In re Eubanks

• Decision Date: 12 May 1998
• Docket Number: BAP No. 97-8078,97-8084.
• Citation: 219 BR 468
• Parties: In re Timothy R. EUBANKS and Tonya J. Eubanks, Debtors. FIRST UNION MORTGAGE CORPORATION, Appellant, v. Timothy R. EUBANKS and Tonya J. Eubanks, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

219 B.R. 468 (1998)

In re Timothy R. EUBANKS and Tonya J. Eubanks, Debtors FIRST UNION MORTGAGE CORPORATION, Appellant, v. Timothy R. EUBANKS and Tonya J. Eubanks, Appellees.

BAP Nos. 97-8078, 97-8084.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued February 4, 1998.

Decided May 12, 1998.

John F. Cannizzaro, Cannizzaro, Frasier & Bridges, Marysville, OH, for Appellees.

J. Micahel Debbeler, Catherine L. Evans, Lerner, Sampson and Rothfuss, Cincinnati, OH, for Appellant.

Before: BAXTER, LUNDIN, and STOSBERG, Bankruptcy Appellate Panel Judges.

OPINION

First Union Mortgage Corporation appeals the bankruptcy court's orders overruling objections and confirming the Debtor's Chapter 13 plan. The bankruptcy court held that the 1994 enactment of 11 U.S.C. § 1322(c)(2) created an exception to the protection from modification in § 1322(b)(2) that permitted a Chapter 13 plan to bifurcate an undersecured "short term" mortgage on the debtors' principal residence. We affirm.

I. ISSUE ON APPEAL

Whether 11 U.S.C. § 1322(c)(2) permits bifurcation of an undersecured mortgage on a Chapter 13 debtor's principle residence when the last payment on the original payment schedule is due before the final payment under the plan.

II. JURISDICTION AND STANDARD OF REVIEW

The United States District Court for the Southern District of Ohio authorized appeals to the Bankruptcy Appellate Panel of the Sixth Circuit. The order confirming this Chapter 13 plan was a final order for purposes of appeal to the BAP. See Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474 (6th Cir.1992).

The appeal presents only a legal question. A bankruptcy court's conclusions of law are reviewed de novo. See, e.g., National City Bank v. Elliott (In re Elliott), 214 B.R. 148 (6th Cir. BAP 1997) (citations omitted). De novo review requires the Panel to review questions of law independent of the bankruptcy court's determination. In re Schaffrath, 214 B.R. 153, 154 (6th Cir. BAP 1997) (citation omitted). The facts of this case are not disputed.

III. FACTS

On July 6, 1995, the Debtors, Timothy and Tonya Eubanks, executed a $16,400 note in favor of First Union Home Equity Bank, N.A. The Note is secured by a second mortgage on the Debtors' principal residence. The Note requires 60 monthly payments and will mature on July 11, 2000. The first mortgage is held by Waterfield Mortgage Company.

The Debtors filed Chapter 13 on October 16, 1996. First Union filed a proof of claim for $14,526.13. Waterfield filed a proof of claim for its first mortgage for $34,973.61. These two encumbrances total $49,499.74. The appraised value of the Debtors' residence is $45,000. First Union is undersecured by approximately $4,500.¹

The Debtors proposed a Chapter 13 plan that bifurcated First Union's claim into its allowable secured and unsecured components in accordance with 11 U.S.C. § 506(a).² First Union's allowed secured claim (approximately $10,000) would be paid in full with interest pursuant to § 1325(a)(5) under the Debtors' plan. Its unsecured claim (approximately $4,500) would receive the 10% dividend provided for all unsecured claimholders.

First Union objected to confirmation on the ground that bifurcation of its claim was a modification prohibited by § 1322(b)(2). First Union conceded that its claim was the type of "short term" mortgage addressed by the 1994 enactment of § 1322(c)(2); but argued that § 1322(c)(2) created only a limited exception to the anti-modification protection of home mortgages in § 1322(b)(2), allowing the curing of defaults on "short term" mortgages, but not bifurcation.

The bankruptcy court overruled First Union's objection to confirmation, adopting the well-reasoned analysis of In re Young, 199 B.R. 643 (Bankr.E.D.Tenn.1996). The bankruptcy court held that § 1322(c)(2) creates an exception to the protection from modification in § 1322(b)(2) and authorizes "claim splitting" with respect to the discrete group of home mortgages described in the new subsection. In re Eubanks, No. 96-57615 (Bankr.S.D.Ohio July 3, 1997). The bankruptcy court confirmed the Debtors' plan. First Union appealed.

