UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 99-20463
In The Matter Of:
RONALD BARTEE,
Debtor.
____________________
RONALD BARTEE,
Appellant,
V.
TARA COLONY HOMEOWNERS ASSOCIATION and
DANIEL E. O’CONNELL,
Appellees.
Appeal from the United States District Court
for the Southern District of Texas
May 15, 2000
Before HIGGINBOTHAM and PARKER, Circuit Judges; and ATLAS, District
Judge.1
1
District Judge of the Southern District of Texas, sitting
by designation.
ROBERT M. PARKER, Circuit Judge:
Appellant Ronald Bartee ("Debtor") seeks review of an order
sustaining the objection of Appellee Tara Colony Homeowners
Association (“Creditor”) to his proposed Chapter 13 Plan (the
“Plan”). Under the Plan, Debtor moved to “cramdown”2 Creditor’s
claim that is secured by a subordinate lien on Debtor’s principal
residence. Debtor argues that since no equity exists in the
residence after satisfaction of the senior mortgage, pursuant to
the valuation and classification provisions of Bankruptcy Code §
506, Creditor holds only an unsecured claim. Consequently, without
a secured claim, Creditor cannot benefit from the antimodification
provisions of § 1322(b)(2) that protect holders of allowed secured
claims secured by a debtor’s principal residence. Creditor argues
that the Supreme Court’s decision in Nobelman v. American Savings
Bank, 508 U.S. 324 (1993), which interpreted § 1322(b)(2) as
prohibiting the cramdown of under-secured liens, should be extended
to protect junior liens that are wholly unsecured by any
2
“‘Cramdown’ is a term of art used to refer to the
bifurcation of a claim into secured and unsecured portions pursuant
to 11 U.S.C. § 506. Title 11 U.S.C. § 1325(a)(5) allows a Chapter
13 debtor to reduce or eliminate the unsecured portion of the
claim.” In re Perry, 235 B.R. 603, 605 n.1 (S.D. Tex. 1999). In
effect, the secured creditor’s claim is limited to the market value
of the collateral to which the lien is attached. See Lomas
Mortgage, Inc. v. Louis, 82 F.3d 1, 1 n.1 (1st Cir. 1996). “When
a claim is crammed down to zero, this is referred to as ‘strip off’
of a claim.” In re Perry, 235 B.R. at 605 n.1.
2
corresponding value in the collateral residence.3
Debtor advances a second line of argument based on §
1322(c)(2)(1994), an exception to § 1322(b)(2) which permits
modification of short-term mortgages under which the final payment
comes due during the life of the proposed plan. According to
Debtor, § 1322(c)(2) provides an independent basis for cramdown of
the claim, because the single payment due on this annual assessment
came due during the course of the proposed plan.
The bankruptcy court and the district court rejected both of
Debtor’s arguments; we agree solely with his first. We hold that
(1) the Bankruptcy Code’s antimodfication provisions do not protect
secondary lienholders whose interest is not supported by at least
some value in the debtor’s principal residence, and (2) the narrow
exception to the antimodification provisions intended to cover
short-term mortgages does not apply to secondary liens for annual
assessments. AFFIRMED IN PART, REVERSED IN PART and REMANDED.
I. FACTS AND PROCEEDINGS BELOW
3
In Bankruptcy Code parlance an “undersecured” claim is one
supported by collateral valued at less than the amount of the
claim. A “wholly undersecured” claim is one for which the
supporting collateral holds no remaining value after satisfaction
of senior encumbrances. It should be noted that some courts refer
to wholly undersecured claims as simply “unsecured” claims.
Although a wholly undersecured claim is actually “secured” by a
lien, it may still be considered “unsecured” for the purposes of §
1322(b)(2)’s antimodification provision if it is completely without
supporting collateral value. In order to avoid as much confusion
as possible, we will employ the term “wholly undersecured”
throughout this opinion.
3
The parties to this appeal submitted the case to the
bankruptcy court upon a stipulated record. The record reflects
that on March 12, 1998, Ronald Bartee filed a Chapter 13 bankruptcy
case including as property of the estate his principal residence,
a home situated on a lot in Tara Colony subdivision, Richmond,
Texas. Ocwen Federal Bank, FSB holds a first lien mortgage on the
real property and an allowed secured claim in the amount of
$88,840.23. As of the proposed effective date of the Plan,
Debtor’s homestead was valued at only $87,000.
A second claim, secured only by a lien against Debtor’s
principal residence, was filed by Tara Colony Homeowners
Association in the amount of $1,096.62. This subordinate claim is
for a pre-petition annual assessment imposed pursuant to
subdivision covenants and deed restrictions. These covenants and
restrictions provide that each lot within Tara Colony is subject to
an annual maintenance assessment; that each homeowner is deemed to
agree to pay this assessment when he accepts the deed for the lot;
that the assessments, together with interest, costs, and reasonable
attorney’s fees, would be a continuing lien on the property; and
that the assessments would come due on January 1, of the specific
year for the preceding year.4 The payment at issue came due on
4
On December 9, 1983, General Homes Corporation filed with
the Fort Bend County Clerk a “Declaration of Covenants, Conditions
and Restrictions.” Article V of the filed Declaration provides for
the creation of the Tara Colony Homeowner’s Association. Article
VI, Sec. 1 provides for maintenance assessments and the creation of
a lien for assessments. “Each Lot in the Properties is hereby
4
January 1, 1998.
On August 19, 1998, Debtor filed his First Amended Chapter 13
Plan and served all creditors and parties-in-interest. All
conditions and requirements for confirmation of the Plan were met
save only the issue of the treatment of Tara Colony’s claim. The
Plan called for the cramdown of the subordinate lien, treating the
entire claim as a general unsecured claim. Although, as an
unsecured creditor, Tara Colony would not receive any disbursements
on its claim for the delinquent assessment payment, Tara Colony’s
lien is to be retained.
Tara Colony filed an objection to the Plan; Bartee responded
with an objection to the Tara Colony claim. Daniel E. O’Connell,
the Chapter 13 Trustee, appearing as an interested party, opposed
confirmation of the Plan. Following a contested hearing on the
objections, the bankruptcy court allowed the secured claim and
denied confirmation of the Plan.
subjected to an annual maintenance charge, . . . and each Owner of
any Lot by acceptance of a deed therefore . . . is deemed to
covenant and agree to pay to the Association: (1) annual
assessments or charges, and (2) special assessments for capital
improvements . . . . The annual and special assessments, together
with interests, costs, and reasonable attorney’s fees, shall be a
charge on the Lot and shall be a continuing lien upon the property
against which each such assessment is made.” Art. VI, Sec. 6
provides for the subordination of the lien to perfected mortgages.
Art. VI, Sec. 5 specifically grants Tara Colony the right to
foreclose. “Any assessment not paid within thirty (30) days after
the due date shall bear interest from the date at the rate of six
(6%) percent per annum. The Association may bring an action at law
against the Owner personally obligated to pay the same, or
foreclose the lien against the property.”
5
Bartee appealed to District Court for the Southern District of
Texas. The district court affirmed the bankruptcy court’s ruling
and dismissed the appeal with prejudice. This appeal followed.
II. JURISDICTION
Before considering the substantive issues now before us, we
must first address the question of our jurisdiction over this
appeal. Counsel were instructed to brief the question of
"[w]hether the order entered [by the bankruptcy court] is a final
decision, appealable within the meaning of 28 U.S.C. § 158(d), or
whether there is some other basis for appellate jurisdiction.” All
three parties to this appeal contend that this Court may properly
exercise its appellate jurisdiction, invoking the grant of
jurisdiction in § 158(d). We agree.
The jurisdiction of this Court to hear bankruptcy appeals is
conferred by 28 U.S.C. § 158(d)(1994) and 28 U.S.C. §§ 1291 & 1292
(1994). Since this case does not involve interlocutory orders,
injunctions, or any other orders specified in § 1292, we have
jurisdiction over this case only to the extent that the judgments
below are considered “final” within the meaning of § 158(d) or §
1291.5 Because “finality” for the purposes of bankruptcy appeals
5
See 28 U.S.C. § 158(d)(“The courts of appeal shall have
jurisdiction of appeals from all final decisions, judgments, orders
and decrees . . .” entered by the district courts hearing
bankruptcy appeals.); 28 U.S.C. § 1291 (“The courts of appeals . .
