Bellamy, In re
| Decision Date | 21 April 1992 |
| Docket Number | D,No. 434,434 |
| Citation | 962 F.2d 176 |
| Parties | , 26 Collier Bankr.Cas.2d 1459, 22 Bankr.Ct.Dec. 1476, Bankr. L. Rep. P 74,776 In re Jimmie BELLAMY and Cynthia Bellamy, Debtors. Jimmie BELLAMY and Cynthia Bellamy, Plaintiffs-Appellees, v. FEDERAL HOME LOAN MORTGAGE CORPORATION, as assignee of Comfed Mortgage Co., Inc., Defendant-Appellant, Norton P. Feinstein, Trustee, Defendant. ocket 91-5045. |
| Court | U.S. Court of Appeals — Second Circuit |
Carla E. Craig, New York City (Hertzog, Calamari & Gleason, New York City, Dean S. Cooper, Associate General Counsel, Federal Home Loan Mortg. Corp., McLean, Va., of counsel), for defendant-appellant.
Ira B. Charmoy (George W. Derbyshire, Charmoy & Nugent, Bridgeport, Conn., of counsel), for plaintiffs-appellees.
Mark E. Pruitt, Oklahoma City, Okl. (Sandy L. Schovanec, Melvin R. McVay, Jr., Phillips McFall McCaffrey McVay Sheets & Lovelace, P.C., Oklahoma City, Okl., Steven J. Mandelsberg, Thomas D. Gettler, Hahn & Hessen, New York City, of counsel), filed a brief for amicus curiae Federal Nat. Mortg. Ass'n.
David J. Cynamon (Ralph A. Taylor, Jr., Scott E. Barat, Shaw, Pittman, Potts & Trowbridge, William E. Cumberland, General Counsel, Mortg. Bankers Ass'n of America, Washington, D.C., of counsel), filed a brief for amici curiae Mortg. Bankers Ass'n of America, Nat. Ass'n of Realtors (R), American Bankers Ass'n, Nat. Council of Sav. Institutions, and U.S. League of Sav. Institutions in Support of defendant-appellant.
Christopher F. Graham (Thacher Proffitt & Wood, New York City, of counsel), filed a brief for amicus curiae Residential Funding Corp. in Support of defendant-appellant.
Before: KAUFMAN, * CARDAMONE and MINER, Circuit Judges.
On May 24, 1987 Jimmie and Cynthia Bellamy (plaintiffs or debtors) purchased real property to serve as their principal residence in Bridgeport, Connecticut. They financed the purchase by giving a $133,000 promissory note, secured by a first mortgage, to Comfed Mortgage Co., Inc. The note called for monthly mortgage payments of $1,329.79 for a period of 20 years. Defendant-appellant Federal Home Loan Mortgage Corporation (Federal Home) subsequently purchased the mortgage and presently holds a security interest in the Bellamys' real property. See 12 U.S.C. § 1454(a).
When plaintiffs fell $13,000 in arrears, they filed on April 18, 1990 for reorganization under Chapter 13 of the Bankruptcy Code, 11 U.S.C. § 1301 et seq. (1988) (Code). A week later they commenced this adversary proceeding in the Bankruptcy Court for the District of Connecticut seeking, inter alia, to bifurcate Federal Home's allowed claim. The Bellamys sought to have the amount due on the note listed as a secured claim only up to the present market value of their residence, and to have the balance owed in excess of that value listed as an unsecured claim. The property's market value was stipulated to be $127,500. Federal Home filed a proof of claim stating that the total due on the note was $151,340.85. In effect, the Bellamys sought to relegate the mortgagee to the status of an unsecured creditor with respect to the undersecured portion of its allowed claim or $23,840.85, discharge that unsecured debt with other unsecured claims, see 11 U.S.C. § 1322(b)(1), void the mortgage lien to that extent, 11 U.S.C. § 506(d), and reinstate the mortgage in its reduced--"stripped down"--amount. See 11 U.S.C. § 1322(b)(5).
On January 10, 1991 the United States Bankruptcy Court for the District of Connecticut (Shiff, B.J.) held for plaintiffs. 122 B.R. 856 (Bkrtcy.D.Conn.1991). And, in a judgment entered July 9, 1991 the District Court for the District of Connecticut (Eginton, J.) affirmed, 132 B.R. 810 (D.Conn.1991). Federal Home now appeals.