IV. DISCUSSION

Enacted as part of the Bankruptcy Reform Act of 1994, 11 U.S.C. § 1322(c)(2) provides:

(c) Notwithstanding subsection (b)(2) and applicable nonbankruptcy law —

. . . .

(2) in a case in which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor\'s principal residence is due before the date on which the final payment under the plan is due, the plan may provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title.

Pub.L. No. 103-393, 108 Stat. 4106, § 301 (Oct. 22, 1994) (emphasis added) (codified at 11 U.S.C. § 1322(c)(2)).

New § 1322(c)(2) is a statutory exception to the protection from modification afforded most home mortgage lenders in Chapter 13 cases by § 1322(b)(2). The introductory phrase, "notwithstanding subsection (b)(2)," "clearly signals the drafter's intention that the provisions of the `notwithstanding' section override conflicting provisions of any other section." Cisneros v. Alpine Ridge Group, 508 U.S. 10, 18, 113 S.Ct. 1898, 1903, 123 L.Ed.2d 572 (1993) (citing Shomberg v. United States, 348 U.S. 540, 547-48, 75 S.Ct. 509, 512-13, 99 L.Ed. 624 (1955)). Interpreting identical "notwithstanding" language in § 1322(b)(5), the Supreme Court acknowledged that these words create a "statutory limitation" on the rights of mortgage holders in Chapter 13 cases. Nobelman v. American Savings Bank, 508 U.S. 324, 331, 113 S.Ct. 2106, 2110, 124 L.Ed.2d 228 (1993). See also In re Bagne, 219 B.R. 272, 276 (Bankr.E.D.Cal. 1998) ("Section 1322(b)(5) provides an exception to § 1322(b)(2). . . . Another exception . . . is found in § 1322(c)(2). . . . Plainly, this language `notwithstanding subsection 1322(b)(2)' instructs the court to disregard § 1322(b)(2).").

Section 1322(b)(2), the subsection to which § 1322(c)(2) is an exception, provides:

(b) Subject to subsections (a) and (c) of this section, the plan may —

. . . .

(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. . . .

11 U.S.C. § 1322(b)(2).

In Chapter 13 cases, § 1322(b) grants debtors broad power to modify the rights of the holders of secured claims. Section 1322(b)(2) then creates an exception to that broad power of modification for claims "secured only by a security interest in real property that is the debtor's principal residence." Section 1322(c)(2) now creates an "exception to the exception" for the subset of real property secured claims "in a case in which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor's principal residence is due before the date on which the final payment under the plan is due." 11 U.S.C. § 1322(c)(2). In other words, in 1994 Congress abrogated the protection of home mortgages from modification in Chapter 13 cases to the extent, and with respect to, the real estate secured claims described in new § 1322(c)(2).

First Union must concede that its claim falls within the class of mortgages that § 1322(c)(2) subjects to modification in Chapter 13 cases. Its argument that "bifurcation" is not a modification permitted by § 1322(c)(2) tortures the words used by Congress, makes a mess of several other well-settled provisions of the Code and trumps the plain language of the statute with the ambiguous silence of legislative history.

A. Plain Meaning.

"The plain meaning of legislation should be conclusive, except in the `rare cases in which the literal application of a statute will produce a result demonstrably at odds with the intentions of the drafters.'" United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 1031, 103 L.Ed.2d 290 (1989) (alteration in original) (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 3250, 73 L.Ed.2d 973 (1982)).

With respect to First Union's second mortgage, § 1322(c)(2) authorizes the Debtors' plan to "provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title." 11 U.S.C. § 1322(c)(2). Section 1325(a)(5) provides:

(a) Except as provided in subsection (b), the court shall confirm a plan if —

. . . .

(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. . . .

11 U.S.C. § 1325(a)(5).

The "allowed secured claim" of which § 1325(a)(5) speaks is derived through valuation and "bifurcation" in accordance with § 506(a). As the Supreme Court explained, "Section 506 . . . governs the definition and treatment of secured claims, . . . and provides that a claim is secured only to the extent of the value of the property on which the lien is fixed; the remainder of that claim is considered unsecured." Ron Pair, 489 U.S. at 238-39, 109 S.Ct. at 1029 (footnotes omitted). The Supreme Court has recognized that undersecured claims are split by § 506(a) and then can be "crammed down" in a Chapter 13 case by § 1325(a)(5):

Under the cramdown option of § 1325(a)(5)(B), the debtor is permitted to keep the property over the objection of the creditor, provided the creditor retains the lien securing the claim, citation omitted, and the debtor is required to provide the creditor with payments, over the life of

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