United States Court of Appeals
For the First Circuit
No. 02-2501
IN RE MARIA CELINA CARVALHO AND FRANCISCO ANDRADE,
Debtors.
___________________
MARIA CELINA CARVALHO AND FRANCISCO ANDRADE,
Plaintiffs, Appellees,
v.
FEDERAL NATIONAL MORTGAGE ASSOCIATION,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Robert E. Keeton, U.S. District Judge]
Before
Selya, Circuit Judge,
R. Arnold,* Senior Circuit Judge,
and Lipez, Circuit Judge.
Deirdre J. Keady, with whom Thomas J. Walsh and Harmon Law
Offices, PC were on brief, for appellant.
Jeffrey M. Frankel for appellees.
July 9, 2003
__________
*The Hon. Richard S. Arnold, of the Eighth Circuit, sitting by
designation.
SELYA, Circuit Judge. In this case of first impression
at the federal appellate level, we must address the effect of post-
confirmation default and consequent relief from the automatic stay
on the bifurcated lien of a secured creditor. The creditor claims
that, in such circumstances, relief from the automatic stay
nullifies the earlier lien-stripping order, mends the bifurcation,
and restores the lien on the collateral to its original shape.
Both the bankruptcy court and the district court rebuffed this
claim. We too reject it: relief from the automatic stay, in and
of itself, works no such alchemy.
I.
Background
The relevant facts are undisputed. In 1991, the debtors,
Maria Celina Carvalho and Francisco Andrade, borrowed $155,000 from
Federal National Mortgage Association (FNMA). They signed a
promissory note in that amount and secured it by granting FNMA a
first mortgage on a multi-family residence in Dorchester,
Massachusetts (the Property).
Approximately five years later, the debtors filed a
voluntary petition under Chapter 13 of the Bankruptcy Code. See 11
U.S.C. §§ 1301-1330 (allowing individual debtors to reorganize
their debts). FNMA filed a proof of claim, presumably including
arrearages, accrued interest, late charges, and the like, in the
amount of $165,166. Several other creditors also filed claims.
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Alleging that the then-current value of the Property was
less than the amount owed to FNMA, the debtors asked the court to
bifurcate FNMA's claim into secured and unsecured portions. See 11
U.S.C. § 506(a) (stating that the "allowed claim of a creditor
secured by a lien on property . . . , is a secured claim to the
extent of the value of such creditor's interest . . . and is an
unsecured claim to the extent that the value of [such interest] is
less than the amount of such allowed claim"); see also id. § 103(a)
(making general provisions under Chapter 5 of the Bankruptcy Code
applicable to bankruptcy cases under, inter alia, Chapter 13).
After some skirmishing, not relevant here, the parties stipulated
to the applicability of this lien-stripping protocol. They then
agreed to divide the debt into a secured claim of $105,000
(representing the agreed value of the Property) and an unsecured
claim for roughly $60,000 (representing the balance of the
indebtedness owed to FNMA).
In due course, the bankruptcy court confirmed a Chapter
13 plan (the Plan) that embodied the bifurcation. Under the terms
of the Plan, the debtors were to make regular payments to a court-
appointed trustee, who would then disburse funds to the various
creditors (including FNMA) according to a set schedule. Under this
scenario, FNMA was to receive fixed monthly payments on the secured
portion of its bifurcated claim until that item was paid in full
but was to receive only an aggregate 10% dividend on the unsecured
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portion. See id. § 1322(b)(2) (allowing bankruptcy courts to
approve Chapter 13 plans modifying the rights of most secured
creditors); see also Lomas Mtge., Inc. v. Louis, 82 F.3d 1, 7 (1st
Cir. 1996) (interpreting sections 506(a) and 1322(b)(2) of the
Bankruptcy Code to allow bifurcation of a secured creditor's claim
in a Chapter 13 proceeding). The Plan also incorporated an
agreement to the effect that the debtors would continue to pay FNMA
directly to fund an escrow account for taxes and insurance on the
Property.
At some point — the exact date is of no moment — the
debtors began struggling to meet their obligations under the Plan.
