In re Bellamy, Bankruptcy No. 5-90-00688
| Citation | 122 BR 856 |
| Decision Date | 10 January 1991 |
| Docket Number | Bankruptcy No. 5-90-00688,Adv. No. 5-90-0203. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — District of Connecticut |
| Parties | In re Jimmie BELLAMY and Cynthia Bellamy, Debtors. Jimmie BELLAMY and Cynthia Bellamy, Plaintiffs, v. FEDERAL HOME LOAN MORTGAGE CORP., Assignee of Comfed Mortgage Co., Inc. and Norton P. Feinstein, Defendants. |
Ira B. Charmoy, George W. Derbyshire, Law Offices of Ira B. Charmoy, Bridgeport, Conn., for plaintiffs.
Carla E. Craig, Hertzog, Calamari & Gleason, New York City, Dean S. Cooper, Associate Gen. Counsel, Federal Home Loan Mortg. Corp., Reston, Va., and Richard A. Roberts, Fazzone, Nuzzo & Baille, P.C., Cheshire, Conn., for defendant Federal Home Loan Mortg. Corp.
ALAN H.W. SHIFF, Bankruptcy Judge.
The plaintiffs seek to bifurcate the claim and void the lien of Federal Home Loan Mortgage Corp. ("the defendant")1 under Code § 506(a) and (d),2 to the extent that the allowed amount of that claim exceeds the value of their residence. The plaintiffs further seek a determination that the value of their residence is its fair market value reduced by the amount of so-called disposal costs.3
On May 24, 1987, the plaintiffs purchased real property located at 135 Clover Hill Avenue in Bridgeport, Connecticut as their principal residence (the "residence"). To finance that purchase, the plaintiffs gave Comfed Mortgage Co., Inc. a $133,000.00 promissory note payable in monthly installments of $1,329.79 during its twenty year term, which was secured only4 by a first mortgage on the residence. The note provided that in the event of a late payment, the note holder had the right to accelerate the due date of the principal balance and all interest owed. The defendant subsequently purchased the mortgage and now holds a first perfected security interest on the residence.5
The plaintiffs filed for relief under Chapter 13 of the Bankruptcy Code on April 18, 1990. On that date, the plaintiffs were in arrears on their mortgage payments in the approximate amount of $13,000.00. On April 25 the plaintiffs commenced the instant adversary proceeding to "strip" the defendant's lien to the value of the residence. The proof of claim filed by the defendant on September 4, 1990 states that the total amount of its secured claim is $151,340.85. The parties have stipulated that the value of the residence is $127,500.00 and that "a reasonable estimate of the costs of disposal of the subject property to the Defendant, FEDERAL HOME LOAN MORTGAGE CORP., would be $10,200.00, which is eight percent (8%) of the value of said property." Stipulation of Facts, Dec. 6, 1990. The parties further stipulated during oral argument that the defendant's rights are secured only by a perfected security interest the residence, and that the defendant's mortgage is a so-called long term mortgage as to which § 1322(b)(5) is applicable.
Code § 506 provides in relevant part:
Code § 1322(b) provides:
Chapter 13 debtors typically attempt to save their homes from state court ordered foreclosure by filing plans which cure defaults and maintain payments on reinstated mortgages. See 11 U.S.C. § 1322(b)(2), (5).6 As a refinement to that strategy, debtors attempt to utilize § 506(a) and (d) to reduce the amount of the reinstated mortgage to the value of their residence. That strategy is commonly employed during times, such as these, when real estate values are depressed. These debtors go a step further by seeking a determination that the value of their residence is reduced by the amount of so-called disposal costs.
Predictably, mortgagees, such as this defendant, argue that "§ 1322(b)(2) prohibits modification of any rights of a `holder of ... a claim secured by a security interest in real property that is the debtor's principal residence'", so that the plain language of the statute prevents the application of § 506(a). The defendant further contends that any conflict between § 506 and § 1322(b)(2) must be resolved in favor of § 1322(b)(2), as it is the more specific provision; that the legislative history supports an interpretation of § 1322(b)(2) which prevents the plaintiffs' use of § 506(a); and that allowing the plaintiffs to reduce the mortgage would be at odds with the statutory scheme of chapter 13 and produce an unfair result in that the plaintiffs would enjoy the benefit of any appreciation in the residence's value. The plaintiffs respond that § 506(a) and § 1322(b)(2) must be read together and harmonized.
