Commercial Fed. Mtge. v. Smith

United States Court of Appeals,

Eleventh Circuit.

No. 94-6802.

In re Bruce Craig SMITH, Debtor.

COMMERCIAL FEDERAL MORTGAGE CORPORATION, Plaintiff-Appellant,

v.

Bruce Craig SMITH, Defendant-Appellee.

David P. Rogers, Jr., Chapter 13 Standing Trustee, Defendant.

June 26, 1996.

Appeal from the United States District Court for the Northern
District of Alabama. (No. CV 94-H-1016-S), James Hughes Hancock,
Judge.

Before BIRCH and CARNES, Circuit Judges, and SIMONS*, Senior
District Judge.

BIRCH, Circuit Judge:

This case focuses on whether a debtor, whose primary residence

has been sold in a prepetition foreclosure proceeding, but who has

retained his statutory right of redemption under Alabama law, can

cure his default under the mortgage and redeem his property after

the foreclosure sale by paying arrearage through his Chapter 13

plan and maintaining regular mortgage payments outside the plan.

Both the district court and bankruptcy court found that the

debtor's attempt to reinstate his mortgage through a Chapter 13

plan was proper. We REVERSE. 170 B.R. 708.

I. BACKGROUND

Appellant, Commercial Federal Mortgage Corporation

("Commercial Federal"), held a mortgage on debtor Bruce Craig

*
Honorable Charles E. Simons, Senior U.S. District Judge for
the District of South Carolina, sitting by designation.
 1
Smith's principal residence in the amount of $84,939. Smith

defaulted under the terms of the note and mortgage when he failed

to pay the monthly installments when they were due. On October 18,

1993, Commercial Federal conducted a valid foreclosure sale and

purchased Smith's property. Commercial Federal then sent Smith a

letter notifying him that he had ten days to vacate the property,

as required under Alabama law. Smith vacated the property within

that time. Thus he preserved his statutory right of redemption

under Alabama Code § 6-5-251 (1993). On December 29, 1993, Smith

filed a voluntary Chapter 13 bankruptcy proceeding. 11 U.S.C. §§

1301-1330 (1993). In his Chapter 13 plan, Smith proposed to

reinstate the foreclosed mortgage by paying the prepetition

arrearage through the plan while maintaining regular monthly

payments on the debt directly to Commercial Federal. The filing of

the Chapter 13 petition gave rise to an automatic stay of

Commercial Federal's foreclosure proceeding. 11 U.S.C. § 1301. On

January 13, 1994, Commercial Federal moved the bankruptcy court for

relief from the stay in order to complete its eviction proceedings.

The bankruptcy court denied Commercial Federal's motion and held

that Smith had retained his statutory right of redemption under

Alabama law, and that the right of redemption could be exercised

according to Smith's Chapter 13 plan. The bankruptcy court based

its decision on In re Ragsdale, 155 B.R. 578 (Bankr.N.D.Ala.1993).

Commercial Federal appealed the decision of the bankruptcy

court, and argued that Smith lost his right to cure his default on

1
This case originally was consolidated with In re Linda F.
Shaw, 94-6803. We grated Shaw's consent motion to dismiss her
appeal.
the mortgage on the date of the foreclosure sale of his property.

The district court affirmed the decision of the bankruptcy court,

and found that, although other circuits have held that the date of

the foreclosure sale is the ultimate "cut-off" date on which the

statutory right of redemption is lost, cases in the Eleventh

Circuit support the principle outlined in In re Ragsdale, "that a

debtor could cure his prepetition default on his home mortgage by

making payments through the Chapter 13 trustee, and simultaneously

maintain his regular mortgage payments directly to the claimant,

notwithstanding the fact that the prepetition default had already

resulted in a foreclosure sale." Commercial Fed. Mortgage Corp. v.

Smith, 170 B.R. 708, 710 (N.D.Ala.1994). Commercial Federal

appealed the district court's ruling.

II. ANALYSIS

The issue presented by the parties is whether 11 U.S.C. §

1322(b) permits a debtor to exercise his state statutory right of

redemption in a Chapter 13 plan by "curing" a default and

"reinstating" a mortgage after a valid foreclosure sale of his

property. We review the conclusions of law of the bankruptcy court

and the district court de novo. In re Sublett, 895 F.2d 1381, 1383

(11th Cir.1990). The facts of this case are not in dispute.

