In re Demoff

• Citation: 109 BR 902
• Decision Date: 29 December 1989
• Docket Number: Bankruptcy No. 87-61378.
• Parties: In re Clifford Alexander DEMOFF, Linda Joan Demoff, Debtors.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Indiana

109 B.R. 902 (1989)

In re Clifford Alexander DEMOFF, Linda Joan Demoff, Debtors.

Bankruptcy No. 87-61378.

United States Bankruptcy Court, N.D. Indiana, Hammond Division at Gary/Lafayette.

December 29, 1989.

Angelo Sabato, I.A. Woloshansky, Merrillville, Ind., for debtors.

MEMORANDUM OPINION AND ORDER¹

KENT LINDQUIST, Chief Judge.

I Statement of Proceedings

This matter is before the Court on the motion of Clifford Alexander Demoff and Linda Joan Demoff, the Chapter 13 Debtors herein (hereinafter: "Debtors"), filed on December 22, 1988 to determine the value of the mortgage lien of Provident Institution for Savings for the City of Boston (hereinafter: "Provident") in the sum of $48,500.00 or the alleged market value thereof, and to allow Provident's claim in excess of the market value as an unsecured claim. Provident filed its objection to the Debtors' motion on January 13, 1989. The Court held a pre-hearing conference on this matter on February 28, 1989. The parties advised they were conducting settlement negotiations, and the Court ordered that if no settlement was reached by April 4, 1989, the Court would enter an order setting a briefing schedule on the legal issues indicated. A telephonic status conference on April 4, 1989, and the parties having stipulated that there were no issues of material fact at this time agreed that there was no need to submit evidence because the dispute was a question of law only. The legal issue presently before the Court is whether the chapter 13 debtors may value Provident's collateral pursuant to ž 506(a) and void its mortgage to the extent to the extent Provident is unsecured pursuant to ž 506(d) notwithstanding ž 1322(b)(2) and when that mortgage is secured only by the debtor's principal residence. The parties have not stipulated as to the value of the real estate which is a factual issue the Court may have to address at a later time.

II Statement of Facts

Provident filed an action against the Debtors to foreclose its note and mortgage in the Lake County Circuit Court C87-1315 on March 25, 1987. Provident obtained a judgment on May 27, 1987, and scheduled the property for a sheriff's sale to be held on September 18, 1987.

The Debtors filed this Chapter 13 proceeding on July 24, 1987. The Debtors' Schedule A-2 lists a debt to Provident in the amount of $44,277.44 secured by a mortgage in the Debtors' residence, which has a stated fair market value of $48,500.00. Schedule A-2 further lists an arrearage of $4,761.12. On September 18, 1987, Provident filed a proof of claim in the amount of $55,130.69, and objected to the Debtors' plan. Provident itemized the amounts due on its mortgage as follows:

                  Principal                  44,277.44
                  Interest from 9/1/86 to
                    8/31/87 at 14%            7,231.98
                  Escrow deficiency             205.77
                  Attorney fees & costs       3,415.50
                                            __________
                                            $55,130.69
                

III

Conclusions of Law and Discussion

No objection was made by counsel to the jurisdiction of this Court to this matter, the Court finds jurisdiction to be present, and that this contested matter is a core proceeding pursuant to 28 U.S.C. ž 157.

The precise legal issue presently before the Court is whether pursuant to ž 506(a) a Chapter 13 debtor can bifurcate a claim secured only by the Debtor's principal residence into an allowed secured claim and an allowed unsecured claim when the holder of that security interest is undersecured, and to the extent that the lien secures a claim against the debtors that is not an allowed secured claim void such lien pursuant to ž 506(d) in his plan, notwithstanding ž 1322(b)(2), which provides that a debtor's plan may not modify a claim secured only by a security interest in real property that is the debtors' principal residence.

The resolution of this issue involves the application of several provisions of the Bankruptcy Code.

Section 506(a) bifurcates a creditor's claim into secured and unsecured components and provides as follows:

ž 506. Determination of secured status.

(a) 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 of this title, is a secured claim to the extent of the value of such creditor\'s interest in the estate\'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 that the value of such creditor\'s interest or the amount so subject to setoff 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, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor\'s interest. (Emphasis supplied).

