Hart, In re

• Decision Date: 17 January 1991
• Docket Number: No. 89-6325,89-6325
• Citation: 923 F.2d 1410
• Parties: , 24 Collier Bankr.Cas.2d 925, 21 Bankr.Ct.Dec. 385, Bankr. L. Rep. P 73,789 In re Danny L. HART and Joanne E. Hart, Debtors. EASTLAND MORTGAGE CO., Plaintiff-Appellee, v. Danny L. HART and Joanne E. Hart, Defendants-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1410

923 F.2d 1410

59 USLW 2511, 24 Collier Bankr.Cas.2d 925,

21 Bankr.Ct.Dec. 385,

Bankr. L. Rep. P 73,789

In re Danny L. HART and Joanne E. Hart, Debtors EASTLAND MORTGAGE CO., Plaintiff-Appellee, v. Danny L. HART and Joanne E. Hart, Defendants-Appellants.

No. 89-6325.

United States Court of Appeals Tenth Circuit.

Jan. 17, 1991.

Rehearing Denied Feb. 26, 1991.

James L. Bentley, UAW-GM Legal Services Plan, Oklahoma City, Okl., for debtors-defendants-appellants.

Sandy Schovanec, Phillips McFall McVay Sheets & Lovelace (Melvin R. McVay with her on the briefs), Oklahoma City, Okl., for plaintiff-appellee.

Before MOORE, TACHA and BRORBY, Circuit Judges.

PER CURIAM.

The issue in this bankruptcy case is whether a home mortgage protected by 11 U.S.C. Sec. 1322(b)(2) can be bifurcated into secured and unsecured portions based on the fair market value of the property under a threshold application of the provisions of 11 U.S.C. Sec. 506(a) to an undersecured mortgage. The district court found that the attempt to do so was a modification of the mortgage and, as such, was improper. We hold that the bifurcation was a recognition of the legal status of the creditor's interest in the debtors' property and not a modification of the mortgage. We reverse.

Danny L. Hart and Joanne E. Hart, debtors in the chapter 13 bankruptcy action from which this appeal arose, took out a loan secured by a mortgage held by the Federal National Mortgage Association and serviced by appellee Eastland Mortgage Company, a creditor in the bankruptcy action. The mortgage described the security for the loan to be the real property to which the Harts' mobile home is attached,

TOGETHER WITH all the improvements now or hereafter erected on the property, and all easements, rights, appurtenances, rents, royalties, mineral, oil and gas rights and profits, water rights and stock and all fixtures now or hereafter a part of the property. All replacements and additions shall also be covered by this Security Instrument. All of the foregoing is referred to in this Security Instrument as the "Property."

In re Hart, No. 88-6229-TS, Order Concerning Debtors' Motion to Amend Plan at 5 (Bankr.W.D.Okla. Mar. 24, 1988) (hereafter, the "bankruptcy court order"). At the time the Harts submitted their chapter 13 wage earner plan to the bankruptcy court for approval, a $55,000 balance remained on Eastland's note. However, the fair market value of the property described in the mortgage was stipulated to be $30,000. One part of the Harts' chapter 13 plan, approved by the bankruptcy court without objection, referred to the mortgage as a $55,000 secured indebtedness, while other parts of the plan referred to the mortgage as a $30,000 secured and $25,000 unsecured indebtedness. When the Harts filed a motion to amend the plan, correcting what they referred to as a "scrivener's error" so that the plan consistently listed $30,000 of the debt as secured and $25,000 as unsecured, Eastland objected.

The bankruptcy court granted the Harts' motion to amend and approved the plan over Eastland's objections. Eastland appealed to the district court, and that court reversed, holding modification of the mortgage to be inappropriate, given the protection of residential mortgages granted by 11 U.S.C. Sec. 1322(b)(2). In re Hart, No. CIV-89-797-T, Order (August 28, 1989) (hereafter, the "district court order"). The Harts appealed to this court.

The standard by which this court reviews district court decisions arising on appeal from the bankruptcy court was set forth in Hall v. Vance, 887 F.2d 1041 (10th Cir.1989):

It is well established that neither this court nor the district court can disturb a bankruptcy court's findings of fact unless they are clearly erroneous. A factual finding is clearly erroneous " 'when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.' " This court, however, may exercise de novo review over the bankruptcy court's conclusions of law.

Id. at 1043 (citations omitted). See also First Bank v. Mullet (In re Mullet), 817 F.2d 677, 679 (10th Cir.1987) ("both the court of appeals and the district court are to review the bankruptcy court's legal determinations de novo "); cf. Jarboe v. United Bank (In re Golf Course Builders Leasing, Inc.), 768 F.2d 1167, 1169 (10th Cir.1985) ("the 'clearly erroneous' standard does not apply to ... mixed questions of law and fact").

