Airat Temitayo Adejobi

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
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In re:
Airat Temitayo Adejobi, 	Chapter 13
a/k/a Airat Temitayo Bakare 	Case No. 1-08-42518-jf
Debtor.
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DECISION AND ORDER DENYING DEBTOR’S MOTION
TO REDUCE SECURED CREDITOR’S CLAIM
APPEARANCES:
Stuart P. Gelberg, Esq.
600 Old Country Road
Suite 410
Garden City, New York 11530
Debtor’s Counsel
Doris Barkhordar, Esq.
Deutsch & Schneider, LLP
79-37 Myrtle Avenue
Glendale, New York 11385
Counsel for Emigrant Funding Corporation
Marianne DeRosa
100 Jericho Quadrangle
Suite 208
Jericho, New York 11753
Chapter 13 Trustee
JEROME FELLER
United States Bankruptcy Judge
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Before the Court in the above-captioned Chapter 13 case is a motion (“Motion”) of Airat
Temitayo Adejobi a/k/a Airat Temitayo Bakare (“Debtor”) to reduce a proof of claim filed by
Emigrant Funding Corporation (“Emigrant”) designated as Claim Number 2 on the claims
register (“Claim”). The Debtor objects to that part of the Claim for pre-petition arrears calculated
by Emigrant through utilization of a contractual default rate of interest (“Default Interest Rate”).
The Debtor argues that the pre-default rate of interest (“Non-Default Interest Rate”) is the proper
interest rate to be used.
Upon review of all the submissions and after hearing oral argument, we conclude that 11
U.S.C. § 1322(e) 	is 	unambiguous 	in 	its 	command 	that 	the 	underlying 	agreement 	and
nonbankruptcy law are dispositive where, as here, a debtor seeks to cure mortgage arrears under
a Chapter 13 plan. 	The underlying agreement between the Debtor and Emigrant provides for a
Default Rate of Interest and the Debtor does not dispute that the agreement is in accordance with
applicable nonbankruptcy law. 	The Default Interest Rate is therefore the proper interest rate to
be used in calculating the Debtor’s pre-petition mortgage arrears. 	Accordingly, the Motion is
denied.
I.
In the spring of 2007, the Debtor purchased a six family residential building located at
1215 Frisco Ave., Far Rockaway, New York (“Property”). The Property was acquired for
business purposes and is not the Debtor’s residence. The acquisition by the Debtor was financed
by Emigrant. On May 23, 2007, the Debtor obtained a loan in the principal amount of $315,000
from Emigrant evidenced by a promissory note (“Note”) and secured by a commercial mortgage
(“Mortgage”) on the Property. 	The Note and Mortgage provides for annual interest at 9% and
rises, in the event of default, to an annual interest rate of 24%. 	Monthly payments were to
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commence on July 1, 2007. The Debtor made four monthly payments and with the payment due
November 1, 2007 went into default. 	Emigrant declared the entire debt due and commenced a
foreclosure proceeding on April 23, 2008. 	On April 25, 2008, the Debtor filed a Chapter 13
petition and thereby stayed the foreclosure proceeding.
The Claim was filed by Emigrant on May 19, 2008. 	Schedule B attached to the Claim
lists pre-petition arrears amounting to $46,234.31. The pre-petition arrears consist of six unpaid
monthly payments for the period of November 1, 2007 through April 25, 2008 aggregating
$34,950.02 (“Pre-Petition Monthly Mortgage Arrearages”), plus other charges not disputed by
the Debtor. 	The $34,950.02 figure for Pre-Petition Monthly Mortgage Arrearages is computed
on the basis of the Default Interest Rate. 	The Debtor challenges this number, arguing that the
Non-Default Interest Rate should be used and on that basis estimates that the Claim is excessive
by approximately $21,000.
The Debtor filed an amended Chapter 13 plan, Doc. No. 25, proposing to cure the pre-
petition arrearages to Emigrant over a 48 month period (“Plan”), and thereby de-accelerate and
reinstate the original terms of the Note and Mortgage. 	However, the sum of $25,323.06 to be
paid under the Plan, which assumes a Non-Default Interest Rate on the Pre-Petition Monthly
Mortgage Arrears, falls short of the pre-petition arrearages sought in the Claim. 	Emigrant
objects to the Plan because it fails to provide for the full amount of the Claim as required by 11
U.S.C. § 1325(a)(5)(B)(ii). Confirmation of the Plan has been held in abeyance pending judicial
resolution of the proper interest rate to calculate the amount necessary to cure the Pre-Petition
Monthly Mortgage Arrears.
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II.
Section 1322(e) of the Bankruptcy Code, 11 U.S.C. § 1322(e), was added to the
bankruptcy statute by the Bankruptcy Reform Act of 1994. 1 This provision was made to apply to
agreements entered into after October 22, 1994, the effective date of the 1994 amendments to the
Code.2 Section 1322(e) reads 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 the 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.
