Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
10-20-1994
IN RE: Lillie Johns
Precedential or Non-Precedential:
Docket 94-1437
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Recommended Citation
"IN RE: Lillie Johns" (1994). 1994 Decisions. Paper 162.
http://digitalcommons.law.villanova.edu/thirdcircuit_1994/162
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 94-1437
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IN RE: LILLIE M. JOHNS
LILLIE M. JOHNS
v.
ROUSSEAU MORTGAGE CORPORATION;
COMMONWEALTH EASTERN MORTGAGE CORPORATION;
COMMONWEALTH MORTGAGE CORPORATION OF AMERICA;
DELAWARE COUNTY REGIONAL WATER CONTROL;
DELAWARE COUNTY REGIONAL WATER CONTROL AUTHORITY;
PENNSYLVANIA HOME REMODELING COMPANY;
REDEVELOPMENT AUTHORITY OF CHESTER;
DEPARTMENT OF PUBLIC WELFARE
Rousseau Mortgage Corporation,
Appellant
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On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil No. 93-06624)
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Submitted Under Third Circuit LAR 34.1(a)
Thursday, September 22, 1994
PANEL: BECKER, COWEN and GARTH, Circuit Judges
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(Opinion filed October 20, 1994)
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Lawrence T. Phelan
Peter C. Cilio
Federman & Phelan
Two Penn Center Plaza
Suite 900
Philadelphia, Pennsylvania 19102
Attorney for Appellant
Lawrence R. Rudderham
Kirifides & Rudderham
P.O. Box 723
Chester, Pennsylvania 19016
Attorney for Appellee
OPINION OF THE COURT
GARTH, Circuit Judge:
This appeal presents us with two issues. First,
whether a debtor in a chapter 13 bankruptcy may modify the rights
of an undersecured mortgage lender under 11 U.S.C. § 1322(b)(2)
and 11 U.S.C.§ 506(a) when the mortgage is secured by both real
and personal property. Second, whether a pre-petition
foreclosure judgment precludes modification of the mortgagee's
secured claim because the terms of the mortgage have "merged"
into the foreclosure judgment. The district court held that
modification was appropriate and was not precluded by merger. We
affirm.
I.
Appellee Lillie M. Johns ("Ms. Johns") purchased a
house in Chester, Pennsylvania on April 29, 1986, with the help
of a loan secured by a mortgage that was later assigned to
Rousseau Mortgage Corporation ("Rousseau"). The mortgage covered
Ms. Johns' home as well as "any and all appliances, machinery,
furniture and equipment (whether fixtures or not) of any nature
whatsoever now or hereafter installed in or upon said premises."
Appellee's Appendix 31.
At some time prior to filing in bankruptcy, and
following over a year's delinquency on the part of Ms. Johns, the
Delaware County Court of Common Pleas entered a foreclosure
judgment against Ms. Johns and in favor of Rousseau in the amount
of $39,557.15.
It was stipulated in the bankruptcy court that the fair
market value of Ms. Johns' residence was $8,000, and that the
value of her appliances, machinery, furniture and equipment
("personalty") was $1,000.
On April 15, 1993, shortly before the planned
foreclosure sale, Ms. Johns filed a voluntary petition for relief
under Chapter 13 of the Bankruptcy Code. Thereafter, Ms. Johns
instituted an adversary action in bankruptcy court against
Rousseau to limit Rousseau's claim to the fair market value of
the mortgaged premises. By Order of November 4, 1993, the
bankruptcy court, pursuant to 11 U.S.C. § 506(a), bifurcated
Rousseau's interest into a secured claim of $9,000 and an
unsecured claim of $30,557.15, holding that the anti-modification
provision of 11 U.S.C. §1322(b)(2) did not prohibit a
modification of the debtor's indebtedness where the secured claim
was secured by personalty as well as an interest in the debtor's
principal residence. The bankruptcy court also rejected
Rousseau's argument that the mortgage foreclosure judgment
precluded reliance on the mortgage's "additional security"
provisions because the mortgage had merged into the judgment.
Rousseau appealed to the district court, which, by
Memorandum and Order dated March 17, 1994, affirmed the order of
the bankruptcy court. This appeal followed.
