Nobleman v. American Savings Bank

United States Court of Appeals,
Fifth Circuit.
No. 91–1796.
In the Matter of Leonard NOBLEMAN and Harriet Nobleman, Debtors.
Leonard NOBLEMAN and Harriet Nobleman, Appellants,
v.
AMERICAN SAVINGS BANK and Tim Truman, Standing Chapter 13 Trustee, Appellees.
Aug. 13, 1992.
Appeal from the United States District Court For the Northern District of Texas.
Before BROWN, GARWOOD and EMILIO M. GARZA, Circuit Judges.
EMILIO M. GARZA, Circuit Judge:
The United States Bankruptcy Court for the Northern District of Texas denied confirmation
of the Chapter 13 reorganization plan proposed by Leonard and Harriet Nobleman, in which the
Noblemans attempted to bifurcate a mortgage lien claim on their principal residence into secured and
unsecured claims. The United States District Court for the Northern District of Texas affirmed the
decision of the bankruptcy court. See 129 B.R. 98 (N.D.Tex.1991). The Noblemans appeal, and,
finding that the use of 11 U.S.C. § 5061 to bifurcate this claim would impermissibly modify the rights
of American Savings Bank under 11 U.S.C. § 1322(b)(2),2 we affirm the order of the district court.
1
Section 506(a) of Title 11 provides:
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 ... 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.
2
Section 1322(b)(2) of Title 11 provides that the Chapter 13 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.
I
The facts of this case are uncontested. The No blemans executed a note in the amount of
$68,250.00, payable to American Savings Bank (American), and secured by a deed of trust on their
principal residence—a condominium in a complex in Dallas, Texas.3 Six years later, the Noblemans
filed a voluntary petition for relief under Chapter 13 of the bankruptcy code. American filed its proof
of claim for $71,265.04—which was later amended to $71,335.04. The Noblemans then filed an
initial and modified Chapter 13 Plan of Reorganization. The plan valued the Noblemans' residence
at $23,500.00. The Noblemans also filed a motion for valuation pursuant to 11 U.S.C. § 506 along
with certain modifications to their plan. At the confirmation hearing, Mr. Nobleman testified as to
the value of the property; no controverting evidence of its value was offered by any other party.
In their modified plan, the Noblemans proposed to make direct payments to American at the
mortgage contract rate only up to the scheduled value of the condominium. The balance of
American's claim—$41,257.66—would be treated as a general unsecured claim under the Plan,
payable pari passu, though the Noblemans did plan to cure the prepetition arrearages owed to
American. The unsecured creditors would receive nothing.
Both American and the Standing Chapter 13 Trustee objected to the confirmation of the plan
on the grounds that, inter alia, the plan purported to alter the lienholders' rights in violation of 11
U.S.C. § 1322(b)(2). The bankruptcy court found that the plan impermissibly proposed to modify
American's rights by bifurcating American's claim into secured and unsecured claims in violation of
11 U.S.C. § 1322(b)(2). Accordingly, the bankruptcy court denied confirmation of the Noblemans'
modified Chapter 13 plan, and the district court affirmed.4
3
The deed of trust also provided for a security interest in an undivided .67% interest in the
common areas of the condominium complex, escrow funds, proceeds of hazard insurance, and
rents.
4
The Bankruptcy Court's conclusion of law—that the modified plan violated 11 U.S.C. §
1322(b)(2)—is subject to plenary review on appeal. See In re Delta Towers, Ltd., 924 F.2d 74,
76 (5th Cir.1991) (quotations omitted); In re Allison, 960 F.2d 481, 483 (5th Cir.1992) (citations
II
The parties and their amici are not in agreement regarding the approach we should take in
interpreting the interplay between sections 506(a) and 1322(b)(2) of the bankruptcy code. The
Noblemans concede that a debtor may not modify the rights of holders of a secured claim if such
security is an interest in real property that is the debtor's principal residence. They assert, however,
that section 506(a) defines a secured claim as the value of the collateral, while any balance on the debt
above this amount is an unsecured claim. Thus, they contend that, under section 1322(b)(2), the only
portion of a claim which cannot be modified is the part supported by the value of the collateral—the
secured claim. The part of the claim in excess of the value of the collateral becomes an unsecured
claim, which can be modified.