Section 1322(b)(3) of the Bankruptcy Code, 11 U.S.C. § 1322(b)(3), provides that a
Chapter 13 plan may provide for the curing of any default. However, prior to the enactment of
section 1322(e), the Code had no provision addressing the amount required to cure a default
under a Chapter 13 plan. Section 1322(b)(3) permitted a cure of a default pursuant to a Chapter
13 plan, but did not provide any definition of a cure or any statutory guidance as to the amount
required to cure the default. 	Section 1322(e) filled the gap. 	For agreements signed after the
effective date of section 1322(e), as in the instant case, if a Chapter 13 plan proposes to cure a
default, the amount necessary to cure the default is determined in accordance with the underlying
agreement and applicable nonbankruptcy law. 	Thus, in curing pre-petition payment defaults, a
debtor will have to pay interest at a contractual default rate if it is enforceable under state or
other nonbankruptcy law.
1 Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 305, 108 Stat. 4106 (October 22, 1994).
2 Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 702(b)(2)(D), 108 Stat. 4106 (October 22, 1994).
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III.
It is undisputed that the Debtor defaulted on the loan from Emigrant. Further, the Debtor
does not negate the existence of a Default Interest Rate in the underlying agreement with
Emigrant. 	Nor does the Debtor contend that the Default Interest Rate provided for in the
underlying agreement is unenforceable under applicable nonbankruptcy law, which in this case is
New York State law. Instead, the Debtor asserts that while Emigrant’s entitlement to the Default
Interest Rate arises in the first instance from the agreement between the parties and applicable
state law, any obligation of the Debtor to pay the Default Interest Rate is subject to a qualifying
or 	contrary 	provision 	of 	the 	Bankruptcy 	Code, 	i.e., 	section 	1322(b)(3). 	Under 	section
1322(b)(3), a Chapter 13 plan may “provide for the curing . . . of any default”. According to the
Debtor, a cure corrects all defaults and prohibits an award of default interest.
The position of the Debtor is based upon a 1988 decision of the Ninth Circuit, Great
Western Bank & Trust v. Entz-White Lumber and Supply, Inc. (In re Entz-White Lumber and
Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988). 	In Entz-White, the Ninth Circuit held that, if a
debtor cures a default as part of a plan of reorganization, the debtor “is entitled to avoid all
consequences of the default including higher post-petition default rates.” Id. at 1342. In support
of this holding, the Ninth Circuit cited a leading case on cure, In re Taddeo, 685 F.2d 24 (2d Cir.
1982), for the proposition that, while undefined by the Code itself, “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 1340. Entz-White interpreted Taddeo to mean that a post-default interest rate is a
consequence of default which is nullified in the context of cure.
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There are two discrete aspects to curing a default. First, the amount necessary to cure the
default. 	Second, the legal consequences arising upon carrying out or implementing the cure.
The issue before the Second Circuit in Taddeo and the only aspect addressed by that Court was
the legal consequences upon cure effectuation. 	The Second Circuit ruled that curing a default
allows Chapter 13 debtor/mortgagors, notwithstanding contractual acceleration clauses, to de-
accelerate their mortgage and reinstate the original payment terms of the debt. 	Nowhere in
Taddeo is there any mention as to how one is to determine the amount necessary to cure the
default. Taddeo actually says nothing about restoration of pre-default interest rates. Entz-White
extended the reasoning of Taddeo to determine the amount necessary to cure a default and
decided the statutory right to cure nullifies or removes a contractual default rate from the
computation. 	With the enactment of section 1322(e) in 1994, such extension of Taddeo is no
longer justified or warranted. A prominent treatise on bankruptcy law accurately and succinctly
summarized the effect of section 1322(e) as follows:
Under section 1322(e), the amount necessary
to cure a default is the same as would be
required to cure if the debtor were not in
bankruptcy. 	Two conditions must be met
before 	interest 	and 	other 	charges 	can 	be
required as part of a bankruptcy cure. 	First,
the interest or charges must be required under
the 	original 	agreement, 	and 	second, 	they
cannot be prohibited by state law. 	In other
words, the bankruptcy court will never require
interest in excess of that permitted by state
law, 	and 	will 	require 	none 	unless 	the
agreement provides for interest.
Collier on Bankruptcy, § 1322.18 at 1322.67 (Alan N. Resnick et al., 15th ed. rev. 2006).
As indicated above, the underlying agreement between Emigrant and the Debtor provides
for a Default Interest Rate and the Debtor does not contest its enforceability under New York
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State law. 	Accordingly, the amount necessary to cure the Debtor’s Pre-Petition Monthly Arrears
for the period of November 1, 2007 through April 25, 2008 was properly computed by Emigrant
on the basis of the Default Interest Rate.
