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May a Debtor Cure a Mortgage Default to Which He Is Not a Party Through a Chapter 13 Plan

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This article addresses the situation in which a chapter 13 debtor attempts to cure a default under a mortgage to which the debtor is not a party through his or her chapter 13 plan. This predicament generally arises when the mortgaged property is transferred to the debtor by the mortgagor whether through voluntary transfer, inheritance or by decree of a court, such as any divorce decree. Once such a transfer or assignment occurs, an issue arises when the transferee or assignee files a chapter 13 bankruptcy as to whether the chapter 13 debtor may cure the default of the mortgagor through the debtor’s chapter 13 plan, thereby altering the terms of the mortgage without having assumed the mortgage or without having otherwise obtained the approval of the mortgagee for the transfer.

Case Law Prior to 1991

One of the first cases to grapple with the issue of whether a third-party assignee of a mortgage could cure the assignor’s default through the assignee’s chapter 13 plan was Green v. Arlington Trust Co. (In re Green) 42 B.R. 308 (Bankr. E.D. Pa.). In that case, the bankruptcy court determined that a third-party assignee to which a mortgage was assigned could not cure the default of his assignor in his chapter 13 plan because no debtor-creditor relationship existed and such a relationship is required under §1322 of the Bankruptcy Code. "The general interpretation of §322 of the Bankruptcy Code is to the effect that it has to do with curing of default conditions occurring in a debtor-creditor relationship." Id. at 309. (citations omitted). Likewise, in Jim Walter Homes Inc. v. Kelly (In re Kelly) 67 B.R. 508 (Bankr. S.D. Miss. 1986), it was held that a debtor who received property from her brother could not cure in her chapter 13 plan the pre-petition default of her brother because there was no debtor-creditor relationship and the creditor never accepted her as a debtor. Other cases that have disallowed the curing of an assignor’s pre-petition default by an assignee are In re Wilkinson, 99 B.R. 366 (Bankr. N.D. Ohio 1989) and In re Jones, 98 B.R. 757 (Bankr. N.D. Ohio 1989).

Prior to 1991, the only exception to the general rule that an assignee could not cure an assignor’s default under a mortgage agreement was set out in In re Everhart, 87 B.R. 35 (Bankr. N.D. Ohio 1988). In that case, the court held that based upon principles of equity, a debtor who lacked privity on a mortgage transaction between his parents and the mortgage company could cure the parent’s default on the mortgage note because it was proven that the mortgagee knew of the conveyance of the property from the mortgagors to the debtor, the mortgagees issued payment books in the name of the debtor from whom they received payments over a long period of time and the payments from the debtor totaled over $18,000 against the original mortgage amount of $22,500. Id. at 37-38.

The Johnson Decision

In 1991, the Supreme Court rendered a decision in Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed. 2d 66 (1991), that, on its face, would seem inapplicable to the issue discussed herein. The Johnson case involved a "chapter 20" situation in which a debtor, who was relieved of all personal liability under his mortgage by the discharge in his chapter 7 case, attempted to cure the arrears owing under his mortgage through the reorganization plan in his subsequent chapter 13 case. Specifically, while the creditor, Home State Bank, attempted to foreclose on farm property of the debtor, due to the debtor’s default under a promissory note, the debtor filed a chapter 7 petition. The bankruptcy court then discharged the debtor from personal liability on the promissory note. The bank once again attempted to initiate foreclosure proceedings, but before the foreclosure could take place, the debtor filed a chapter 13 plan, this time listing the bank’s mortgage in the farm property as a claim against his estate. The debtor then proposed to make payments to the bank through the chapter 13 plan equal to the bank’s in rem judgment. The Supreme Court defined the issue in the case as "whether a mortgage lien that secures an obligation for which a debtor’s personal liability has been discharged in a chapter 7 liquidation is a ‘claim’ subject to inclusion in an approved chapter 13 reorganization plan." 501 U.S. at ____, 111 S.Ct. at 2150, 115 L.Ed. 2d at _____.

The Supreme Court began in Johnson its analysis by looking to the definition of "claim" pursuant to §101(5) of the Bankruptcy Code, which provides as follows:

‘[C]laim’ means –

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured; or

(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured.