. shall have jurisdiction of appeals from all final decisions of
the district courts of the United States . . . .”).
6
under § 158(d) is considered more liberally or flexibly than
“finality” under § 1291, we address the appealability of the denial
of confirmation order in this case solely under the less stringent
standard of § 158(d). See Internal Revenue Serv. v. Orr (In re
Orr), 180 F.3d 656, 659 (5th Cir. 1999)(“There is [] a lower
threshold for meeting the ‘final judgments, orders, and decrees’
appealability standard under 28 U.S.C. § 158(d) than there is for
the textually similar ‘final decisions’ appealability standard
under 28 U.S.C. § 1291.”).
This circuit has long rejected adoption of a rigid rule that
a bankruptcy case can only “be appealed as a ‘single judicial unit’
at the end of the entire bankruptcy proceeding.” Orr, 180 F.3d at
659 (quoting Texas Extrusion Corp. v. Lockheed Corp. (In re Texas
Extrusion Corp.), 844 F.2d 1142, 1155 (5th Cir. 1988)).6 Instead,
6
Two circuit courts of appeal favor a rigid rule of
finality. Such a rule is undesirable primarily because it is
fraught with unintended inefficiencies -- such as the necessity of
making serial filings or involuntary proposed plans -- and other
appellate pitfalls. See, e.g., Simons v. Federal Deposit Ins.
Corp. (In re Simons), 908 F.2d 643 (10th Cir. 1990); Maiorino v.
Branford Savings Bank, 691 F.2d 89 (2d Cir. 1982). The defects of
a rigid rule, when applied to the denial of a confirmation of
Chapter 13 plan, were set forth in Judge Lumbard’s dissenting
opinion in Maiorino:
The procedural holding adopted by the majority may have
serious substantive consequences. Only the debtor may
propose a Chapter 13 plan. Therefore the debtor is
always the party who seeks to confirm a plan; the
creditor is always the party who seeks to deny
confirmation. The effect of today's holding is that when
creditors lose and a plan is confirmed, creditors may
appeal immediately as of right; when debtors lose and a
7
an appealed bankruptcy order must constitute either a "final
determination of the rights of the parties to secure the relief
they seek,” or a final disposition “of a discrete dispute within
the larger bankruptcy case for the order to be considered final.”
Orr, 180 F.3d at 659 (quoting In re Texas Extrusion Corp., 844 F.2d
at 1155). We recently explained the utility of our flexible rule
of finality:
[A] determination that appellate jurisdiction arises only
when the bankruptcy judge enters an order which ends the
entire bankruptcy case, leaving nothing for the court to
do but execute the judgment, would substantially
frustrate the bankruptcy system. This is so particularly
when, as here, one independent decision materially
affects the rest of the bankruptcy proceedings. Separate
and discrete orders in many bankruptcy proceedings
determine the extent of the bankruptcy estate and
influence creditors to expend or not to expend effort to
recover monies due them. The reversal of such an order
would waste exorbitant amounts of time, money, and labor
and would likely require parties to start the entire
bankruptcy process anew. This potential waste of
judicial and other resources has influenced this Court
and other courts of appeals to view finality in
bankruptcy proceedings in a more practical and less
technical light.
plan is rejected, they may appeal only by leave of the
district court. Their only alternative is to wait until
a less favorable plan is confirmed, which may be months
away, or until the bankruptcy court dismisses the case or
dissolves the automatic stay, which the debtors will try
to postpone for as long as possible. In either event, a
bankruptcy court ruling which is final as to a plan of
arrangement will be reviewable long after it is made,
perhaps long after the plan can be revived. Congress
enacted Chapter 13 to aid consumer debtors; we should not
delay their access to relief on appeal.
Maiorino, 691 F.2d at 95 (Lumbard, J., dissenting)(emphasis added).
8
England v. Federal Deposit Ins. Corp. (In re England), 975 F.2d
1168, 1171 (5th Cir. 1992).
Recognition that the denial of a Chapter 13 plan can be a
final order is all but compelled by considerations of practicality.
Often an appeal is the only reasonable course, since the debtor is
left without any real options in formulating his plan. In the
instant case, under the bankruptcy court’s ruling, Debtor cannot
modify Tara Colony’s claim, he therefore lacks any alternative if
the plan is to address the assessment claim. If an appeal is
impermissible, Debtor must choose between filing an unwanted or
involuntary plan and then appealing his own plan, or dismissing his
case and then appealing his own dismissal.
Under our flexible rule of finality, we have, on numerous
occasions, addressed the merits of appeals from the denial of
confirmation of Chapter 13 plans. See, e.g., Williams v. Tower
Loan of Mississippi, Inc. (In re Williams), 168 F.3d 845 (5th Cir.
1999); O’Connell v. Troy & Nichols, Inc. (In re Cabrera), 99 F.3d
684 (5th Cir. 1996); Grubbs v. Houston First American Savings
Assoc. (In re Grubbs), 730 F.2d 236 (5th Cir. 1984) (en banc);
Foster v. Heitkamp (In re Foster), 670 F.2d 478 (5th Cir. 1982).
In fact our decision in Nobleman v. American Savings Bank (In re
Nobleman), 968 F.2d 483 (1992),7 aff’d, Nobelman v. American
7
The correct spelling of the debtors’ surname is “Nobelman,”
however, the title of the case was misspelled when docketed. In an
effort to maintain harmony with the Clerk’s Office, we retained the
9
Savings Bank, 508 U.S. 324 (1993), involved the denial of
confirmation of a Chapter 13 plan.8
In the case of a denial of confirmation of a plan, we look to
whether or not the order was intended to serve as a final denial of
the relief sought by the debtor. If the order was not intended to
be final -- for example, if the order addressed an issue that left
the debtor able to file an amended plan (basically to try again) --
appellate jurisdiction would be lacking. See Orr, 180 F.3d at 659.
The character of the bankruptcy court’s order demonstrates
that the court was aware that policy and practicality counseled
against retaining jurisdiction over the case. The bankruptcy
court’s order, in which it denied confirmation of the proposed plan
and denied Debtor’s objection to the disputed claim, was styled
“Final Order.” This order conclusively determined the substantive
rights at issue and ended the dispute. The record does not contain
any indication that the bankruptcy court intended to take any
further action on the objection to the claim or the objection to
confirmation, and no party to this action argues that any further
incorrect spelling in our opinion. The Supreme Court did not feel
similarly constrained, accordingly, they used the correct spelling.
8
The parties note that we held jurisdiction to be proper in
several analogous bankruptcy cases. See Moody v. Empire Life Ins.
Co. (In re Moody), 849 F.2d 902, 904 (5th Cir. 1988) (order
allowing a claim or priority in a bankruptcy proceeding which
determines the amount due a creditor is appealable); In re Lift &
Equip. Serv., Inc., 816 F.2d 1013, 1015 (5th Cir. 1987)
(recognition of a creditor’s security interest is a final order).
10
action was to take place. The district court entered a Memorandum
and Opinion affirming the bankruptcy court’s ruling and dismissed
the appeal with prejudice. Thus, while the labeling of the
judgments below is not determinative, the courts’ characterization
of their orders as final and their apparent decision not to take
further action all support the conclusion reached by all parties to
this appeal, namely that the bankruptcy court’s order was final.
Accordingly, we believe jurisdiction to be proper.
III. DISCUSSION
A. Standard of Review
Since there are no contested issues of fact in this appeal, we
are presented solely with questions of law. We review a Bankruptcy
court’s legal rulings de novo. See Traina v. Whitney National
Bank, 109 F.3d 244, 246 (5th Cir. 1997).