One amicus suggests that allowing debtors to bifurcate a mortgage lien claim pursuant to
section 506 and allowing a modification pursuant to section 1322(b)(2) results in a systematic and
coherent application of the bankruptcy code. It further argues that to prohibit the bifurcation of a
claim would ignore that various sections of the bankruptcy code are to be read together.
American, on the other hand, contends that the proposed modification of the Noblemans'
Chapter 13 plan is impermissible because it would bifurcate the creditor's claim into secured and
unsecured claims. American asserts that bifurcation of a secured claim in real property that is the
debtor's principal residence violates section 1322(b)(2) because the plain meaning of section
1322(b)(2) prohibits such a modification. Furthermore, American contends that the general
provisions of section 506 must not be read t o prevail over the specific provisions of section
1322(b)(2), because the general language of one section should not control matters specifically
addressed in another. American also argues that the limited bar regarding modification of the rights
of residential lenders was enacted in response to Congressional perceptions that these lenders perform
a valuable social purpose by making home loans.
omitted).
Two other amici agree with American, contending that bifurcating a debtor's secured claim
under section 1322(b)(2) is unfair and unworkable because bifurcation: (i) provides a windfall to
Chapter 13 debtors; (ii) results in home mortgage lenders receiving worse treatment under Chapter
13 than other secured creditors; and (iii) does not help promote the bankruptcy code's fresh start
objective. Furthermore, the amici argue that the plain meaning of section 1322(b)(2) precludes a
debtor from "cramming down"5 a claim secured only by the debtor's principal residence, and that the
rights of holders of secured claims, which include a claim secured only by a security interest in
property that is the debtor's principal residence, may not be modified.
III
The foregoing summary of the different positions of the parties and their amici demonstrates
that the interplay between sections 506 and 1322(b)(2) of the bankruptcy code is not entirely clear.
A
Four circuit courts have adopted the position advocated by the Noblemans, allowing
bifurcation of an undersecured mortgage into a secured portion and an unsecured portion. In
Bellamy v. Federal Home Loan Mortgage, 962 F.2d 176, 179–180 (2d Cir.1992), the Second Circuit
discussed sections 506(a) and 1322(b)(2), and reasoned that a claim must first be analyzed under
section 506(a) to determine the part that is fully secured—that is, the amount equal to the market
value of the propert y on which the lien is fixed. The balance of the claim owed above the market
value is unsecured. Id. Bifurcating a claim into secured and unsecured portion does not, for
purposes of section 1322(b)(2), modify the creditor's rights, but rather determines how, under the
bankruptcy code, the creditor's right to payment must be satisfied. Id. at 179–180. The Third, Ninth,
and Tent h Circuits have held similarly. See In re Hart, 923 F.2d 1410, 1411 (10th Cir.1991)
(bifurcation of a home mortgage into secured and unsecured portions based on the fair market value
5
Cram-down is a term which refers to an attempt by a Chapter 13 debtor to reduce a secured
claim to the value of the collateral securing the claim and to discharge the balance as an unsecured
claim under the Chapter 13 plan.
of the property under a threshold application of section 506(a) was a recognition of the legal status
of the creditor's interest in the debtors' property and not a modification of the mortgage); Wilson v.
Commonwealth Mortgage Corp., 895 F.2d 123, 126–29 (3d Cir.1990) (unsecured portion of
creditor's claim may be modified, and anti-modification provision of section 1322(b)(2) does not
apply because creditor's claim was secured by personal property as well as by debtor's residence)6;
In re Hougland, 886 F.2d 1182, 1183 (9th Cir.1989) (nothing in section 1322(b)(2) affects the
determination under section 506(a) that an undersecured claim can be divided into a secured portion
and an unsecured portion).
