DEBTORS                                               CASE NO.04-22202




This matter is before the court for a decision on the Debtors’ objection to the claim of creditor Bank of New York (“BNY”).  BNY holds the mortgage on the Debtors’ principal residence; the mortgage has been reduced to a judgment in a state foreclosure proceeding, but there has been no foreclosure sale.  The Debtors’ objection specifically concerns the amount of costs and expenses which BNY claims as part of the arrearage owed by the Debtors.  The Debtors maintain that these costs and expenses are limited by the terms of the original note, and that terms concerning costs and expenses found in the mortgage should not be considered.

1.      Procedural and factual history

The Debtors executed a note dated March 15, 2000 (“the Note”) in the principal amount of $97,500.00 to Metwest Mortgage Services, Inc.  The Debtors also executed a mortgage dated March 15, 2000 (“the Mortgage”) to secure the Note, thereby granting a lien on their principal residence located at 137I Jericho Road, Warsaw, Kentucky.  The Note and Mortgage were subsequently assigned to BNY.  The Debtors represent that they made payments on the Note until December 2002, and then in January 2003 entered into an agreement with BNY to pay the December 2002 payment in six monthly installments along with the monthly payments then due.  The Debtors further represent that they made payments as agreed in January, February and March 2003, and that after that BNY refused to accept further payments.

   On August 8, 2003 BNY filed a foreclosure proceeding in Gallatin Circuit Court.  The Debtors filed a Chapter 7 petition on August 27, 2003.  BNY filed a proof of claim and a motion for relief from stay.  The discharge in that case was entered on December 29, 2003.  On August 17, 2004, a summary judgment and order of sale was entered in the Gallatin Circuit Court case, and the Debtors filed their Chapter 13 petition on August 30, 2004.  Their Chapter 13 plan proposed to pay the arrearage due to BNY to the trustee and the current monthly mortgage payments directly to BNY.  According to the Debtors, BNY accepted one post-petition payment from them and then refused to accept any further post-petition payments.  They state that they have escrowed three monthly post-petition payments.

On November 16, 2004, BNY filed a proof of claim for the principal amount due on the Note and claiming an arrearage including costs and expenses in the amount of $10,589.27.  The total amount of the claim was $129,114.71, including a $128,117.22 secured component and a $997.49 unsecured component.  On November 30, 2004, BNY filed a motion for relief from stay, seeking to enforce its interest in the subject property.  The Debtors filed an objection to BNY’s claim on December 2, 2004, stating only that they objected to the amount of the arrearage.  They also filed an objection to BNY’s relief motion on December 13, 2004.  BNY filed a response to the Debtors’ objection to its claim on December 23, 2004.

At the hearing on BNY’s relief motion on January 11, 2005, the parties informed the court that an agreed order would be tendered.  (So far, no such order has been tendered).  At the hearing on the Debtors’ objection to BNY’s claim on the same date, the court set the matter for an evidentiary hearing on February 8, 2005.  The Debtors’ hearing on the confirmation of their Chapter 13 plan was also continued to February 8, 2005.  At the February 8, 2005 hearing, the parties were given briefing time on the issue of the Debtors’ objection to BNY’s claim; the confirmation hearing was continued again.  The Debtors filed an amended Chapter 13 plan on February 10, 2005.  The amended plan does not appear to change the treatment of the Mortgage or the arrearage owed to BNY.  BNY has not objected to the original Chapter 13 plan or to the amended plan, and does not dispute that the Debtors may cure their arrearage within the Chapter 13 plan and make mortgage payments outside the plan.

2.      Legal discussion

The applicable Bankruptcy Code section here is section 1322, which provides in pertinent part:

(b) Subject to subsections (a) and (c) of this section, the plan may--

. . . .

   (2) 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, . . .;

. . . .

   (5) notwithstanding paragraph (2) of this subsection, 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 final payment is due after the date on which the final payment under the plan is due;

. . . .