B. § 1322(b)(2)
1. The Nature of the Tara Colony Claim
Under Texas state law, a homeowners association’s claim on an
unpaid maintenance assessment is secured by a lien running with the
land giving the association the right to foreclose on the residence
to enforce unpaid maintenance fees or other costs. See Inwood
North Homeowner’s Assoc., Inc. v. Harris, 736 S.W.2d 632, 635-36
(Tex. 1987). “A restrictive covenant that touches and concerns the
land is binding on subsequent purchasers of the property.” In re
Perry, 235 B.R. 603, 605 (S.D. Tex. 1999)(citing Inwood, 736 S.W.2d
11
at 635.). The Tara Colony lien is a binding subordinate security
interest in the debtor’s primary residence.
2. The Governing Bankruptcy Code Sections
Bartee seeks to reorganize his debts under Chapter 13 of the
Bankruptcy Code. Chapter 13 was designed to facilitate the
adjustment of the debts of individuals whose regular income allows
them to fund a flexible repayment plan. See LAWRENCE P. KING, ET AL.,
COLLIER ON BANKRUPTCY § 1322.01 (15th ed. 1999) (hereinafter “COLLIER ON
BANKRUPTCY”). The great benefit to a Chapter 13 bankruptcy is that
a debtor can preserve existing assets, all the while granting
creditors a ratable recovery from future income unavailable under
Chapter 7 liquidation. See Foster v. Heitkamp (In re Foster), 670
F.2d 478, 483 (5th Cir. 1982); Kitchens v. Georgia Railroad Bank
and Trust Co., 702 F.2d 885, 887 (11th Cir. 1983). Following the
completion of all payments specified under the plan, the debtor is
granted a liberal discharge. See id.; see also 11 U.S.C. § 1328.
With these benefits in mind, “courts have repeatedly emphasized
Congress’s preference that individual debtors use Chapter 13
instead of Chapter 7.” In re McDonald, 205 F.3d 606, 614 (3d Cir.
2000).
The resolution of this case rests upon the interaction of two
sections of the Bankruptcy Code as applied to a junior lien
unsecured by any supporting value in the collateral home. The
first, § 506(a), describes the extent to which an allowed claim is
12
to be treated as a secured claim for purposes of the Code, as well
as how a secured claim is to be valued. See COLLIER ON BANKRUPTCY §
506.01. Essentially, this valuation provision acts as a “sorter”
of claims; claims are categorized as either secured or unsecured
depending on the value of the supporting collateral. See COLLIER ON
BANKRUPTCY § 506.03. The relevant portion of section 506(a) reads:
An allowed claim of a creditor secured by a lien on
property in which the estate has an interest . . . is a
secured claim to the extent of the value of such
creditor's interest in the estate's interest in such
property, ... and is an unsecured claim to the extent
that the value of such creditor's interest . . . is less
than the amount of such allowed claim. Such value shall
be determined in light of the purpose of the valuation
and of the proposed disposition or use of such property.
11 U.S.C. § 506(a)(1994); see United States v. Ron Pair
Enterprises, Inc., 489 U.S. 235, 239 (1989)(under § 506(a), “a
claim is secured only to the extent of the value of the property on
which the lien is fixed; the remainder of that claim is considered
unsecured”).
A Chapter 13 plan may modify the rights of creditors holding
secured claims; the extent to which the plan may modify these
rights and still be confirmed by the bankruptcy court depends upon
the application of § 1325(a)(5).9 See In re Young, 199 B.R. 643,
9
§ 1325(a)(5) provides:
(a) Except as provided in subsection (b), the court shall
confirm a plan if--
....
(5) with respect to each allowed secured claim provided
for by the plan--
13
647 (Bankr. E.D. Tenn. 1996)(“The very essence of a § 1325(a)(5)
modification is the write down or ‘cramdown’ of a secured claim to
the value of the collateral securing the debt.”). The exception to
this rule is contained in the second Code section at issue, §
1322(b)(2), which prohibits the modification of the rights of the
holder of a claim secured only by a security interest in a debtor’s
principal residence. See Lam v. Investors Thrift (In re Lam), 211
B.R. 36, 38 (B.A.P. 9th Cir. 1997). In relevant part, § 1322(b)(2)
provides:
(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,
or of holders of unsecured claims, or leave unaffected
the rights of holders of any class of claims.
11 U.S.C. § 1322(b)(2)(1994).
3. Nobelman Resolves an Earlier Split in Authority
The Supreme Court addressed the interplay of § 506(a) and §
1322(b)(2) as applied to an undersecured first lienholder, in
(A) the holder of such claim has accepted the plan;
(B)(i) the plan provides that the holder of such claim
retain the lien securing such claim; and
(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; or
(C) the debtor surrenders the property securing such
claim to such holder...
11 U.S.C. § 1325(a)(5)(1994).
14
Nobelman v. American Savings Bank, 508 U.S. 324 (1993). Prior to
Nobelman, all four circuit courts of appeal that had addressed the
interaction of these provisions concluded that a Chapter 13 debtor
could use § 506(a) to ascertain what portion of the mortgage was
supported by collateral value in the homestead. The debtor could
then bifurcate the mortgage into secured and unsecured portions, of
which only the secured portion would be shielded from modification
by § 1322(b)(2).10
When the issue was first presented to this court, we rejected
our sister courts’ reasoning. See In re Nobleman, 968 F.2d 483
(5th Cir. 1992).11 Our nonconformist decision created a circuit
split, prompting the Supreme Court to grant certiorari. Justice
Thomas, writing for a unanimous court, employed an analysis more
akin to that of our sister courts, only to disagree with their
conclusion. Unfortunately, Justice Thomas’s efforts to harmonize
these two statutory provisions created some confusion among the
lower courts; the perceived ambiguity in the opinion is the root
cause of the current split of authority on the issue now before us.
10
See, e.g., In re Bellamy, 962 F.2d 176 (2d Cir. 1992); In
re Hart, 923 F.2d 1410 (10th Cir. 1991); Wilson v. Commonwealth
Mortgage Corp., 895 F.2d 123 (3d Cir. 1990); In re Hougland, 886
F.2d 1182 (9th Cir. 1989).
11
The Nobelmans submitted a Chapter 13 plan that valued their
principal residence, encumbered by a mortgage for $65,250, at only
$23,500. Under their proposed plan, the Nobelmans sought to pay
only the latter amount as a secured claim and treat the remaining
balance as an unsecured claim for which the mortgagee was to
receive nothing.
15
See, e.g., In re Lam, 211 B.R. at 42 (holding that § 1322(b)(2)
does not protect a wholly undersecured lienholder); In re Perry,
235 B.R. 603, 607-08 (S.D. Tex. 1999) (holding that § 1322(b)(2)
does protect a wholly undersecured lienholder).
Although the Justices affirmed the result we had reached in
Nobleman, they disagreed with our analysis. First, we concluded
that § 506(a) and § 1322(b)(2) were in conflict. See In re
Nobleman, 968 F.2d 483, 489 (5th Cir. 1992)(“The bifurcation of an
undersecured home mortgage runs afoul of the specific protection
afforded under section 1322(b)(2) to home mortgage creditors whose
claims are secured only by a debtor’s principal residence.”).
Second, we concluded that § 1322(b)(2) trumped § 506(a). See id.
The Supreme Court rejected our reasoning that § 506(a) was rendered
a nullity by § 1322(b)(2), but nevertheless, agreed with the end
result -- namely, that § 1322(b)(2)’s antimodification provision
protected the entire mortgage.12
Justice Thomas began his opinion by confirming that § 506(a)
is the starting point in the analysis and is not rendered a nullity
in the Chapter 13 context. See id. at 328 (“[Debtors] were correct
in looking to § 506(a) for a judicial valuation of the collateral
to determine the status of the bank's secured claim.”)
Furthermore, debtors could “seek a valuation in proposing their
12
As we turn to discuss the current split in authority, our
rejected analysis should be kept in mind, as it bears a striking
resemblance to the analysis urged by Tara Colony in this case.