The property rights of a debtor in a bankruptcy estate are

defined by state law. In Alabama, a mortgagee holds legal title to

the real property subject to the mortgagor's equitable right of

redemption. Ala.Code § 35-10-26 (1993). Alabama foreclosure law

provides that, upon a foreclosure sale, a mortgagor's equitable

right of redemption ends. FDIC v. Morrison, 747 F.2d 610, 613
(11th Cir.1984), cert. denied, 474 U.S. 1019, 106 S.Ct. 568, 88

L.Ed.2d 553 (1985). "[F]oreclosure of a mortgage extinguishes the

debt to the amount of the purchase price, if that amount is less

than the debt, or extinguishes the entire debt if the purchase

price is more than that amount." Davis v. Huntsville Prod. Credit

Ass'n, 481 So.2d 1103, 1105 (Ala.1985). The purchaser at the

foreclosure sale then holds legal title to the property, subject to

the mortgagor's one year statutory right of redemption. Ala.Code

§ 6-5-248(a) & (b).

The only way to exercise a statutory right of redemption under

Alabama law is for the mortgagor to make a lump sum cash payment of

the entire purchase price paid at the foreclosure sale, plus

interest, taxes, and "all other lawful charges." Ala.Code § 6-5-

253(a). Smith claims that this provision of Alabama law does not

prevent him from reinstating his mortgage through a Chapter 13

plan.

Smith first argues that he has a property interest in his

Alabama statutory right of redemption, which became property of the

bankruptcy estate. Smith claims that the property interest should

be included in the bankruptcy estate pursuant to 11 U.S.C. §

541(a).2 Although section 6-5-250 of the Alabama Code

characterizes the statutory right of redemption as a mere personal

privilege and not property or a property right, it is still a right

that becomes property of the bankruptcy estate under the broad

2
Section 541 provides that a bankruptcy estate is comprised
of, among other types of property, "all legal or equitable
interest of the debtor in property as of the commencement of the
case." 11 U.S.C. § 541(a)(1)(1988).
definition provided in Bankruptcy Code section 541. See Wragg v.

Federal Land Bank, 317 U.S. 325, 63 S.Ct. 273, 87 L.Ed. 300 (1943);

In re Saylors, 869 F.2d 1434, 1437 (11th Cir.1989).

Section 1322 of the Bankruptcy Code provides that a Chapter 13

plan "may ... provide for the curing or waiving of any default."

11 U.S.C. § 1322(b)(3). The plan also "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 U.S.C. § 1322(b)(2) (emphasis added). Under
section 1322(b)(5), however, a plan "may ... provide for the curing

of any default within a reasonable time and maintenance of payments

while the case is pending on 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." 11 U.S.C. § 1322(b)(5).3

3
In 1994, section 1322 was amended. The amended section
1322 provides in pertinent part that:

(c) Notwithstanding subsection (b)(2) and applicable
nonbankruptcy law—

(1) a default with respect to, or that gave rise
to, a lien on the debtor's principal residence may be
cured under paragraph (3) or (5) of subsection (b)
until such residence is sold at a foreclosure sale that
is conducted in accordance with applicable
nonbankruptcy law.

11 U.S.C. § 1322(c)(1) (Supp.1996) (emphasis added).

The 1994 amendments do not apply with respect to cases
commenced before October 22, 1994. Smith filed for
bankruptcy on December 29, 1993, and, therefore, this
subsection is not applicable to his case. It should be
noted, however, that if we were to apply the amended version
of section 1322, the foreclosure sale of Smith's property
most likely would have cut off his ability to cure the
default on his mortgage. See In re Sims, 185 B.R. 853, 867
(Bankr.N.D.Ala.1995) (holding that the amended section
1322(c)(1) unambiguously prohibits the debtor from
 Smith concludes that "[i]t logically follows that the debtor

should be able to exercise the right of redemption through his

Chapter 13 plan." Brief of Appellee at 11 (footnote omitted).

Smith argues that the reasoning of In re Ragsdale, 155 B.R. 578,

should be followed in this case. Commercial Federal claims that

the analysis of the bankruptcy court in In re McKinney, 174 B.R.

330 (Bankr.S.D.Ala.1994), is the proper approach.

The Ragsdales were borrowers under a promissory note, secured

by a mortgage on their residence. In re Ragsdale, 155 B.R. at 580.

The Resolution Trust Corporation ("RTC") conducted a foreclosure

sale of the property and was the successful bidder at the sale.