11 U.S.C.A. §101(5)(Supp. 1991)

The Supreme Court in Johnson noted that Congress intended in §101(5) to "adopt the broadest available definition of ‘claim’" and that "right to payment [means] nothing more nor less than an enforceable obligation...." See Johnson, 501 U.S. at ____, 111 S.Ct. at 2154, 115 L. Ed. at ____ (citing Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. __, __, __, 110 S.Ct. 2131, __, __, 109 L.Ed. 2d 588 (1990)). On this basis and on the basis of the legislative history and background of the Code, the Supreme Court in Johnson concluded:

Applying the teachings of Davenport, we have no trouble concluding that a mortgage interest that survives the discharge of a debtor’s personal liability is a ‘claim’ within the terms of §101(5). Even after the debtor’s personal obligations have been extinguished, the mortgage holder still retains a ‘right to payment’ in the form of its right to the proceeds from the sale of the debtor’s property. Alternatively, the creditor’s surviving right to foreclose on the mortgage can be viewed as a ‘right to an equitable remedy’ for the debtor’s default on the underlying obligation. Either way, there can be no doubt that the surviving mortgage interest corresponds to an ‘enforceable obligation’ of the debtor.

Johnson, 501 U.S. at ____, 111 S.Ct. at 2154, 115 L.Ed. 2d at _____.

Case Law Subsequent to Johnson

The facts of the Johnson case differ markedly from the facts in the pre-1991 cases cited above. While the pre-1991 cases involved an assignment of a mortgage to a third party and an intent by the assignee to cure or alter the terms of the mortgage through its chapter 13 plan, the Johnson case involved no third parties at all. The maker of the note in Johnson was the same person that filed both the chapter 7 and chapter 13 actions. Despite this difference in the facts, some courts have applied the Johnson rationale concerning definition of a claim to allow assignees of mortgages to cure pre-petition defaults by the assignors even though the assignee never officially assumed the mortgage, and the mortgagee never approved the assignment. Other courts, however, have interpreted Johnson to apply only to the facts specifically set forth in that case, namely in chapter 20 situations.

In City Corp. Mortgage Inc. v. Lumpkin (Matter of Lumpkin), for the first time since Johnson was decided, a court was faced with the situation in which a chapter 13 debtor who had received property from her mother but did not assume the mortgage upon transfer and had no personal liability on the mortgage, attempted to include the mortgage in a chapter 13 plan. While the earlier decisions most likely would have held that the plan could not be confirmed because there was no debtor-creditor relationship, the Lumpkin court applying Johnson held that pursuant to Johnson, even if the chapter 13 debtor had no personal liability on the mortgage, the mortgagee’s in rem claim against the property was still subject to inclusion in the chapter 13 plan. Id at 241-242. The court concluded that after Johnson, a chapter 13 plan may deal with a claim where there is no personal liability no matter what circumstances underlay the lack of personal liability. Id at 242. Other cases that have followed this reasoning include Matter of Hutcherson, 186 B.R. 546 (Bankr. M.D. Ga. 1995) (by virtue of transfer of ownership from mortgagor-mother to the debtor-daughter, mortgagee did hold a "claim" against the debtor-daughter’s estate in bankruptcy even though no privity of contract existed between the mortgagee and the debtor), In re Wilcox, 209 B.R. 181 (Bankr. E.D.N.Y. 1996) (lack of privity did not prevent chapter 13 debtor from paying mortgage note on inherited property through plan since lender had claim against the estate) and In re Allston, 206 B.R. 297 (Bankr. E.D.N.Y. 1997) (mortgagee held "claim" against debtors’ estate even though no privity of contract ever existed between mortgagee and debtors, and thus debtors could seek to repay their claim as part of the chapter 13 plan).

Although a number of cases have held post-Johnson that an assignee of a mortgage may pay the same through the chapter 13 plan without assuming the debt, others have held fast to the pre-Johnson holding that without privity of contract there is no debtor-creditor relationship and therefore an assignee may not cure the assignor’s default through the plan. See In re Mitchell, 184 B.R. 757 (Bankr. C.D. Ill. 1994); In re Wright, 183 B.R. 541 (Bankr. C.D. Ill 1995) and Ulster Savings Bank v. Kizelnik (In re Kizelnik), 198 B.R. 171 (Bankr. S.D.N.Y. 1995). In the Kizelnik matter, the court noted that cases such as the matter of Hutcherson inpermissively extend the Johnson holding beyond the same-debtor situation to chapter 13 cases involving a transfer of property from a mortgagor-parent to a debtor-child. Id. at 178. The Kizelnik court concluded that Johnson should be limited to its peculiar facts and should therefore only govern the resolution of "chapter 20" cases involving a single mortgagor whose chapter 13 bankruptcy is preceded by one under chapter 7. The court noted further that "the anomalous results in both Hutcherson and Lumpkin offend traditional commercial and contract law precepts, based upon a misinterpretation and misapplication of the Supreme Court’s holding in Johnson and this court declines to recognize the misguiding precedent." Id.


Prior to 1991, the law with regard to the curing of mortgage defaults by a third-party debtor through a chapter 13 plan seemed more certain. Unless principals of equity dictated otherwise, it was not permitted. After Johnson, however, there is a split of authority and it is difficult to predict how the various courts will rule on the issue.

Journal Date: 
Wednesday, July 1, 1998

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