Litton v. Wachovia ( 2003 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: ANNA S. LITTON, 
Debtor.
ANNA S. LITTON,

Debtor-Appellant,
No. 02-1423
v.
WACHOVIA BANK,
Creditor-Appellee,
JO S. WIDENER,
Trustee-Appellee.

Appeal from the United States District Court
for the Western District of Virginia, at Abingdon.
Glen M. Williams, Senior District Judge.
(CA-01-48, BK-00-3809-WSA)
Argued: February 27, 2003
Decided: May 27, 2003
Before MICHAEL, KING, and SHEDD, Circuit Judges.
Vacated and remanded with directions by published opinion. Judge
King wrote the majority opinion, in which Judge Michael joined.
Judge Shedd wrote a dissenting opinion.
COUNSEL
ARGUED: Robert Tayloe Copeland, COPELAND & BIEGER, P.C.,
Abingdon, Virginia, for Appellant. Andrew Major Hanson, PENN,
2 IN RE: LITTON
STUART & ESKRIDGE, Abingdon, Virginia, for Appellees. ON
BRIEF: Mark L. Esposito, PENN, STUART & ESKRIDGE, Bristol,
Virginia, for Appellees.
OPINION
KING, Circuit Judge:
Anna S. Litton appeals the district court’s decision affirming dis-
missal of her Chapter 13 bankruptcy petition. See In re Litton, 275
B.R. 259 (W.D. Va. 2002). Mrs. Litton maintains that the court erred
in ruling that her proposed plan was an impermissible modification of
a debt that she and her husband owed to Wachovia Bank, N.A.
("Wachovia"). Because Mrs. Litton’s proposed plan does not consti-
tute an impermissible modification, we vacate the district court’s dis-
missal and direct that it remand Mrs. Litton’s petition to the
bankruptcy court for further proceedings.
I.
This appeal arises from the third in a series of bankruptcy proceed-
ings initiated in the Western District of Virginia by Mrs. Litton and
her husband. The resolution of this appeal turns initially on our
assessment of the intended meaning of a term used in an earlier court-
approved settlement agreement that prohibited the Littons from seek-
ing any modification of a debt they owed Wachovia. Because we con-
clude that the no-modification provision of the settlement agreement
embodies the concepts contained in § 1322 of the Bankruptcy Code,
we must decide whether Mrs. Litton’s proposed plan of reorganiza-
tion seeks to "modify" the terms of that agreement or, alternatively,
seeks to "cure" the Litton’s default of their obligations to Wachovia.
While a modification would indeed be prohibited by the provisions of
11 U.S.C. § 1322(b)(2), a cure is expressly authorized under 11
U.S.C. § 1322(b)(5).1
1
Pursuant to Chapter 13, a proposed plan may "modify the rights of
holders of secured claims, other than a claim secured only by a security
interest in real property that is the debtor’s principal residence." 11
IN RE: LITTON 3
A.
As an initial matter, it is necessary to review certain fundamental
concepts of bankruptcy law. Under Chapter 13 of the Bankruptcy Code,2
individuals with regular income may petition a bankruptcy court for
bankruptcy protection and for reorganization of their debts.3 After a
Chapter 13 petition has been filed, all claims against the petitioning
debtor’s assets are automatically stayed. See 11 U.S.C. § 362(a). A
trustee, appointed by the government, oversees the administration of
the debtor’s assets, or the "bankruptcy estate." See id. § 704. After fil-
ing a Chapter 13 bankruptcy petition, a debtor must propose a "plan
of reorganization," which is scrutinized both by the bankruptcy court
and by the parties-in-interest, i.e., the debtor’s creditors and the bank-
ruptcy trustee, in a confirmation hearing. See id. § 1324. At the con-
firmation hearing, the parties-in-interest are entitled to object to the
court’s confirmation of the proposed plan. Id. If the proposed plan is
confirmed by the bankruptcy court, and if the debtor complies with
the plan’s terms, the debtor obtains a discharge of his debts.
U.S.C. § 1322(b)(2) (emphasis added). Because the Littons’ debt to
Wachovia is secured by their principal residence, § 1322(b)(2) prohibits
Mrs. Litton from modifying the debt through bankruptcy proceedings.
A plan of reorganization may, however, "notwithstanding paragraph
(2) of this subsection, provide for the curing of any default within a rea-
sonable time and maintenance of payments while the case is pending on
any . . . secured claim on which the last payment is due after the date on
which the final payment under the plan is due." Id. § 1322(b)(5) (empha-
sis added).
2
Chapter 13 of the Bankruptcy Code is codified in Title 11 of the
United States Code.
3
This appeal focuses primarily on Chapter 13 of the Bankruptcy Code,
which differs in some respects from Chapters 7 and 11 of the Code.