Id. Nine days later, the Ragsdales filed a petition under Chapter

13 of the Bankruptcy Code. Id. The Ragsdales' Chapter 13 plan

included a proposal "to cure the default on the mortgage

indebtedness to the RTC by paying the arrearage through the Chapter

13 Trustee, and to pay post-petition installments directly to the

RTC." Id. The RTC objected to the Ragsdales' proposed plan and

claimed that, under Section 1322(b)(3), the Ragsdales could not

cure a default in the mortgage, and, under Section 1322(b)(5), the

debt was no longer a "long-term debt." Id. The bankruptcy court

in In re Ragsdale pronounced that it was not persuaded by the

reasoning of the "leading case" that discusses treatment of a

debtor's mortgage in Chapter 13, In re Glenn, 760 F.2d 1428 (6th

Cir.), cert. denied, 474 U.S. 849, 106 S.Ct. 144, 88 L.Ed.2d 119

(1985), and noted that:

reinstating the mortgage under a Chapter 13 plan where there
has been a prepetition foreclosure sale).
 This Court does not view allowing a debtor to utilize Chapter
13 to keep his home and eventually pay the entire debt owed on
it as unleashing a variety of ills on the home mortgage
industry. Nor does this Court feel that allowing a debtor to
cure a default on a home mortgage will "decrease the
attractiveness of home mortgages as investment opportunities,"
as the Sixth Circuit suggests.

In re Ragsdale, 155 B.R. at 583 (quoting In re Glenn, 760 F.2d at

1434) (footnote omitted).

The In re Ragsdale court reasoned that the statutory right of

redemption is a property right that survives the filing of a

bankruptcy petition and, therefore, it may be exercised through a

Chapter 13 plan. Id. at 585. The bankruptcy court then concluded

that the statutory right of redemption need not be exercised under

the Chapter 13 plan "strictly by the terms of state law," but that

it could be "used to bring the debtor's interest into the Chapter

13 plan, where it may be dealt with as an accelerated debt." Id.

at 586. The bankruptcy court further stated that "[t]his Court ...

holds that where a debtor files a Chapter 13 petition following a

foreclosure sale of his residence, he may pay the pre-foreclosure

sale arrearage through the Chapter 13 trustee, while maintaining

payments under the terms of the original contract." Id. at 586.

In In re McKinney, a case with facts nearly identical to those

of In re Ragsdale, the bankruptcy court rejected the In re Ragsdale

court's reasoning and held that:

[A]fter a foreclosure sale occurs, there is no "unsecured or
secured claim on which the last payment is due after the date
on which the final payment under the plan is due." There is
also no "default" to cure or waive. Therefore, there is no
ability to cure and maintain mortgage payments under 11 U.S.C.
§ 1322(b)(3) or (5).

In re McKinney, 174 B.R. at 335. The bankruptcy court determined

that, when the debtor's property was sold at the foreclosure sale,
title passed to the purchaser, and the mortgage was extinguished.

Id. at 338. It stated that because "[s]ection 1322 allows

modifications only to the extent there exists something to

modify[,] [o]nce the debtors' claim to title is extinguished at the

foreclosure sale, § 1322(b) is no longer applicable." Id.

The Sixth Circuit case, In re Glenn, is discussed in both In

re Ragsdale and In re McKinney, and we find its analysis to be

persuasive. In re Glenn, 760 F.2d 1428. In re Glenn was the

consolidation of three appeals, two of which involved debtors who

filed Chapter 13 petitions after their property had been sold at

foreclosure sales but before their statutory redemption periods had

expired. Id. at 1429-30. The Sixth Circuit reasoned as follows:

All courts agree that at some point in the foreclosure
process, the right to cure a default is irretrievably lost;
however, the statute itself provides no clear cut-off point
except that which the courts may see fit to create. The
closer that point of finality is to the beginning of the
process, the greater is the protection accorded the mortgage
holder, and, hence, the more attractive the home mortgage
becomes as an investment. Conversely, the further down the
line the court can reach to protect the debtor from the
consequences of his default, the better the debtor's needs are
met by the Chapter 13 proceedings, and the more attractive
those proceedings become to such debtors.

In re Glenn at 1435 (footnote omitted). The court then drew a

bright-line termination date of the right to cure a default through

a Chapter 13 plan as the date of the sale of the mortgaged

property. Id. at 1435. We agree with the Sixth Circuit's

selection of this termination date and the reasons it articulated

for choosing this date. See id. at 1435-36.4 While Smith retained

4
Several other circuits have reached similar conclusions in
cases where there was a prepetition foreclosure sale. Matter of
Boyd, 11 F.3d 59, 60-61 (5th Cir.) (holding that, under
Mississippi law, a valid foreclosure cuts off all rights to the
his statutory right of redemption after filing his Chapter 13

petition, he cannot modify that right of redemption under a Chapter

13 plan that is filed after a foreclosure sale.

