In re Bender

• Decision Date: 22 March 1988
• Docket Number: Adv. No. 87-0548F.,Bankruptcy No. 87-02103F
• Citation: 86 BR 809
• Parties: In re Allen BENDER and Alesia Bender, Debtors. Allen BENDER and Alesia Bender, Plaintiffs, v. COMMONWEALTH MORTGAGE COMPANY OF AMERICA, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

86 B.R. 809 (1988)

In re Allen BENDER and Alesia Bender, Debtors Allen BENDER and Alesia Bender, Plaintiffs, v. COMMONWEALTH MORTGAGE COMPANY OF AMERICA, Defendant.

Bankruptcy No. 87-02103F, Adv. No. 87-0548F.

United States Bankruptcy Court, E.D. Pennsylvania.

March 22, 1988.

David A. Searles, Community Legal Services, Inc., Philadelphia, Pa., for debtors.

Leslie J. Carson, Jr., Philadelphia, Pa., for defendant/Commonwealth Mortg. Co.

Edward Sparkman, Philadelphia, Pa., Trustee.

MEMORANDUM

BRUCE I. FOX, Bankruptcy Judge:

On April 30, 1987, the debtors filed a chapter 13 bankruptcy petition. Among their creditors was Commonwealth Mortgage Company of America (hereinafter referred to as "Commonwealth") which held a mortgage against the debtors' residence. On May 19, 1987, Commonwealth filed a secured proof of claim. In response, the debtors commenced an adversary proceeding which, in essence, objected to the secured claim on two discrete grounds: first, that the allowed secured claim of Commonwealth is limited to $15,000.00 by virtue of 11 U.S.C. § 506(a), (d); second, that Commonwealth violated the provisions of the pre 1982 Federal Truth-in-Lending Act, (hereinafter referred to as "TILA"), 15 U.S.C. § 1601 et seq., and this violation entitled the debtors to a $2,000.00 recoupment against Commonwealth's claim.

In lieu of trial, the parties have stipulated that the fair market value of the debtors' residence was $15,000.00.¹ They also stipulated that Commonwealth did violate TILA and the debtors are entitled to a $2,000.00 recoupment. See generally Werts v. Federal National Mortgage Ass'n, 48 B.R. 980 (E.D.Pa.1985); In re Dangler, 75 B.R. 931 (Bankr.E.D.Pa.1987). Left for decision are two related legal issues: does 11 U.S.C. § 506(a), (d) afford these debtors any relief?; if so, how does one apply the TILA recoupment?

I

The meaning of 11 U.S.C. § 506(a) has been well stated by a leading commentator:

The first sentence of section 506(a) provides that an allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553, is a secured claim only to the extent of the value of such creditor\'s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent the value of such interest or such amount is less than the amount of such allowed claim. Stated differently, section 506(a) requires a bifurcation of a "partially secured" or "undersecured" claim into separate and independent secured claim and unsecured claim components.

3 Collier on Bankruptcy, ¶ 506.04, at 506-15 (15th ed. 1987). (footnotes omitted). Accord In re Everett, 48 B.R. 618 (Bankr. E.D.Pa.1985). Its purpose is to reflect the economic reality that an undersecured creditor cannot expect to look to its collateral for full payment of its claim and so is both a secured creditor and an unsecured creditor:

The Code scheme of Section 506 is that creditors receive through the valuation procedure of the Bankruptcy Court the same property value they would receive through a nonbankruptcy forced sale of the Debtor\'s nonexempt assets as of the petition date. . . . The operation of section 506(d) merely effectuates the market place.

In re Tanner, 14 B.R. 933, 936-37 (Bankr. W.D.Pa.1981).

A.

Commonwealth offers no challenge to those underlying premises. Rather, it argues correctly that 11 U.S.C. § 506(a) is not self effectuating. A lien is not void to the extent it exceeds an allowed secured claim, unless 11 U.S.C. § 506(d) applies. This subsection, which was amended in 1984, now states:

(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void unless —

(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or

(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.

It is subsection 506(d)(2) which is raised by Commonwealth.