When they failed to make the obligatory escrow payments, FNMA
sought relief from the automatic stay in order to exercise its
state-law right of foreclosure against the Property. See 11 U.S.C.
§ 362(a) & (d)(1) (staying proceedings against a debtor or her
estate but allowing a court to lift or modify the stay "for
cause"). FNMA's motion acknowledged the bifurcation of its claim
and prayed generally for relief from the stay. It did not,
however, specify the amount of the debt that it envisioned as
secured.
The debtors were not represented by counsel at this point
in time and interposed no objection. Accordingly, the bankruptcy
court granted FNMA's motion. The court's order did not specify the
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amount of the secured claim, nor did it mention (let alone revoke)
the earlier bifurcation.
Notwithstanding the lifting of the automatic stay, the
debtors continued, albeit with an occasional misstep, to make
payments to the trustee as called for by the Plan.1 When the
debtors finally obtained counsel, they moved to vacate the order
granting relief from the automatic stay. The bankruptcy court
denied this motion on November 13, 2000. For reasons that are not
readily apparent from the record, FNMA nonetheless refrained from
moving forward with a foreclosure proceeding.
Near the end of the following year, the debtors moved to
discharge FNMA's mortgage. By then, they had completed payment of
FNMA's secured and unsecured claims as called for by the Plan and
had offered to pay the arrearages incurred with respect to the
escrow account. Although FNMA had not yet foreclosed on the
Property, it steadfastly refused to accept payments from either the
trustee or the debtors after the date of default.
Consistent with this position, FNMA objected to the
proposed discharge. The main thrust of its objection was that the
debtors had not in fact fully paid (or offered to pay) their debt
because their payments had tracked the Plan instead of the terms of
the seminal promissory note. In FNMA's view, the latter, rather
1
The trustee twice moved to dismiss the case for the debtors'
failure to remain current. Both times, however, the debtors
managed to bring their payments up to date.
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than the former, limned the extent of the debtors' actual
obligation because the bankruptcy court's order lifting the
automatic stay had, in effect, nullified the earlier bifurcation
and reinstated the debt to its original shape. On this basis, FNMA
asserted that the debtors could obtain a discharge of the mortgage
only by paying the full contractual amount owed on the original
indebtedness, dollar for dollar.
The debtors vehemently disagreed with this logic, and the
bankruptcy court rejected it. The court concluded that lifting the
automatic stay lacked the talismanic significance envisioned by
FNMA. It held, moreover, that the confirmation of the Plan had a
res judicata effect, thus limiting FNMA's entitlement to the
amounts provided for in the Plan. Accordingly, the court enjoined
any foreclosure pending an assessment of the debtors' ability to
cure the earlier default.
On FNMA's first-tier appeal, the district court affirmed
the injunction (albeit on a somewhat different rationale). This
second-tier appeal followed. See 28 U.S.C. § 158(a) & (d).
II.
Analysis
As the parties have framed the case, the central issue is
not whether the debtors have a right to attempt to cure their
default, but, rather, how much they must pay in order to do so. In
making this determination, the court of appeals normally looks to
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the bankruptcy court's decision, scrutinizes that court's findings
of fact for clear error, and affords de novo review to its
conclusions of law. See Jamo v. Katahdin Fed. Credit Union (In re
Jamo), 283 F.3d 392, 401 (1st Cir. 2002). Under this paradigm, we
owe no particular deference to the conclusions of the intermediate
appellate tribunal (be it a district court or a bankruptcy
appellate panel). Brandt v. Repco Printers & Lithographics, Inc.
(In re Healthco Int'l, Inc.), 132 F.3d 104, 107 (1st Cir. 1997).
Where, as here, the core dispute is over a question of law,
engendering de novo review, Jamo, 283 F.3d at 401, we are not
wedded to the bankruptcy court's rationale, but, rather, may affirm
its decision on any independently sufficient ground made manifest
by the record. T I Fed. Credit Union v. DelBonis, 72 F.3d 921, 929
(1st Cir. 1995); Resolution Trust Corp. v. Best Prods. Co. (In re
Best Prods. Co.), 68 F.3d 26, 30 (2d Cir. 1995).