Bankruptcy courts, including some in this circuit and the First, Sixth, Seventh, Eighth and
Eleventh circuits, have adopted the position advocated by American. These courts that have held
bifurcation impermissible because such bifurcation would vitiate the purpose of section 1322(b)(2).
See, e.g., In re Chavez, 117 B.R. 733, 736 (Bankr.S.D.Fla.1990) (in a Chapter 13 case, the allowed
amount of a claim secured only by a security interest in a principal residence of a debtor is, at filing,
the balance owing on the debt without regard to the value of the collateral, section 506(a)
notwithstanding); In re Kaczmarczyk, 107 B.R. 200, 202 (Bankr.D.Neb.1989) (section 1322(b)(2)
claims should not be bifurcated). In In re Boullion, 123 B.R. 549, 551 (Bankr.W.D.Tex.1990), the
bankruptcy court discussed the interplay between sections 1322(b)(2) and 506(a), and stated that "in
view of Grubbs' [v. Houston First Am. Sav. Ass'n, 730 F.2d 236 (5th Cir.1984) (en banc) ]
interpretation of the intention of Congress in enacting § 1322(b)(2), applying 11 U.S.C. § 506 to
these secured claims would result in a "modification' in contravention of the clear meaning of the
statute." Similarly, in In re Schum, 112 B.R. 159, 162 (Bankr.N.D.Tex.1990), the bankruptcy court
6
In Sapos v. Provident Inst. of Sav. in the Town of Boston, No. 91–3768, ––– F.2d ––––,
––––, 1992 WL 143504 at *1 (3d Cir. June 29, 1992), the Third Circuit affirmed its holding in
Wilson. The Third Circuit noted the Supreme Court's holding in Dewsnup v. Timm, ––– U.S.
––––, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992), and stated that the Dewsnup Court's
"interpretation of section 506 in a chapter 7 liquidation does not apply in this chapter 13
reorganization." Id. at ––––, 1992 WL 143504 at *6. The Third Circuit concluded that "a
Chapter 13 debtor with an undersecured debt, whether that debt be secured solely by residential
real estate or by realty and personalty, may resort to bifurcation under section 506(a)...." Id. at
––––, 1992 WL 143504 at *10.
held that the "proposed modification of the debt would have the effect of treating the real property
secured by only a lien on the debtor's principal residence in the same manner as any other property
secured by a lien."7
B
The Supreme Court's recent decision in Dewsnup v. Timm, ––– U.S. ––––, 112 S. Ct. 773,
775, 116 L. Ed. 2d 903 (1992), lends support to this view that bifurcation is impermissible. In
Dewsnup, the Court had to decide whether, under 11 U.S.C. § 506(d) of the bankruptcy code, a
debtor could "strip down" a creditor's lien on real property to the value of the collateral, when that
value is less than the amount of the claim secured by the lien. The Court held that section "506(d)
does not allow petitioner to "strip down' respondents' lien, because respondents' claim is secured by
a lien and has been fully allowed pursuant to § 502." Id., ––– U.S. at ––––, 112 S. Ct. at 778. The
Court specifically stated that it took no position on the meaning of the words "allowed secured claim"
in other provisions of the bankruptcy code, specifically section 506(a).8 Id., ––– U.S. at ––––, 112
7
See also In re Sauber, 115 B.R. 197 (Bankr.D.Minn.1990). In Sauber, the bankruptcy court
denied the confirmation of a debtor's Chapter 13 plan that proposed to divide the first mortgage
into secured and unsecured portions. Id. at 199. The Sauber court stated that "[t]he Ninth
Circuit, in Hougland, takes an overly technocratic approach in analyzing the language of §
1322(b)(2) ... and in relating § 506(a) to it." Id. The Sauber court reasoned that by focusing on
the terms "secured claim" and "unsecured claim", and by using section 506(a) definitions, the
Hougland court judicially removed most of the protection that the statute provides. Id.