Chapter 13 of the Bankruptcy Code of 1978, 11 U.S.C. Secs. 1301-30 (1988)

provides for the adjustments of the debts of an individual with regular income, through extensions and composition plans, usually extending no more than three years, Sec. 1322(c) of the Code, funded out of the Chapter 13 petitioner's future income (which is submitted to the court for the payment of the debts as provided for by the plan, Sec. 1322(a) of the Code). The adjustments and extensions so allowed, however, are subject to provisions that protect the interests of creditors, including, inter alia, their secured interests.

Grubbs v. Houston First Am. Sav. Ass'n, 730 F.2d 236, 237 (5th Cir.1984) (en banc).

Two sections of the Code are particularly important in this case. The first is 11 U.S.C. Sec. 1322(b)(2). Section 1322 sets forth the required contents of a chapter 13 debtor's plan for rehabilitation. Subsection (b)(2) provides that 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."

The original draft of the Code, prepared by the Commission on the Bankruptcy Laws of the United States, recommended permitting modification of secured indebtedness on personal property. Grubbs, 730 F.2d at 243-44; In re Neal, 10 B.R. 535, 538 (Bankr.S.D. Ohio 1981); see also H.R.Rep. No. 595, 95th Cong., 1st Sess., reprinted in 1978 U.S.Code Cong. & Admin.News 5963; S.Rep. No. 989, 95th Cong., 2d Sess., reprinted in 1978 U.S.Code Cong. & Ad.News 5787. The House version of the Code, H.R. 8200, 95th Cong., 1st Sess. (1977), expanded this capability for modification of secured interests to include both real and personal property. Grubbs, 730 F.2d at 243; In re Neal, 10 B.R. at 538-39. The Senate version, S. 2266, 95th Cong., 2d Sess. (1978), restricted the House version's broad right to modification by adding the underlined phrase of the following passage, "(2) modify the rights of holders of secured claims (other than claims wholly secured by mortgages on real property) or of holders of unsecured claims." Grubbs, 730 F.2d at 245 & n. 14; In re Neal, 10 B.R. at 539. The final version of the Code reflected the efforts of a compromise committee. "There was no explanation as to the rationale for the change of the word 'wholly' to the word 'only.' " Id. The change in the order of the words in the clause also remains unexplained.

In Grubbs, the Fifth Circuit found that Congress intended to protect the home mortgage industry:

With regard to Sec. 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 perceptions, or to suggestions advanced in the legislative hearings [by advocates for secured creditors], that, home-mortgagor [sic] lenders, performing a valuable social service through their loans, needed special protection against modification thereof (i.e., reducing installment payments, secured valuations, etc.).

730 F.2d at 246 (emphasis in original); see also id. at 245 n. 13; Federal Land Bank v. Glenn (In re Glenn), 760 F.2d 1428, 1433-34 (6th Cir.), cert. denied sub nom Miller v. First Fed., 474 U.S. 849, 106 S.Ct. 144, 88 L.Ed.2d 119 (1985); In re Seidel, 752 F.2d 1382, 1385-86 (9th Cir.1985); In re Harris, 94 B.R. 832, 836 (D.N.J.1989); In re Foster, 61 B.R. 492, 495 (Bankr.N.D.Ind.1986) (special protection of Sec. 1322(b)(2) was created as narrow exception to broad restructuring power under chapter 13; exception sought to decrease lender's risk in residential real estate loans); In re Neal, 10 B.R. at 536-37. At least one court has concluded that the benefit of section 1322(b)(2) was intended to apply only to lending institutions dealing solely in real estate loans, such as banks and savings and loan associations, as opposed to finance companies who regularly take other forms of security, such as motor vehicles and household furnishings. United Companies Fin. Corp. v. Brantley, 6 B.R. 178, 189 (Bankr.N.D.Fla.1980); cf. In re Glenn, 760 F.2d at 1434 (application of section 1322(b)(2) often arises in the context of consumer debts for personal property secured by the debtor's home or in the context of financing for business ventures secured by the debtor's home).

The other section of the Code bearing on this case is 11 U.S.C. Sec. 506(a):

An 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. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property.

"Section 506 ... governs the definition and treatment of secured claims.... Subsection (a) of Sec. 506 provides that a claim is secured only to the extent of the value of the property on which the lien is fixed; the remainder of that claim is considered unsecured." United States v. Ron Pair Enters., Inc., 489 U.S. 235, 238-39, 109 S.Ct. 1026, 1029, 103 L.Ed.2d 290 (1989); see also Dewsnup...