16
Chapter 13 plan,” and it would be this “judicial valuation of the
collateral [that would] determine the status of the [creditor’s]
secured claim." Id. at 328. Nevertheless, the Court ultimately
held that
to give effect to § 506(a)'s valuation and bifurcation of
secured claims through a Chapter 13 plan in the manner
the [debtors] propose would require a modification of the
rights of the holder of the security interest. Section
1322(b)(2) prohibits such a modification where, as here,
the lender's claim is secured only by a lien on the
debtor's principal residence.
Id. at 331. Thus, under the plain language of § 1322(b)(2), a
debtor is prevented from using § 506(a) to bifurcate a claim
secured only by a lien on the debtor's principal residence. “The
court's rationale for this holding was that the secured and
unsecured components arose out of the same loan documents that gave
the bank its rights and, therefore, the debtors could not ‘modify
the payment and interest terms for the unsecured component . . .
without also modifying the terms of the secured component.’" In re
Baez, 244 B.R. 480, 483 (Bankr. S.D. Fla. 2000). A key element to
this conclusion was the fact that, even after the operation of §
506(a), the mortgage holder was "still the 'holder' of a 'secured
claim,' because [the debtors’] home retain[ed] $23,500 of value as
collateral." Nobelman, 508 U.S. at 329. As the holder of a
secured claim, the mortgage holder’s “rights” could not be
modified.
But what exactly are these “rights?” Since the Bankruptcy
17
Code offers no definition, Justice Thomas reasoned that Congress
must have intended the state law definition to govern. These
unmodifiable rights were deemed to include the right to receive
monthly payments, to "proceed against the [debtor's] residence by
foreclosure and public sale, and the right to bring an action to
recover any deficiency remaining after foreclosure." Id. at 329.
Similarly, one would expect the right of a junior mortgagee to
advance funds to a senior mortgagee, insurer or tax collector to
protect its collateral to be similarly protected. See In re Baez,
244 B.R. at 484. Justice Thomas concluded his rights analysis with
an admonition that Nobelman should not be read as holding that a
home mortgage holder’s rights are completely “unaffected” by a
Bankruptcy. By example, Justice Thomas referenced a creditor’s
right of foreclosure in the event of default, a right that is
“checked by the Bankruptcy Code’s automatic stay provision.” See
Nobleman, 508 U.S. at 330.
Having explained that a debtor can opt for a valuation
pursuant to § 506(a), and having defined the “rights” that a holder
of a secured claim can enjoy without risk of modification, Justice
Thomas turned to the final step in the discussion, explaining
exactly what constitutes a “secured claim.” Our sister courts had
concluded that § 1322(b)(2)’s antimodification clause applied only
to that portion of a creditor’s claim that was still considered
secured after operation of § 506(a). These courts, applying the
18
rule of the last antecedent, determined that the clause "other than
a claim secured only by a security interest in . . . the debtor's
principal residence," modified the antecedent immediately preceding
it -- "secured claims."13 If the modifying clause applied only to
the term “secured claims,” then it was reasoned, the
antimodification provision was only implicated by that part of the
mortgage that was supported by collateral value in the home as
determined by § 506(a).
Justice Thomas characterized this reasoning as “sensible as a
matter of grammar” but “not compelled.” Nobelman, 324 U.S. at 330.
Instead, Justice Thomas explained that Congress consciously chose
the unqualified term "claim" rather than the term of art “secured
claim” when crafting the antimodification provision. Because
“claim” is broadly defined under the Bankruptcy Code, the
conclusion to be drawn from its use is clear. Essentially,
Congress employed the broader term specifically to capture the
entire claim -- including both its secured and unsecured portions
-- put forward by the bank. It is this expansive reading of the
term “claim” in § 1322(b)(2)’s antimodification clause which has
caused the confusion in the lower courts. Specifically, some
13
The exact language at issue states that the debtor’s plan
may “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. . . .”
11 U.S.C. § 1322(b)(2)(1994).
19
courts have continued to see a tension between § 506(a) and §
1322(b)(2) when applied to wholly undersecured junior liens or
mortgages. See In re Robinson, 231 B.R. 30, 33 (Bankr. D. N.J.
1997) (“creditor's rights under § 1322(b)(2) may not be modified .
. . and there is no right to look to § 506(a) for valuation”).
4. Contentions of the Parties
Debtor contends this case is resolved by § 506(a) alone. He
argues that in light of Nobelman, he is clearly prevented from
bifurcating and stripping down the purchase money first lien on the
residence. Debtor opted for a valuation of the residence, pursuant
to § 506(a), which resulted in an estimated market value of
$87,000. Although the first lien is slightly undersecured, Ocwen
Federal is still the holder of a secured claim, and therefore, can
fully rely upon § 1322(b)(2) to preclude modification of its lien.
Debtor argues that it is equally clear that the junior lien
can be modified without offense to § 1322(b)(2). The valuation
exposed the second lien as wholly without any supporting collateral
value in the home. According to Debtor, under the plain language
of § 1322(b)(2), Tara Colony is not the holder of an allowed
secured claim, thus its claim is unprotected by § 1322(b)(2) and is
subject to cramdown.
Creditor’s contrary argument is based on a determination that
the emphasis in the Nobleman decision was on the “rights” of
creditors rather than value of the claims. Purportedly, the
20
critical point is not the classification of a claim as either
secured or unsecured, but rather the fact that the creditor holds
a lien on the residence. See, e.g., American Gen. Fin. v.
Dickerson, 229 B.R. 539, 542 (M.D. Ga. 1999). Creditor emphasizes
Justice Thomas’s statement in Nobelman that the position taken by
the debtors “fail[ed] to take adequate account of § 1322(b)(2)’s
focus on ‘rights.’” Nobelman, 508 U.S. at 328. It is argued that
just as the Nobelman Court sought to protect the rights of under-
secured creditors, we must similarly protect the rights of wholly
undersecured creditors.
In support of its position, Creditor points to the manner in
which § 1322(b)(2) was drafted. Specifically, Congress chose to
use the phrase “claim secured . . . by” rather than the term of art
“secured claim.” Under this line of reasoning, “secured claim” is
a subset of the broader “claims secured by” -- in this case a lien.
Therefore the nature of the claim can be determined solely by
ascertaining whether the claim is secured by a lien; any contrary
result reached through the valuation and claim determination scheme
of § 506(a) can be disregarded.14
14
Creditor emphasizes the following passage in Nobleman
stated:
But even if we accept petitioners' valuation, the bank is
still the "holder" of a "secured claim," because
petitioners' home retains $23,500 of value as collateral.
The portion of the bank's claim that exceeds $23,500 is
an "unsecured claim componen[t]" under § 506(a); however,
that determination does not necessarily mean that the
21
5. The New Split in Authority
The different positions staked out by the parties reflect a
substantial split of authority among the courts that have addressed
§ 1322(b)(2)’s applicability to a wholly undersecured second
mortgage or lien. Until very recently, the only appellate court to
address the issue was the bankruptcy appellate panel of the Ninth
Circuit. See In re Lam, 211 B.R. 36 (B.A.P. 9th Cir. 1997). The
Ninth Circuit bankruptcy panel agreed with the majority of courts
that the antimodification provision of § 1322(b)(2) does not apply
to a wholly unsecured second lien. See id. at 41. As we began
drafting this opinion, the Third Circuit handed down a like-minded
opinion, reversing a district court that had expressly adopted the
minority view. See In re McDonald, 205 F.3d 606 (3d Cir. 2000).
We are of the same mind.15 Yet the magnitude and evenness of the
"rights" the bank enjoys as a mortgagee, which are
protected by § 1322(b)(2), are limited by the valuation
of its secured claim.
508 U.S. at 329 (emphasis added).
15
If we err in our view, we are in good company. See In re
McCarron, 242 B.R. 479 (Bankr. W.D. Mo. 2000);In re Flowers, No.
98-11492, 1999 WL 118022 (Bankr. E.D. Va. Jan. 14, 1999); Johnson
v. Asset Management Group, LLC (In re Johnson), 226 B.R. 364 (D.
