On appeal from the United States District Court for the Western District of Pennsylvania
(Civil Action Nos. 94-982 and 94-1174) Argued: November 20, 1995
BEFORE: BECKER, SAROKIN and WELLFORD, *fn* Circuit Judges
(Opinion filed July 30, 1996)
The primary dispute in this appeal concerns the rate of postpetition interest to which plaintiffs, the Penn Hills School District and Allegheny County, Pennsylvania, are entitled in connection with their oversecured prepetition tax claims against the defendants, numerous Chapter Thirteen bankruptcy debtors. Plaintiffs contend that interest should accrue at the applicable rates set forth in the Pennsylvania Municipal Code, and thus, that the bankruptcy and district courts erred in approving defendants' bankruptcy plans, which proposed to pay post-petition interest at a substantially lesser rate. Having carefully considered this issue and the others presented in this appeal, we AFFIRM in part and REVERSE in part.
II. STATEMENT OF THE CASE
Samuel and Alice DeSarno, Laura and David Rankin, Stacy Johnson, and Alice Bonacci defaulted on real estate taxes owed to Allegheny County and the Penn Hills School District. Because the salient facts are identical as to each defendant, we limit our background discussion to the DeSarnos. After the Desarnos defaulted on their tax obligations, plaintiffs filed secured claims against their principal residence in the approximate amount of $4,500. Under Pennsylvania law, these claims constitute first liens on the property and plaintiffs are entitled to receive interest on the underlying debts at certain statutorily prescribed rates. The DeSarnos' residence is worth many times the amount of the principal debt plus interest; thus, plaintiffs' claims are substantially oversecured.
In June 1993, to avoid a foreclosure on their house, the DeSarnos filed a voluntary petition for bankruptcy under Chapter Thirteen of the United States Bankruptcy Code. The DeSarnos subsequently filed a plan proposing to pay in full plaintiffs' prepetition claims (100 percent of the principal debt plus interest at the statutory rates), but proposing to pay post-petition interest at a rate much lower than those prescribed by the relevant Pennsylvania statutes.
In November 1993, the bankruptcy court confirmed the DeSarnos' plan subject to a determination of the appropriate post-petition interest rate. The bankruptcy court directed the parties to file briefs supporting their respective positions, but did not schedule oral argument or conduct an evidentiary hearing on the matter. Allegheny County and Penn Hills argued at the confirmation hearing that they were entitled to interest at twelve and ten percent per annum, respectively, pursuant to Pennsylvania statutes. The DeSarnos, on the other hand, argued that plaintiffs' post-petition claims were modifiable under 11 U.S.C. Section(s) 1322(b)(2) and that post-petition interest should be set to accrue at a "reasonable" rate, as opposed to the statutory rates.
In May 1994, the bankruptcy court confirmed the DeSarnos' plan in its entirety, holding that plaintiffs' claims were modifiable and that the proposed rate of post-petition interest met and exceeded the rate that the court determined to be reasonable. Thereafter, plaintiffs sought review of the plan in the district court. Notwithstanding initial concern over the bankruptcy court's failure to hold an evidentiary hearing to aid in its determination of an appropriate interest rate, the district court affirmed the bankruptcy court's decision. This timely appeal ensued. Defendant Stacy Johnson subsequently filed a cross-appeal challenging the applicable rate of prepetition interest for Allegheny County.
The following issues are before us in this appeal and cross-appeal: (1) whether it was error to determine that Allegheny County is entitled under Pennsylvania statutory law to prepetition interest at a rate of twelve percent per annum; (2) whether the lower courts erred in holding that a tax claim secured by a statutory lien on a Chapter Thirteen debtor's principal residence is modifiable pursuant to 11 U.S.C. Section(s) 1322(b)(2); and (3) if so, whether the reduced rate of post-petition interest approved by the lower courts provides plaintiffs with the "present value" of their claims pursuant to 11 U.S.C. 1325(a)(5)(B)(ii).
We review the bankruptcy court's findings of fact for clear error. Sharon Steel Corp. v. National Fuel Gas Distrib. Corp., 872 F.2d 36, 38 (3d Cir. 1989). We exercise plenary review, however, in regard to the bankruptcy court's "choice, application and interpretation of legal precepts." Id. at 38-39.
We first address whether the bankruptcy court correctly determined that Allegheny County is entitled to prepetition interest on its tax claims at a rate of twelve percent under Pennsylvania law. Although most of the defendants have conceded this point, defendant Johnson argues that the ...