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.
In
Feiss,
this Court examined into the legislative and case law history of C.P.L.R. § 5206(a) and concluded that, as a matter of New York law, while either joint tenant could employ the $10,000 exemption, it could not be aggregated. 15 B.R. at 828. Moreover, this Court rejected the argument that 11 U.S.C. § 522(m) mandated a different result as a matter of federal law,
id.,
although the Court recognized that the question might be a more difficult one in the event that New York “opted out” of the federal exemption scheme,
id.
As of September 1, 1982, New York has opted out, Ch. 540, § 284 [1982] N.Y.Laws 1407 (McKinney) (the opt-out law) and the Court has been asked to re-evaluate
Feiss
in light thereof.
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 Court need not address that question.
That is because it is the function of a court to interpret the law so as to effectuate both Congress’ and the New York Legislature’s intentions. To that end, the Legislature’s purpose must be divined. It is only after that legislative purpose has been determined and found to be in real or apparent conflict with federal law that the parameters of a provision such as section 522(m) would have to be plumbed. In the instant case, based on the Court’s conclusion that the New York Legislature intended that joint debtors filing bankruptcy after September 1, 1982 could aggregate their homestead exemption,
the Court finds not even an apparent conflict to be resolved. Accordingly, the Court never reaches the issue of section 522(m)’s meaning.
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: •
This bill would reassert New York’s exemptions with modifications. These modifications address abuses in the law and protect the vast majority of debtors in need of a fresh start. In addition to extending an exemption of $2400 above liens and encumbrances for an automobile, which is twice the present federally allowed amount, the exemptions provided by this measure are more lenient than those now allowed in 40 other states.
For example, for a husband and wife filing jointly, in excess of $35,000 in real and personal property may be declared exempt under its provisions, not including specific entitlements.
(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.
Whether that was an accurate statement of the case law in May 1982 is beside the point: when New York opted-out, a $20,000 homestead exemption was an assumption of the bill. Accordingly, for this Court to apply section 5206 as interpreted prior to New York’s
opting-out would be to interpret the statute in a way unenvisioned by the Legislature and presumably in derogation of their goals. That is not the role of a court.
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
even after a default, that 11 U.S.C. § 1322(b)(2) prohibits the modification of this right, and therefore, the Mayers conclude, the debtors’ proposal to cure the mortgage arrearages and expenses at only 12% interest is improper.
The Note
The note in question provides:
Upon failure of the Borrower to pay any installment when due hereunder ... Lender may immediately, without notice, declare the entire remaining unpaid principal balance
and all earned interest
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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.
In
Feiss,
this Court examined into the legislative and case law history of C.P.L.R. § 5206(a) and concluded that, as a matter of New York law, while either joint tenant could employ the $10,000 exemption, it could not be aggregated. 15 B.R. at 828. Moreover, this Court rejected the argument that 11 U.S.C. § 522(m) mandated a different result as a matter of federal law,
id.,
although the Court recognized that the question might be a more difficult one in the event that New York “opted out” of the federal exemption scheme,
id.
As of September 1, 1982, New York has opted out, Ch. 540, § 284 [1982] N.Y.Laws 1407 (McKinney) (the opt-out law) and the Court has been asked to re-evaluate
Feiss
in light thereof.
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 Court need not address that question.
That is because it is the function of a court to interpret the law so as to effectuate both Congress’ and the New York Legislature’s intentions. To that end, the Legislature’s purpose must be divined. It is only after that legislative purpose has been determined and found to be in real or apparent conflict with federal law that the parameters of a provision such as section 522(m) would have to be plumbed. In the instant case, based on the Court’s conclusion that the New York Legislature intended that joint debtors filing bankruptcy after September 1, 1982 could aggregate their homestead exemption,
the Court finds not even an apparent conflict to be resolved. Accordingly, the Court never reaches the issue of section 522(m)’s meaning.
