In re Brouse

• Decision Date: 09 February 1990
• Docket Number: Adv. No. 89-A-1038.,Bankruptcy No. 89-B-11631-A
• Citation: 110 BR 539
• Parties: In re Patricia Louise BROUSE, Debtor. Patricia Louise BROUSE, Plaintiff, v. CSB MORTGAGE CORP. and Colorado National Bank South, Defendants.
• Court: U.S. Bankruptcy Court — District of Colorado

110 B.R. 539 (1990)

In re Patricia Louise BROUSE, Debtor Patricia Louise BROUSE, Plaintiff, v. CSB MORTGAGE CORP. and Colorado National Bank South, Defendants.

Bankruptcy No. 89-B-11631-A, Adv. No. 89-A-1038.

United States Bankruptcy Court, D. Colorado.

February 9, 1990.

Thomas E. Orrell, John A. Cimino, P.C., Denver, Colo., for defendant, Colorado Nat. Bank South.

Harold J. Baer, Jr., Harold J. Baer, Jr., P.C., Denver, Colo., for plaintiff.

MEMORANDUM OPINION AND ORDER

SIDNEY B. BROOKS, Bankruptcy Judge.

THIS MATTER comes before the Court on the Debtor's Complaint to Determine the Value of Lien and Allow the Deficiency as Unsecured. The Chapter 13 Debtor, Patricia Louise Brouse ("Debtor" herein), requests an order of the Bankruptcy Court avoiding two creditors' liens pursuant to 11 U.S.C. § 506(d). The dispute is submitted to the Court on stipulated facts and presents two issues for the Court's determination.

The first issue is the ubiquitous and much contested issue of whether or not a debtor can "write down," "strip," or cause to "vanish," a lien securing a creditor's claim if the creditor's claim exceeds the value of the collateral. This Debtor seeks, pursuant to Section 506(d), an order of Court to avoid, or to extinguish, two creditors' liens on her home to the extent the amount of the creditors' claims exceed the value of the collateral.

The second issue is whether or not a Chapter 13 debtor is precluded from avoiding a lien pursuant to Section 506(d), because of the language of 11 U.S.C. § 1322(b)(2) which provides, essentially, that a debtor may not modify the rights of a creditor whose claim is secured only by a security interest in the debtor's principal residence.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

The facts are essentially not in dispute. Debtor owns her residence which is valued at approximately $27,120.00.¹ Defendant CSB Mortgage Company ("CSB" herein) holds a claim against the Debtor in the sum of approximately $45,000.00, which claim is secured by a first deed of trust on the Debtor's principal residence. Defendant Colorado National Bank South ("Bank" herein) holds a claim against the Debtor in the sum of approximately $9,000.00, which claim is secured by a lien on the property in a second position. Encumbrances on the Debtor's principal residence, therefore, exceed the value of the residence by approximately $26,880.00.

Pursuant to 11 U.S.C. § 506(a),² CSB has a claim secured by the collateral in the sum of approximately $27,120.00 and an unsecured claim in the approximate sum of $17,880.00. Likewise, the Bank has an unsecured claim in the approximate amount of $9,000.00. Secured claims are "secured to the full extent, and only to the full extent, that there is value in the collateral actually securing the claim. . . . The claim against the estate is, in effect, bifurcated into secured and unsecured components." In re Hermansen, 84 B.R. 729, 734 (Bankr.D. Colo.1988).

Debtor filed a Motion to Confirm her Chapter 13 Plan and the Bank objected to the Plan because, the Bank maintains, the Plan attempts to modify its claim which is secured only by the Debtor's principal residence and such modification is in violation of 11 U.S.C. § 1322(b)(2). No other objections were filed to Debtor's Plan. Debtor filed the within adversary proceeding to determine her right to avoid both liens and otherwise fix the validity, priority, and extent of the two liens on her home. Because the Debtor's Complaint in the adversary proceeding raises the identical issues to those raised in the Bank's objection to confirmation, this Court has consolidated the objection to confirmation hearing with the decision in the adversary proceeding for purposes of judicial efficiency.

DISCUSSION

The first question before the Court is, as stated above, can the Debtor invoke Section 506(d) to avoid two lien claims to the extent that the claims exceed the value of the collateral?³ More specifically, can this Debtor avoid (1) the Bank's second lien on her principal residence to the full extent of its $9,000.00 claim, and (2) CSB's deed of trust to the extent of approximately $17,800.00, the amount of the claim in excess of the estimated value of her property?

This Court finds and concludes that this Debtor, and generally any debtor, may use Section 506(d) to avoid lien claims, in whole or in part, which exceed the value of the collateral securing such claims.

This issue has generated many different opinions and a sharp difference in decisions, everywhere. The majority of courts addressing this issue have expressed the view which this Court adopts by this decision. In re Folendore, 862 F.2d 1537 (11th Cir.1989); Gaglia v. First Federal Sav. & Loan Ass'n., 889 F.2d 1304 (3rd Cir.1989); Matter of Lindsey, 823 F.2d 189 (7th Cir. 1987); In re Garnett, 88 B.R. 123 (Bankr. W.D.Ky.1988); In re O'Leary, 75 B.R. 881 (Bankr.D.Or.1987); In re Worrell, 67 B.R. 16 (C.D.Ill.1986); In re Lyons, 46 B.R. 604 (Bankr.N.D.Ill.1985); In re Tanner, 14 B.R. 933 (Bankr.W.D.Pa.1981); accord 3 Collier on Bankruptcy § 506.07 at 506-71 (15th ed. 1988).

