400 F.Supp. 1352 (N.D.Cal. 1975), C-75-0766, In re Moralez

Docket Nº:C-75-0766 WHO.
Citation:400 F.Supp. 1352
Party Name:In re Herman MORALEZ and Josephine Pearl Moralez, Debtors. Paul DeBruce WOLFF, as Chapter XIII Trustee, Appellant, v. WELLS FARGO BANK, national association, Appellee.
Case Date:July 03, 1975
Court:United States District Courts, 9th Circuit, Northern District of California

Page 1352

400 F.Supp. 1352 (N.D.Cal. 1975)

In re Herman MORALEZ and Josephine Pearl Moralez, Debtors.

Paul DeBruce WOLFF, as Chapter XIII Trustee, Appellant,


WELLS FARGO BANK, national association, Appellee.

No. C-75-0766 WHO.

United States District Court, N.D. California.

July 3, 1975

Page 1353

Kornfeld & Koller, Lynn Anderson Koller, Oakland, Cal., for appellant.

David J. Brown, Brobeck, Phleger & Harrison, San Francisco, Cal., for appellee.


ORRICK, District Judge.

This appeal from an order of the bankruptcy court presents the question whether Rule 13-307(d) of the Bankruptcy Rules (prescribed pursuant to 28 U.S.C. § 2075 and which became effective on October 1, 1973) modifies a substantive right in violation of 28 U.S.C. § 2075 1 and is, therefore, of no legal effect. Meek v. Centre County Banking Co., 268 U.S. 426, 45 S.Ct. 560, 69 L.Ed. 1028 (1925) .

Page 1354

I find that it does and for the reasons hereinafter set forth affirm the order of the bankruptcy court.

The facts of the case are simple. Herman and Josephine Moralez filed a petition for a Wage Earner Plan under the provisions of Chapter XIII of the Bankruptcy Act on August 13, 1974. Their plan required payments of $302.30 per month to the Chapter XIII trustee for disbursement to creditors. At the time of filing the debtors had an automobile which was financed by the Wells Fargo Bank (the 'Bank'). The agreed balance due at the time of filing was $5,266.94. The car was valued under Rule 13-307(d) at $3,912.50, and the trustee informed the Bank he would honor the Bank's claim up to that amount and that the balance of the claim would be considered unsecured, to be paid pro rata with all other general creditors. The Bank moved for an order requiring the trustee to maintain full contract payments of $154 per month until the balance owed the Bank was paid. On March 6, 1975, the bankruptcy court found that Rule 13-307(d) constitutes a substantive change in the law thereby exceeding the rule-making power of the Supreme Court and granted the Bank's motion.

Rule 13-307(d) reads as follows:

'If a secured creditor files a claim, the value of the security interest held by him as collateral for his claim shall be determined by the court. The claim shall be allowed as a secured claim to the extent of the value so determined and as an unsecured claim to the extent it is enforceable for any excess of the claim over such value. For the purposes of this subdivision the court may appoint an appraiser in the manner specified by and subject to the limitations of Bankruptcy Rule 606.'

Both parties agree that Rule 13-307(d) is properly construed to mean that a secured creditor holding an installment note whose security has a value as of the date of valuation less than the total amount due is not entitled to receive the full contract payments due and to become due under the note even though the debtor or his trustee retains the security. Such an interpretation flies in the face of the well-settled law that executory contracts, including secured installment notes with payments yet to become due, must be substantially performed once they have been accepted by the trustee. Thompson v. Texas Mexican R. Co., 328 U.S. 134, 66 S.Ct. 937, 90 L.Ed. 1132 (1946). It thus modifies a substantive right of the secured creditor, the bank.

The trustee, however, claims that Rule 13-307(d) is an adaptation of Section 57h (11 U.S.C. § 93(h)), which prescribes certain valuation procedures, 2 and is, therefore, itself only procedural. He argues that Rule 13-307(d) does not modify the creditor's right to his security but only adopts a procedure for...

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