Chapter 7 provides a liquidation mechanism for "taking control of the
property of the debtor, selling it, and distributing the proceeds to credi-
tors in accordance with the distribution scheme of the Code." 1 Collier
on Bankruptcy ¶ 1.03 (15th ed., rev. 2003). Chapter 11, like Chapter 13,
is available for use by individuals. Unlike Chapter 13, however, Chapter
11 is also available for use by partnerships and corporations. Indeed,
Chapter 11 is primarily used by business debtors. Id.
4 IN RE: LITTON
In proposing a plan of reorganization under Chapter 13, a debtor
may seek to "catch up" on past-due payments or, in certain circum-
stances, to alter the terms of a debt. By contrast, a Chapter 13 plan
of reorganization that includes a debt secured by a lien on the debtor’s
principal residence may not propose to modify the terms of that debt.
Id. § 1322(b)(2). A proposed plan may, however, seek to cure "any
default," including a default on a claim secured by the debtor’s princi-
pal residence. Id. § 1322(b)(5). With this background in mind, we
turn to the relevant facts and procedural history of this appeal.
B.
The Littons live on and operate a small farm in Washington
County, Virginia. They also own and manage several rental properties
in that area. On May 16, 1988, the Littons granted a deed of trust on
their Washington County farm (which is their principal residence) to
Central Fidelity Bank. This deed of trust secured repayment of a
promissory note in the sum of $193,764. The Littons granted an addi-
tional deed of trust to Central Fidelity Bank on September 21, 1990,
for the purpose of providing additional security for the promissory
note.
After encountering financial difficulties, Mr. Litton filed a petition
in bankruptcy on March 23, 1992, seeking relief in the Western Dis-
trict of Virginia under Chapter 11 of the Bankruptcy Code (the "1992
Petition"). In order to dispose of the 1992 Petition, the bankruptcy
court entered an agreed order of November 14, 1994, the Non-
Material Modification Order, which the Littons and Central Fidelity
executed. At some point after the execution of the Non-Material Mod-
ification Order, Wachovia purchased the assets of Central Fidelity
Bank, including the Littons’ promissory note.
Faced with continuing financial difficulties, Mrs. Litton, on Sep-
tember 4, 1997, filed a Chapter 13 bankruptcy petition in the same
court (the "1997 Petition"). Similar to their settlement of the 1992
Petition, the Littons, in March of 2000, entered into a settlement
agreement with their creditors, including Wachovia. This settlement
agreement disposed of the 1997 Petition and augmented the 1994
Non-Material Modification Order. The terms of this agreement were
IN RE: LITTON 5
incorporated into an order entered by the bankruptcy court on March
3, 2000 (the "2000 Order").
Pursuant to the 2000 Order, the Littons were to pay $55,000 to
Wachovia on or before June 30, 2000 (the "Initial Payment"). The
2000 Order further provided that, if the Littons made the Initial Pay-
ment in a timely manner, Wachovia would refinance the balance of
its loan to the Littons. Conversely, if the Littons failed to make the
Initial Payment in a timely manner, Wachovia could, under the terms
of the 2000 Order, pursue its non-bankruptcy rights and remedies
with respect to the deeds of trust on the Littons’ real estate, i.e., by
implementing foreclosure proceedings on the Littons’ farm. Further-
more, the 2000 Order, mirroring the language of § 1322(b)(2), prohib-
ited the Littons from seeking any further modification of the "terms
of the order" in any future bankruptcy proceeding.
The Littons failed to make the Initial Payment on time, and
Wachovia promptly moved to foreclose on the Littons’ farm. On
November 21, 2000, Mrs. Litton filed this Chapter 13 petition in the
Western District of Virginia (the "2000 Petition"), and the automatic
stay arising under the Bankruptcy Code halted the foreclosure pro-
ceedings. At the time she filed the 2000 Petition, and in accordance
with the provisions of § 1321, Mrs. Litton proposed a plan of reorga-
nization, seeking to reorganize her debts and emerge from bankruptcy
(the "Plan"). The Plan proposed the reinstitution of the terms of the
2000 Order by obligating Mrs. Litton to resume her payments to
Wachovia. In particular, the Plan provided: "[t]he term of this plan
shall be three months. . . . Debtor proposes to catch up in arrearages
in payments to Wachovia Bank ($55,000) . . . within 30 days, and to
make regular payments as called for in the [2000 Order]. . . . The case
will then be concluded."
Wachovia objected to confirmation of the Plan, and it also sought
relief from the automatic stay. In a separate filing, the Chapter 13
trustee also objected to confirmation of the Plan, and she sought to
have the 2000 Petition either dismissed or converted to a Chapter 7
liquidation proceeding. On February 9, 2001, the bankruptcy court
entered an order dismissing the 2000 Petition, concluding that it con-
stituted an improper use of Chapter 13. Mrs. Litton promptly sought
reconsideration of the bankruptcy court’s order, supporting her
6 IN RE: LITTON
request with an affidavit that she jointly executed with her husband.