Md. 1998); In re Yi, 219 B.R. 394 (E.D. Va. 1998); Lam v.
Investor’s Thrift (In re Lam), 211 B.R. 36 (B.A.P. 9th Cir. 1997)
appeal dismissed, 192 F.3d 1309 (9th Cir. 1999); In re Perugini,
234 B.R. 247 (Bankr. D. Conn. 1999); In re Phillips, 224 B.R. 871
(Bankr. W.D. Mich. 1998); In re Reeves, 221 B.R. 756 (Bankr. C.D.
Ill. 1998); In re Cerminaro, 220 B.R. 518, 32 Bankr. Ct. Dec. (CRR)
708 (Bankr. N.D.N.Y. 1998); In re Bivvins, 216 B.R. 622 (Bankr.
E.D. Tenn. 1997); In re Smith, 215 B.R. 716 (Bankr W.D. Tenn.
22
split in authority is surprising, as demonstrated by the growing
number of courts holding to the minority view.16 Also, the split
1998); In re Scheuer, 213 B.R. 415 (Bankr N.D.N.Y. 1997); In re
Cervelli, 213 B.R. 900 (Bankr. D.N.J. 1997); In re Geyer, 203 B.R.
726 (Bankr. S.D. Cal. 1996); In re Sanders, 202 B.R. 986 (Bankr. D.
Neb. 1996); Associates Fin. Servs. Corp. v. Purdue (In re Purdue),
187 B.R. 188 (S.D. Ohio 1995); Wright v. Commercial Credit Corp.
(In re Wright), 178 B.R. 703 (E.D. Va. 1995), appeal dismissed
without op., 77 F.3d 472 (4th Cir. Va. 1996)(unpublished table
decision); Vaillancourt v. Marlow (In re Vaillancourt), 197 B.R.
464 (Bankr. M.D. Pa. 1996); In re Cavaliere, 194 B.R. 7 (Bankr. D.
Conn. 1996); Castellanos v. PNC Bank, Nat'l Ass'n (In re
Castellanos), 178 B.R. 393 (Bankr. M.D. Pa. 1994); In re Mitchell,
177 B.R. 900 (Bankr. E.D. Mo. 1994); Norwest Fin. Ga. v. Thomas (In
re Thomas), 177 B.R. 750 (Bankr. S.D. Ga. 1995); In re Lee, 177
B.R. 715 (Bankr. N.D. Ala. 1995); In re Woodhouse, 172 B.R. 1
(Bankr. D.R.I. 1994); In re Sette, 164 B.R. 453 (Bankr. E.D.N.Y.
1994); In re Castellanos, 178 B.R. 393 (Bankr. M.D. Pa. 1994); In
re Mitchell, 177 B.R. 900 (Bankr. E.D. Mo. 1994); In re Hornes, 160
B.R. 709 (Bankr. D. Conn. 1993);In re Moncrief, 163 B.R. 492
(Bankr. E.D. Ky. 1993); In re Kidd, 161 B.R. 769 (Bankr. E.D.N.C.
1993); In re Lee, 161 B.R. 271 (Bankr. W.D. Okla. 1993); In re
Williams, 161 B.R. 27 (Bankr. E.D. Ky. 1993); In re Hornes, 160
B.R. 709 (Bankr. D. Conn. 1993); In re Plouffe, 157 B.R. 198
(Bankr. D. Conn. 1993); see also Howard v. National Westminster
Bank (In re Howard), 184 B.R. 644 (Bankr. E.D.N.Y. 1995) (wholly
unsecured nonconsensual judicial lien may be "stripped down" in a
Chapter 7 case); In re Gray, 182 B.R. 15 (Bankr. W.D. Va. 1995)
(denial of attorney's fees to secured creditor with no remaining
collateral is not a modification); In re Hutchins, 162 B.R. 1014
(Bankr. N.D. Ill. 1994) (lender whose lien is eliminated by a
foreclosure by the first mortgagee no longer has a security
interest protected by § 1322(b)(2)); cf. In re Cardinale, 142 B.R.
42 (Bankr. D.R.I. 1992) (pre- Nobelman case).
16
See In re Perry, 235 B.R. 603 (S.D. Tex. 1999); American
General Finance, Inc. v. Dickerson, 229 B.R. 539 (M.D. Ga. 1999);
Green Tree Consumer Discount Co. v. Miller (In re Miller), No. 99-
13446, 1999 WL 1052509 (Bankr. E.D. Pa. Nov. 5, 1999); In re Cater,
240 B.R. 420 (Bankr. M.D. Ala. 1999); In re Boehmer, 240 B.R. 837
(Bankr. E.D. Pa. 1999); In re Perkins, 237 B.R. 658 (Bankr. S.D.
Ohio 1999); In re Cupp, 229 B.R. 662 (Bankr. E.D. Pa. 1999); In re
Diggs, 228 B.R. 611 (Bankr. W.D. La. 1999); In re Tanner, 223 B.R.
379 (Bankr. M.D. Fla. 1998); In re Lewandowski, 219 B.R. 99 (Bankr.
23
extends to the leading bankruptcy treatises,17 but a number of other
W.D. Pa. 1998); In re Bauler, 215 B.R. 628 (Bankr. D.N.M. 1997); In
re Mattson, 210 B.R. 157 (Bankr. D. Minn. 1997); In re Shandrew,
210 B.R. 829 (Bankr. E.D. Cal. 1997); In re Fraize, 208 B.R. 311
(Bankr. D.N.H. 1997); In re Barnes, 207 B.R. 588 (Bankr. N.D. Ill.
1997); In re Jones, 201 B.R. 371 (Bankr. D.N.J. 1996); In re
Barnes, 199 B.R. 256 (Bankr. W.D.N.Y. 1996); In re Witt, 199 B.R.
890 (W.D. Va. 1996); In re Neverla, 194 B.R. 547 (Bankr. W.D.N.Y.
1996); In re Johnson, 160 B.R. 800 (S.D. Ohio 1993) (section
1322(b)(2) prevents modification of a mechanic's lien which is
entirely undersecured).
17
Colliers adopts the majority view:
The Nobelman opinion strongly suggests . . . that if a
lien is completely undersecured, there would be a
different result. The opinion relies on the fact that,
even after bifurcation, the creditor in the case was
"still the 'holder' of a 'secured claim' because
petitioners' home retain[ed] $23,000 of value as
collateral." If the creditor had held a lien on property
that had no value (perhaps because the property was fully
encumbered by prior liens), then under this analysis it
would not have been a "holder of a secured claim"
entitled to protection by § 1322(b)(2).
5 COLLIER ON BANKRUPTCY, § 1322.06[1][a] at 1322-16 (Lawrence King 15th
ed. 1989).
The minority view is urged by Judge Keith M. Lundin, United
States Bankruptcy Judge for the Middle District of Tennessee, in
his treatise on chapter 13 bankruptcy, which states:
Although the bank's claim in Nobelman was partially
secured by real property that was the debtor's principal
residence, Justice Thomas's analysis ties the protection
from modification in § 1322(b)(2) to the existence of a
"claim" secured by a lien on real property, without
regard to whether the claim holder would also have an
allowed secured claim after valuation and analysis under
§ 506(a). The clear implication of this analysis is that
even a completely unsecured claim holder "secured" only
by a lien on real property that is the debtor's principal
residence would be protected from modification by §
1322(b)(2), notwithstanding that such an "unsecured"
lienholder could not have an allowable secured claim
under § 506(a). Although the concept of an "unsecured
24
scholarly commentators are not so evenly divided; they favor the
majority view.18
6. Resolution Based on the Text of the Statutes
The perceived ambiguity in the Nobelman opinion stems first
from Justice Thomas’s focus on the “rights” of holders of secured
claims faced with potential bifurcation, and second from his
expansive reading of the term “claims.” Conversely, his discussion
of the operative effect of § 506(a) was succinct. The fact that
bifurcation is impermissible under § 1322(b)(2) is irrelevant to
the case at hand, one that does not involve the bifurcation of an
undersecured lien. Instead, it is the first part of Justice
Thomas’s analysis that is fundamental to the resolution of this
case, namely the confirmation that § 506(a) is the starting point
secured claim" is impossible under § 506(a), Justice
Thomas's focus on the "rights" of the "holders" of a
"claim secured only by ..." in § 1322(b)(2) extends the
protection from modification to claims that are secured
by a lien on the debtor's principal residence, without
regard to the allowance or disallowance of secured claims
under § 506(a). In other words, the trigger for Justice
Thomas's protection of rights analysis is the existence
of a lien, not the presence of value to support the lien.
