MEMORANDUM
ROBERT JOHN HALL, Bankruptcy Judge.
The Court has before it the chapter 13 plan, 11 U.S.C. § 1301 et seq. (Supp. IV 1980), of Marilyn and Gordon Webb (the debtors) and the objections thereto of Richard McCord, the standing chapter 13 Trustee, and of Ronald and Patricia Mayer (the Mayers), the second mortgagee of the debtors.
The Trustee's Objection
The Trustee's objection is based on the debtors' attempt to exempt $20,000 in the equity of their principal residence under N.Y.C.P.L.R. § 5206(a) (McKinney 1978). The Trustee relies on this Court's prior decision, In re Feiss, 15 B.R. 825 (Bkrtcy.E.D.N. Y.1981) for the proposition that joint debtors can exempt no more than $10,000 in equity under that section and therefore moves to deny confirmation.
The debtors, relying on cases such as In re Rizzo, 21 B.R. 913, 915 (Bkrtcy.W.D.N.Y. 1982) argue that 11 U.S.C. § 522(m) is a substantive provision of federal law mandating the creation of state law exemptions even where none may have existed before so that each debtor in a joint case may have available the same exemptions. Although the Court has serious reservations as to whether that is what section 522(m) means,
The Opt-Out Law
Congress clearly delegated the power to regulate bankruptcy exemptions to all those states which wished to exercise it, 11 U.S.C. § 522(b)(1); see In re Sullivan, 680 F.2d 1131, 1137 (7th Cir.1982) and New York has elected to exercise that power. That being the case, the initial inquiry must be into what the New York Legislature envisioned when it opted-out of the federal scheme. Clearly, the Court cannot resolve possible federal-state conflicts until it decides that such conflicts exist.
The legislative history to the New York opt-out law is hardly a model of precision. Be that as it may, a Memorandum in Support prepared by Assemblyman Robach, one of the sponsors of the bill, stated:
(Emphasis added). Inasmuch as in this Court's experience, few joint debtors enter bankruptcy with more than a few thousand dollars in personal property, it would appear that the sponsor's projections of $35,000 in exemptions must assume an aggregating of the homestead exemption.
Moreover, this conclusion is confirmed by the record of the debate in the Assembly where repeated reference was made to the proposition that joint debtors could exempt $20,000 in the equity in their homes in a bankruptcy proceeding.
Consequently, the Court concludes that the New York Legislature intended to allow its debtors to aggregate their homestead exemptions in bankruptcy proceedings and therefore dismisses the Trustee's objection to the plan.
The Mayers' Objection
The Mayers, as second mortgagee on the debtors' principal residence, object to the plan based on the proposed payments. Specifically, the Mayers contend that the mortgage note provides for the continuance of 24% interest
The Note
The note in question provides:
Note dated August 6, 1980 at 2 (emphasis added).
It should also be noted that this note and mortgage was in fact foreclosed to judgment on September 29, 1982, and the debtors are attempting to reinstate it pursuant to 11 U.S.C. § 1322(b)(3) & (5); see DiPierro v. Cullen (In re Taddeo), 685 F.2d 24 (2d Cir.1982); In re Acevedo, 26 B.R. 994 (E.D.N.Y.1982).
Section 1325 provides in pertinent part:
11 U.S.C. § 1325. Section 1322, on the other hand, provides in pertinent part:
11 U.S.C. § 1322. Finally, section 506(b) provides:
11 U.S.C. § 506(b); cf. also id. at § 103(a) (chapter 5 applies in chapter 13).
Based on these apparently inconsistent provisions, the case law has split on the question of their proper reconciliation.
Some Courts, relying on the punctuation employed in section 506(b), have ruled that that section only entitles the oversecured creditor to interest at the legal rate notwithstanding the language of the contract. See, e.g., In re Marx, 11 B.R. 819 (Bkrtcy.S.D.Ohio 1981); In re Minguey, 10 B.R. 806, 807 (Bkrtcy.W.D.Wis.1981). Other Courts, while not so limiting section 506(b), have held that in chapter 13 section 506 serves only to fix the secured creditor's total claim as of confirmation, while section 1325(a)(5) creates in the secured creditor a right independent of contract to receive a fair market interest rate on that deferred claim. See, e.g., In re Klein, 10 B.R. 657, 661 (Bkrtcy.E.D.N.Y.1981).
However, before the Court can address these questions, it must first determine what the contract provides, and whether it is valid under New York law
Initially, it must be noted that the note provides for the payment of interest on interest in the event of a default. See supra. However, "[f]or a century the New York Court of Appeals consistently has held that a contractual provision to pay interest on interest is void under the law of New York." Debentureholders Protective Committee v. Continental Investment Corp. (In re Continental Investment Corp.), 679 F.2d 264, 271 (1st Cir.), cert. denied, ___ U.S. ___, 103 S.Ct. 192, 74 L.Ed.2d 155 (1982) (citing Giventer v. Arnow, 37 N.Y.2d 305, 333 N.E.2d 366, 372 N.Y.S.2d 63 (1975); Newburger-Morris Co. v. Talcott, 219 N.Y. 505, 114 N.E. 846 (1916); Young v. Hill, 67 N.Y. 162 (1876)). Accordingly, the Mayers cannot rely on the note provision as entitling them to 24% interest on the accrued interest.
