In re Enewally

• Decision Date: 27 May 2004
• Docket Number: No. 02-57119.,No. 02-57151.,02-57119.,02-57151.
• Citation: 368 F.3d 1165
• Parties: In re Ikechukwu MacDonald ENEWALLY; In re Uzoamaka B. Enewally, Debtors. Ikechukwu MacDonald Enewally; Uzoamaka B. Enewally, Appellants, v. Washington Mutual Bank, Appellee. In re Uzoamaka B. Enewally, Debtor. Washington Mutual Bank, Petitioner-Appellant, Ikechukwu MacDonald Enewally, Respondent-Appellee, v. Uzoamaka B. Enewally, Respondent-Appellee, and Ikechukwu MacDonald Enewally, Debtor.
• Court: U.S. Court of Appeals — Ninth Circuit

368 F.3d 1165

In re Ikechukwu MacDonald ENEWALLY; In re Uzoamaka B. Enewally, Debtors.

Ikechukwu MacDonald Enewally; Uzoamaka B. Enewally, Appellants, v. Washington Mutual Bank, Appellee.

In re Uzoamaka B. Enewally, Debtor.

Washington Mutual Bank, Petitioner-Appellant, Ikechukwu MacDonald Enewally, Respondent-Appellee, v. Uzoamaka B. Enewally, Respondent-Appellee, and Ikechukwu MacDonald Enewally, Debtor.

No. 02-57119.

No. 02-57151.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 2, 2004.

Filed May 27, 2004.

COPYRIGHT MATERIAL OMITTED

Thomas G. Kemerer, Law Offices of Stephen M. Taylor, Long Beach, CA, for the appellants/cross-appellees.

Alan S. Wolf, The Wolf Firm, Newport Beach, CA, for the appellee/cross-appellant.

Appeal from the United States District Court for the Central District of California; Gary L. Taylor, District Judge, Presiding. D.C. No. CV-02-00459-GLT.

Before: CANBY, JR., RYMER, and THOMAS, Circuit Judges.

THOMAS, Circuit Judge.

In this appeal, we consider whether a Chapter 13 bankruptcy plan may provide for dividing a loan into secured and unsecured claims, commonly referred to as "lien stripping," with the debtor satisfying the secured claim beyond the life of the Chapter 13 plan. We conclude that this type of plan is not permitted under Chapter 13 of the Bankruptcy Code, and we affirm the judgment of the district court.

I

In 2000, Ikechukwu and Uzoamaka Enewally filed a joint voluntary petition for Chapter 13 bankruptcy and an accompanying Chapter 13 plan. In their schedules, the Enewallys listed a fee interest in three properties: their residence in Norwalk, California, and two rental properties in Long Beach, California. The property at issue in this case is located at 3380 Andy Street in Long Beach ("the Andy property"). The Enewallys' bankruptcy schedules stated that the Andy property had a value of $210,000, encumbered by a $245,023 first deed of trust held by Washington Mutual Bank ("Bank"). Thus, according to the bankruptcy schedules, $35,023 of the Enewallys' debt to the Bank was unsecured.

Under the debtors' initial and First Amended Chapter 13 plans, the Bank was to receive regular payments pursuant to the loan terms. Prior to confirmation of their amended Chapter 13 Plan, the debtors filed an adversary complaint against the Bank seeking a judgment valuing the Andy property at $210,000. The complaint also sought to bifurcate the loan into secured and unsecured claims pursuant to 11 U.S.C. §§ 506(a), 1322(b)(2), with $30,744.33 of the Bank's debt deemed unsecured. Before entering judgment on the adversary complaint, the bankruptcy court confirmed the amended plan.

In the adversary proceeding, the debtors sought to maintain the contractual monthly payments on the reduced secured balance with interest, while disposing of the unsecured balance through their confirmed Chapter 13 plan. To achieve that end, the debtors filed a motion to modify the confirmed plan. The motion sought to insert a provision advising creditors of the proposed loan modifications asserted in the adversary proceeding. The motion also explicitly noted that no financial changes to the confirmed plan were desired. The bankruptcy court granted the Enewallys' motion to modify their Chapter 13 plan on the condition that they prevailed in the adversary proceeding.

The debtors filed a motion for summary judgment in the adversary proceeding, supported by an affidavit signed by Ikechukwu Enewally expressing his opinion that the fair market value of the Andy property was $210,000. No other evidence was tendered to the bankruptcy court on valuation by any party.

After holding three hearings, the bankruptcy court granted summary judgment to the debtors. The bankruptcy court valued the Andy property at $210,000 because it was "the stipulated value of the property." The court required the debtors to make monthly payments on the $210,000 secured portion of the loan, pursuant to the original loan terms, and to pay 17% of the unsecured claim throughout the life of the plan, the remainder to be discharged upon successful completion of the Chapter 13 plan. Final judgment was entered, and the Bank timely appealed to the district court. The district court reversed the determination that the debtors could repay the bifurcated loan over a term in excess of five years, holding that the bankruptcy court's opinion was inconsistent with Nobelman v. Am. Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). The district court affirmed the bankruptcy court's valuation of the Andy property at $210,000, based on the undisputed valuation affidavit. The debtors timely appealed the judgment of the district court, and the Bank timely cross-appealed.