Smith claims that our holding in In re Saylors dictates a

decision in his favor. 869 F.2d 1434. The issue in In re Saylors

was whether a Chapter 13 plan could cure a home mortgage arrearage

when the underlying mortgage debt had been discharged through a

Chapter 7 proceeding. Id. at 1436. We found "that a home mortgage

debt is transformed into a nonrecourse obligation when the debt is

discharged in a chapter 7 case." Id. We held that the rights of

the debtor, including the equitable and statutory rights of

redemption, are not modified upon the receipt of a Chapter 7

discharge. Id. The In re Saylors debtor still retained his

equitable right of redemption, because, although there had been a

Chapter 7 discharge of the debt, there had been no foreclosure

sale. We found that either a statutory or equitable right of

redemption is a property right "sufficient to give a bankruptcy

court jurisdiction over a debtor's home," but we did not hold that

property, including the mortgagor's right of redemption, and,
therefore, a Chapter 13 plan filed after the foreclosure sale
could not include a provision for monthly mortgage payments),
cert. denied, --- U.S. ----, 114 S.Ct. 2103, 128 L.Ed.2d 664
(1994); Justice v. Valley Nat'l Bank, 849 F.2d 1078, 1080 (8th
Cir.1988) (holding that, "[b]ecause a foreclosure sale
extinguishes the mortgage contract[,] ... the provisions of
Chapter 12 relating to the debtor's power to cure defaults and
modify the rights of secured creditors are not applicable after a
foreclosure sale has been held"); Matter of Tynan, 773 F.2d 177,
179 (7th Cir.1985) (rejecting debtor's argument that statutory
redemption period should be tolled until Chapter 13 plan is
completed, and concluding that to do so "would cloud every title
secured through a foreclosure sale due to the possible filing of
a voluntary petition in bankruptcy during the statutory
redemption period").
the bankruptcy court could modify the terms of a statutory right of

redemption, which is what Smith urges us to do in this case. Id.

at 1437.

Furthermore, this case also is distinguishable from our

recent decision, In re Hoggle, 12 F.3d 1008 (11th Cir.1994), where

we concluded that a confirmed Chapter 13 plan could be modified to

allow a debtor to cure a postconfirmation default pursuant to

section 1322(b)(5). Id. at 1012. In In re Hoggle, we found that

the statutory scheme of Chapter 13 was intended to allow

flexibility in an individual's plan to cure defaults, even those

occurring after a Chapter 13 plan has been confirmed. Id. at 1010-

11. The flexibility of a Chapter 13 plan does not, however, extend

to debts that have been satisfied through a foreclosure sale. We

must strike a balance between the rights of a debtor under the

bankruptcy laws and the legitimate economic interest in encouraging

lenders to invest in home mortgages. The line drawn by other

circuits, and now by us in applying Alabama law, is at the

foreclosure sale.5

5
A foreclosure sale may introduce a third party into the
relationship between the mortgagor and mortgagee, a good faith
purchaser. While the good faith purchaser buys the property at
the foreclosure sale with the knowledge that the mortgagor
retains a one-year statutory right of redemption, he does not
purchase with the knowledge that if the mortgagor files for
bankruptcy, the redemption period under a Chapter 13 plan will be
extended, thus further clouding the purchaser's title to the
property. Although this case did not involve a third-party
purchaser, we foresee problems with allowing the interests of
third-party purchasers to be clouded in this way. Cf. In re
Thompson, 894 F.2d 1227, 1230 & n. 6 (10th Cir.1990) (concluding
that "[p]urchase by an independent third party at a foreclosure
sale raises enough additional concerns to justify ending the
right to cure in bankruptcy at that point," but declining to hold
the same when the purchaser at foreclosure is the mortgagee).
 III. CONCLUSION

We are persuaded by the reasoning of In re McKinney and In re

Glenn and hold that, when a debtor files for Chapter 13 bankruptcy

following the foreclosure sale of his property, he can cure the

default through an exercise of his Alabama statutory right of

redemption. This right cannot be modified under a Chapter 13 plan,

and it must be exercised as dictated under Alabama law by making a

lump sum payment within one year of the foreclosure sale that

includes the principal, interest and other charges under the

mortgage. Accordingly, we REVERSE the district court's decision in

this case.