Because this case was submitted on a stipulated record
and presents issues of statutory interpretation and conclusions
of law only, our standard of review is plenary. Brown v.
Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d
Cir. 1988).
II.
Chapter 13 of the Bankruptcy Code permits debtors to
structure repayment of their indebtedness through a plan approved
by the bankruptcy court. Section 1322(b) lists ten provisions
which Chapter 13 debtors may, at their option, include in their
bankruptcy plans. Section 1322(b)(2) in particular provides that
a 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, or of
holders of unsecured claims, or leave
unaffected the rights of holders of any class
of claims.
(emphasis added). This provision thus allows modification of the
rights of both secured and unsecured creditors, with the
exception that the rights of creditors whose claims are secured
only by a mortgage on the debtor's principal residence may not be
modified.
Section 506(a) defines allowed1 secured and allowed
unsecured claims as follows:
An allowed secured 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.
Section 506(a) thus "provides that a claim is secured only to
the extent of the value of the property on which the lien is
fixed." United States v. Ron Pair Enterprises, Inc., 489 U.S.
235, 239, 109 S.Ct. 1026, 1029 (1989). Any surplus is, by
definition, unsecured.
We have recently held in In re Hammond, 27 F.3d 52 (3d
Cir. 1994) that the Bankruptcy Code did not preclude bifurcation
of a secured interest in a personal residence when personalty
also secured the debtor's loan. In so holding we have re-
affirmed the continuing vitality of a prior holding of this Court
reached in Wilson v. Commonwealth Mortg. Corp., 895 F.2d 123 (3d
Cir. 1990).
In Wilson we held that the anti-modification provision
of § 1322(b)(2) does not prohibit modification of the unsecured
portion of an undersecured mortgage on the debtor's principal
residence. This holding was overturned by the Supreme Court in
Nobelman v. American Sav. Bank, __ U.S. __, 113 S.Ct. 2106
1
. An "allowed" claim is one that will serve as the basis
for distribution. 11 U.S.C. § 502(a).
(1993). However, our decision in Wilson in favor of the
mortgagor-debtor was also based on a second and alternative
ground. Having noted that the mortgage agreement in question
covered not only real estate but personalty as well, we concluded
that:
[T]he anti-modification provision of section 1322 does
not bar the bankruptcy court's order [limiting the
creditor's allowed secured claim to the fair market
value of the principal residence] because the
creditor's interest was not secured only by real
property as required by the statute. By its express
terms, § 1322 prohibits modification of a creditor's
rights only when the creditor's claim is "secured only
by a security interest in real property that is the
creditor's principal residence."
Wilson, 895 F.2d at 128; see also Sapos v. Provident Inst. of
Sav. in Town of Boston, 967 F.2d 918 (3d Cir. 1992). Nobelman
did not address, and hence did not disturb, this alternative
ground of decision.
Thus, in Hammond we reasserted and upheld the principle
that bifurcation is available when a mortgage secures both the
residence and personal property of the debtor. The Hammonds had
given Commonwealth a purchase money mortgage on their home and on
"any and all appliances, machinery" etc. installed in their home.
The security interest given in Hammond cannot be distinguished
from the security interest given by Ms. Johns to Rousseau.
Hence, the present case is in all relevant respects
indistinguishable from, and therefore controlled by, Hammond.
See Internal Operating Procedure 9.1.2 Indeed, Rousseau's
2
. I.O.P. 9.1 states that:
supplemental brief, filed shortly after our decision in Hammond
was handed down, at least implicitly acknowledged that Hammond
governs our decision here by focusing almost exclusively on
reasons why Hammond should be overruled as inconsistent with
Nobelman.
III.
Rousseau also contends that because the mortgage has
been foreclosed, the terms of the mortgage "merge" into the
foreclosure judgment of the Delaware County Court of Common Pleas
and thereby cease to exist, leaving Rousseau with a security
interest which does not include Ms. Johns' personalty.