II

The Bankruptcy Reform Act of 1978 ("Bankruptcy Code"), Pub.L. No. 95-598, 92 Stat. 2549 (1978), effected important changes in the treatment of secured creditors in bankruptcy proceedings. One of the most significant changes, codified in 11 U.S.C. § 506, describes how secured status is to be determined. This section effectively "abolishes the use of the terms `secured creditor' and `unsecured creditor' and substitutes in their places the terms `secured claim' and `unsecured claim.' "H.R.Rep. No. 95-595, 95th Cong., 1st Sess. at 356 (1977) reprinted in 1978 U.S.C.C.A.N. 6312.¹ Under the Bankruptcy Code, a secured loan may be separated into two distinct claims: a secured claim for an amount equal to the value of the security, and an unsecured claim for the difference, if any, between the amount of the loan and the value of the security.² 11 U.S.C. § 506. As the Supreme Court explained in Dewsnup v. Timm, 502 U.S. 410, 414-15, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), one possible interpretation is that:

under § 506(a), a claim is secured only to the extent of the judicially determined value of the real property on which the lien is fixed, a debtor can void a lien on the property pursuant to § 506(d) to the extent the claim is no longer secured and thus is not "an allowed secured claim." In other words, § 506(a) bifurcates classes of claims allowed under § 502 into secured claims and unsecured claims; any portion of an allowed claim deemed to be unsecured under § 506(a) is not an "allowed secured claim" within the lien-voiding scope of § 506(d).

Indeed, a number of courts have acknowledged that the plain language of § 506(d) indicates that an undersecured lien is void to the extent that it exceeds the value of the collateral. See, e.g., Crain v. PSB Lending Corp. (In re Crain), 243 B.R. 75, 77-78 (Bankr.C.D.Cal.1999). However, the Supreme Court in Dewsnup held that a lien was not void to the extent that the loan was undersecured, but rather the lien securing the entire amount of the loan survived a Chapter 7 bankruptcy undisturbed. The Court explained stating:

Therefore, we hold that § 506(d) does not allow petitioner to "strip down" respondents' lien, because respondents' claim is secured by a lien and has been fully allowed pursuant to § 502.

502 U.S. at 417, 112 S.Ct. 773.

Thus, after Dewsnup, courts have refused to allow lien stripping in Chapter 7 cases. See, e.g., Talbert v. City Mortgage Servs. (In re Talbert), 344 F.3d 555, 557-62 (6th Cir.2003); Ryan v. Homecomings Fin. Network, 253 F.3d 778, 783 (4th Cir.2001); 4 Collier on Bankruptcy ¶ 506.06[1][b] at 506-150 (Lawrence P. King et al. eds., 15th ed.2003). However, the extent to which lien stripping would be allowed under other chapters of the Bankruptcy Code remained an open question after Dewsnup, as the Fifth Circuit explained:

The rationales advanced in the Dewsnup opinion for prohibiting lien stripping in Chapter 7 bankruptcies, however, have little relevance in the context of rehabilitative bankruptcy proceedings under Chapters 11, 12, and 13, where lien stripping is expressly and broadly permitted, subject only to very minor qualifications. The legislative history of the Code makes clear that lien stripping is permitted in the reorganization chapters.

Bartee v. Tara Colony Homeowners Ass'n (In re Bartee), 212 F.3d 277, 291 n. 21 (5th Cir.2000) (quoting Jane Kaufman Winn, Lien Stripping After Nobelman, 27 LOY. L.A. L. REV. 541, 554-55 (1994)).

Lien stripping can occur in a number of different ways under the Bankruptcy Code; thus, each circumstance must be separately examined in its own statutory context. For example, following Dewsnup, a number of Circuit Courts — including ours — reaffirmed the use of lien stripping in residential loans in Chapter 13 cases. See Bellamy v. Federal Home Loan Mortgage Corp. (In re Bellamy), 962 F.2d 176, 180 (2d Cir.1992); Lomas Mortgage USA v. Wiese, 980 F.2d 1279, 1282 (9th Cir.1992). However, the Supreme Court rejected this approach in Nobelman v. Am. Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), holding that " § 1322(b)(2) prohibits a Chapter 13 debtor from relying on § 506(a) to reduce an undersecured homestead mortgage to the fair market value of the mortgaged residence."³ Id. at 325-26, 113 S.Ct. 2106.

This appeal requires us to consider the question in a slightly different context from the one at issue in Nobelman. Specifically, the question in this case is whether a Chapter 13 debtor may bifurcate a non-residential secured real estate loan under § 506(a), but maintain payments on the claim pursuant to § 1322(b)(5) beyond the life of a Chapter 13 plan as circumscribed by § 1322(d).⁴ In a very thorough and scholarly opinion, the bankruptcy court in this case concluded that the Bankruptcy Code allowed the debtor to do so. The bankruptcy court explained that:

A chapter 13 plan may treat a secured debt under two statutory alternatives. First, the plan may modify the rights of a holder of a secured claim pursuant to § 1322(b)(2). Second, the plan may cure any default and maintain payments on the secured claim pursuant to § 1322(b)(5).

As to lien stripping under § 1322(b)(2), the bankruptcy court noted that "the debtors...