Anderson v. Hancock

820 F.3d 670 (4th Cir. 2016)

Purchase the Printed Copy at bsmsphd.com

Nature of the Case

To access this section all you need to do is click here and register.

Facts

Anderson, Jr., and Jernigan (Ps) purchased a home from Wayne and Tina Hancock (Ds). The purchase was financed by a $255,000 loan from Ds. In exchange for the loan, Ps granted Ds a deed of trust on the property and executed a promissory note requiring monthly payments in the amount of $1,368.90 a rate of five percent over a term of thirty years. The note provided states that: In the event borrower has not paid their monthly obligation within 30 days of the due date, then borrower shall be in default. Upon that occurrence, the borrower's interest rate shall increase to Seven percent (7%) for the remaining term of the loan until paid in full. The increase in interest rate shall result in a new payment amount of $1696.52, which shall be due and payable monthly according to the terms stated herein, save and except the increase in rate and payment. Ds could also accelerate the entire mortgage or pursue any other rights available to a lender under North Carolina Law. Ps failed to make a payment. Ds notified Ps that they were in default and that future payments should reflect the increased seven percent rate of interest provided for in the note. Ps responded asking for a chance to become current on arrears. They failed to make any further payments. A few months after the increase to 7%. Ds initiated foreclosure proceedings. Ps filed Chapter 13 invoking the automatic stay and halting foreclosure proceedings. Ps filed a proposed bankruptcy plan contemporaneous with their petition. Ps proposed to pay off prepetition arrears over a period of sixty months. Arrears were calculated using a five percent interest rate. The plan also reinstated the original maturity date of the loan and proposed that Ps again make post-petition payments at a five percent interest rate. Ds objected and wanted to enforce the higher rate as per the note. The court held that the change to the default rate of interest was not permitted under §1322(b)(2). That section prevents plans from 'modify[ing]' the rights of creditors whose interests are secured by debtors' principal residences. The court held that the increased rate of interest was not a consequence of default that bankruptcy could 'cure' consistent with the allowances afforded to bankruptcy plans in § 1322(b)(3) and (b)(5). Ps appealed and the court held that setting aside the seven percent default rate of interest would be a modification that is prohibited by statute. But it held that acceleration and foreclosure was a 'disjunctive alternative remedy' to the default rate of interest and that once Ds accelerated the loan, the rate of interest reverted back to five percent. Ps appealed.