(c) Notwithstanding subsection (b)(2) and applicable non-bankruptcy 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 non-bankruptcy law; . . . .


In situations similar to the one at bar, i.e., a mortgagee has obtained a foreclosure judgment but no foreclosure sale has taken place, mortgagees have argued that they are entitled to the protection of section 1322(b)(2), but are not subject to the limited exception in section 1322(b)(5) because they no longer have a contract for a long term debt enforceable against the debtors.  The addition of section 1322(c)(1) to the Bankruptcy Code, however, had the effect of permitting cure and deceleration until an actual foreclosure sale.  The meaning of the term “actual foreclosure sale” has been the subject of some debate, but as set out in In re Boylan, 255 B.R. 311 (Bankr. S.D. Ohio 2000), a case in which a foreclosure sale had not yet occurred:

The Court of Appeals for the Sixth Circuit had previously announced a ‘foreclosure sale’ rule in Federal Land Bank v. Glenn (In re Glenn), 760 F.2d 1428 (1985), cert. denied 474 U.S. 849, 106 S.Ct. 144, 88 L.Ed.2d 119.  The 1994 amendment to Title 11 U.S.C., codified as § 1322(c), appears to go beyond Glenn, however.  Section 1322(c) is broadly drafted and requires a default only ‘with respect to a lien on the debtor’s principal residence.’  Once that qualification has been met, the debtor has a right to decelerate and cure the default and maintain payments under the now reinstated loan. 

Id. at 313.  It would appear, therefore, that the Debtors may cure their arrearage and maintain payments on their mortgage loan.  BNY has not argued that they may not do this.

The only point of contention between the Debtors and BNY is the amount of the costs and expenses component of their arrearage.  The Debtors contend that costs and expenses should be limited by the terms of the Note, which states at paragraph 6(E): “If the Note Holder has required me to pay immediately in full . . . , the Note Holder will have the right to be paid back by me U.S. $500.00 for its costs and expenses in enforcing this Note.”  The Mortgage, however, provides in part at paragraph 21 that the lender is “entitled to collect all expenses incurred in pursuing the remedies provided in this paragraph . . . , including, but not limited to, reasonable attorneys’ fees and costs of title evidence.” 

The Debtors make reference to 54A AmJur2d § 10, which provides in part that “it is a widely accepted general rule that a mortgage . . . and a note . . . secured by it are to be deemed parts of one transaction and construed together as such[.] Where . . . there is an irreconcilable difference between notes . . . and mortgages . . .given to secure them, the former prevail.”  Kentucky courts have similarly held that notes and mortgages must be construed together.  See Fidelity & Columbia Trust Co. v. Schmidt, 53 S.W.2d 713 (Ky. 1932). The Debtors maintain that “the plain reading” of the two provisions set out above results in limiting BNY’s costs to $500.00.  BNY contends that the Note itself makes it clear that it does not contemplate such a limitation.  In support of this contention, BNY points out that paragraph 10 of the Note provides in pertinent part:

This Note is a uniform instrument with limited variations in some jurisdictions.  In addition to the protections given to the Note Holder under this Note, a Mortgage, Deed of Trust or Security Deed (“the Security Instrument”), dated the same date as this Note, protects the Note Holder from possible losses which might result if I do not keep the promises which I make in this Note.


This language acknowledges that the lender will be afforded protections against loss other than those found in the Note itself, i.e. the protections afford by the Mortgage.  While the Debtors are correct that where there is an irreconcilable difference in a note and a mortgage, the note prevails, it appears that paragraph 10 of this Note resolves any difference and allows for the imposition of costs and expenses per the terms of the Mortgage.

The court is therefore of the opinion that the Debtors’ objection to BNY’s claim should be overruled.  An order in conformity with this opinion will be entered separately.


Copies to:


Linda Schaffer, Esq.

Benjamin K. Phillips, Esq.

Chapter 13 Trustee