Hammond v. Commonwealth Mortgage Corp. of America

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
6-9-1994
Hammond v. Commonwealth Mortgage
Corporation
Precedential or Non-Precedential:
Docket 93-1747
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Recommended Citation
"Hammond v. Commonwealth Mortgage Corporation" (1994). 1994 Decisions. Paper 42.
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 93-1747
___________
IN RE:
MICHAEL HAMMOND; JEANETTE HAMMOND,
Debtors
MICHAEL HAMMOND; JEANETTE HAMMOND
v.
COMMONWEALTH MORTGAGE CORPORATION OF AMERICA
COMMONWEALTH MORTGAGE CORPORATION OF AMERICA, L.P.,
Appellant
___________
Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil Action No. 90-05606)
___________
Argued: February 17, 1994
PRESENT: BECKER, HUTCHINSON and COWEN, Circuit Judges
(Opinion Filed June 9, l994 )
____________
Lawrence T. Phelan, Esquire
Peter C. Cilio, Esquire (Argued)
Federman & Phelan
Suite 900
Two Penn Center Plaza
Philadelphia, PA 19103
Attorney for Appellant
Susan L. DeJarnatt, Esquire (Argued)
Community Legal Services
3207 Kensington Avenue
1
Philadelphia, PA 19134-1917
Attorney for Michael and Jeanette Hammond
____________
2
____________
OPINION OF THE COURT
____________
HUTCHINSON, Circuit Judge.
Appellant, Commonwealth Mortgage Corporation of America
("Commonwealth"), appeals an order of the United States District
Court for the Eastern District of Pennsylvania affirming a
decision of the United States Bankruptcy Court for that district.
The bankruptcy court had permitted appellees, Michael and
Jeanette Hammond (the "Hammonds" or the "debtors"), to bifurcate
Commonwealth's claim against the Hammonds into secured and
unsecured components pursuant to 11 U.S.C.A. § 506(a). In so
doing, the bankruptcy court effectively limited Commonwealth's
mortgage claim to the fair market value of the premises securing
the mortgage. On appeal Commonwealth argues a bifurcation that
has this effect is contrary to the recent United States Supreme
Court decision of Nobelman v. American Savings Bank, 113 S. Ct.
2106 (1993), concerning the interplay between section 506(a) and
section 1322(b)(2) of the Bankruptcy Code of 1978.1 We conclude
that Nobelman overrules only one of the two rationales underlying
our decisions in Wilson v. Commonwealth Mortgage Corp., 895 F.2d
1
In its brief, Commonwealth, relying on Stendardo v. Federal
Nat'l Mortgage Ass'n (In re Stendardo), 991 F.2d 1089, 1094-95
(3d Cir. 1993), also argued that merger of the mortgage into the
foreclosure judgment eliminated any additional security interest
the mortgage provided to the mortgagee. Commonwealth conceded at
oral argument that it waived this argument by its failure to
raise it in the district court. Thus, we do not consider it.
See Frank v. Colt Indus., Inc., 910 F.2d 90, 100 (3d Cir. 1990).
3
123 (3d Cir. 1990), and Sapos v. Provident Institution of
Savings, 967 F.2d 918 (3d Cir. 1992). Therefore, we will affirm
the district court.
I. Factual & Procedural History
The Hammonds purchased their home at 5636 North 11th
Street, Philadelphia, Pennsylvania, on June 15, 1984. They
financed the purchase with a loan from Jersey Mortgage Company,
which has since been assigned to Commonwealth. The assignment
made Commonwealth the holder of a $22,500.00 purchase money
mortgage on the Hammonds' home, as well as an additional security
interest in:
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 . . . .
Appendix ("App.") at 15.
On December 15, 1987, Commonwealth foreclosed the
mortgage and obtained a foreclosure judgment for $30,726.10.2 The
foreclosure eventually caused the Hammonds to file a Chapter 13
bankruptcy petition in the Eastern District of Pennsylvania on
January 8, 1990. On February 8, 1990, Commonwealth filed a
secured claim for $42,969.93.3
2
On August 30, 1989, damages were reassessed at $40,407.80.
3
Commonwealth's claim was computed as follows:
Principal $22,108.71
Interest to the date of bankruptcy $13,165.59
Late Charges $ 649.43
4
The Hammonds thereafter filed an adversary proceeding,
seeking to limit Commonwealth's allowed secured claim to the fair
market value of their home by bifurcating the claim into secured
and unsecured components pursuant to 11 U.S.C.A. § 506. The
parties stipulated that the fair market value of the Hammonds'
home is $25,000.00.
On July 30, 1990, the bankruptcy court agreed with the
Hammonds and entered an order limiting Commonwealth's secured
claim to $25,000.00. See Hammond v. Commonwealth Mortgage Co.