To resolve the competing concerns presented on this appeal we must analyze the interplay of two provisions of the Code. Because the issue is one of statutory construction, we review the opinions of the trial courts de novo. See Truck Drivers Local 807 v. Carey Transp., Inc., 816 F.2d 82, 88 (2d Cir.1987). In seeking to "strip down" Federal Home's secured claim to the present market value of its collateral, plaintiffs rely on Code § 506(a). This provision applies in Chapter 13 reorganizations, see Code § 103(a), and states, in relevant part
[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ... and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim.
In other words, an allowed claim secured by a lien is "a secured claim" only up to the market value of the property on which the lien is fixed, and is an unsecured claim for the balance owed above that market value. See United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 239, 109 S.Ct. 1026, 1029, 103 L.Ed.2d 290 (1989); see also, e.g., Superior Paint Mfg. Co., Inc. v. Lopez-Soto (In re Lopez-Soto), 764 F.2d 23, 26 (1st Cir.1985).
Federal Home's position is grounded on a different section of the Code, also applicable in Chapter 13 proceedings. It relies on 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 ... (emphasis supplied).
§ 1322(b)(2), which provides that a Chapter 13 plan of reorganization may
It asserts that this provision prohibits the modification of its right to full payment of the note. According to Federal Home, allowing plaintiffs to strip away the undersecured portion of the mortgage on the debtors' principal residence would be a modification of its "rights" prohibited by § 1322(b)(2) because, as a consequence, that debt will not be paid in full. See §§ 1322(b)(1), (6). The bankruptcy and district courts both rejected this argument. For the reasons stated below, so do we.
Our view, consistent with the other circuits that have addressed this issue, is that § 1322(b)(2) prohibits modification of a residential mortgage lender's rights only insofar as the mortgagee holds a secured claim. But, whether--and the extent to which--the mortgagee holds a secured claim must first be determined according to § 506(a). See Eastland Mortgage Co. v. Hart (In re Hart), 923 F.2d 1410, 1413 (10th Cir.1991) (per curiam); Wilson v. Commonwealth Mortgage Corp., 895 F.2d 123, 127 (3rd Cir.1990); Hougland v. Lomas & Nettleton Co. (In re Hougland), 886 F.2d 1182, 1183 (9th Cir.1989). Contra, e.g., In re Sauber, 115 B.R. 197, 198-99 (Bkrtcy.D.Minn.1990); Matter of Kaczmarczyk, 107 B.R. 200, 202-03 (Bkrtcy.D.Neb.1989). The several arguments advanced by Federal Home against such a construction of § 1322(b)(2) will be addressed in turn.
The first argument is based on the prohibition against modification language of § 1322(b)(2). Section 506(a), appellant contends, deals solely with whether a claim is secured or unsecured and does not purport to affect a creditor's rights. Because these two Code provisions concern different aspects of a creditor's status, appellant continues, § 506(a) need not be looked to before applying § 1322(b)(2), particularly in light of the fact that "rights" is a broader concept than "claims," and a creditor's rights under a contract are to be safeguarded regardless of how a claim is classified. Therefore, Federal Home concludes, bifurcation is a prohibited modification of its rights because it allows debtors to classify as unsecured a portion of a contractually secured claim owed a mortgagee, with the result that such creditor's right to payment under the mortgage remains unsatisfied.
We are unprepared to adopt Federal Home's reading of § 1322(b)(2). Acknowledging that this section prohibits modification of a residential mortgagee's rights does not answer the ultimate question to be decided--what are those rights? It appears that Federal Home is insisting that because its "rights" may not be modified, the parties' contract--requiring full payment of the note regardless of the value of the residence--may not be altered by treating as an unsecured claim the amount due over and above the actual value of the property. Obviously, once classified as unsecured, that portion of the debt will not be fully satisfied.
The real question is whether the "rights" to which § 1322(b)(2) refers include the mortgagee's rights concerning its claim or its rights with respect to its secured claim. If the former, then § 1322(b)(2) must be read as prohibiting modification of a mortgagee's right to payment of the full amount of its allowed claim, i.e. the amount of its note. But construing this section of the Code in that light would be directly contrary to one of the Code's cornerstones, aimed at making a fundamental change from the Bankruptcy Act, that treatment under the Code turns on whether a claim is secured or unsecured, not on...
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