Court Opinion

ID: 9477813
Source: CourtListenerOpinion
Date Created: 2023-08-05 06:31:53.757468+00
Date Added: 2024-06-11T17:46:03.725038
License: Public Domain

HEANEY, Circuit Judge,
dissenting.
Although I agree with much of the majority opinion, I respectfully dissent from that portion of it which holds that the right to cure does not extend beyond the foreclosure sale.
First, I agree with the majority that Johnson v. First National Bank of Montevideo, 719 F.2d 270 (8th Cir.1983), cert. denied, 465 U.S. 1012, 104 S.Ct. 1015, 79 L.Ed.2d 245 (1984), does not control this case. It would be a mistake to hold that Johnson renders state created redemption periods inviolate in the bankruptcy courts. Cf. In re Maanum, 838 F.2d 991, 992 (8th Cir.1988) (Heaney J. dissenting from denial of rehearing en banc) (“If a party is entitled to relief under a specific provision of the Bankruptcy Code, it should not be prejudiced by the fact that a state deadline has *1089passed.”). As Johnson recognizes, although the law of the state in which the bankrupt’s property is situated ordinarily governs the rights of the parties in the property, “[w]here Congress has chosen to exercise its authority, contrary provisions of state law must accordingly give way.” Id. at 273. Therefore, if Chapter 12 offers the Justices specific relief, the running of a state redemption period should not frustrate that relief.
Second, I agree with the majority that, pursuant to 11 U.S.C. § 1222(b)(3) and (5), a Chapter 12 plan of reorganization may remedy a default notwithstanding the fact that, pursuant to a contract, the creditor may have accelerated the entire debt due. See, e.g., In re Roach, 824 F.2d 1370, 1374-77 (3rd Cir.1987); In re Terry, 780 F.2d 894 (11th Cir.1985); In re Glenn, 760 F.2d 1428, 1442 (6th Cir.), cert. denied, 474 U.S. 849, 106 S.Ct. 144, 88 L.Ed.2d 119 (1985); In re Clark, 738 F.2d 869, 872-74 (7th Cir.1984); Grubbs v. Houston First American Savings Association, 730 F.2d 236, 237 (5th Cir.1984) (en banc); In re Taddeo, 685 F.2d 24 (2d Cir.1982). But see In re Harlan, 783 F.2d 839 (9th Cir.1986); In re Seidel, 752 F.2d 1382 (9th Cir.1985).
Third, I agree with the majority that 11 U.S.C. § 1222(b)(2) does not authorize an extension of a state redemption period. Courts have drawn a distinction between the right to “modify” and the right to “cure.” See, e.g., In re Roach at 1374-77; In re Taddeo at 27. The former, found in section 1222(b)(2), authorizes a plan which proposes to distribute to creditors less than the total amount of their claims. Cf. 11 U.S.C. § 506 (defining allowed secured claim); 11 U.S.C. § 1225(a) (authorizing confirmation of a Chapter 12 plan which provides, inter alia, that the value of property distributed on account of a secured claim is not less than the amount of an allowed secured claim). The latter, found in section 1222(b)(3) and (5), authorizes a plan proposing to remedy events of default which have already occurred and to continue payments. See, e.g., In re Taddeo at 26-27.
Accordingly, courts have interpreted section 1322(b) as authorizing plans which propose to cure a default on a home mortgage obligation despite the fact that section 1322(b)(2), unlike section 1222(b)(2), prohibits modification of the rights of a holder of a claim secured only by a security interest in real property which serves as the principal residence of the debtor. See, e.g., In re Roach at 1376; In re Glenn at 1434. They have done so on the ground that the right to cure does not sufficiently interfere with the rights of the home mortgagee to work a modification. See id. Similarly, sections 1222(b)(2) and 1222(b)(5) are not cumulative or overlapping. Rather, they are distinct provisions designed to serve very different purposes. Given these distinct functions, modification of a claim should not in any way interfere with the running of a state redemption period.
Notwithstanding my agreement with the majority in the above respects, I cannot concur in the majority’s holding that “the cure provisions of section 1222(b) are inapplicable after a foreclosure sale has been held.” Majority Opinion at 14-15. Instead, I would hold that the clear and strong rehabilitative purposes of Chapter 12 require application of the cure provisions of section 1222(b) to the fullest extent. That is, a debtor should be allowed to propose a Chapter 12 plan of reorganization which remedies any default within a reasonable time and maintains payment during the term of the plan and thereafter.
The majority argues that once a foreclosure judgment and sale occur, the mortgage is extinguished. Thus, in attempting to exercise its rights under section 1222(b)(5), the debtor actually seeks to modify the state court judgment and sale. Yet, to the extent the judgment conflicts with specific rights granted the debtor under the Bankruptcy Code, contrary provisions of the state court judgment must give way. Much of the Bankruptcy Code involves modification of state created property rights. Such modifications are not prohibited merely because the rights involved are embodied in a state court judgment. Moreover, it is unlikely that the limited authority to cure granted in section *10901222(b)(5) would create significantly greater confusion or uncertainty in the real property law of South Dakota than exists as a result of the redemption period already afforded mortgagors in that state.
In addition, the majority argues that the terms “cure” and “default” are commonly understood to presuppose a contractual relationship. From this, it is inferred that Congress intended to provide relief for defaulting mortgagors only as long as the contractual relationship continues. Yet, the language of section 1222(b)(5) does not limit the right to cure to those debts arising out of an existing contractual relationship. The majority’s point that Congress was aware of the differences between contractual obligations and rights arising by operation of statute is hardly helpful to its case. One would think that if Congress had been aware of such an important distinction, it would have clearly expressed its intention to limit the debtor’s right to cure a default to a time before acceleration, judgment, or sale. It did not. I see no reason for the Court to impose a limitation on the right to cure that is not supposed by the broad language of section 1222(b)(5).
In addition, the specific rehabilitative goals of Chapter 12 also require a broader right to cure than that adopted by the majority. Contrary to the view of the majority opinion, Chapter 12 was intended to and does offer family farmers more than procedural changes aimed at simplifying federal reorganization procedure. Majority Opinion at 12. In passing Chapter 12, Congress enacted substantive changes in the laws affecting family farm reorganizations. See, e.g., 11 U.S.C. § 1225 (modifying the absolute priority rule). While the substantive changes may be the result of a balance struck between offering family farmers important protections and ensuring that farm lenders receive a fair repayment, the changes embodied in Chapter 12 clearly reveal an overarching purpose to “give family farmers facing bankruptcy a fighting chance to reorganize their debts and keep their land.” H.R.Rep. 554, 99th Cong., 2d Sess., 48, reprinted in 1986 U.S. Code Cong. & Admin.News 5249.
Moreover, Chapter 12 is specifically intended to benefit family farmers. Therefore, it is appropriate to take into account the peculiar nature of a family farm enterprise in interpreting it. Ordinarily, the largest and most important productive asset and source of collateral of a family farm operation will be the land that is farmed. Thus, for a plan of reorganization under Chapter 12 to succeed, retention of the land is a necessity. Without it, liquidation, and the loss it imposes on all creditors will, in all probability, be the only viable course. A broad view of the right to cure under section 1222(b)(5), therefore, is most in keeping with the purposes of Chapter 12 because it increases the likelihood that family farmers facing bankruptcy will be able to retain the single most important element in an effective reorganization.
In light of the specific purposes of Chapter 12 and the broad language of section 1222(b)(5), I would hold that at any time prior to final divestment of the debtor’s interest, the debtor may appropriately propose a plan of reorganization that will, within a reasonable time, cure any default.