(In re Hammond), No. 90-10093 (Bankr. D.N.J. July 30, 1990).4 The
order provided for the Hammonds to repay Commonwealth's secured
claim of $25,000.00 at an interest rate of ten percent over
sixty-months in accord with the debtors' plan. The bankruptcy
court confirmed the debtors' plan on August 21, 1990. The plan
provides:
1. The future earnings of the debtor are
submitted to the supervision and control
of the trustee and the debtor shall pay
to the trustee the sum of $ 666 on a
monthly basis for a period of 60 months.
Escrow Deficit $ 4,006.57
Mortgage foreclosure expenses $ 3,039.63
TOTAL $42,969.93
4
The Hammonds filed for bankruptcy in the United States
Bankruptcy Court for the Eastern District of Pennsylvania, but
Judge Wizmur, a United States Bankruptcy Judge for the District
of New Jersey, entered the order from which this appeal was
taken. At the time these proceedings were taking place, the
bankruptcy court for the Eastern District apparently had a large
backlog. To reduce the backlog, certain cases were transferred
either to the United States Bankruptcy Court for the District of
New Jersey or perhaps assigned by designation to New Jersey
bankruptcy judges.
5
2. From the payments so received, the
trustee shall make disbursements as
follows:
* * *
(b) Holders of allowed secured claims shall
retain the liens securing such claims and
shall be paid as follows:
-Lien of Commonwealth in excess of
market value to be avoided. Allowed
secured claims to be paid inside
plan.
App. at 21.
Commonwealth appealed the bankruptcy court's order of
July 30, 1990 to the district court. It did not appeal the
confirmation order. On July 2, 1993, the district court affirmed
the bankruptcy court's decision to bifurcate Commonwealth's claim
into secured and unsecured portions. At the same time the
district court vacated and remanded the case for additional
proceedings to determine the value of any remaining security.
Hammond v. Commonwealth Mortgage Co. (In re Hammond), 156 B.R.
943, 948-49 (E.D. Pa. 1990). This timely appeal followed.
II. Jurisdiction & Standard of Review
The statute which governs jurisdiction over appeals
from bankruptcy court decisions is 28 U.S.C.A. § 158. Section
158 provides in relevant part:
(a) The district courts of the United States
shall have jurisdiction to hear appeals from
final judgments, orders, and decrees . . . of
bankruptcy judges entered in cases and
proceedings referred to the bankruptcy judges
under section 157 of this title . . . .
6
* * *
(d) The courts of appeals shall have
jurisdiction of appeals from all final
decisions, judgments, orders, and decrees
entered under subsections (a) and (b) of this
section.
28 U.S.C.A. § 158(a),(d) (West 1993) (emphasis added). We
conclude that the district court had appellate jurisdiction under
section 158(a), and we have jurisdiction over the district
court's order under section 158(d).5
Review of the district court order involved in this
case presents questions of law. Therefore, we exercise plenary
review. See Sapos, 967 F.2d at 922; Dent v. Cunningham, 786 F.2d
173, 175 (3d Cir. 1986).
5
The district court's order vacating the bankruptcy court's order
and remanding the case for a determination of the value of the
additional security interest raises the question whether the
district court's order was a "final order" for purposes of
section 158(d). We have expansively interpreted the phrase
"final order" as used in section 158(d). See In re Porter, 961
F.2d 1066, 1072 (3d Cir. 1992) ("[B]ankruptcy cases have
traditionally been subject to more lenient finality rules than
other cases . . . . '[W]hen the bankruptcy court issues what is
indisputably a final order, and the district court issues an
order affirming or reversing, the district court's order is also
a final order . . . .'") (quoting In re Marin Motor Oil, Inc.,
689 F.2d 445, 449 (3d Cir. 1982)). We believe the district
court's order is final within the meaning of section 158(d) and
we have appellate jurisdiction to review it.
7
III. Analysis
This appeal concerns the interaction between two
provisions of the Bankruptcy Code: section 506(a) and section
1322(b)(2).6 Section 506(a) provides, in pertinent part:
(a) An allowed claim of a creditor
secured by a lien on property in which the
estate has an interest, or that is subject to
setoff under section 553 of this title, is a
secured claim to the extent of the value of
such creditor's interest in the estate's
interest in such property, or to the extent
of the amount subject to setoff, as the case
may be, and is an unsecured claim to the
extent that the value of such creditor's
interest or the amount so subject to setoff
is less than the amount of such allowed claim
. . . .
11 U.S.C.A. § 506(a) (West 1993). In essence section 506(a)
limits a creditor's secured claim to the value of its collateral.
See United States v. Ron Pair Enters., Inc., 109 S. Ct. 1026,
1029 & n.3 (1989).