Before plunging into our analysis, we deem it important
to note what FNMA does not contest. In mounting this appeal, it
challenges neither the validity of the Plan nor the bifurcation of
its claim within the Plan as originally formulated. This bears out
our intuition that both the Plan and the bifurcation were properly
drafted and implemented under existing law. See, e.g., Lomas
Mtge., 82 F.3d at 7; Sapos v. Provident Inst. of Sav., 967 F.2d
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918, 925-26 (3d Cir. 1992).2 Turning to the contentions that FNMA
does advance, its principal thesis is that relief from the
automatic stay, in and of itself, unlocked the shackles of the
Plan; once the bankruptcy court lifted the stay, this thesis runs,
the Plan no longer bound it in any way (and, therefore, the
concessions embodied in the Plan went up in smoke).
The debtors' initial response is that the fact of
confirmation has a res judicata effect sufficient to trump FNMA's
thesis. This counterattack has a certain superficial appeal.
Broadly stated, the doctrine of res judicata operates to bar the
relitigation of issues that were or could have been raised in an
earlier action between the same parties prescinding from the same
set of operative facts. See Allen v. McCurry, 449 U.S. 90, 94
(1980); Kale v. Combined Ins. Co., 924 F.2d 1161, 1165-66 (1st Cir.
1991). The doctrine is not foreign to bankruptcy practice in
general or to Chapter 13 proceedings in particular. Thus,
confirmation of a Chapter 13 plan customarily is res judicata as to
all issues that were or could have been decided during the
2
Typically, bifurcation does not apply to a debtor's principal
residence. See 11 U.S.C. § 1322(b)(2). Here, a part of the
Property served as the debtors' principal residence, but FNMA's
loan was nonetheless subject to bifurcation because the loan was
simultaneously secured by other collateral (i.e., the remaining
units in the multi-family tenement). See Lomas Mtge., 82 F.3d at
7 (holding that the Bankruptcy Code does not prohibit lien-
stripping with regard to multi-unit dwellings); Hammond v.
Commonwealth Mtge. Corp. (In re Hammond), 27 F.3d 52, 56-57 (3d
Cir. 1994) (allowing bifurcation of lien secured by both a
principal residence and personal property).
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confirmation process. See Universal Am. Mtge. Co. v. Bateman (In
re Bateman), 331 F.3d 821, ___ (11th Cir. 2003) [No. 02-11221, slip
op. at 7]; 5 Lawrence P. King et al., Collier on Bankruptcy ¶
1327.01, at 1327-2 (15th ed. 2002).
Although we accept this general rule, it does not pertain
here. A debtor's post-confirmation default, like many other post-
confirmation events, does not come within the preclusive reach of
a confirmed plan. See Barbosa v. Soloman, 235 F.3d 31, 39 n.11
(1st Cir. 2000); Ellis v. Parr (In re Ellis), 60 B.R. 432, 434
(B.A.P. 9th Cir. 1985). This is because the factual circumstances
surrounding post-confirmation events could not have been considered
and resolved by a bankruptcy court at the time of confirmation.
See Harmon v. United States ex rel. Farmers Home Admin., 101 F.3d
574, 582 n.5 (8th Cir. 1996); In re Shaffer, 48 B.R. 952, 957-58
(Bankr. N.D. Ohio 1985). It follows that res judicata does not
supply a serviceable shield in this case. Consequently, we hold
that confirmation of the Plan, without more, did not bar FNMA from
litigating the validity or value of its claim in light of
subsequent (post-confirmation) developments.
Still and all, rejecting a res judicata argument is a far
cry from saying that FNMA's full contractual lien has been
resurrected. FNMA labors to persuade us that the debtors' post-
confirmation default, coupled with FNMA's securing of relief from
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the automatic stay, produced just such a Lazarus-like effect. We
are not convinced.