The affidavit explained the extensive efforts that the Littons had
made, and the various difficulties they had encountered, in seeking to
comply with the 2000 Order.4 On March 30, 2001, the bankruptcy
court denied reconsideration. See In re Litton, 276 B.R. 87, 93
(Bankr. W.D. Va. 2001).
Mrs. Litton appealed the bankruptcy court’s rulings to the district
court for the Western District of Virginia. The district court agreed
that the 2000 Petition was an improper use of Chapter 13, and it
affirmed the bankruptcy court’s dismissal. See Litton, 275 B.R. at
264. Mrs. Litton has appealed the district court’s order to this Court,
and we possess jurisdiction pursuant to 28 U.S.C. § 158(d).
II.
We review "the judgment of a district court sitting in review of a
bankruptcy court de novo, applying the same standards of review that
were applied in the district court. Specifically, we review the bank-
ruptcy court’s factual findings for clear error, while we review ques-
tions of law de novo." In re Biondo, 180 F.3d 126, 130 (4th Cir.
1999). Any mixed questions of law and fact are also reviewed de
novo. Carter Enters. v. Ashland Specialty Co., 257 B.R. 797, 800
(S.D.W. Va. 2001).
III.
A.
The resolution of this appeal turns, first of all, on whether the par-
ties intended the term "modification," as used in the settlement agree-
ment that was incorporated into the 2000 Order, to be interpreted in
accordance with the narrow no-modification provision of § 1322, or
4
In their affidavit, the Littons stated that Mr. Litton had negotiated
with six separate individuals seeking to sell timber, the proceeds of
which were to be used to fund the Initial Payment to Wachovia. The affi-
davit further asserted that the Littons had lost over 70% of their tobacco
crop in 2000, which represented a $15,000 loss of income.
IN RE: LITTON 7
whether they instead intended the term to preclude all modifications,
even those authorized by § 1322.
Under Virginia law, the cardinal rule applied in the construction of
contracts is that the intention of the parties controls.5 Paul v. Paul,
203 S.E.2d 123, 125 (Va. 1974). Where the language in a contract is
unambiguous, it is inappropriate for the court to consider extrinsic
evidence. Great Falls Hardware Co. of Reston v. S. Lakes Vill. Ctr.
Assocs., 380 S.E.2d 642, 643 (Va. 1989). The Great Falls court noted
that "an unambiguous document should be given its plain meaning."
Id.; see also Ross v. Craw, 343 S.E.2d 312, 316 (Va. 1986) (noting
that contracts must be construed as written).
It is unclear whether the Littons and Wachovia intended the no-
modification provision of the 2000 Order to be interpreted narrowly
or broadly, i.e., to proscribe only certain modifications or to proscribe
all modifications. A contract is ambiguous when the language
employed therein can be "understood in more than one way or refers
to two or more things at the same time." Douglas v. Hammett, 507
S.E.2d 98, 101 (Va. 1998). Because the prohibition on "modification"
contained in the 2000 Order is susceptible to more than one meaning,
it is ambiguous. We must, therefore, turn to the subject matter of the
2000 Order, and to the circumstances surrounding its entry, in an
effort to discern the parties’ true intent. See Monterey Corp. v. Hart,
224 S.E.2d 142, 147 (Va. 1976).
It is important — indeed, it is controlling — in this context, that
the Littons and Wachovia agreed on the terms of the 2000 Order to
settle a pending bankruptcy case (the 1997 Petition), and to augment
the settlement terms of an earlier bankruptcy case (the 1992 Petition).
Accordingly, we must conclude that the Littons and Wachovia
intended the term "modification," as used in the 2000 Order, to be
consistent with the meaning contemplated by § 1322 of the Bank-
5
We apply Virginia law in interpreting the 2000 Order because it was
agreed to by the Littons and Wachovia in Virginia. See Woodson v.
Celina Mut. Ins. Co., 177 S.E.2d 610, 613 (Va. 1970) ("The nature,
validity and interpretation of contracts are governed by the law of the
place where made.").
8 IN RE: LITTON
6
ruptcy Code. Therefore, we must assess the extent and breadth of the
no-modification provision of § 1322(b)(2).
B.
On appeal, Wachovia’s primary contention in support of the bank-
ruptcy court’s dismissal of the 2000 Petition is that the Plan proposes
a prohibited modification. By contrast, Mrs. Litton maintains that the
Plan constitutes a permissible cure under § 1322(b)(5), and that the
2000 Petition should not have been dismissed. In affirming the bank-
ruptcy court’s dismissal of the 2000 Petition, the district court con-
cluded that, because the 2000 Order contained its no-modification
provision, the Plan’s proposed alterations of the 2000 Order would be
impermissible. See In re Litton, 275 B.R. at 264.
