Rake v. Wade

Background

Three pairs of homeowners filed Chapter 13 bankruptcy in Oklahoma after falling behind on long-term home loans assigned to a mortgage holder who served as trustee. The notes charged a small fee for missed payments but said nothing about interest on arrearages. Each loan was covered by a first mortgage on the debtor’s principal residence, and each home was worth more than the loan balance, making the lender an oversecured creditor. The debtors’ plans proposed to repay the past-due amounts without interest. The lender objected and appealed after lower courts rejected his claim for interest; the Tenth Circuit reversed, and the Supreme Court agreed to resolve a circuit split.

Reasoning

The core question was whether a bankruptcy plan that “cures” missed mortgage payments can avoid paying postpetition interest on those arrearages. The Court explained that one Bankruptcy Code provision plainly allows oversecured creditors to collect postpetition interest up to the value of the collateral, and another provision requires plans to give secured creditors the present value of their claims. The Court found that the cure rule lets debtors repay arrearages but does not prescribe the terms of the cure. Reading the rules together, the Court concluded that an oversecured mortgage holder is entitled to interest on arrearages paid under a Chapter 13 plan, both before and after plan confirmation. The Court did not set the exact interest rate that must be used.

Real world impact

The decision means mortgage lenders can claim interest on arrearages that homeowners cure through Chapter 13 plans. Homeowners and lawyers must account for added interest when designing repayment schedules, and bankruptcy courts must ensure plans pay the present value of such claims.