FNMA's asseveration relies heavily upon In re Miano, 261
B.R. 391 (Bankr. D.N.J. 2001). At first blush, Miano bears a
family resemblance to the case at hand. There, as here, an
undersecured creditor acquiesced in bifurcation of its claim
against the debtors. Id. at 392. There, as here, the creditor
obtained relief from the automatic stay after the debtors failed to
comply with the confirmed plan. Id. There, as here, the creditor
demanded full payment of the original indebtedness. In a brief
opinion, the bankruptcy court found for the creditor, reasoning
that once the debtors defaulted and the court lifted the stay, the
confirmed plan no longer bound the creditor. Id. at 392-93.
Upon careful perscrutation, we find that the resemblance
between the two cases is more apparent than real. There are a
number of salient distinctions. For one thing, the Miano debtors
sold the encumbered property at a price much higher than the value
originally ascribed to it by the bankruptcy court. In
contradistinction, the instant debtors have not sold the Property
at all (indeed, they have made plain their desire to retain
possession of it). For another thing, Miano involved a short-term
situation in which the debtors made absolutely no payments under
the confirmed plan. This stands in stark contrast to the situation
before us, where the Plan has run its course and the debtors have
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made virtually all the payments called for under it (they have even
offered to make the side payments due to FNMA, albeit with some
hiccoughs along the way). While principles of equity may suggest
that Chapter 13 debtors who turn their backs on a confirmed plan
from the get-go cannot expect to reap its benefits, cf. In re
Pearson, 214 B.R. 156, 164 (Bankr. N.D. Ohio 1997) (referring to
effect of conversion from Chapter 13 to Chapter 7), the debtors in
this case did not forsake the Plan. To the contrary, they
struggled mightily to comply with its provisions.
Even leaving these distinctions to one side, we find the
Miano decision singularly unpersuasive. The court's legal analysis
strikes us as seriously flawed. Moreover, the decision rests on a
porous legal foundation; none of the cases cited by the court
stands for the proposition that relief from the automatic stay
necessarily includes relief from the confirmed plan as a whole.
Even when read for all they are worth, these cases at most
reiterate the venerable saw that a debtor's post-confirmation
default can provide good cause for relief from the automatic stay.
See, e.g., W. Equities Inc. v. Harlan (In re Harlan), 783 F.2d 839,
841 (9th Cir. 1986) (per curiam); Ellis, 60 B.R. at 434; In re
Binder, 224 B.R. 483, 490 (Bankr. D. Colo. 1998); In re Smith, 104
B.R. 695, 700 (Bankr. E.D. Pa. 1989); In re Wright, 54 B.R. 553,
555 (Bankr. E.D. Pa. 1985); Anaheim Sav. & Loan Ass'n v. Evans (In
re Evans), 22 B.R. 980, 983 (Bankr. S.D. Cal. 1982). Indeed, many
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of the cases indicate that, in spite of relief from the automatic
stay, the confirmed plan continues to bind both debtors and
creditors in other respects. See, e.g., Ellis, 60 B.R. at 436
(allowing debtor to cure a default by resuming payments under the
confirmed plan notwithstanding the granting of relief from the
automatic stay); Binder, 224 B.R. at 490 ("Granting relief from
stay for Debtor's default in performance of post-confirmation
obligations to [Creditor] does not upset the plan; it implements
it."). We therefore refuse FNMA's invitation to accord Miano
precedential force.
FNMA mounts one last argument in support of reversing the
lien-stripping order and reinstating the full amount of the
original debt. It asserts that a Chapter 13 plan is akin to a
contract and that, given their default, the debtors cannot now
expect FNMA to perform its side of the bargain. This argument is
unavailing.