Section 1322(b)(2) governs the contents of a Chapter 13
bankruptcy plan and 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
6
In their brief, the Hammonds mention the supportive effect the
plan's confirmation may have on their position as to the amount
of the bank's secured claim. In supplemental briefing, however,
both parties agreed that issue did not affect the merits.
Therefore, we will not discuss it further.
8
unsecured claims, or leave unaffected
the rights of holders of any class of
claims . . . .
11 U.S.C.A. § 1322 (West 1993). This section, which limits a
party's ability to modify the rights of a lien on real property
that is a debtor's principal place of residence, is known as an
"antimodification provision." Sapos, 967 F.2d at 921. The
specific question which arises when one considers section 506(a)
and section 1322 together is whether section 1322(b)(2) precludes
a Chapter 13 debtor from relying on section 506(a) to modify the
unsecured portion of an undersecured mortgage claim, or whether
the debtor is entitled to bifurcate a secured claim pursuant to
section 506(a).
In Wilson and Sapos, this Court considered the
interplay between sections 506(a) and 1322(b)(2). In those cases
we held that section 1322(b)(2) does not prohibit modification of
the unsecured component of an undersecured mortgage. See Sapos,
967 F.2d at 926; Wilson, 895 F.2d at 127-28. Moreover, we held
that section 1322(b)(2)'s antimodification clause does not apply
when the creditor has an additional security interest in
collateral other than the real property in which the debtor
resides because section 1322(b)(2)'s express terms cover claims
secured only by a security interest in the debtor's principal
residence. See Sapos, 967 F.2d at 925-26; Wilson, 895 F.2d at
128.
The district court, considering itself bound by Sapos
and Wilson, affirmed the bankruptcy court's ruling bifurcating
9
Commonwealth's mortgage claim into secured and unsecured portions
because Commonwealth's mortgage was secured by a lien on the
debtors' personal property as well as the real property that was
their home. As the district court recognized, this case is on
all fours with Wilson. There too the mortgagee's claim was
secured by "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" in addition to
the lien on the mortgage debtors' residence. Wilson, 895 F.2d at
124.
Commonwealth argues that we should overrule our
opinions in Wilson and Sapos because of the Supreme Court's
recent decision in Nobelman. Nobelman did expressly overrule the
holding in Wilson and Sapos that section 1322(b)(2) does not
preclude a debtor from modifying the undersecured portion of a
mortgage. Nobelman, 113 S. Ct. at 2109, 2111. The Supreme Court
stated: "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 2111.
The Supreme Court's opinion in Nobelman, however, did
not expressly address our alternate rationale for our decisions
in Wilson and Sapos. In those cases, we also held that a
mortgagee who has an additional security interest in property
other than the real estate which is the mortgagors' primary
residence cannot claim any benefit from section 1322(b)(2)'s
antimodification provision and therefore such a mortgagee's claim
can be bifurcated under section 506(a). See Sapos, 967 F.2d at
10
925-26; Wilson, 895 F.2d at 128. The district court, in the
instant case, recognized that the record in Nobelman indicates
that there the mortgagee also held an additional security
interest in "the common areas of the condominium complex, escrow
funds, proceeds of hazard insurance, and rents." Hammond v.
Commonwealth Mortgage Company, 156 B.R. at 947 n.6 (quoting In re
Nobelman, 129 B.R. 98, 99 (N.D. Tex. 1991), aff'd, 968 F.2d 483
(5th Cir. 1992), aff'd, 113 S. Ct. 2106 (1993)). The district
court in Nobelman had held, contrary to Sapos and Wilson, that
this additional security interest did not matter, but neither the
United States Court of Appeals for the Fifth Circuit nor the
Supreme Court addressed the issue on appeal. Therefore, the
district court in the case now before us felt this Court's
alternate rationale in Wilson and Sapos was still controlling
and, applying principles of stare decisis, affirmed the
bankruptcy court on this ground.
Commonwealth contends, however, that Nobelman
implicitly overrules our alternate holding in Wilson and Sapos
because the Nobelman mortgage also had an additional security
interest which the Supreme Court failed to give any effect.
Commonwealth points out that the district court in Nobelman
expressly held the debtors' argument that the additional security
interest took their mortgage out of the protection of the
antimodification clause was "without merit." Nobelman, 129 B.R.
at 104. Commonwealth contends that the Supreme Court's failure
to discuss the additional security interest that the Nobelman
mortgage provided indicates such an additional interest in
11
collateral found at or on the debtors' residence is not
significant. Therefore Commonwealth concludes this panel can and
should overrule Sapos and Wilson in their entirety. It argues we
should decide instead that a security interest in fixtures or
personal property on the mortgaged premises does not preclude a
mortgagee from taking advantage of the antimodification provision
that section 1322(b)(2) provides for a lien secured by mortgages
on a debtors' principal residence. Commonwealth would have us
consider the additional security interest provided for in its
mortgage as meaningless standard language that gives it no
additional security as a practical matter.