IV.
Section 1322(e) was enacted to overrule the Supreme Court decision in Rake v. Wade,
508 U.S. 464 (1993). In Rake, the Court required debtors curing pre-petition mortgage defaults
to pay not only the interest on the principal, but also interest on that interest, as well as interest
on other components of pre-petition arrearages. 	These interest payment requirements to cure
were mandated by Rake even though applicable nonbankruptcy law prohibited them and were
not contemplated by the parties to the original transaction. 	As stated by Representative Jack
Brooks as part of the Floor Statements made in connection with the Bankruptcy Reform Act of
1994:
[Section 1322(e)] will have the effect of over-
ruling the decision of the Supreme Court in
Rake v. Wade, 508 U.S. 464, 133 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 	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 limit the secured creditor to
the benefit of the initial bargain with no court
contrived windfall. 	It is the Committee’s
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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.
H.R. Rep. 103-834, 103 rd Cong., 2d Sess 55 (October 4, 1994).
Based upon the above legislative history, Debtor argues that § 1322(e) was designed to
restrict rather than expand secured creditors’ rights and therefore should not be construed to
require payments of higher default interest rates to cure pre-petition defaults. 	This argument is
flawed to the core. The essential thrust of the statement by Representative Brooks is that section
1322(e) is intended to leave the parties to the rights provided by their agreements and applicable
nonbankruptcy law. Thus, the terms in the underlying agreement specifying an interest rate upon
default should suffice, so long as it is not forbidden by applicable nonbankruptcy law.
Moreover, where the language of the statute is so plain, as section 1322(e), there is no reason to
search beyond its words for a different intent. See Lamie v. U.S. Trustee, 540 U.S. 526, 634, 124
S.Ct. 1023, 10370 (2004); Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530
U.S. 1, 6, 120 S.Ct. 1942, 1947); see also In re Thompson, 372 B.R. 860, 865 (Bankr. S.D. Ohio
2007) (observing that the plain language of section 1322(e) has broader application than just the
overruling of Rake v. Wade); In re Landrum, 267 B.R. 577, 582 (Bankr. S.D. Ohio 2001)
(pointing out that while section 1322(e) was intended to overrule Rake v. Wade, “Congress did
not go so far as to say that § 1322(e) was intended to accomplish this purpose alone); In re Lake,
245 B.R. 282, 285 (Bankr. N.D. Ohio 2000).
V.
A contractual default rate of interest is a deliberate bargain among private parties. There
is nothing intrinsically unscrupulous or wrong with a contractual default rate of interest. It
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simply reflects a heightened risk of nonpayment and the unforeseeable cost involved in collected
defaulted debt. As the Second Circuit long ago explained:
A variable interest provision in the event of
default 	such 	as 	we 	have 	here 	is 	not 	a
penalty, 	nor 	should 	it 	be 	considered
unconscionable. 	It can be beneficial to a
debtor in that if may enable him to obtain
money at a lower rate of interest than he
could otherwise obtain it, for if a creditor
had to anticipate a possible loss in the value
of the loan due to his debtor’s bankruptcy or
reorganization, he would need to exact a
higher uniform interest rate for the life of the
loan. The debtor has the benefit of the lower
rate until the crucial event occurs; he need
not pay a higher rate throughout the life of
the loan.
Ruskin v. Griffiths, 269 F.2d 827, 832 (2d Cir. 1959), cert. denied, 361 U.S. 947 (1960)
(Citations Omitted).
The general rule in bankruptcy is that contractual interest on a debtor’s obligation accrues
up to the date of the bankruptcy filing. 	If unpaid, all contractually accrued interest, including
default interest, becomes an integral component of a creditor’s claim in bankruptcy. The policy
underlying section 1322(e) is that in determining the amount necessary to cure a default under a
Chapter 13 plan, the equitable power of a federal court exercising bankruptcy jurisdiction may
not be invoked to set aside rights vouchesafed to a secured creditor under contract and
enforceable under applicable nonbankruptcy law. The accrued and unpaid interest that attached
to the Debtor’s contractual obligation to Emigrant from November 1, 2007 to April 25, 2008 was
at the Default Interest Rate. 	Section 1322(e) provides that any defense to the Default Interest
Rate that is available to the Debtor outside of the bankruptcy context is also available in
bankruptcy. The Debtor has interposed no such defenses.
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VI.
Based on all of the foregoing, the Debtor’s Motion seeking to reduce the Claim of
Emigrant designated as Claim Number 2 in the above-captioned Chapter 13 case, is denied.
IT IS SO ORDERED
Dated: Brooklyn, New York
April 29, 2009
s/Jerome Feller
Jerome Feller
United States Bankruptcy Judge
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