Deutsche Bank National Trust Co. v. Tucker, No. 09-5867 (6th Cir. 2010)

CASE SNAPSHOT

In resolving a conflict within the Sixth Circuit, the Court of Appeals has held that chapter 13 debtors who propose in their plan of reorganization to cure the arrearage on their mortgage loan are required to pay all fees and costs required by the mortgage and non-bankruptcy law, even if the mortgage lender is undersecured. Put another way, mortgage lenders may include such fees and costs in their proofs of claim.

FACTUAL BACKGROUND

The debtor, Mrs. Tucker, executed a note in favor of Novelle Financial Services in August 2004. As security for the note, Mrs. Tucker and her husband gave Novelle a mortgage on their house. The note and mortgage were subsequently assigned to a trust for which Deutsche Bank National Trust Company was a trustee. In February 2008, Mrs. Tucker filed a petition for chapter 13 bankruptcy, listing the value of the home at $88,000. Deutsche Bank filed a proof of claim for $103,328.84, which included a pre-petition arrearage total of $23,286.89. The Debtor objected to the proof of claim, arguing that, of the pre-petition arrearage, fees and costs totaling $4,660.62 should be treated as unsecured under a prior case that held that, under section 1322(e) of the Bankruptcy Code, fees and costs can only be included in arrears to the extent that they are also secured amounts under section 506(b).

In her plan of reorganization, the Debtor proposed to reduce the arrearages paid to Deutsche Bank by the amount of fees and costs. The Bankruptcy Court sided with the Debtor. Deutsche Bank appealed to the United States District Court for the Eastern District of Kentucky, which certified the issue for direct appeal to the Sixth Circuit.

COURT ANALYSIS

The Circuit Court framed the issue as “what amounts are properly part of an arrearage cure under section 1322(e) when the debtor is undersecured?” To answer, the court was required to examine the interaction of sections 506(b) (which deals with secured status) and 1322(e) (which deals with cure amounts). The note permitted the lender to recover certain fees and costs in the event of default. The Debtor argued that only the amount of fees and costs that were secured could properly be included in the arrearage.

Section 1322(e) states that, “[n]otwithstanding… section 506(b)…. 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 non-bankruptcy law.” The Bankruptcy Court had determined that “notwithstanding” was ambiguous because it could mean either (i) section 506(b) has no applicability in a chapter 13 case, or (ii) the creditor must meet section 1322(e)’s requirements in addition to meeting the requirements of being fully secured under section 506(b). Because of this perceived ambiguity, the Bankruptcy Court had then turned to the legislative history and concluded that only secured creditors first meeting the requirement of section 506(b) were entitled to add interest, costs and fees to their arrearage claim under section 1322(e).

The Circuit Court disagreed with the Bankruptcy Court’s approach. The Circuit Court resolved the interaction of sections 506(b) and 1322(e) utilizing strict statutory construction, and employed the rule that words in a statute should be interpreted by their ordinary meaning. Applying the ordinary meaning of “notwithstanding,” the court determined that Congress expressly resolved any conflict between sections 506(b) and 1322(e) in favor of 1322(e). “By using the term ‘notwithstanding’ in section 1322(e), Congress expressly precluded section 506(b) from applying to a Chapter 13 cure situation where the parties have a contrary agreement.” Even if the court were to look beyond the plain language of the statute and examine legislative intent, the court stated that “[i]t is hard to imagine a clearer statement of congressional intent than ‘notwithstanding … section 506(b) … the amount necessary to cure the default, shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.’”

The Circuit Court therefore concluded that section 506(b) has no applicability in a situation in which the debtor is keeping the original contract in place and bringing it up to date, and that the Bankruptcy Court’s conclusion conflicted with the plain language of the statute. Moreover, the Circuit Court’s conclusion was in accord with the holdings of several other courts and authorities.

The Circuit Court vacated the lower court’s decision, and remanded the case to the Bankruptcy Court for proceedings not inconsistent with this opinion.

PRACTICAL CONSIDERATIONS

The term “notwithstanding” is frequently used in all types of statutory language, and is thus the frequent subject of judicial construction. Parties often debate whether the word is to be applied in a supplanting or supplementing manner. The Circuit Court here held that “notwithstanding” is unambiguous in section 1322(e), and that it supplants any possible implication of 506(b). This holding agrees with the Second and Third Circuits, among others, and reaffirms that courts will first apply the plain meaning of words in a statute. This decision resolves a conflict in the Sixth Circuit and provides guidance to undersecured lenders and debtors alike.