To the extent that a confirmed plan resembles a contract,
there is no legally sound reason why the remedy for every default
necessarily should be rescission. Generally speaking, the law of
contracts recognizes a wide spectrum of potential anodynes. See
generally 3 E. Allan Farnsworth, Farnsworth on Contracts §§ 12.1 to
12.3 (2d ed. 2003). Here, it seems clear that, under the
bankruptcy court's ukase, FNMA stands to receive a condign remedy
(either specific performance or expectation damages) with respect
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to the debtors' default. The root purpose of a contract remedy is
"to place the plaintiff-promisee in as good a position as [it]
would have occupied had the defendant-promisor not breached the
contract," 24 Richard A. Lord, Williston on Contracts § 64:1, at 7
(4th ed. 2002) (collecting cases), and either of these remedies
would accomplish that goal by making FNMA whole. That is why other
courts have approved the use of such remediation in comparable
circumstances. See, e.g., Ellis, 60 B.R. at 436 (allowing debtor
to avoid foreclosure so long as she cured the default on her
reorganization plan); cf. Green Tree Accept., Inc. v. Hoggle (In re
Hoggle), 12 F.3d 1008, 1010 (11th Cir. 1994) (emphasizing that
permitting debtors to cure post-confirmation defaults is consistent
with Chapter 13's overarching policy).
FNMA resists this straightforward answer, urging us to
subject defaulting debtors to a more draconian penalty in order to
discourage repetitive defaults and a generally nonchalant attitude
anent compliance with reorganization plans. We regard such
punitive measures as unnecessary, unwise, and incompatible with the
goals of the Bankruptcy Code. We explain briefly.
Bankruptcy law endeavors to strike an equitable balance
between the debtors' needs — especially the need for a fresh start
— and the creditors' rights. The bankruptcy court must hold that
delicate balance steady and true. As matters stand, the Code gives
bankruptcy courts more than adequate powers to ensure that debtors
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do not engage in gamesmanship or otherwise flout the provisions of
Chapter 13. See Perry v. Commerce Loan Co., 383 U.S. 392, 404
(1966); Hoggle, 12 F.3d at 1011-12. To accept FNMA's position
would tilt the scales in favor of secured creditors, allowing them
to use the fortuity of even a technical post-confirmation default
to disrupt a confirmed plan. That would confuse the function of an
order lifting the automatic stay with the function of an order
dismissing a Chapter 13 petition.
III.
Conclusion
We need go no further. In this case, we have been asked
to hand a new weapon to a secured creditor at the expense of the
debtors' honest efforts to carry out the provisions of a confirmed
plan of reorganization. Neither the Bankruptcy Code nor the case
law affords any compelling reason why we should do so. We hold,
therefore, that bifurcation of a creditor's claim into secured and
unsecured portions is not annulled by the mere act of granting
relief from the automatic stay.3 Consequently, we affirm
3
We regard it as unlikely that a bankruptcy court has the
authority, in the exercise of its discretion, to rescind a lien-
stripping order merely because it deems the creditor entitled to
relief from the automatic stay. After all, Chapter 13 is designed
to ensure that debtors enjoy a fresh start. See H.R. Rep. No. 95-
595, at 118 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5963,
6078-79. Exceptions to this policy should be construed narrowly.
In re Pelkowski, 990 F.2d 737, 744-45 (3d Cir. 1993). Moreover,
allowing the easy resurrection of contractual liens would likely
redound to the detriment of other creditors. See Harmon, 101 F.3d
at 583 (suggesting that a creditor's retention of its full,
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the order staying foreclosure until the debtors' ability to cure
their post-confirmation default can be ascertained. To that end,
we remand this case to the district court with instructions that
it, in turn, remand the matter to the bankruptcy court for further
proceedings aimed at determining the precise amounts owed to FNMA
and what fees and interest, if any, should be assessed in
consequence of the debtors' earlier default.
Affirmed. Costs shall be taxed in favor of the
appellees.
original lien even after lien-stripping "might violate the
prohibition against differential treatment within the class of
unsecured claims"); United Carolina Bank v. Hall, 993 F.2d 1126,
1128-29 (4th Cir. 1993) (explaining that even after a post-
confirmation default and a consequent lifting of the stay, allowing
excess payments would "adversely affect[] other creditors, as the
resources available in a Chapter 13 proceeding are finite"). Here,
however, the bankruptcy court has made plain that it never intended
to restore FNMA's contractual lien against the debtors to its
original contours. Thus, we need not determine the scope of the
bankruptcy court's discretionary authority.
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