Moreover, the Court concludes that the language of the note fails to justify awarding the Mayers 24% interest on the principal arrearage. The note provides for 24% interest on the principal. It provides further for an acceleration of the principal in the event of a default together with the continuation of interest at 24%. Nowhere, however, does the note provide the remedy where, as here, the principal of the note is accelerated and then de-accelerated in a chapter 13 plan. Accordingly, under the doctrine that an instrument is construed against its draftsman, Rentaways, Inc. v. O'Neill Milk & Cream Co., 308 N.Y. 342, 348, 126 N.E.2d 271 (1955); cf. N.Y.U.C.C. § 3-119, Official Comment 3 (McKinney 1964) (note is a contract) the Court finds the note's language does not support the Mayers' construction.
The Code
Assuming, arguendo, that this Court found the note's language sufficient to manifest an agreement that de-accelerated accrued principal would still accrue interest at 24% per annum until repaid, the
For example, if there is an arrearage "X" under a secured transaction, that implies that the secured party envisioned having $X in his hand today. If he had those dollars in his hand, he would invest them in today's market at whatever rate was available to him now regardless of at what rate he had originally contracted for with the original debtor.
Accordingly, in the instant case, the Court will hold a hearing on April 28, 1983 at 9:30 A.M. for the purpose of determining what investment opportunities are available to the Mayers if they had their total claim in hand today.
FootNotes
11 U.S.C. § 522(m). The legislative history to this section, if it tells anything, indicates that section 522(m) was never intended by Congress as mandating a doubling of exemptions.
Both the House and Senate versions of the Code contained identical versions of what was to become section 522(m). Compare section 522(n) of H.R. 8200, 95th Cong., 1st Sess. (1977) with section 522(1) of S. 2266, 95th Cong.2d Sess. (1978).
On the Senate side, it is clear that the provision was not intended to enable joint debtors to double their homestead exemptions.
The Senate version of the Code would have limited debtors to state law exemptions, while the House version created federal exemptions and would have allowed debtors to elect between the federal or state scheme. See S.Rep. No. 989, 95th Cong., 2d Sess. 6, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5792; compare H.R. 8200 § 522 with S. 2266 § 522. The Senate was concerned, however, that the House version would allow one joint debtor to elect the federal exemptions while the other joint debtor elected the state exemptions thereby creating an "instant affluence." S.Rep. No. 989, 95th Cong. 2d Sess. 6, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5792. But when one couples this fear with the observation that many states had homestead exemptions even more liberal than the proposed federal exemption, one must conclude that the Senate could not have intended section 522(m) as enabling joint debtors to aggregate their homestead exemptions. For if section 522(m) was so intended, many joint debtors would have been able to exempt more by doubling their state homestead exemptions then by one choosing the federal and the other the state exemption as authorized by the complained of House bill. Accordingly, it must be concluded that the Senate intended section 522(m) to do no more than state the rule that in a joint case, although technically one proceeding, each debtor would be entitled to those exemptions available under state law: no more, no less.
Similarly, although it is clear that the House took a far more liberal stance than the Senate concerning bankruptcy exemptions, there is nothing in the legislative history of the Code to indicate that the House intended their version of section 522(m) as authorization for joint debtors to double available state homestead exemptions. In fact the House solution to the perceived inadequacy of state exemptions was the creation of the federal exemption scheme, not a rewriting of state law. See H.R.Rep. No. 595, 95th Cong., 1st Sess. 126 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6087. Accordingly, the House Report on what was to become section 522(m) stated only that the section entitled joint debtors to independently choose the federal or state exemption scheme. Id. at 363, U.S.Code Cong. & Ad.News at 6319. In this Court's opinion that was all that was intended by the House.
The House-Senate compromise, of course, did create a set of federal exemptions, albeit at a somewhat reduced level; but then also allowed the states to prohibit their debtors from electing that scheme at all. 124 Cong.Rec. S17412 (daily ed. October 6, 1078) (remarks of Sen. DeConcini); id. at H11095 (daily ed. September 28, 1978) (remarks of Rep. Edwards); see 11 U.S.C. § 522(b) & (d) (Supp. IV 1980). Based thereon, it has been held that it was the Senate's view on exemption legislation that prevailed. In re Sullivan, 680 F.2d 1131, 1135-36 (7th Cir.), cert. denied, ___ U.S. ___, 103 S.Ct. 349, 74 L.Ed.2d 388 (1982).
In sum the Court has found nothing to indicate that Congress envisioned section 522(m) as an authorization for joint debtors to double their state's homestead exemption.
As a final point, it should be noted that the statements in cases such as Rizzo and Cheeseman v. Nachman (In re Cheeseman), 656 F.2d 60 (4th Cir.1981) on which Rizzo relied that section 522(m) mandated a doubling of state exemptions were pure dictum for in neither case was such a doubling authorized.
Record of Proceedings in New York Assembly, May 17, 1982 at 5364-65.
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