Because the Littons’ debt to Wachovia is secured by an interest in
the Littons’ primary residence, § 1322 would ordinarily prohibit a
modification of the 2000 Order. Nevertheless, a separate provision of
the same statute, § 1322(b)(5), provides that the Littons are entitled
to cure any default of their obligations relating to the debt on their
principal residence.7 We must therefore resolve whether the Plan
6
Because the 2000 Order does not contain a provision expressly pro-
hibiting the Littons from attempting to "cure" a default, we are not pre-
sented with, nor do we take any position on, the question of whether such
a prohibition would be valid and enforceable. The parties, by their settle-
ment agreement, merely prohibited "modification" of the 2000 Order,
and we limit our inquiry to the interpretations accorded to the concepts
of prohibited "modifications" and permissible "cures" under § 1322.
7
The dissent disputes the applicability of this statutory cure provision.
Specifically, the dissent contends that because "the final balloon payment
on Wachovia’s mortgage was due on January 30, 2000[,]. . . Mrs. Litton
cannot rely upon § 1322(b)(5) to authorize any cure in this case." Post
at 18. We must respectfully disagree. While it is true that the cure provi-
sion applies only to secured claims that have yet fully to mature, that
restriction presents no impediment to a cure in the case at hand. The
2000 Order, and not the original mortgage, governed the relationship
between the Littons and Wachovia. The terms of that Order included the
possibility of a repayment period that would extend to 2005, and those
terms made no provision for a balloon payment upon default of the Initial
Payment. Thus, under the 2000 Order, Wachovia’s claim would not fully
mature prior to the date of the final payment under the Plan, and the cure
provision of § 1322(b)(5) remains applicable.
IN RE: LITTON 9
seeks to "modify" the 2000 Order or, alternatively, whether it seeks
to "cure" the Littons’ default. In so doing, we must understand the
interpretations accorded to the concepts of "modification" and "cure"
in Chapter 13 jurisprudence.
1.
The bankruptcy courts have consistently interpreted the no-
modification provision of § 1322(b)(2) to prohibit any fundamental
alteration in a debtor’s obligations, e.g., lowering monthly payments,
converting a variable interest rate to a fixed interest rate, or extending
the repayment term of a note. See, e.g., In re Schum, 112 B.R. 159,
161-62 (Bankr. N.D. Tex. 1990) (concluding that plan was impermis-
sible modification because it proposed to reduce monthly payments
and secured valuation). In In re Gwinn, 34 B.R. 936, 944-45 (Bankr.
S.D. Ohio 1983), the court approved a plan as a permissible cure
under § 1322(b)(5), because the plan did not propose to lower
monthly payments, extend the repayment period, or make the obliga-
tion conditional. It instead sought only to reinstate the original con-
tract with a minor delay in payment. Id.; see also In re Cooper, 98
B.R. 294 (Bankr. W.D. Mich. 1989) (finding impermissible modifica-
tion where plan proposed new payment schedule). Along similar
lines, another bankruptcy court concluded that confirmation of a
Chapter 13 plan would have constituted an impermissible modifica-
tion because the plan proposed to alter fundamental aspects of the
debtor’s obligations, i.e., the nature and rate of interest, and the matu-
rity features of the loan. In re Coffey, 52 B.R. 54, 55 (Bankr. D.N.H.
1985). As these decisions have emphasized, § 1322(b)(2) prohibits
modifications that would alter at least one fundamental aspect of a
claim.
2.
Conversely, a "cure" merely reinstates a debt to its pre-default posi-
tion, or it returns the debtor and creditor to their respective positions
before the default. In Landmark Financial Services v. Hall, 918 F.2d
1150 (4th Cir. 1990), we had occasion to assess the meaning of the
term "cure," as it is used in § 1322(b)(5). In that decision, Judge Hall
determined that "a cure reinstates the original pre-bankruptcy agree-
ment of the parties. . . [and] is not a modification of the [creditor’s]
10 IN RE: LITTON
rights. Cure by its very nature assumes a regime where debtors rein-
state defaulted debt contracts in accordance with the conditions of
their contracts." Id. at 1154 (emphasis added and internal citations
omitted).
Our sister circuits have taken a similar view of the use of the term
"cure" in bankruptcy proceedings. For example, the Second Circuit
has observed that, "[c]uring a default commonly means taking care of
the triggering event and returning to pre-default conditions." DiPierro
v. Taddeo, 685 F.2d 24, 26-27 (2d Cir. 1982). The DiPierro court
noted that "[w]e do not read ‘curing defaults’ under (b)(3) or ‘curing
defaults and maintaining payments’ under (b)(5) to be modifications
of claims." Id. at 27.
