Harmon v. U.S. Through Farmers Home Admin.

Citation101 F.3d 574
Decision Date02 December 1996
Docket Number95-3520 and 95-3708,Nos. 95-3420,s. 95-3420
Parties, Bankr. L. Rep. P 77,180 Delores HARMON, Individually and as Executrix of the Estate of Ralph Harmon, Appellee/Cross-Appellant, v. UNITED STATES of America, acting through the FARMERS HOME ADMINISTRATION, United States Department of Agriculture; Thomas A. Lloyd, Assistant U.S. Attorney; Dallas Tonsager, State Director of the Farmers Home Administration, Appellants/Cross-Appellees. Delores HARMON, Individually and as Executrix of the Estate of Ralph Harmon, Appellant, v. UNITED STATES of America, acting through the FARMERS HOME ADMINISTRATION, United States Department of Agriculture; Thomas A. Lloyd, Assistant U.S. Attorney; Dallas Tonsager, State Director of the Farmers Home Administration, Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

Thomas A. Lloyd, argued, Pierre, SD (Craig P. Gaumer and Karen E. Schreier, U.S. Attorney, Sioux Falls, SD, on the brief), for Appellant.

Robert R. Schaub, argued, Chamberlain, SD, for appellees.

Before FAGG, BOWMAN, and HANSEN, Circuit Judges.

BOWMAN, Circuit Judge.

This case presents a question of first impression in the Courts of Appeals: whether Chapter 12 of the Bankruptcy Code permits a debtor to "strip down" an undersecured creditor's lien to the value of the collateral. We hold that it does and accordingly affirm the judgment of the District Court. 1

I.

In 1974, Delores Harmon and her late husband entered into a contract for deed to purchase 917 acres of real estate. Five years later, the Harmons obtained a loan from the Farmers Home Administration, now known as the Farm Service Agency (FSA), and granted the FSA a mortgage on the same property. In September 1987, the Harmons filed for bankruptcy protection under Chapter 12 of the Bankruptcy Code, 11 U.S.C. §§ 1201-1231 (1994). At that time, the Harmons owed $113,800 on the contract for deed and $425,817 on the FSA loan. The FSA filed a proof of claim in the amount of $425,817 in the Harmons' bankruptcy case.

After some preliminary wrangling, the Harmons and the FSA stipulated that the Harmons' land was worth $165,000, and the Bankruptcy Court entered an order establishing the value at that amount. Because the contract for deed was the first lien against the land, the value of the FSA's security, and therefore the value of its secured claim, was $51,200. The Harmons' First Amended Chapter 12 Reorganization Plan (the Plan) proposed to pay the FSA's secured claim, including interest at nine percent, in thirty annual payments of $4,983.62 each. The Harmons agreed to devote their projected disposable income during the three years following confirmation of the Plan to payment of unsecured claims, including the FSA's unsecured claim for the balance of the loan. The Bankruptcy Court confirmed the Plan on June 16, 1988.

In December 1992, the Harmons agreed to pay the FSA an additional $75,000 out of their disposable income to settle the FSA's objection to their discharge. After the Harmons made payments totaling $75,000, the Bankruptcy Court granted them a discharge on March 16, 1994. In accordance with the Code, the discharge did not include the thirty-year repayment of the FSA's secured claim and similar long-term obligations.

In the meantime, Mrs. Harmon's husband had died in August 1993, and she sought to sell the land. Assistant United States Attorney Thomas Lloyd notified Harmon's attorney that the FSA would require payment of the entire remaining balance of the loan, including the portion that was unsecured in the Harmons' bankruptcy, before releasing its mortgage. Harmon took the position that she owed the FSA the balance of its secured claim and nothing more. In order to facilitate the sale of the land, Harmon and the FSA entered into a stipulation on July 15, 1994, providing that the FSA would transfer its lien from the land to the proceeds of sale, which would be held in escrow pending resolution of the parties' dispute. Several days later, Harmon sold the property for $730,000 and paid off the balance of the FSA's secured claim, which was then $45,671.49. After the payment of costs, $587,798 was escrowed. As of April 1995, the FSA claimed to be entitled to approximately $309,000 of the proceeds as the unpaid balance of the loan.