Courts are divided on whether § 1322(b)(2) prohibits lien stripping under § 506(a). Those which hold that it does not reason that § 1322(b)(2) only prohibits modification of the allowed secured portion of the creditor's claim as established under § 506(a). E.g., Wilson v. Commonwealth Mortgage Corp., 895 F.2d 123, 126-28 (3d Cir.1990); Hougland v. Lomas & Nettleton Co. (In re Hougland), 886 F.2d 1182, 1183-85 (9th Cir.1989); Goins v. Diamond Mortgage Corp., 119 B.R. 156, 158-62 (Bankr.N.D.Ill.1990); McNair v. Chrysler First Fin. Serv. Corp. of Va. (In re McNair), 115 B.R. 520, 522-23 (Bankr.E.D. Va.1990); In re Moore, 113 B.R. 239, 239 (Bankr.E.D.Va.1990); Brouse v. CBS Mortgage Corp. (In re Brouse), 110 B.R. 539, 543 (Bankr.D.Colo.1990).
Other courts hold that § 506(a) may not be read to interfere with the specific prohibition of § 1322(b)(2), which they say preserves the rights of secured creditors, including the right to full payment of their secured claim and the right "to attempt to `use an appreciation in land values to offset their losses' at some future time." In re Christiansen, 121 B.R. 63, 64, 20 B.C.D. 1986, 1986 (Bankr.D.Co.1990), quoting Dewsnup v. Timm (In re Dewsnup), 908 F.2d 588, 592 (10th Cir.1990) (). See also In re Sauber, 115 B.R. 197, 198-99 (Bankr.D.Minn. 1990); Matter of Kaczmarczyk, 107 B.R. 200, 202-03 (Bankr.D.Neb.1989); In re Russell, 93 B.R. 703, 705-07 (D.N.D.1988); In re Catlin, 81 B.R. 522, 523-24 (Bankr.D. Minn.1987). I respectfully decline to follow those cases as I believe that their conclusions beg the question, what are the rights of a secured creditor after the commencement of a chapter 13 case?
It is well settled that Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). Here, as noted, it is conceded that under state law and the note and mortgage, the defendant has a perfected security interest in the plaintiffs' residence. It is also well settled that after bankruptcy, a creditor's rights are restricted because of the codified public policy of giving a debtor an opportunity to reorganize, see In re Wonder Corp. of America, 72 B.R. 580, 588 (Bankr.D. Conn.1987), aff'd, 82 B.R. 186 (D.Conn. 1988), which in chapter 13 usually means saving the home. Thus, while there is no question as to the validity of the defendant's security interest in the plaintiffs' residence, all that means is that the plaintiffs' debt was secured to the extent of the value of the collateral held by the defendant, i.e. their residence. The defendant never had a claim secured by more than the value of its collateral. And although the defendant had a prepetition right to accelerate its note, commence a foreclosure action, and realize any subsequent increase in the value of the residence, those rights do not survive bankruptcy and are not protected by § 1322(b)(2). To hold otherwise would, inter alia, nullify the automatic stay. See 11 U.S.C. § 362(a).
Contrary to the defendant's assertion, it has no right to payment of its secured claim; it only has a right to the payment of the allowed amount of that claim. Indeed, no creditor in a chapter 13 case has the right to the payment of its claim — only the payment of the allowed amount of that claim. See 11 U.S.C. § 1325(a)(5). See also 11 U.S.C. § 726(a). It is the plaintiffs, on the other hand, who have the right to cure the default, which reduces the defendant's secured claim to the amount of the arrearage, and provide in their plan for the payment of that amount as the allowed amount of the secured claim. See 11 U.S.C. §§ 1322(b)(5), 1325(a)(5).
The defendant also argues...
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