The Seventh Circuit has given a similar meaning to the term
"cure," as it is used in the Bankruptcy Code. It observed that "[t]he
terms ‘modify’ and ‘cure’ are nowhere defined in the Bankruptcy
Code. However, it is clear that Congress intended ‘cure’ to mean
something different from ‘modify.’" In the Matter of Clark, 738 F.2d
869, 871-72 (7th Cir. 1984). Significantly, the Clark court also
observed that, "[o]rdinarily, the means by which one cures a default
is by paying all amounts due and owing . . . . Thus, the plain meaning
of ‘cure,’ as used in § 1322(b)(3) and (5), is to remedy or rectify the
default and restore matters to the status quo ante." Id. at 872 (empha-
sis added); see also In re Metz, 820 F.2d 1495, 1497 (9th Cir. 1987)
(interpreting "cure" provisions of Chapter 13 as permitting "the debtor
to ‘cure’ (i.e., pay or bring current) arrearages on the debt and thereby
reinstate the debt"). Given these definitions and interpretations of the
terms "modify" and "cure," as they have been used in bankruptcy pro-
ceedings, we next examine whether the Plan would fundamentally
alter the terms of the 2000 Order.
C.
The 2000 Petition was filed on November 21, 2000, when the Lit-
tons’ only default, under the terms of the 2000 Order, was their failure
to make the Initial Payment. By providing for terms of payment virtu-
ally identical to those required by the 2000 Order, the Plan simply
sought to return the 2000 Order to its pre-default condition. See Land-
mark, 918 F.2d at 1154 (noting that cure reinstates defaulted debt
IN RE: LITTON 11
contract to its original terms). It proposed that Mrs. Litton pay all
arrearages and maintain all payments during the life of the Plan. It did
not propose the reduction of any installment payments or of the
amounts due to Wachovia under the 2000 Order; it did not propose
an extension of the final maturity date on the Littons’ debt to
Wachovia; and it did not propose an alteration of any other terms of
the 2000 Order. 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." Clark, 738 F.2d.
at 872.8
D.
Finally, we briefly assess the district court’s alternate bases for
affirming the dismissal of the 2000 Petition. First, the court reasoned
that, because the 2000 Order provided for certain remedies —
namely, foreclosure — in the event of the Littons’ default, the Littons
were precluded from altering the terms of the 2000 Order by filing for
bankruptcy. Contrary to this reasoning, Wachovia’s right to institute
8
The dissent maintains that Mrs. Litton’s proposed Chapter 13 plan
"simply is not a cure" because the Plan "did propose an extension of the
final maturity date of the Littons’ debt to Wachovia, from January 2000
to March 2005. And confirmation of Mrs. Litton’s plan will place
Wachovia in a worse position than it was in under the 2000 Agreement:
Wachovia will lose entirely the benefit of holding a matured mortgage,
and it will be forced to undertake additional financing obligations on
terms more favorable to Mrs. Litton." Post at 17 (emphasis in original).
This critique misses its mark, however, because under the terms of the
2000 Order, Wachovia did not hold a matured mortgage: the Order
expressly contemplates a repayment period extending to 2005. Thus,
rather than depriving Wachovia of "the benefit of holding a matured
mortgage," the Plan merely restores the parties to their respective,
bargained-for positions under the 2000 Agreement. And while the Plan
does effect this restoration without requiring that the Littons furnish
additional consideration to Wachovia, such is merely the consequence of
Congress’s decision to place certain debtor-friendly provisions into the
Bankruptcy Code: § 1322(b)(5) does not require that the debtor furnish
consideration in exchange for a cure.
12 IN RE: LITTON
foreclosure proceedings is subject to the provisions of the Bankruptcy
Code that permit a debtor to file a bankruptcy petition up to the time
of a foreclosure sale. See 11 U.S.C. § 1322(c)(1). Because the Bank-
ruptcy Code provides the framework within which a creditor may
assert contractual remedies in the event of a default, the terms of the
2000 Order do not, of their own accord, preclude Mrs. Litton from fil-
ing the 2000 Petition and proposing to cure her default to Wachovia.