As Collier notes, the provisions of § 506(d)(2) permit a lien to survive bankruptcy even though it exceeds the value of a secured claim which might have been allowed. If the creditor is content not to participate in the bankruptcy proceedings, (or is unaware of them), and fails to file any proof of claim, and neither the debtor nor any other person files a proof on behalf of the lien creditor, its lien will not be avoided:

Under section 506(d), prior to its amendment in 1984, a lien could not be avoided if "a party in interest had not requested that the court determine and allow or disallow such claim under section 502." This provision in effect required that the lienholder be given the opportunity for its "day in court" before any action affecting the lien could be taken. If no party in interest requested allowance or disallowance of the claim, the lien would survive the bankruptcy case even if the entire personal liability of the debtor were extinguished. The amended section 506(d) incorporates the notice aspect of prior section 506(d) by providing that liens will not be avoided if a proof of claim has not been filed.

Thus, there are occasions when the holder of a secured claim will have greater protection with respect to its lien than with respect to the claim secured by the lien. If the holder never becomes aware of the debtor\'s bankruptcy case (and, in a chapter 11 case, its claim is not scheduled or is scheduled as disputed, contingent or unliquidated), its claim may nonetheless be discharged by reason of its failure to file a proof of claim. However, in order for its lien to be avoided, either the holder or another person entitled to do so must file a proof of claim with respect to the holder\'s claim. The holder would, of course, be entitled to "notice and a hearing" with respect to an objection to the filed proof of claim.

3 Collier on Bankruptcy, § 506.07, 507-66 to 507-68 (15th ed. 1987). (footnote omitted)²

Commonwealth argues that its proof of claim, filed on May 19, 1987, is not a proof of claim for purposes of § 506(d) because it seeks only payment of the prepetition mortgage arrearages, not the entire prepetition debt; and, as the arrearage is less than the value of the debtor's residence, it contends that its proof cannot be challenged under § 506(d). This argument misinterprets both section 506(d)(2) and local Bankr.Rule 3001.1, as well as overlooks one aspect of its own proof of claim.

11 U.S.C. § 1322 contains two discrete parts. Subsection (a) lists three aspects which must be included in every chapter 13 plan. By contrast, subsection (b) lists items which may be included in a chapter 13 plan. Unlike Chapter 11, only the debtor in chapter 13 may file a plan. 11 U.S.C. § 1321. Thus, it is the debtor who decides whether to incorporate some or any of the provisions of § 1322(b) into his plan. Among those elective provisions is § 1322(b)(5) which permits a debtor to cure prepetition defaults of long term residential secured claims, while keeping current with postpetition payments.

The provisions of § 1322(b)(5) differ from the provisions of 11 U.S.C. § 1325(a)(5). The latter states:

(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 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.

When a debtor's plan provides for an allowed secured claim, the plan must comply with § 1325(a)(5) or else an objection to confirmation must be sustained. When the debtor's plan calls for curing a prepetition mortgage debt, it is not providing for the allowed secured claim of the mortgage, which is defined by 11 U.S.C. § 506(a). Appeal of Capps, 836 F.2d 773 (3d Cir.1987). See In re Fries, 68 B.R. 676 (Bankr.E.D.Pa.1986).

As Collier on Bankruptcy notes:

When a default on a mortgage or other long term debt is cured under section 1322(b)(5), the full amount of the creditor\'s claim is not paid during the chapter 13 case. Rather, the debtor preserves the benefit of a longer payment schedule which extends beyond the due date of the last payment under the plan, and the creditor is protected by the exception to discharge for long term debts on which defaults are cured.

Thus, the curing of defaults pursuant to section 1322(b)(5) is a right conceptually distinct from chapter 13 cramdown, which allows a debtor to modify the rights of secured creditors by reducing their payments or in other ways. Indeed, when a long term mortgage on the debtor\'s principal residence is the creditor\'s only security, a chapter 13 plan may not modify the creditor\'s rights. In contrast to the curing of a long term debt which is not paid in full during the plan, where a secured creditor\'s rights are modified with respect to a debt provided for in the plan, the plan is not entitled to confirmation unless it does provide for full payment of the allowed secured claim, as well as interest to meet the "present value test," during the term of the plan.

5 Collier on Bankruptcy ¶ 1322.094, at 1322-20 to 1322-21 (15th ed. 1987) (footnotes omitted).

In some instances, a debtor will be unable to elect to cure the prepetition debt, pursuant to a chapter 13 plan, because the foreclosure process is too far advanced to be amenable to a cure under § 1322(b)(5). Matter of Roach, 824 F.2d 1370 (3d Cir. 1987). However, when that right to cure under § 1322(b)(5) exists, it is for the debtor³ as the plan proponent, not the creditor, to elect to choose between curing the prepetition debt and providing for the allowed secured claim. Cf. Appeal of Capps, (provisions of § 1325(a)(5)...