Similarly, in In re Mitchell, 125 B.R. 5, 6 (Bankr.D.N.H.1991) the court stated
that the specific language of section 1322(b)(2) prevails over the general language of
section 506(a). To support this conclusion, the Mitchell court noted that if Congress had
intended to change the manner in which a claim secured by a debtor's residence would be
treated under the bankruptcy code, Congress would have specifically limited section
1322(b)(2) to claims secured pursuant to section 506. Id. at 8; see also In re Etchin, 128
B.R. 662, 665 (Bankr.W.D.Wis.1991) (bifurcation and partial avoidance of an
undersecured home mortgage by a Chapter 13 debtor runs afoul of the specific protection
afforded to creditors whose claims are secured only by a debtor's principal residence under
§ 1322(b)(2)); In re Bradshaw, 56 B.R. 742, 747 (S.D.Ohio 1985)(section 1322(b)(2)
prevents modification of any loan secured only by a security interest in the debtor's
principal residence).
8
See Patterson v. Shumate, ––– U.S. ––––, ––––, 112 S. Ct. 2242, 2251, 119 L. Ed. 2d 519
(1992) (Scalia, J., concurring) (noting the one-subsection-at-a-time approach taken by Dewsnup
Court when interpreting section 506(d) of Title 11 of the bankruptcy code).
S.Ct. at 778, n. 3. The Court declared that "to grant a debtor the broad new remedy against allowed
claims to the extent that they become "unsecured' for purposes of § 506(a) without the new remedy's
being mentioned somewhere in the Code itself or in the annals of Congress is not plausible, in our
view, and is contrary to basic bankruptcy principles." Id., ––– U.S. at ––––, 112 S. Ct. at 779. The
Court reasoned that the creditor's lien stays with the real property until foreclosure because that "is
what was bargained for by the mortgagor and the mortgagee." Id., ––– U.S. at ––––, 112 S. Ct. at
778. "Any increase over the judicially determined valuation during bankruptcy rightly accrues to the
benefit of the creditor, not to the benefit of the debt or and not to the benefit of other unsecured
creditors whose claims have been allowed...." Id.
C
In our analysis, we are cognizant that "[t]he plain meaning of legislation should be conclusive,
except in the "rare cases [in which] the literal application of a statute will produce a result
demonstrably at odds with the intention of its drafters.' " United States v. Ron Pair Enterprises, Inc.,
489 U.S. 235, 242, 109 S. Ct. 1026, 1031, 103 L. Ed. 2d 290 (1989) (quotation omitted). The words
of the statute "are the primary, and ordinarily the most reliable, source of interpreting the meaning
of any writing...." See Watt v. Alaska, 451 U.S. 259, 266, n. 9, 101 S. Ct. 1673, 1678, n. 9, 68
L. Ed. 2d 80 (1981) (quotation omitted). Section 506(a) of Title 11 provides:
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 ... 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.
Section 506(a) is a provision of general applicability in cases under Chapter 7, 11, 12 and 13 of the
bankruptcy code. See 11 U.S.C. § 103(a). Section 1322(b)(2) of Title 11, however, only applies in
Chapter 13 cases. See 11 U.S.C. § 103(h). Section 1322(b)(2) provides that the Chapter 13 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.
Section 1322(b)(2) clearly prohibits the modification of rights of holders of secured claims
if the claim is secured only by a security interest in the debtors' principal residence. However, this
prohibition set forth in section 1322(b)(2) appears to conflict with section 506(a), which would allow
the modification. If two statutes conflict, a generally accepted tenet of statutory construction is that
the general language of a statute does not "prevail over matters specifically dealt with in another part
of the same enactment." See In re Russell, 93 B.R. 703, 705 (D.N.D.1988) (citations omitted); see
also Landmark Land Co. v. Office of Thrift Supervision, 948 F.2d 910, 912 (5th Cir.1991), quoting
Gozlon–Peretz v. United States, ––– U.S. ––––, 111 S. Ct. 840, 848, 112 L. Ed. 2d 919 (1991)
(citation omitted) (a specific provision controls over one of more general application); Mennor v.
