Summary
allowing strip off of wholly unsecured mortgage lien during confirmation process
Summary of this case from Marsh v. U.S. Dep't of Hous. & Urban Dev. (In re Marsh)Opinion
Case No. 01-11520
September 23, 2002
DECISION
This case is before the court to consider confirmation of the debtor's proposed Chapter 13 plan. Personal Finance Company holds a third mortgage on the debtor's residence. Nonetheless, the amounts due an account of the first and second mortgages exceed the property's value; so there is no value for Personal Finance's third position and its claim is totally unsecured See 11 U.S.C. § 506(a). Debtor's plan proposes to treat it as such, and, in the process, remove its mortgage from the debtor's home. Personal Finance has objected to confirmation of this plan, contending that its claim is protected from modification by § 1322(b)(2) of the United States Bankruptcy Code.
Section 1322(b)(2) of the Bankruptcy Code authorizes a Chapter 13 plan to "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). In Nobelman v. American Savings. Bank,, the Supreme Court considered whether this provision prevented a chapter 13 plan from removing the unsecured portion of partially secured mortgage. Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). That debtor's plan proposed to bifurcate the creditor's total claim of $71,335 into a secured claim of $23,500, representing the uncontroverted value of the debtor's home, and an unsecured claim for the remaining amounts due the lienholder. While the secured portion of the claim was to be paid, the unsecured portion would receive nothing. The plan also proposed to limit (or cramdown) the creditor's lien to the amount of its allowed secured claim. The Court concluded that "section 1322(b)(2) prohibits a Chapter 13 debtor from relying on § 506(a) to reduce an undersecured homestead mortgage to the fair market value of the mortgaged residence."Nobelman, 508 U.S. at 325, 113 S.Ct. at 2108. Personal Finance contends that, even though its lien has no value, given the public policy behind § 1322(b)(2) Nobelman compels a similar conclusion here.
Ever since Nobelman, the courts have debated its application to a creditor whose lien against the debtor's residence has no value whatsoever and they are divided on the issue. The majority — which includes every circuit court to consider the question — holds that a creditor's lien must have some value to be protected by § 1322(b)(2) and that liens which are totally unsecured by may be removed or stripped off. See e.g., In re Lane, 280 F.3d 663, 665-669 (6th Cir. 2002); In re Pond, 252 F.3d 122, 124-126 (2nd Cir. 2001); In re Bartee, 212 F.3d 277, 284-295 (5th Cir. 2000) ("[T]he Bankruptcy Code's antimodification provisions do not protect secondary lienholders whose interest is not supported by at least some value in the debtor's principal residence."); In re McDonald, 205 F.3d 606, 611 (3rd Cir. 2000); In re Tanner, 217 F.3d 1357, 1358-1360 (11th Cir. 2000) (creditors whose liens are wholly unsecured under Section 506(a) are not entitled to the protection of section 1322(b)(2) even if their claim was secured solely be a lien on the debtor's principal residence); In re Mann, 249 B.R. 831, 838 (1st Cir. BAP 2000); In re Lam, 211 B.R. 36, 38-41 (9th Cir. BAP 1997), appeal dismissed on other grounds, 192 F.3d 1309 (9th Cir. 1999); In re Cervelly, 213 B.R. 900 (Bankr. D.N.J. 1997); Wright v. Commercial Credit Corp., 178 B.R. 703, 707 (E.D.Va. 1995), appeal dismissed 77 F.3d 472 (4th Cir. 1996). The minority view reaches the opposite conclusion and holds that so long as a creditor's only security is the debtor's principal residence its rights cannot be modified, regardless of whether or not the lien has any value. See e.g., In re Cupp, 229 B.R. 662 (Bankr. E.D.Pa. 1999); In re Bauler, 215 B.R. 628 (Bankr. D.N.M. 1997); In re Shandrew, 210 B.R. 829 (Bankr. E.D.Cal. 1997); In re Frazie, 208 B.R. 311 (Bankr. D.N.M. 1997); In re Barnes, 207 B.R. 588 (Bankr. N.D.Ill. 1997) (concentration on partially secured interest is a misreading of Nobelman's focus on rights); In re Barnes, 199 B.R. 256 (Bankr. W.D.N.Y. 1996); In re Neverla, 194 B.R. 547 (Bankr. W.D.N.Y. 1996) (right of mortgagee to be paid in full is not modifiable in Chapter 13 even if wholly unsecured); In re Jones, 201 B.R. 371, 374 (Bankr. D.N.J. 1996) (the existence of the mortgage lien and not the value of the collateral determines the applicability of Section 1322(b)(2)).
Having considered these competing positions, the court concludes that the majority view represents the most appropriate reading of both § 1322(b)(2) and Nobelman. Section 1322(b)(2) protects the rights of creditors that hold a particular type of "secured claim." In Nobelman the Court recognized that the value of the creditor's lien mattered — "Petitioners were correct in looking to § 506(a) for a judicial valuation of the collateral to determine the status of the bank's secured claim." Nobelman, 508 U.S. at 328, 113 S.Ct at 2110. Having done so, it then observed that even a partially secured creditor was "still the `holder' of a `secured claim'" whose "rights" were protected from modification by § 1322(b)(2). Nobelman, 508 U.S. at 329, 113 S.Ct at 2110. Thus, in order to enjoy the protection of § 1322(b)(2), a creditor must first be the "holder of a secured claim," as that term is defined by § 506(a), and not just a lien.
Although Personal Finance holds a lien upon the debtor's residence, that lien has no value. As a result, it does not hold a secured claim and its rights can properly be modified. Its objection to confirmation of debtor's proposed plan should be overruled and the plan confirmed. An order doing so will be entered.