Accordingly, Rousseau argues that Nobelman precludes bifurcation
of the remaining security interest - that is the residence - into
secured and unsecured interests.3
Rousseau notes that in In re Stendardo, 991 F.2d 1089
(3d Cir. 1993) we held that where a foreclosure judgment had been
entered on a mortgage containing no specific language preserving
a debtor's obligation to pay taxes and insurance premiums beyond
the date of the judgment, the mortgagee could not rely on the
terms of the mortgage for recoupment of advances made for taxes
(..continued)
It is the tradition of this court that the holding of a
panel in a reported opinion is binding on subsequent
panels. No subsequent panel overrules a holding in a
published opinion of a previous panel. Court in banc
consideration is required to do so.
3
. The same issue raised here was also raised in In re Hammond,
27 F.3d 52 (3d Cir. 1994). We did not address it at that time,
however, because the appellant had not argued the merger issue to
the district court.
and insurance. From this, Rousseau argues that all specific
terms of the mortgage were merged into the judgment, leaving
Rousseau with a security interest in Ms. Johns' residence alone
because § 1322(b)(2) evinces Congress' intention to protect home
mortgage lenders from cram-downs.
We are not attracted by this argument. If Rousseau's
rights under § 1322(b)(2) were to be determined solely because it
was the holder of a judicial lien rather than the holder of a
mortgage then it could not claim protection under the anti-
modification provision because that provision "applies only to
claims secured by a 'security interest' in the debtor's
house. . .." First Nat. Fidelity Corp. v. Perry, 945 F.2d 61, 64
(3d Cir. 1991), and Perry, referring to the Code, defines a
security interest "as a lien created by an agreement" 11 U.S.C. §
101(51). It is clear that a judgment lien is not "created by
agreement."
In Perry, however, we also held that a "security
interest" within the meaning of § 1322(b)(2) continues to exist
after a foreclosure judgment. Thus in determining whether the
protections of § 1322(b)(2) attach, we require that the security
interest created by the parties be analyzed as we discussed
above. The security interest created by Ms. Johns' original
mortgagee and then assigned to Rousseau included Ms. Johns'
personal property as well as her principal residence. In that
circumstance, we have held in Hammond, supra, that modification
of the security interest is not barred by the operation of §
1322(b)(2).
Moreover, Rousseau has not demonstrated why it should
be favored over other secured creditors just by virtue of having
reduced its claim to a foreclosure judgment. Rousseau has
furnished us with no authority which would justify a holding that
Rousseau was entitled to be placed in a superior position
compared to other secured creditors simply because it has
relinquished a security interest that was taken in the original
transaction with Ms. Johns. The original contract with Ms.
Johns, which specified that the mortgagee would be secured not
only by a mortgage on her principal residence but also by a
security interest in her personalty, fell within the exception
found in § 1322(b)(2). Rousseau cannot now escape from that
exception by relying on its status as the holder of a non-
consensual judgment and thereby gain the protection that had
originally been given up when a security interest in both real
and personal property had been sought and taken. Nor can it
obtain that protection by now foregoing part of the security,
i.e. the personalty, which it originally required.
Our holding in Perry that a security interest continued
to exist after a foreclosure judgment was based in large part on
our concern that to hold otherwise would frustrate the clear
intentions of Congress: "If modification of the lender's rights
were permissible after it secured a foreclosed judgment, the
[antimodification] assurance afforded by § 1322(b)(2) would be
rendered largely illusory." Perry at 65. The same holds true of
the exception to that section's antimodification protections.
Thus, although the foreclosure judgment terminated the
mortgage, i.e. the contractual relationship between Ms. Johns and
now Rousseau, see Matter of Roach, 824 F.2d 1370 (3d Cir. 1987),
the security interest taken by Rousseau survives in toto and that
interest must, as we have previously explained, include
Rousseau's security interest in Ms. Johns' personalty. This
being so, § 1322(b)(2) operates to permit modification into
secured and unsecured interests, as the bankruptcy and district
court held.
IV.
Having held that § 1322(b)(2) does not bar modification
of a mortgage which is secured by both real and personal property
and having held that a pre-petition foreclosure judgment cannot
bar modification of the mortgagee's secured claim by reason of
"merger," we will affirm the March 17, 1994 judgment of the
district court.