LUNDIN, KEITH M., CHAPTER 13 BANKRUPTCY, § 4.46, at 4-56 (2d ed. 1994).
18
See, e.g., Jane Kaufman Winn, Lien Stripping After
Nobelman, 27 LOY. L.A. L. REV. 541, 584 (1994); Veryl Victoria
Miles, The Bifurcation of Undersecured Residential Mortgages Under
§ 1322(b)(2) of the Bankruptcy Code: The Final Resolution, 67 AM.
BANK. L.J. 207, 285 (1993); Comment, Bankruptcy – How Judicial
Interpretation of 11 U.S.C. § 1322(c)(2) has Given Wholly Unsecured
Loans a whole Lot of Undeserved Security, 24 WM. MITCHELL L. REV. 713
(1998).
25
in the analysis. See Nobelman, 324 U.S. at 328.
Given the express instruction to visit § 506(a) first, it is
no wonder the majority of courts hold to the same reasoning put
forward by Debtor. If it is correct to “look[] to § 506(a) for a
judicial valuation of the collateral to determine the status of the
bank's secured claim," then it stands to reason that valuation will
control the determination of the mortgagee's security interest --
i.e., whether it is a secured or unsecured claim. “Once we accept
that courts must apply § 506(a), then it follows, even under
Nobelman, that a wholly unsecured mortgage holder does not have a
secured claim.” In re McDonald, 205 F.3d 606, 611 (3d Cir. 2000).
In the case of a wholly undersecured junior mortgage, the valuation
function of § 506(a) obviates the need to even consult §
1322(b)(2). After all, Justice Thomas’s determination that the
creditor bank held a secured claim rested upon the fact that the
lien was supported by at least some collateral value in the home.
See id. at 329. Unlike the bank in Nobelman, which held both a
secured claim and an unsecured claim, Tara Colony holds only an
unsecured claim. Without an allowed secured claim, a creditor
cannot invoke § 1322(b)(2). See In re Woodhouse, 172 B.R. 1, 2
(Bankr. R.I. 1994) (“any ‘rights’ [a wholly undersecured creditor]
may assert under Nobelman by virtue of its security documents are
illusory, hyper-technical, and possibly relevant only in law review
articles”).
26
Those courts holding to the minority view are unable to
explain how § 506(a) can apply and yet not actually serve the
valuation and claim determination purpose for which it was crafted.
Instead, these courts argue that the rights of a lienholder should
not turn on the vagaries of a property valuation. See In re Perry,
235 B.R. 603, 607 (S.D. Tex. 1999) (“Considering the inexact and
fluctuating nature of the valuation process, this result is
needlessly harsh.”); Dickerson, 229 B.R. at 543 (“This would place
too much emphasis on the valuation process, which is inexact and is
subject to fluctuations in the market.”).19 These courts are left
to argue that § 506(a) and § 1322(b)(2) are essentially in conflict
and that § 1322(b)(2) prevails. See, e.g., id. at 542. However,
we know this position to be untenable, since it was the one we
espoused in our Nobleman opinion, a position unambiguously rejected
by the Supreme Court. See Nobelman, 324 U.S. at 328-29.
The minority courts insist that the focus remain on the
existence of a lien regardless of whether there is even a penny of
value to which it can attach. Rather, if the claim is secured by
a lien on the residence, that state law label must prevail over the
operation of the Bankruptcy Code. We reject this reasoning as have
both appellate panels that have ruled on the issue. See McDonald,
(“We do not think there is any meaningful sense in which a court
19
It should be noted that Congress’s intent to protect home
lenders does not necessarily mean that they intended to entirely
insulate them from changing market conditions.
27
could be said to apply § 506(a) if the sole function of the section
was simply to adopt the state-law label of the claim as secured. .
. . Courts hardly need to perform a valuation of the collateral to
adopt the original state-law label of the claim as secured.”); In
re Lam, 211 B.R. at 41 (“Nobelman’s reference to section 506(a) is
‘meaningless unless some portion of the claim must be secured under
§ 506 analysis before the creditor is entitled to retain the rights
it has under state law.”)(quoting In re Williams, 161 B.R. 27, 29-
30 (Bankr. E.D. Ky. 1993)).20
We find the minority view to be a misreading of Nobleman,
that creates a false conflict in the Bankruptcy Code. As the Third
Circuit explained, the two provisions at issue can be easily
reconciled:
Perhaps the clearest explanation of how the Court's
discussion of the two sections can be reconciled is to
point out that while the antimodification clause uses the
term "claim" rather than "secured claim" and therefore
applies to both the secured and unsecured part of a
mortgage, the antimodification clause still states that
the claim must be "secured only by a security interest in
20
We are unconvinced that Justice Thomas’s focus on “rights”
and the expansive interpretation of the term “claim” represents a
tectonic shift in the focus of the Bankruptcy Code. Instead, the
appropriate focus remains on the nature of the claim not the nature
of the holder of the claim. See In re Hornes, 160 B.R. 709, 718
(Bankr. D. Conn. 1993). In fact, the legislative history reflects
Congress’s intent to differentiate between secured and unsecured
claims not secured and unsecured creditors. In re Lam, 211 B.R. at
41 ("The code does not generally classify creditors based on the
existence of a piece of paper purporting to give a creditor rights
in specified collateral, but rather on whether a creditor actually
holds a claim supported by valuable estate property.") (quoting In
re Hornes, 160 B.R. at 715.).
28
... the debtor's principal residence." If a mortgage
holder's claim is wholly unsecured, then after the
valuation that Justice Thomas said that debtors could
seek under § 506(a), the bank is not in any respect a
holder of a claim secured by the debtor's residence. The
bank simply has an unsecured claim and the
antimodification clause does not apply. On the other
hand, if any part of the bank's claim is secured, then,
under Justice Thomas's interpretation of the term
"claim," the entire claim, both secured and unsecured
parts, cannot be modified. We think this reading
reconciles the various parts of the Court's opinion.
In re McDonald, 205 F.3d at 612 (footnote omitted)(citation
omitted).21
21
In his FED R. APP. P. 28J letter to this Court following the
Third Circuit’s ruling in McDonald, counsel for the United States
Trustee argues that the reasoning in McDonald is flawed. The
Trustee contends that the Supreme Court rejected this same analysis
in Dewsnup v. Timm, 502 U.S. 410 (1992). The Trustee points to the
holding in Dewsnup in which the Court determined that lien
stripping was not an option available to Chapter 7 debtors:
[W]e hold that § 506(d) does not allow petitioner to
‘strip down’ respondent’s lien, because respondent’s
claim is secured by a lien and has been fully allowed
pursuant to § 502.
502 U.S. at 416. Purportedly, Dewsnup’s ban on lien stripping
carries over with similar effect on Chapter 13 debtors.
To the contrary, the Supreme Court’s holding was expressly
restricted to Chapter 7 liquidation cases, and is inapplicable to
the reorganization bankruptcy chapters. See In re Young, 199 B.R.
643, 650 (Bankr. E.D. Tenn. 1996). As one commentator explained:
The rationales advanced in the Dewsnup opinion for
prohibiting lien stripping in Chapter 7 bankruptcies,
however, have little relevance in the context of
rehabilitative bankruptcy proceedings under Chapters 11,
12, and 13, where lien stripping is expressly and broadly
permitted, subject only to very minor qualifications.
The legislative history of the Code makes clear that lien
stripping is permitted in the reorganization chapters.
Winn, supra note 18, at 554-55 (footnote omitted).