Fort Hood Nat'l Bank, 829 F.2d 553, 557 (5th Cir.1987) ("The general language in a statute such as
42 U.S.C. § 2000e–5(k) may not be interpreted to authorize what is disallowed by the specific
language of 28 U.S.C. § 1920"); D. Ginsberg & Sons, Inc. v. Popkin, 285 U.S. 204, 208, 52 S. Ct.
322, 323, 76 L. Ed. 704 (1932) (general language of a statutory provision, although broad enough
to include it, will not be held to apply to a matter specifically dealt with in another part of the same
enactment). We accordingly hold that the specific language of section 1322(b)(2) prevails over the
general language of section 506(a).
Moreover, section 1322(b)(2) describes its subject matter as the modification of "the rights
of holders of" claims, not as the modification of claims as such; thus, the section can properly be
read as excepting from its reach modification of "the rights of holders of ... a claim secured only by
a security interest in real property that is the debtor's principal residence...." Therefore, even if the
entirety of such a claim is not a secured claim (as per section 506(a)), the rights of a holder of such
a claim may not be modified under section 1322(b)(2).
D
The legislative history also indicates that Congress intended this result. In Grubbs v. Houston
First Am. Sav. Ass'n, we discussed section 1322(b)(2)'s legislative history and noted:
With regard to § 1322(b)(2), the Senate receded from its position that no "modification" was
to be permitted of any mortgage secured by real estate; it instead agreed to a provision that
modification was to be barred only as to a claim "secured only by a security interest in real
property that is the debtor's principal residence." This limited bar was apparently in response
to perception, or to suggestions advanced in the legislative hearings ... that, home-mortgagor
lenders, performing a valuable social service through their loans, needed special protection
against modification....
730 F.2d 236, 246 (5th Cir.1984) (en banc) (emphasis supplied in Grubbs.)
In Grubbs we held that section 1322(b), "construed in the light of its legislative history and
of its context within Chapter 13 ... evinces no legislative intent that a home-mortgagor debtor is
barred either (a) from curing a pre-petition acceleration into maturity of the unpaid installments due
upon his home mortgage, or (b) from proposing ... that all past due or matured amounts secured by
his home mortgage be paid during the term of his plan...." Id. at 237. Therefore, although our
holding in Grubbs did not specifically deal with the interplay between section 506(a) and section
1322(b)(2) of Title 11 of the bankruptcy code, we did discuss the legislative history of section
1322(b)(2) and noted the legislative intent not to permit any modification on a claim secured by the
debtor's principal residence.
We are persuaded that our analysis of section 506(a) and section 1322(b)(2) is consistent with
the legislative history of section 1322(b)(2) of the bankruptcy code—the desire to afford some
protection to the home mortgage industry. See Grubbs, 730 F.2d at 245–46. As the other courts
which have discussed these provisions have noted, t he Senate and House versions of section
1322(b)(2) were different. The proposed House version was favorable to debtors, allowing the plan
to "modify the rights of holders of secured claims or of holders of unsecured claims...." See 3 App.
Collier on Bankruptcy at III, 537 (15th Ed.1992). The proposed Senate version was favorable to
lenders, stating that the plan could "modify the rights of holders of secured claims (other than claims
wholly secured by mortgages on real property) or of holders of unsecured claims...." Id. at VII,
572–73. Neither the Senate version nor the House version became the final version of section
1322(b)(2)—the final version was characterized by legislative leaders as a "compromise" agreement.
See Bankruptcy Reform Act of 1978, Pub.L. No. 95–598, 1978 U.S.C.A.N. 5787, 6481, 6550
(statements of Representative Edwards and Senator DeConcini—section 1322(b)(2) of the House
amendment represents a compromise agreement between similar provisions in the House bill and
Senate amendment). We believe our interpretation of section 506(a) and section 1322(b)(2) reflects
this compromise.
Accordingly, we hold that section 1322(b)(2) prohibits confirmation of the Noblemans'
Chapter 13 plan. 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. Section 506(a) cannot be used to bifurcate the claim and vitiate
the protection of section 1322(b)(2).
IV
For the foregoing reasons, we AFFIRM.