, including defaults on secured contracts such as land sale installment
agreements as well as mortgages and unsecured debts such as student loans and installment tax
payment arrangements); Keith M. Lundin, 2 Chapter 13 Bankruptcy § 115.1 at 115-7 (3d ed.
2000 & Supp. 2004) (Section 1322(b)(5) applies to any long term debt). This literal construction
of “any default” supports those cases that have found that a debtor may propose a modified plan
to cure post-petition as well as prepetition arrears. Green Tree Acceptance, Inc. v. Hoggle (in re
Hoggle), 12 F.3d 1008 (4th Cir. 1994). Accordingly, I hold as a matter of bankruptcy law that a
debtor may cure the arrearage under a loan modification without curing the arrearage under the
original note and still invoke the protection of §1322(b)(5) so long as the loan modification
agreement does not foreclose such cure.
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Wachovia argues that Russo is not persuasive because its outcome (which favors the
Debtors’ position) was driven by the facts of that case and not any case law or reference to
the Bankruptcy Code. 12 As I have already concluded that it is the parties’ agreement that
determines the outcome of this contested matter, I agree that a different result may obtain
under different facts. However, Wachovia does not enlighten me as to why the provisions
of the Loan Modification compel a different result here. It appears that some of the Russo
factors are present here while others are not. Significantly, the Loan Modification altered
the payment terms of the original note and mortgage and provided for full payment of the
note after a default was acknowledged. A new amortization schedule was implemented, not
a short term cure that would reinstate the original payment terms. Like the agreement in
Russo, the Loan Modification requires Debtors to make current payments to have the benefit
of the new terms. 	Moreover like the Russo court, I am unable to conclude that a cure
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requires payments under the Loan Documents absent an express statement to that effect in
the Loan Modification. As noted above, while the original default was preserved as to
acceleration and foreclosure, the document is silent on what Wachovia’s intentions were
short of those ultimate remedies should Debtors fail to make current payments.
In a reported case my research uncovered, In re Gellerman, 263 B.R. 691 (Bankr. D.
R.I. 2001), the preservation of payment defaults did not preclude cure limited to the post-
modification default only. The Gellermans had an outstanding arrearage after completing
a series of forbearance agreements with their mortgagee. That amount was segregated into
a “corporate advance” or “arrearage” bucket when the loan was securitized. No efforts were
made to collect the arrearage by either the original lender or assignee. When the borrowers
defaulted again and entered another forbearance agreement, this time with the assignee, both
parties acknowledged that the loan delinquency was shifted to an arrearage bucket and that
the Gellermans had a continuing obligation (albeit without specifying when or how) 	to
satisfy it which would not be cured by the completing the forbearance agreement. Id. at 692-
93. 	When the Gellermans yet again defaulted and subsequently filed their bankruptcy
petition, the issue there, like here, was whether the arrearage to be cured under §1322(b)(5)
was the amount solely due under the forbearance agreement or whether that amount should
also include the arrearage bucket.
The Gellerman court reasoned that the separation of the pre-securitization arrearage
and forbearance from its collection as well as the subsequent forbearance agreement that
preserved the assignee’s claim for the “arrearage bucket” but did not require its payment to
cure the default demonstrated the parties’ intent to place the securitized arrearage at the end
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of the note. Id. at 694. As such the court found for the purposes of §1325(b)(5) that the
arrearage to be cured did not include the securitized arrearage and that allowing it to be
included in the arrearage claim would give the lender a windfall and deprive the debtors of
the benefit of their earlier bargain.
Unlike the Gellerman court, I need not infer the parties’ intent because the terms of
the Loan Modification are unambigous: 	the Loan Arrearage is to be paid out at the
conclusion of the original loan term over a reamortized schedule extending the maturity date
provided the Debtors continue to make timely monthly payments under the Loan. Like the
treatment of the arrearage bucket in Gellerman, Wachovia agreed to this deferral of receipt
of the Loan Arrearage and a forbearance of the original default so long as current monthly
payments were made. While current payments were not maintained, Debtor’s cure of the
NBP Arrearage would return Debtors to their pre-default status under the Loan as modified
by the Loan Modification and would nullify the consequence of their post-NBP default.
Cure of the NBP Arrearage pursuant to §1325(b)(5) restores the status quo ante. Allowing
Wachovia to add the Loan Arrearage to the cure amount under the Plan gives it more than
its predecessor contractually agreed to receive. 	Moreover it would foreclose for these
Debtors one of the most powerful remedies available to debtors reorganizing under Chapter
13, the ability to cure any pre-bankruptcy default notwithstanding the prohibition on
modifying a loan secured solely by residential real estate. 11 U.S.C. §1322(b)(2).