29
In sum, we find no tension between the valuation and claim
determination provisions of § 506(a) and the antimodification
provision of § 1322(b)(2). As applied to Tara Colony’s claim,
Debtor properly opted for a valuation of his principal residence
pursuant to § 506(a). That valuation revealed that the junior lien
on the property was unsupported by any value in the residence after
satisfaction of the first mortgage. Consequently, Tara Colony
holds only an unsecured claim, and therefore, may not invoke the
antimodification protection of § 1322(b)(2). The bankruptcy court
erred when it refused to confirm Debtor’s proposed plan.
7. Only the Majority View Comports with
Legislative History and Serves Public Policy
The result we reach today is compelled by consideration of the
Bankruptcy Code and the Nobelman decision. The policies underlying
the mortgage antimodification provisions further bolster our
position. A review of the legislative history of § 1322(b)(2)
reveals that the minority view is unsupported by the legislative
history of § 1322(b)(2) and ill serves public policy in a number of
ways. But just as the minority view runs far afield of the purpose
of the antimodification provision, a review of recent bankruptcy
reforms demonstrates that the minority view’s breach with
congressional intent is only widening.
In his brief concurring opinion in Nobelman, Justice Stevens
30
explained that the result reached by the unanimous court comported
with the legislative history of § 1322(b)(2) which reflected
Congress’s intent to bestow “favorable treatment” upon residential
mortgage lenders “to encourage the flow of capital into the home
lending market.” Nobelman, 508 U.S. at 332 (Stevens, J.,
concurring). The courts holding to the minority view contend that
Congress intended to provide protection to all lenders operating in
the mortgage lending markets without differentiating between home-
purchase (i.e., first mortgage) lending and home equity or consumer
(i.e., junior mortgage) lending. Under this reasoning, §
1322(b)(2) illustrates Congress's intent to unequivocally protect
all lending -- as long as the debt is secured by the debtor’s
principal residence -- regardless of the purpose of the loan.22
22
Although our review of cases involving wholly undersecured
junior lienholders revealed several in which the subordinate
lienholder was either a homeowners’ or condominium association, a
substantial majority involve lenders providing consumer spending
loans. See, e.g., In re Perry, 235 B.R. 603 (S.D. Tex. 1999)
(homeowners’ association); In re Robinson, 231 B.R. 30 (Bankr.
D.N.J. 1997) (condominium association). We are mindful that
different policy considerations are at play when these
associations’ liens are at issue than the liens of consumer
spending lenders. Homeowners’ assessments are frequently a cost-
effective means of repairing a subdivision’s streets and
maintaining adjoining public rights of way, preventing nuisances
that can arise from the failure of nearby property owners to keep
their tracts free from trash or pests. Similarly, assessments can
finance on-site private security to prevent crime and reduce the
burden on public-financed law enforcement. Finally, by maintaining
established quality standards within the subdivision, assessments
enhance the property values of individual residences thus
contributing to an increase area tax base. Condominium assessments
are often the sole means of providing for the maintenance of common
areas or shared utilities.
31
In contrast, the majority of courts analyzing the legislative
history on this point have concluded that Congress did not view all
mortgage lending as such an undifferentiated enterprise. See,
e.g., In re Pouffe, 157 B.R. 198, 200 (Bankr. Conn. 1993). Rather,
§ 1322(b)(2) was enacted to increase lending for home purchases by
providing home mortgage lenders greater protection under the
Bankruptcy Code. “[B]ecause second mortgages are not in the
business of lending money for home purchases, the same policy
reasons for protection of first mortgages under section 1322(b)(2)
do not exist for second mortgages.” In re Lam, 211 B.R. at 41; see
also Miles, supra note 18 (“[M]ost cases involving a cramdown are
cases where the property has been overappraised or junior
lienholders have taken mortgages against oversecured property,
examples of creditor abuse in mortgage lending that do not merit
protection by Congress.”). Because secondary lending is targeted
primarily at personal spending, allowing wholly undersecured second
But while we can acknowledge a markedly different purpose for
the lien, in our analysis, we can look only to the manner in which
that claim is structured (i.e., by a subordinate lien or mortgage).
Our decision to today does not reflect a belief that Congress
specially targeted association assessments secured by a subordinate
lien for inferior treatment, but simply that such assessments fall
alongside categories of lending that lie solidly outside the narrow
zone of protection crafted by Congress in § 1322(b)(2). Were we
free to draw fresh lines of protection, we might decide that some
form of reconfiguration is in order to take account of this limited
subset of cases. However, Congress has defined the boundaries of
antimodification protection with the larger subset of cases in
mind, and we cannot not disturb its judgment. If these types of
assessments are moved beyond the reach of § 506(a) it will be at
Congress’s behest.
32
mortgages under the umbrella of the antimodification clause would
be unlikely to positively impact home building and buying. See In
re Lam, 211 B.R. at 41. “The holder of a second mortgage is apt to
be very much like other general creditors, and therefore it seems
reasonable that a wholly unsecured second mortgage will be subject
to the same rules that apply to other secured claims-- i.e., a
claim not secured by any current value in the specified collateral
is deemed an unsecured claim.” In re McDonald, 205 F.3d 606, 613
(3rd Cir. 2000).
Not only is the minority view mistargeted, but adoption of the
minority view would upset the delicate balance that Congress
established between rights of purchase-money lenders and over-
extended debtors. This interpretation would jeopardize one of the
prime benefits of Chapter 13 -- the ability of a debtor to retain
existing assets -- by creating an incentive for lenders to take a
security interest in a borrower’s principal residence
notwithstanding the absence of value in the residence for the
creditor. See In re Lam, 211 B.R. at 41 (“[S]uch a result might
encourage junior mortgagees to intentionally obtain a mortgage on
property that is already overburdened with senior mortgages for the
sole purpose of avoiding modification of his or her pre-petition
contractual rights.”) (citing In re Neal, 10 B.R. 535, 537 (Bankr.
S.D. Ohio 1981) and In re Harris, 94 B.R. 832, 836 (D.N.J.1989)).
As one commentator elaborated, this is not an abstract problem:
33
In addition, several other policy justifications support
denying antimodification protection to junior lienors.
One has to do with predatory lending practices prevalent
in communities that have traditionally been denied access
to finance on conventional terms. Although the practice
of granting home equity loans to permit homeowners to
cash out their equity in houses that may have appreciated
substantially since purchase may not raise significant
policy issues in many instances, a real problem arises
when low-income households--in which home equity may be
the only significant asset--are pressured into granting
multiple liens on their homesteads by unscrupulous
lenders. Predatory lenders may target members of [these
low-income] communities threatened with foreclosure by
refinancing their debt at astronomical interest rates.
The ability of such junior lienors to hide behind the
antimodification provision of § 1322(b)(2) is
particularly offensive to public policy.
Jane Kaufman Winn, Lien Stripping After Nobelman, 27 LOY. L.A. L.
REV. 541, 584 (1994). In essence, an overly expansive reading of
§ 1322(b)(2) allows opportunistic lenders to convert what would
normally be dischargeable unsecured debt into nondischargeable
secured debt. Lenders are able to obtain high interest rates on
their loans while avoiding the concomitant risk usually associated
with such lending. See Comment, supra note 18 at 714-15. The less
expansive view of § 1322(b)(2) that we embrace is in accord with
the purpose -– acknowledged by both sides of this debate -- of
promoting home purchase lending, while at the same time withholding
incentives to opportunistic secondary lenders to acquire unsecured
liens in order to defeat potential Chapter 13 plans.
Just as it is clear that the legislative history of §
1322(b)(2) does not support the minority view, a review of
subsequent legislative activity also counsels against over
34
extension of antimodification protection. In an outstanding
opinion, the Bankruptcy Appellate Panel for the Sixth Circuit
compiled a detailed history of the legislative developments between
1991 and the passage of the 1994 bankruptcy reforms. See First
Union Mortgage Corp. v. Eubanks (In re Eubanks), 219 B.R. 468, 473-
77 (B.A.P. 6th Cir. 1998). Legislative history of the Bankruptcy
Reform Act of 1994 “reveals that between 1991 and 1994 both houses
of Congress repeatedly studied ways to reduce the protection of
subordinate and ‘short term’ mortgages in Chapter 13 cases.” In re
Eubank, 219 B.R. at 473-77. Specifically, “Congress considered the
need for [an] exception to § 1322(b)(2) continuously.” Id. at 479.