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: •
This bill would reassert New York’s exemptions with modifications. These modifications address abuses in the law and protect the vast majority of debtors in need of a fresh start. In addition to extending an exemption of $2400 above liens and encumbrances for an automobile, which is twice the present federally allowed amount, the exemptions provided by this measure are more lenient than those now allowed in 40 other states.
For example, for a husband and wife filing jointly, in excess of $35,000 in real and personal property may be declared exempt under its provisions, not including specific entitlements.
(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.
Whether that was an accurate statement of the case law in May 1982 is beside the point: when New York opted-out, a $20,000 homestead exemption was an assumption of the bill. Accordingly, for this Court to apply section 5206 as interpreted prior to New York’s
opting-out would be to interpret the statute in a way unenvisioned by the Legislature and presumably in derogation of their goals. That is not the role of a court.
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
even after a default, that 11 U.S.C. § 1322(b)(2) prohibits the modification of this right, and therefore, the Mayers conclude, the debtors’ proposal to cure the mortgage arrearages and expenses at only 12% interest is improper.
The Note
The note in question provides:
Upon failure of the Borrower to pay any installment when due hereunder ... Lender may immediately, without notice, declare the entire remaining unpaid principal balance
and all earned interest
and accrued late charges due and payable without notice to the Borrower and, thereafter,
such total
so declared due and payable shall bear interest at the rate of twenty-four (24) percent per annum until paid.
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:
(a) The court shall confirm a plan if—
(5) with respect to each allowed secured claim provided for by the plan—
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim ....
11 U.S.C. § 1325. Section 1322, on the other hand, 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 last payment is due after the date on which the final payment under the plan is due;
11 U.S.C. § 1322. Finally, section 506(b) provides:
(b) To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any
reasonable fees, costs or charges provided under the agreement under which such claim arose.
11 U.S.C. § 506(b); ef.
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 overse-cured 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).
Finally, some Courts, have held that the question of whether interest under section 1325(a)(5) must be the contract, as opposed to, the market rate turns on whether the secured party is secured only by a security interest in the debtor’s principal residence.
See, e.g., In re Simkins,
16 B.R. 956 (Bkrtcy.E.D.Tenn.1982); cf
.
11 U.S.C. § 1322(b)(2).
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
for a contract claim invalid under state law is invalid in bankruptcy.
Vanston Bondholders Protective Committee v. Green,
329 U.S. 156, 170, 67 S.Ct. 237, 243, 91 L.Ed. 162 (1946) (Frankfurter, J., concurring).
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-accelerat-ed accrued principal would still accrue interest at 24% per annum until repaid, the
Court would not find that contractual provision binding on it. First, because it is federal and not state law which determines the allowance of interest in bankruptcy proceedings,
Vanston Bondholders Protective Committee v. Green,
329 U.S. 156, 162-63, 67 S.Ct. 237, 239-40, 91 L.Ed. 162 (1946);
Debentureholders,
679 F.2d at 271; and second, because the Court holds that section 1325(a)(5) entitles the secured creditor to receive, independently of his contract, interest payments sufficient to equate the deferred total paid to his present claim,
In re Hibbert,
14 B.R. 891, 894 (Bkrtcy.E.D.N.Y.1981). In other words, section 1325(a)(5) requires that the secured creditor receive not less than the present value of his allowed claim. Section 506, on the other hand, fixes that allowed secured claim,
In re Klein,
10 B.R. 657, 661 (Bkrtcy.E.D.N.Y.1981). Therefore, as of the confirmation date, section 506(b) incorporates .contractual provisions to fix the total secured claim. Thereafter, the Court, independently of the contract, must fix an interest factor such that the total of such deferred payments is equivalent to the receipt of the total claim today.
In re Hibbert,
14 B.R. 891, 894 (Bkrtcy.E.D.N.Y.1981);
In re Smith,
4 B.R. 12, 13 (Bkrtcy.E.D.N.Y.1980). By this method the secured party’s rights are not modified but protected.
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.