Second, the court concluded that, because the Littons did not estab-
lish that they had experienced an unforeseen change in circumstances,
the dismissal of the 2000 Petition was warranted.9 A change in cir-
cumstances, foreseen or unforeseen, is but one of many factors a court
should consider when assessing whether a Chapter 13 petition or plan
of reorganization has been filed in "good faith"; it does not constitute
an independent test for whether a petition should be dismissed. See
Neufeld v. Freeman, 794 F.2d 149, 152 (4th Cir. 1986). Because the
district court agreed with the bankruptcy court’s finding that the 2000
Petition had been filed in good faith, In re Litton, 275 B.R. at 263,
that petition should not have been dismissed simply because Mrs. Lit-
ton had failed to demonstrate an unforeseen change in circumstances.10
In sum, the 2000 Petition was filed in good faith and it proposed
a permissible cure. In such circumstances, Mrs. Litton was not pre-
9
In requiring Mrs. Litton to establish an "unforeseeable" change in cir-
cumstances, the district court appeared to rely on the principle that a con-
firmed Chapter 13 plan may not be modified without establishing that the
debtor experienced a substantial and unanticipated change in circum-
stances after confirmation of his plan. See 11 U.S.C. § 1329; In re James,
260 B.R. 368, 374 (Bankr. E.D.N.C. 2001). The unforeseen change-in-
circumstances requirement does not control in this matter, however,
because Mrs. Litton does not seek to modify a confirmed plan. Rather,
she seeks to cure a default.
10
The district court also sought to justify its dismissal on the basis of
policy concerns, namely, that confirmation of the Plan would discourage
settlements between lenders and debtors. Such policy concerns, however,
do not constitute independent "causes" warranting dismissal. 11 U.S.C.
§ 1307(c). In any event, as discussed above, the Plan does not seek to
modify the 2000 Order; it seeks to cure arrearages. Therefore, confirma-
tion of Mrs. Litton’s Plan will not place Wachovia in any worse position
than it was in under the 2000 Order.
IN RE: LITTON 13
cluded from availing herself of the protections afforded to Chapter 13
debtors by the Bankruptcy Code.
IV.
Pursuant to the foregoing, we conclude that the bankruptcy court
erred in dismissing the 2000 Petition. Accordingly, we vacate the dis-
trict court’s dismissal and direct that it remand Mrs. Litton’s petition
to the bankruptcy court for further proceedings.
VACATED AND REMANDED WITH DIRECTIONS
SHEDD, Circuit Judge, dissenting:
Anna Litton’s proposed Chapter 13 plan was a modification of
Wachovia’s rights, not a simple cure of a default. For this reason, the
bankruptcy court was well within its authority to find that Mrs. Litton
had violated the terms of the court’s settlement order and to dismiss
her Chapter 13 petition. The bankruptcy court (and the district court)
properly recognized the crucial fact in this case, that Wachovia’s
mortgage had already matured before Mrs. Litton missed the payment
called for by the settlement order. Thus, Mrs. Litton’s proposed plan
required Wachovia to extend the term of its already matured mort-
gage. This was a modification of Wachovia’s rights, and it was not
permissible under the Bankruptcy Code. I respectfully dissent.
I.
Wachovia’s mortgage on Mrs. Litton’s property matured (at the lat-
est) on January 31, 2000. In March 2000, Wachovia entered into a
settlement with Mrs. Litton to dispose of her first Chapter 13 case.
According to the settlement, the Littons would make payments of
$10,000 and $55,000 to Wachovia. If the Littons made these pay-
ments by June 30, 2000, then — and only then — Wachovia would
restructure the mortgage, re-amortizing the remaining balance using
a 15-year term and the residential mortgage interest rate afforded by
Wachovia on June 30, 2000. Under this new arrangement, the Littons
would make annual payments of at least $10,000, with the entire obli-
gation to mature by balloon payment on March 3, 2005, or one year
14 IN RE: LITTON
after construction of improvements to Exit 17 on Interstate 81, which-
ever first occurred. The settlement further provided that if the Littons
failed to make the scheduled payments by June 30, 2000, then
Wachovia would be entitled to foreclose the property according to the
underlying mortgage instruments. In other words, the parties agreed
that Mrs. Litton’s payment of $10,000 and $55,000 by June 30, 2000
was a condition precedent to further financing by Wachovia on new
terms. At the parties’ invitation, the bankruptcy court entered an
Agreed Order memorializing the settlement.
Wachovia initiated foreclosure proceedings when Mrs. Litton
failed to make the scheduled payment of $55,000 by June 30, 2000.
Shortly before the foreclosure, Mrs. Litton filed the instant Chapter
13 petition and proposed a plan whereby she would "catch up in
arrearages in payments to Wachovia Bank ($55,000) . . . within 30
days, and . . . make regular payments as called for by agreement."
The bankruptcy court dismissed Mrs. Litton’s petition, ruling that
her proposed plan violated the terms of the Agreed Order because that
plan proposed to "make a new agreement between the parties directly
contrary to the provisions of their original agreement." It was impor-
tant to the bankruptcy court — as it should be to this Court — that
"[p]rior to the making of such agreement the full balance owing on
the note secured by the deed of trust was already due and payable."
II.