This result is consistent with other cases that have considered the parameters of a
cure under §1325(b)(5) where a prior default precedes the triggering default. In Litton v.
Wachovia Bank (In re Litton), 330 F.3d 636 (4 th Cir. 2003), the court considered the debtors’
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attempt to cure a default of a March 3, 2000 order (the “2000 Order”) memorializing a
settlement agreement entered in their 1997 Chapter 13 case. Prior to that settlement, debtors
had unsuccessfully settled their financial difficulties with this lender in a prior 1992
bankruptcy case. 	Under the 2000 Order, the debtors were required to make an initial
payment of $55,000 by June 30, 2000, as a condition of securing refinancing of the balance
of their loan with Wachovia. They failed to do so, and Wachovia moved to foreclose. A
new and third Chapter 13 case followed on November 21 in which the debtors proposed to
cure the arrearages by making the $55,000 payment in 30 days and regular payments as
provided in the 2000 Order. Wachovia objected to confirmation of the plan. While the issue
was whether the plan was an impermissible modification expressly foreclosed by the 2000
Order, the Court’s opinion is instructive on the use of the cure provision of §1322(b)(5).
The 2000 Petition was filed on November 21, 2000, when the Littons' only
default, under the terms of the 2000 Order, was their failure to make the Initial
Payment. By providing for terms of payment virtually identical to those
required by the 2000 Order, the Plan simply sought to return the 2000 Order
to its pre-default condition. [citation omitted]. It proposed that Mrs. Litton pay
all arrearages and maintain all payments during the life of the Plan. . . . Under
these circumstances, the Plan does not propose a “ modification” of the 2000
Order. Rather, evaluated by its express terms, under the foregoing authorities,
and by its proposed treatment of the 2000 Order, the Plan constitutes a “cure”
under the Bankruptcy Code, in that it seeks to restore the “status quo ante.”
[citation omitted]
Id. at 644-45. 	The debtors were permitted to address their payment default of the 2000
Order without regard to the default that had existed before the settlement embodied in that
Order was reached.
A further illustration is provided in In re Simmons, 2004 WL 2249498 (Bankr. N.C.
Oct. 5, 2004), where the debtor was obligated to his lender on two separate notes: only the
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first had payment terms and payment of the second was suspended so long as debtor was not
in default of the payment obligations under the first note. As of the petition date of his
Chapter 13 case, he was in default under the payment terms of the first note which
accelerated payment of the second note. The Plan proposed to cure the first note and make
no payments under the second note. The lender insisted on full payment of the second note
because of the default under the first note. The Debtor’s position was that no payment would
be required under the second note. The court concluded that by proposing to pay the first
note, the parties would be returned to their respective pre-default conditions. 	The Plan
merely reinstated that position.
As these decisions make clear, the essential inquiry is whether the proposed cure will
remove the triggering event that caused the default. In this case, the failure to pay the NBP
Arrearage was the triggering event; cure of it will return the parties to the status quo ante and
permit the Debtors to have the benefit of the loan extension. Accepting Debtors’ legal
position, I conclude that they have met their burden of refuting the prima facie effect of the
Claim. They have demonstrated that their prepetition arrearage under the Loan, as modified
by the Loan Modification, is the stipulated NBP Arrearage of $14,209.75. Payment of that
amount through the Plan will reinstate the modified Loan, including its term that calls for
payment of the Loan Arrearage on the Extended Maturity Date.
An Order consistent with this Memorandum Opinion shall follow.
DIANE WEISS SIGMUND
Chief U.S. Bankruptcy Judge
Dated: October 11, 2006
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UNITED S TATES B ANKRUPTCY COURT
FOR T HE E ASTERN DISTRICT O F PENNSYLVANIA
In re 	: 	Chapter 13
:
WILLIAM L. LAMMY and 	: 	Bankruptcy No. 05-19596DWS
CATHERINE R. LAMMY 	:
:
Debtors. 	:
ORDER
AND NOW, this 11 th day of October 2006, upon consideration of Debtors’ Objection
to Claim (the Objection) of Wachovia Bank National Association as Trustee of the Security
National Mortgage Loan Trust 2004-1 (Wachovia) and Wachovia’s Motion to Allow Claim
(Wachovia’s Motion), and for the reasons stated in the attached Memorandum Opinion;
It is hereby ORDERED that the Objection is SUSTAINED and Wachovia’s Motion
is DENIED. 	Wachovia’s claim for pre-petition arrears is allowed in the amount of
$14,209.75.
DIANE WEISS SIGMUND
Chief U.S. Bankruptcy Judge
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