Thus, § 1322(c)(2) evinces a congressional determination to further
define the proper balance between the interests of debtors and home
mortgage creditors. By enactment of § 1322(c)(2), Congress sought
to withdraw antimodification protection from certain classes of
“second mortgages,” including “short-term, high-interest rate home
equity loans.” In re Perry, 235 B.R. 603, 608 (S.D. Tex.
1999)(quoting In re Eubanks, 219 B.R. at 480). As the Eubanks
court explained, “[r]arely will this provision affect the holder of
a traditional residential, long term mortgage, because any long
term mortgage that is payable within the term of a Chapter 13 plan
will not likely be undersecured.” 219 B.R. at 480 The focus of §
1322(c)(2) is short term, often high interest, second and
nontraditional mortgages, to which those in financial distress
35
sometimes fall victim.”. See In re Mattson, 210 B.R. at 161 ("The
section will typically apply to second mortgages such as this one,
which are based very little on the value of the home and more on
the leverage provided by having a mortgage on a debtor's homestead.
A true first mortgage, payable over a longer term . . ., will
rarely, if ever, be undersecured, especially when the last payment
is coming due during the term[ ] of a plan.").23
The minority view fails to recognize that the enactment of §
1322(c)(2) helps to bring congressional intent into even clearer
focus. Passage of this exception to § 1322(b)(2) demonstrates that
Congress intends to maintain the protections afforded home mortgage
lenders, while preventing “thinly disguised personal” lending from
taking advantage of those protections. See Comment, supra note 18,
at 740. We would be ill advised to extend antimodification
protection to wholly undersecured junior mortgages when such an
interpretation would deviate so strongly from the manifest intent
of Congress.
23
The facts of In re Mattson are illustrative of just such
lending practices. Mattson bought a $49,000 home by obtaining a
loan for $47,405, secured by a priority mortgage on the homestead.
The following year, Mattson received an unsolicited offer for a
debt consolidation loan from Commercial Credit Consumer Services,
Inc. Mattson applied for a $5,000 loan to refinance personal
credit card debt, but was talked into a $10,000 loan, secured by a
second mortgage on her home. No inquiry was made by the lender
about the value of her home or how heavily it was encumbered with
existing mortgage debt. She agreed to a five-year repayment
schedule. Two years later Mattson was unable to make the loan
payments and filed for protection under Chapter 13.
36
Many courts have also expressed concern that over-extension of
§ 1322(b)(2)’s antimodification protections would diminish the
appeal of Chapter 13 and lead to an increase in either Chapter 11
reorganizations or Chapter 7 liquidations. See In re McDonald, 205
F.3d at 614 (“[A] debtor who has outstanding balances on multiple
mortgages exceeding the current value of the debtor's home often
will not try to keep a home encumbered with so much debt, and
instead will turn to a Chapter 7 bankruptcy and allow the home to
be sold in liquidation.”); In re Hornes, 160 B.R. 709, 719 (Bankr.
D. Conn. 1993)(explaining that adoption of the minority view "might
induce more debtors who would qualify for chapter 13 relief to file
chapter 11 cases, in which all unsecured claims may be treated as
such, a more expensive and less expeditious alternative."). The
majority view better serves the policy imperatives of the
Bankruptcy Code by encouraging debtors to first consult Chapter 13
before seeking either to reorganize pursuant to the more expensive
and cumbersome Chapter 11 or liquidate pursuant to Chapter 7.
In conclusion, the legislative history and general policy
considerations reinforce our holding that the Bankruptcy Code does
not permit a wholly undersecured lienholder to rely upon the
antimodification protections afforded mortgagees whose secured
interest in the homestead is supported by at least some value. “It
is not consistent with the statutory scheme of Chapter 13, and the
Bankruptcy Code's bifurcated treatment of [] secured and unsecured
37
claims ... to assume that a junior mortgagee on real property which
is already overburdened by senior mortgages, could insist on being
treated as a creditor with a secured claim and insist on full
payment of its claim based upon the pre-petition contractual
arrangement with the debtor.” In re Plouffe, 157 B.R. 198, 200
(Bankr. D. Conn. 1993).
C. § 1322(c)(2)
Debtor advances an alternative ground for reversal based on
the exception to § 1322(b)(2), discussed supra, enacted as part of
the Bankruptcy Reform Act of 1994. This exception, found at §
1322(c)(2), provides:
(c) Notwithstanding subsection (b)(2) and applicable
nonbankruptcy law--
* * *
(2) in a case in which the last payment on the
original payment schedule for a claim secured only
by a security interest in real property that is the
debtor's principal residence is due before the date
on which the final payment under the plan is due,
the plan may provide for the payment of the claim
as modified pursuant to section 1325(a)(5) of this
title.
11 U.S.C. § 1322(c)(2)(1999). We find Debtor’s contention that the
Tara Colony annual maintenance assessment falls within the ambit of
this exception thoroughly unpersuasive.
Tara Colony’s claim is for the maintenance assessment due
January 1 preceding the date Bartee filed for bankruptcy. Bartee
argues that § 1322(c)(2) applies because the sole payment at issue
came due prior to the expiration of his plan. If § 1322(c)(2)
38
applies, then under § 1325(a)(5), the debtor may cramdown the claim
“to the value of the collateral securing the debt” -– in this case,
$0. In re Eubanks, 219 B.R. at 471; see In re Young, 199 B.R. 643,
647 (Bankr. E.D. Tenn. 1996).
Presented with a virtually identical factual scenario, the
Perry court rejected the debtor’s argument that § 1322(c)(2)
applied because an assessment payment came due during the life of
the debtor’s plan. See In re Perry, 235 B.R. at 608-09. As the
Perry court explained, application of § 1322(c)(2) would require
“last payment” due to be read as meaning “most recent” payment due.
See id. at 608. This interpretation is in conflict with the
meaning that most courts give “last payment,” see id., and is
unsupported by the legislative history of § 1322(c)(2). See In re
Eubanks, 219 B.R. at 473-77. Consequently, courts apply §
1322(c)(2) solely to claims arising from mortgages that mature
prior to the expiration of a debtor’s chapter 13 plan. See In re
Perry, 235 B.R. at 608; see also In re Eubanks, 219 B.R. at 469; In
re Bagne, 219 B.R. 272, 273 (Bankr. E.D. Ca. 1998). The better
reading is that “the ‘last’ payment due under the original schedule
in § 1322(c)(2) refers to the ‘final’ payment and not the most
recent payment.” In re Perry, 235 B.R. at 608.
Furthermore, the one-time yearly assessment cannot properly be
characterized as having an “original payment schedule” similar to
that of a mortgage. Id. at 609. The assessment is calculated each
39
year and comes due upon assessment. The payment of the assessment
does not pay down an existing debt. Thus, adoption of Debtor’s
interpretation would render the “original payment schedule”
language superfluous. See In re Perry, 235 B.R. at 608-09.
Finally, we are unable to find, and Debtor is unable to
provide a citation to, any case in which a court has applied §
1322(c)(2) to a claim stemming from an annual assessment lien.
Accordingly, we hold that an annual assessment due upon assessment
does not meet the requirements of § 1322(c)(2).
IV. CONCLUSION
For the reasons stated above, we hold that a wholly unsecured
lien is not subject to the antimodification clause in § 1322(b)(2).
Also, an annual real property assessment does not fall within the
class of secured interests encompassed by § 1322(c)(2). The
judgment of the District Court is AFFIRMED IN PART and REVERSED IN
PART. This case is to be REMANDED to the Bankruptcy Court for
further proceedings regarding confirmation of Debtor’s Chapter 13
Plan.
40