In Re: David DePietto

Background

David DePietto filed a Chapter 11 bankruptcy case after defaulting on a mortgage loan from Ridgewood Savings Bank. The mortgage was secured only by DePietto’s primary residence. Ridgewood filed a proof of claim for $1,074,619.27, including $474,366.82 in pre-petition arrears—missed mortgage payments that accrued before the bankruptcy filing.

DePietto’s amended reorganization plan proposed paying the arrears over the remaining life of the loan through monthly payments of $2,326, while continuing to pay the outstanding loan balance at the contract rate. The plan classified Ridgewood’s claim as unimpaired, meaning Ridgewood was not entitled to vote on the plan unless the Bankruptcy Court determined otherwise.

Ridgewood objected under Bankruptcy Code §§ 1123 and 1124. It argued that the plan improperly changed its contractual rights by failing to provide interest on the principal component of the arrears while those arrears were repaid over approximately 17 years. Ridgewood also argued that its claim was impaired and that it should have been allowed to vote against the plan.

The Bankruptcy Court confirmed the plan. Judge Robert D. Drain concluded that the plan could cure and reinstate the mortgage under § 1124(2). He also concluded that the note’s two-percent late charge on principal and interest was part of the amount necessary to cure the default under § 1123(d). He rejected Ridgewood’s demand for what he understood as additional interest or compensation for the cost of money because the note did not provide for interest on interest or that additional amount.

District Court’s Analysis

The District Court reviewed the Bankruptcy Court’s legal conclusions without deference, discretionary decisions for abuse of discretion, and factual findings for clear error.

Judge Karas held that Ridgewood’s argument was not resolved by the Bankruptcy Court’s discussion of interest on interest or lost opportunity costs. Ridgewood was arguing for interest on the principal component of the pre-petition arrears, not interest on the interest component. The District Court explained that the cited decision, In re Kizzak Management Corp., addressed interest on defaulted mortgage-interest payments and did not resolve whether a creditor is entitled to interest on the principal component of mortgage arrears.

The District Court agreed with the Bankruptcy Court that a Chapter 11 debtor may cure a mortgage default and restore the original payment schedule. It also agreed that the note’s two-percent contractual late charge was a required part of the cure amount under § 1123(d). But the District Court found that the Bankruptcy Court had not clearly determined whether the plan properly accounted for any outstanding principal component of the arrears and the interest that might accrue on that principal through the end of the loan.

Disposition

The court denied Ridgewood’s appeal without prejudice and remanded the matter to the Bankruptcy Court for additional consideration of whether Ridgewood was entitled to additional interest on any outstanding principal component of the pre-petition arrears during the remaining loan term. Ridgewood may renew its appeal after the Bankruptcy Court makes that determination. The Clerk was directed to remand the case and close the appeal.