Section 506 is implemented by Bankruptcy Rule 3012 which provides as follows:

Rule 3012. Valuation of Security.

The court may determine the value of a claim secured by a lien on property in which the estate has an interest on motion of any party in interest and after a hearing on notice to the holder of the secured claim and any other entity as the court may direct.

Section 506(d) provides for the partial or complete avoidance of a lien to the extent that a lien is not a secured claim as defined in ž 506(a). Section 506(d) provides as follows:

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

(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.²

The legislative history to ž 506(a) as set out in the Senate Report states as follows:

Subsection (a) of this section separates an undersecured creditor\'s claim into two parts: He has a secured claim to the extent of the value of his collateral; and he has an unsecured claim for the balance of his claim. The subsection also provides for the valuation of claims which involve setoffs under section 553. While courts will have to determine value on a case-by-case basis, the subsection makes it clear that valuation is to be determined in light of the purpose of the valuation and the proposed disposition or use of the subject property. This determination shall be made in conjunction with any hearing on such disposition or use of property or on a plan affecting the creditor\'s interest. To illustrate, a valuation early in the case in a proceeding under sections 361-363 would not be binding upon the debtor or creditor at the time of confirmation of the plan. Throughout the bill, references to secured claims are only to the claim determined to be secured under this subsection, and not to the full amount of the creditor\'s claim. This provision abolishes the use of the terms "secured creditor" and "unsecured creditor" and substitutes in their places the terms "secured claim" and "unsecured claim." (S.Rep. No. 95-989, 95th Cong., 2d Sess. 68 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5854). (Emphasis supplied).

The Congressional Record Statements as to ž 506(a) state as follows:

Section 506(a) of the House amendment adopts the provision contained in the Senate amendment and rejects a contrary provision as contained in HR 8200 as passed by the House. The provision contained in the Senate amendment and adopted by the House amendment recognizes that an amount subject to setoff is sufficient to recognize a secured status in the holder of such right. Additionally a determination of what portion of an allowed claim is secured and what portion is unsecured is binding only for the purpose for which the determination is made. Thus determinations for purposes of adequate protection is not binding for purposes of "cram down" on confirmation in a case under chapter 11. (124 Cong.Rec. H11095 (daily ed. Sept. 28, 1978); S17411 (daily ed. Oct. 6, 1978); remarks of Rep. Edwards and Sen. DeConcini).

Section 1322(b)(2) provides as follows:

(b) Subject to subsection (a) and (c) of this section, the plan may ÔÇö

* * * * * *

(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor\'s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;

The Congressional Record Statement to ž 1322(b)(2) states as follows:

Section 1322(b)(2) of the House amendment represents a compromise agreement between similar provisions in the House bill and Senate amendment. Under the House amendment, the plan may modify the rights of holders of secured claims other than a claim secured by a security interest in real property that is the debtor\'s principal residence. It is intended that a claim secured by the debtor\'s principal residence may be treated with under section 1322(b)(5) of the House amendment. (124 Cong.Rec. H11106-07 (daily ed. Sept. 28, 1978); S17423 (daily ed. Oct. 6, 1978); remarks of Rep. Edwards and Sen. DeConcinci).

It is noted that Section 1322(b)(2) of H.R. 8200 simply provided that the plan may "modify the rights of holders of secured claims or holders of unsecured claims." (H.R.Rep. No. 595, 95th Cong. 1st Sess. 429 (1977), U.S.Code Cong. & Admin.News 1978, p. 6384). The Senate version of ž 1322(b)(2) in S 2266 provided that the plan "could modify the rights of holders of secured claims (other than claims wholly secured by mortgages on real property) or of holders of unsecured claims." (S.Rep. No. 989, 95th Cong., 2nd Sess. 141 (1978)). (Emphasis added). See, Norton Bankruptcy Law and Practice, Bankruptcy Code, Legislative History and Comment, ž 1322, Editor's Comment. (Callaghan & Co. 1988-89). It is noted that ž 1322(b)(2) as finally enacted uses the modifier "only" rather than "wholly".

Several other...