In Wilson, we addressed and rejected an identical
argument that an additional security interest in personal
property on or in the real estate securing a residential mortgage
has no real value and can be ignored under the maxim de minimis
non curat lex.7 See Wilson, 895 F.2d at 129. We held in Wilson
that section 1322(b)(2)'s language plainly states that a
mortgagee who has an additional security interest gets no
protection from the antimodification clause of section
1322(b)(2). Id. ("The language of section 1322(b)(2) is
unambiguous. The language of the bankruptcy judge bears
repeating: 'If Commonwealth wishes otherwise, it should delete
such language from its agreements.'"). We also relied on Collier
on Bankruptcy to buttress our holding that creditors who demand
7
The Latin means: "The law does not care for, or take notice of,
very small or trifling matters. The law does not concern itself
about trifles." Black's Law Dictionary 388 (5th ed. 1979).
12
additional security interests in personalty or escrow accounts
and the like pay a price. Their claims become subject to
modification. Their recourse, if they wish to avoid
modification, is to forego the additional security. Id. (citing
5 Collier on Bankruptcy ¶ 1322.06 at 1322-14-15).
Finally, Commonwealth argues that Wilson and Sapos were
improperly decided and points to the legislative history
underlying section 1322(b)(2). It argues that this section was
included to implement Congress's intent to protect lenders of
residential mortgages because they provide a valuable economic
and social service when they make such funds available. See
Grubbs v. Houston First Am. Sav. Ass'n, 730 F.2d 236, 246 (5th
Cir. 1984) (in banc) ("This [section] was apparently in response
to perceptions . . . that, home-mortgagor lenders, performing a
valuable social service through their loans, needed special
protection against modification . . . .") (referring to Hearings
Before the Subcomm. on Improvements of the Judicial Machinery of
the Senate Comm. on the Judiciary, 95th Cong., 1st Sess. 652-53,
703, 707, 714-15, 719-21 (1977)). In fact, Justice Stevens cites
Grubbs and its discussion of legislative history in his
concurrence in Nobelman. In agreeing with the majority, Justice
Stevens concludes that its literal reading of the text of section
1322(b)(2) coincides with Congress's intent to "encourage the
flow of capital into the home lending market." Nobelman, 113
S. Ct. at 2112 (Stevens, J., concurring) (citing Grubbs, 730 F.2d
at 245-246). We acknowledge that section 1322(b)(2) reflects a
congressional policy meant to protect home mortgage lenders.
13
Nevertheless, as we noted in Wilson, the language in section
1322(b)(2) is clear; it refers to "a claim secured only by a
security interest in real property that is the debtor's principal
residence." 11 U.S.C.A. § 1322(b)(2) (emphasis added); Wilson,
895 F.2d at 129. We are unable to read the statutory text to
include mortgages which are secured not only by a "principal
residence" but also by "appliances, machinery, furniture and
equipment (whether fixtures or not) of any nature whatsoever."
App. at 15.
As the Hammonds point out in their brief, the Supreme
Court's failure to address the effect of the additional security
interest in the Nobelman mortgage does not imply that the Supreme
Court held section 1322(b)(2) prohibits bifurcation of
residential mortgages that also give the mortgagee a lien on
personal property used in or about the residence. We conclude
that Nobelman does not overrule our holding in Wilson or Sapos
that a mortgagee who wishes to avoid bifurcation of its claim on
a residential mortgage must limit its lien to the real estate.
The district court correctly concluded that it had to follow this
alternate holding in Sapos and Wilson and bifurcate
Commonwealth's mortgage. This panel is also bound by the
alternate holding of Sapos and Wilson, which the Supreme Court
did not consider in Nobelman. See Internal Operating Procedure
9.1 ("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
14
previous panel. Court in banc consideration is required to do
so.").
In the absence of clearer instruction from the Supreme
Court than we see in Nobelman, we think the alternate rationale
of Sapos and Wilson is controlling. Any change in that holding
is reserved to the Court in banc, not this panel.
IV. Conclusion
We conclude the Supreme Court's decision in Nobelman
did not expressly or implicitly overrule this Court's alternate
rationale for its decisions in Wilson and Sapos. Therefore, we
conclude that a mortgage which creates security interests in a
debtor's personal property in addition to a lien on the
mortgagor's principal residence takes the mortgage beyond the
protection of the antimodification clause of section 1322(b)(2)
of the Bankruptcy Code and permits bifurcation of the mortgage
into secured and unsecured components under section 506(a).
Accordingly, we will affirm the order of the district court.
15