The majority correctly recognizes that the outcome of this appeal
turns on the characterization of Mrs. Litton’s proposed Chapter 13
plan as a modification or a cure.1 Modification and cure are distinct
1
I note, however, my disagreement with the majority’s analysis of this
issue as a matter of contract interpretation. The bankruptcy court did not
dismiss Mrs. Litton’s Chapter 13 petition for failure to comply with a
contractual obligation; rather, the dismissal was premised on Mrs. Lit-
ton’s violation of the bankruptcy court’s order memorializing a settle-
ment. The bankruptcy court was authorized to interpret its own order,
subject to the rule that its interpretation must be consistent with the
Bankruptcy Code. See 11 U.S.C. § 105(a) (authorizing a bankruptcy
court to "issue any order, process, or judgment necessary or appropriate
IN RE: LITTON 15
concepts in the Bankruptcy Code. Landmark Fin. Servs. v. Hall, 918
F.2d 1150, 1154 (4th Cir. 1990); Matter of Clark, 738 F.2d 869, 871-
72 (7th Cir. 1984); In re Taddeo, 685 F.2d 24, 27 (2d Cir. 1982).
11 U.S.C. § 1322(b)(2) provides that a chapter 13 plan may "mod-
ify the rights of holders of secured claims, other than a claim secured
by a security interest in real property that is the debtor’s principal res-
idence." This provision "allows modification of the rights of both
secured and unsecured creditors, subject to special protection for
creditors whose claims are secured only by a lien on the debtor’s
home." Nobleman v. American Sav. Bank, 508 U.S. 324, 327 (1993).
By virtue of its mortgage contract with Mrs. Litton, Wachovia is "in-
disputably the holder of a claim secured by a lien on [Mrs. Litton’s]
home." Id. at 328. Wachovia’s rights as mortgagee are those that are
"reflected in the relevant mortgage instruments" and were "bargained
for by the mortgagor and the mortgagee." Id. at 329-30. Under the
deed of trust at issue in this case, Wachovia retained the right to fore-
close Mrs. Litton’s property once the mortgage matured. Under
§ 1322(b)(2), Mrs. Litton could not "modify" Wachovia’s right to
foreclose upon maturity of the debt.
The Bankruptcy Code does not define the term "modify." Other
courts have held that a plan impermissibly modifies a mortgagee’s
rights where (1) it seeks to delay payment of an unaccelerated debt
that has naturally matured prior to the filing of the case, see Matter
of Cooper, 98 B.R. 294, 298-99 (Bankr. W.D. Mich. 1989); (2) it
seeks to bifurcate treatment of the amount due under a mortgage into
secured and unsecured claims, see In re Schum, 112 B.R. 159, 162
(Bankr. N.D. Tex. 1990); or (3) it seeks to convert a demand loan
obligation with a variable interest rate into a term loan with a fixed
interest rate, see In re Coffey, 52 B.R. 54, 55 (Bankr. D.N.H. 1985).
Indeed, the majority is quite correct that an attempt to "alter funda-
to carry out the provisions" of the Bankruptcy Code). Thus, it is neces-
sary to determine whether Mrs. Litton’s proposed plan amounted to a
modification or a cure in order to determine whether the bankruptcy
court’s interpretation of its own order comports with the substantive pro-
visions of the Bankruptcy Code, not to divine the meaning of an ambigu-
ous contract term.
16 IN RE: LITTON
mental aspects of the debtor’s obligations" is a modification forbidden
by § 1322(b)(2).
Cure under § 1322(b)(5) is different. While a modification imper-
missibly alters the debtor’s obligations with respect to a mortgage —
depriving the mortgagee of its original bargain — a cure simply rein-
states the existing mortgage agreement as if the debtor had never
defaulted. Landmark Fin. Servs., 918 F.2d at 1154; Matter of Metz,
820 F.2d 1495, 1497 (9th Cir. 1987) (stating that a cure "simply rein-
states the original debt after correcting the arrearages"). This Court
has noted that "[c]ure by its very nature assumes a regime where debt-
ors reinstate defaulted debt contracts in accordance with the condi-
tions of their contracts." Landmark Fin. Servs., 918 F.2d at 1154(internal quotations omitted). In other words, "[c]uring a default com-
monly means taking care of the triggering event and returning to pre-
default conditions." In re Taddeo, 685 F.2d at 26-27. Accord In re
Hurt, 158 B.R. 154, 159-60 (9th Cir. BAP 1993) (stating that a cure
restores the debtor’s mortgage "to its original state before the default
regardless of what action the mortgagee has taken"); Matter of Clark,
738 F.2d at 872 ("[A]s the term relates to defaults, ‘cure’ means to
restore matters to the status quo ante.").
III.
Mrs. Litton’s proposed plan was not a cure because it would not
merely restore the status quo ante; to the contrary, it would re-write
the most basic terms of the mortgage. Under the status quo ante,
Wachovia held a matured mortgage. Although Wachovia offered Mrs.