Harmon brought this declaratory judgment action in federal district court on behalf of herself and her husband's estate, seeking to quiet title to the escrowed proceeds of sale. She named as defendants the United States (acting through the FSA), Lloyd, and Dallas Tonsager, state director of the FSA. (We will refer to the defendants collectively as the government.) On cross-motions for summary judgment, the District Court granted judgment for Harmon on July 24, 1995, concluding that the FSA's lien was extinguished by the payment in full of the secured claim and the required payments on the unsecured claim. Harmon v. United States, 184 B.R. 352, 354-55 (D.S.D.1995). The District Court rejected Harmon's contention that the actions of the government were abusive, arbitrary, capricious, and malicious. Id. at 355. The government appeals, and Harmon cross-appeals the declaration that the government did not act arbitrarily.

Harmon applied for attorney fees pursuant to the Equal Access to Justice Act (EAJA), 28 U.S.C. § 2412(d) (1994), but the District Court denied the application, concluding that the government's position was substantially justified. Harmon also appeals this determination.

II.
A.

We begin our analysis with a review of the provisions of Chapter 12. When an undersecured creditor files a proof of claim in a bankruptcy case, § 506(a) divides the claim into a secured claim to the extent of the value of the collateral and an unsecured claim for the remainder. 2 See 11 U.S.C. § 506(a) (1994); United States v. Ron Pair Enters., Inc., 489 U.S. 235, 239 & n. 3, 109 S.Ct. 1026, 1029 & n. 3, 103 L.Ed.2d 290 (1989). The debtor files a plan of reorganization that typically proposes repayment of debts over a three-year period. See 11 U.S.C. §§ 1221, 1222(c) (1994). If the final payment on a secured claim would have been due after the end of the plan period, the debtor may provide for payment of that claim over a period extending beyond the plan. See 11 U.S.C. 1222(b)(9) (1994). The plan may "modify the rights of holders of secured claims, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims." 11 U.S.C. § 1222(b)(2) (1994).

The bankruptcy court is required to confirm a plan if, among other things,

(5) with respect to each allowed secured claim provided for by the plan--

(A) the holder of such claim has accepted the plan;

(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and

(ii) the value, as of the effective date of the plan, of property to be distributed by the trustee or the debtor under the plan on account of such claim is not less than the allowed amount of such claim; or

(C) the debtor surrenders the property securing such claim to such holder.

11 U.S.C. § 1225(a)(5) (1994). In addition, if any unsecured claimant objects, the court must ensure that the debtor will devote all disposable income to payments under the plan during the duration of the plan. See 11 U.S.C. § 1225(b) (1994).

Upon confirmation, the debtor's property is fully restored to him or her, except as otherwise provided in the plan:

(b) Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the [bankruptcy] estate in the debtor.

(c) [Except for debts that will not be discharged] and except as otherwise provided in the plan or in the order confirming the plan, the property vesting in the debtor under subsection (b) of this section is free and clear of any claim or interest of any creditor provided for by the plan.

11 U.S.C. § 1227(b), (c) (1994) (emphasis added).

If the debtor completes making payments under the plan (other than payments that extend beyond the plan period, as described above), the court grants the debtor a discharge "of all debts provided for by the plan" (other than the debts underlying the extended payments). 11 U.S.C. § 1228(a) (1994). A discharge operates as an injunction against any attempt to collect a debt "as a personal liability of the debtor." 11 U.S.C. § 524(a)(2) (1994). A discharge does not, without more, affect a creditor's right to collect a debt in rem by foreclosing a mortgage. See Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 2153-54, 115 L.Ed.2d 66 (1991); Long v. Bullard, 117 U.S. 617, 620-21, 6 S.Ct. 917, 918, 29 L.Ed. 1004 (1886).

B.

Because several sections of the Code defer to the provisions of the debtor's plan, we must also consider the relevant sections of the Harmons' Plan. The key language of the Plan, contained in the introductory section, provides:

With respect to each allowed secured claim, the debtors' property has been valued as of the effective date of the Plan in an amount not less than the value of the claim. In addition, the holder of any claim, secured or impaired, shall retain its pre-petition lien securing such claim until such time that the claim is fully paid. Following payment of the claim, the holder of the claim shall release the lien.

The section of the Plan devoted to the FSA's claim does not mention the lien but does recite that the Harmons and the FSA have stipulated that the FSA's secured claim is $51,200. This section states further that when the debtors have made their thirtieth payment on the secured claim, "the [FSA] shall release any claim it may have."

The Bankruptcy Court's order confirming the Plan summarizes the statutory requirements of § 1225(a)(5) and does not discuss the FSA's lien specifically.

C.

Next we consider the two Supreme Court cases on which the parties have primarily relied: Dewsnup v. Timm, 502 U.S. 410, ...

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