These many opinions have already fully analyzed and expressed well the various, compelling reasons why, in this Court's opinion, a debtor should be able to utilize Section 506(d) to avoid lien claims which are unsecured or undersecured pursuant to Section 506(a). I will not here repeat those reasons; I will simply adopt them.

There are thoughtful opinions, as well, which reject this view. Matter of D'Angona, 107 B.R. 448 (Bankr.D.Conn.1989); In re Doty, 104 B.R. 133 (Bankr.S.D.Iowa 1989); In re Larson, 99 B.R. 1 (Bankr.D. Alaska 1989); In re Shrum, 98 B.R. 995 (Bankr.W.D.Okla.1989); In re Dewsnup, 87 B.R. 676 (Bankr.D.Utah 1988); In re Maitland, 61 B.R. 130 (Bankr.E.D.Va.1986); In re Cordes, 37 B.R. 582 (Bankr.C.D.Cal. 1984); In re Mahaner, 34 B.R. 308 (Bankr. W.D.N.Y.1983).

Two opinions in this District which reject this view and deny a debtor's use of Section 506(d), generally, to avoid lien claims include In re Triplett, No. 88-E-0748, (Bankr.D.Colo. February 15, 1989) unpublished opinion of Chief Judge Charles E. Matheson and In re Sloan, 56 B.R. 726 (Bankr.D.Colo.1986) opinion of Judge Roland J. Brumbaugh.⁴

Simply stated, this Court is persuaded that the majority view allowing a debtor to employ Section 506(d) is correct in legal terms, sound in terms of statutory construction, and unavoidable under the fresh start concept of the Bankruptcy Code. In re Folendore best sums up the reasons for granting to debtors use of Section 506(d) to avoid certain lien claims:

The plain language of the statute, supported by the decisions of a majority of the bankruptcy courts, inferences drawn from the 1984 amendments, and common sense, requires the . . . lien be voidable whether or not the lienor\'s claim has been disallowed under section 502.

In re Folendore, supra at 1539.

Of particular importance to this Court is the conclusion in Folendore that "the plain language of section 506(d) . . ." compels allowing a debtor to avoid a lien unsecured or undersecured pursuant to Section 506(a). The language that "such lien is void" is not notably tricky or ambiguous. In determining the scope of a statute, the Court must begin with the statutory language itself. When the terms of the statute are clear, the statutory language is controlling absent exceptional circumstances. Fidelity Savings & Investment Co. v. New Hope Baptist, 880 F.2d 1172 (10th Cir.1989).

Moreover, and perhaps equally important in this Court's opinion, the use of Section 506(d) allows a debtor to fix with certainty, clarity and finality, the relative rights and interests of the parties at the time of the bankruptcy case. This is a principal feature and purpose of the entire bankruptcy system.

Time to fix relative rights of debtor and secured creditor are at the time of bankruptcy. Creditor rights, claims, and interests are, generally, to be fixed at the time of bankruptcy. That is the clear and unqualified intent of the Code and applicable case law. See, In re Clark, 91 B.R. 570, 573 (Bankr.D.Colo. 1988); In re Potenza, 75 B.R. 17 (Bankr. D.Nev.1987); Matter of Pearson, 773 F.2d 751 (6th Cir.1985). There is no logical reason why that objective should be defeated by denial of access to Code tools purposely designed to fix rights as of that date.

In re Packer, 101 B.R. 651, 653 (Bankr. D.Colo.1989).⁵

The second issue is whether a Chapter 13 debtor is barred from using Section 506(d) by other provisions of Chapter 13, namely Section 1322(b)(2).⁶ This Court concludes that a Chapter 13 debtor is entitled to use Section 506(d) to avoid certain liens and is not barred from doing so by any provisions of Chapter 13.

Most cases dealing with a debtor's use of Section 506 are Chapter 7 cases. However, there is some treatment of this question in Chapter 13 cases and, again, the courts are split. Some courts hold that a Chapter 13 debtor may use Section 506(d). In re Hougland, 886 F.2d 1182 (9th Cir.1989); In re Frost, 96 B.R. 804 (Bankr.S.D.Ohio 1989); In re Harris, 94 B.R. 832 (D.N.J. 1989); In re Kehm, 90 B.R. 117 (Bankr.E. D.Pa.1988); In re Caster, 77 B.R. 8 (Bankr. E.D.Pa.1987); and In re Bruce, 40 B.R. 884 (Bankr.W.D.Va.1984).

Other cases hold that a Chapter 13 debtor cannot use Section 506 because it is inconsistent with and superseded by Section 1322(b)(2). See, In re Russell, 93 B.R. 703 (D.N.D.1988); In re Brown, 91 B.R. 19 (Bankr.E.D.Va.1988); In re Catlin, 81 B.R. 522 (Bankr.D.Minn.1987); In re Hemsing, 75 B.R. 689 (Bankr.D.Mont.1987); and In re Hynson, 66 B.R. 246 (Bankr.D.N.J. 1986).

This Court is persuaded by and adopts the reasoning and decision of In re Hougland which provides, essentially, that (1) there is no inconsistency between Sections 506 and 1322(b), (2) the prohibition of Section 1322(b)(2) against modification of "secured claims" applies only to the secured portion of claims which may be bifurcated pursuant to ...