Litton an opportunity to obtain further financing and avoid foreclo-
sure, such financing was available only if Mrs. Litton made the
$55,000 payment by June 30, 2000. Thus, on the date of the default
— June 30, 2000 — Wachovia was entitled to foreclose unless Mrs.
Litton satisfied the condition precedent of payment.
Rather than restoring the status quo ante, Mrs. Litton’s proposed
plan would create a new mortgage altogether. Under her plan, Mrs.
Litton would make a payment of $55,000 (the payment she had
missed) to Wachovia; in return, Wachovia would continue to finance
her property on the new terms outlined in the settlement agreement.
Presumably, Mrs. Litton would be entitled to re-amortization of the
IN RE: LITTON 17
balance of her debt using a 15-year term and the residential mortgage
rates prevailing on June 30, 2000. She would be entitled to a payment
schedule calling for annual payments of $10,000 with the entire obli-
gation to mature in March 2005. These are new terms — more favor-
able to Mrs. Litton — for which Wachovia received no consideration
at all. In short, Mrs. Litton’s plan would require Wachovia to continue
financing the purchase of her home under terms other than the terms
of the mortgage instrument in effect before her default.2
Contrary to the majority’s assertions, Mrs. Litton’s proposed Chap-
ter 13 plan did propose an extension of the final maturity date of the
Littons’ debt to Wachovia, from January 2000 to March 2005. And
confirmation of Mrs. Litton’s plan will place Wachovia in a worse
position than it was in under the 2000 agreement: Wachovia will lose
entirely the benefit of holding a matured mortgage, and it will be
forced to undertake additional financing obligations on terms more
favorable to Mrs. Litton. This plan simply is not a cure.
Even if the majority were correct that Mrs. Litton’s proposed plan
amounts to a cure, the relevant cure provision cannot save Mrs. Litton
in this case. Section 1322(b)(5) permits cure only with respect to "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." Thus,
"if a large final balloon payment is due on a debt prior to the termina-
tion of the plan, section 1322(b)(5) may not be utilized." 8 Collier on
Bankruptcy § 1322.09[2], at 1322-30 (15th ed. rev. 2003). The final
balloon payment on Wachovia’s mortgage was due on January 30,
2
The majority must presume that the new terms described in the settle-
ment will govern the mortgage if Mrs. Litton makes the payments called
for in her proposed plan. Counsel for Mrs. Litton did not even accept that
proposition, representing at oral argument that Mrs. Litton would insist
upon some — but not all — of the terms contained in the settlement. For
instance, counsel stated that Mrs. Litton would not take the benefit of the
new rate or the 15-year re-amortization term, but that she would be
bound to make payments of at least $10,000 each year. Counsel’s careful
refusal to say that the mortgage would be governed by precisely the same
terms that governed the mortgage prior to the default undermines the
contention that this proposed plan is merely a cure that restores the status
quo ante.
18 IN RE: LITTON
2000 — nine months before Mrs. Litton even proposed her plan.
Accordingly, Mrs. Litton cannot rely upon § 1322(b)(5) to authorize
any cure in this case.3
IV.
The bankruptcy court was exactly right: "Wachovia’s agreement to
restructure and extend significantly the payment terms to the benefit
of the Littons was contingent upon their making a $55,000 payment
by June 30. When the Littons failed to do so, Wachovia was relieved
of any obligation to continue to hold open these favorable terms until
the Littons could manage to take advantage of them." (Emphasis
added.) Mrs. Litton’s proposed plan attempts just the kind of modifi-
cation that the Bankruptcy Code forbids and that Mrs. Litton herself
agreed not to make. The bankruptcy court was well within its discre-
tion to interpret its own order, in accordance with the Bankruptcy
Code, to dismiss Mrs. Litton’s latest Chapter 13 petition. I would
affirm that judgment.
3
The majority opinion concludes that § 1322(b)(5) applies in this case
because the Agreed Order contemplated maturity of the mortgage obliga-
tion in 2005. The majority opinion misreads the Agreed Order. The
Agreed Order, memorializing the settlement reached by the parties,
stated that Wachovia would continue financing on new terms described
in the order "[i]n the event" that Mrs. Litton made the scheduled pay-
ments on or before June 30, 2000. And "[i]n the event" that Mrs. Litton
failed to make this payment, Wachovia would "be entitled to proceed to
enforce its non-bankruptcy law rights and remedies with respect to its
collateral pursuant to" the existing mortgage instruments, which provided
for a January 2000 maturity date. It is clear from these plain terms that
Wachovia still held its matured mortgage and that the effect of the order
was merely to offer Mrs. Litton a last chance to pay to obtain future
financing. When she failed to make payment by June 30, 2000, there was
no new financing arrangement in place and Wachovia was entitled to
"proceed to enforce its non-bankruptcy rights and remedies" just as the
Agreed Order provided.