In re Everett
| Citation | 48 BR 618 |
| Decision Date | 24 April 1985 |
| Docket Number | Adv. No. 84-1284G.,Bankruptcy No. 84-02071G |
| Parties | In re Pamela J. EVERETT, Debtor. Pamela J. EVERETT, Plaintiff, v. KIRK MORTGAGE COMPANY and Government National Mortgage Association, Defendants. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Bruce Fox, Community Legal Services, Inc., Philadelphia, Pa., for plaintiff, Pamela J. Everett.
Frank Federman, Lawrence T. Phelan, Federman & Phelan, Philadelphia, Pa., for defendants, Kirk Mortgage Company and Government National Mortgage Association.
James J. O'Connell, Philadelphia, Pa., trustee.
The query arising in the controversy before us is whether, under 11 U.S.C. § 506(a) and (d) of the Bankruptcy Code ("the Code"), the debtor may avoid a mortgage on a parcel of her realty to the extent that the encumbrance exceeds the fair market value of her property. Based on the reasons set forth below, we conclude that the mortgage is avoidable insofar as that security interest exceeds the value of the property.
We summarize the facts of this controversy as follows:1 The debtor filed a petition for the repayment of her debts under chapter 13 of the Code in 1984. Included in her estate is a parcel of realty which is encumbered by a mortgage held by the Government National Mortgage Association ("GNMA") although the mortgage is administered by Kirk Mortgage Company ("Kirk"), and insured by the Federal Housing Association. As of the filing of the petition the mortgage secured a debt of $7,014.76 although the fair market value of the property was only $1,500.00. If the debtor had filed a petition under chapter 7 rather than under chapter 13, this would be a "no asset" case. The debtor filed the complaint before us to avoid the mortgage to the extent that the underlying debt exceeds the value of the property.
Under the Code, a creditor's claim against the estate is bifurcated into secured and unsecured components. 11 U.S.C. § 506(a). "An allowed claim of a creditor secured by a lien on estate property ... is a secured claim to the extent of the value" of the creditor's interest in that item of estate property. Id. The remainder of the claim is unsecured. Id. Thus, when a mortgage secures a debt which is in excess of the value of the secured property, the excess is not an allowed secured claim but is rather an allowed unsecured claim. The Code provides for the partial or complete avoidance of a mortgage or lien under 506(d):
11 U.S.C. § 506(d).2 We first note that the lien cannot be avoided if the sole reason for the disallowance of the secured claim was 11 U.S.C. § 502(e). § 502(d)(2). Section 502(e) "requires disallowance of the claim for reimbursement or contribution of a co-debtor, surety or guarantor of an obligation of the debtor, unless the claim of the creditor on such obligation has been paid in full." S.Rep. No. 95-989, 95th Cong., 2d Sess. 65, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5851.
Second, § 506(d)(1) merely bars the automatic disallowance of all or a part of a lien unless a party specifically makes a request for such relief since § 502(a) states that a "claim ... is deemed allowed, unless a party in interest ... objects."
The analysis outlined above meshes with clarifying changes made in § 506(d) by the Bankruptcy Amendments and Federal Judgeship Act of 1984 (the 1984 Act):
The 1984 Act eliminated the perceived ambiguity under the earlier version of § 506(d)(1) which suggested to some the need to commence an independent action challenging a proof of claim under § 502.
Although the amendment to § 506 of the Code is not effective as to the case at bench we believe that the 1984 Act effected no substantive change to § 506 but was merely a clarifying change reenunciating Congressional intent on the proper function of § 506 in light of a few aberrational case holdings. Although through statutory amendment a later Congress cannot reinterpret the earlier statute—such being within the proper province of the courts— an amendment may be afforded some weight in divining the intent of the earlier Congress. Glidden Co. v. Zdanok, 370 U.S. 530, 541, 82 S.Ct. 1459, 1468, 8 L.Ed.2d 671 (1962); U.S. v. Tapert, 625 F.2d 111, 121 (6th Cir.1980); cert. den., 449 U.S. 952 and 1034, 101 S.Ct. 356 and 609, 66 L.Ed.2d 216 and 496 (1980); May Dept. Stores Co. v. Smith, 572 F.2d 1275, 1278 (8th Cir. 1978), cert. den., 439 U.S. 837, 99 S.Ct. 122, 58 L.Ed.2d 134 (1978).
In the case at bench the debtor has commenced an action under § 506(a) and (d) to avoid a mortgage to the extent the debt underlying the encumbrance exceeds the value of the property as of the filing of the petition. The value of the property is $1,500.00 while the debt is $7.014.76. Under § 506 the mortgage is ostensibly void but for that portion which secures $1,500.00 of debt. Cosby v. Commercial Banking Corp. (In Re Cosby), 33 B.R. 947 (Bankr.E.D.Pa.1983); Bank of New Jersey v. Johnson (In Re Johnson), 10 B.R. 741 (Bankr.E.D.Pa.1981); Mount Vernon Consumer Discount Co. v. Bracken (In Re Bracken), 35 B.R. 84 (Bankr.E.D.Pa.1983).
GNMA disputes this possible result on two bases, the first of which is supported by Nefferdorf v. Federal National Mortgage Assoc. (In Re Nefferdorf), No. 83-1217 (E.D.Pa. June 8, 1984), affirming 26 B.R. 962 (Bankr.E.D.Pa.1983) (opinion of King, B.J.). In Nefferdorf the debtor commenced an action for lien avoidance under § 506 since the debt underlying the mortgage exceeded the value of the realty which it encumbered. After quoting § 502(b), the Bankruptcy Court held that, The district court affirmed this portion of the decision. As we stated above, a mere request for lien avoidance under § 506 fulfills the requirement of § 506(d)(1), and with this conclusion we hold that on this aspect the decisions in Nefferdorf were in error. Since the district court in Nefferdorf was not presented for consideration the evidence of Congressional intent in § 506(d) which is reflected in the amendment to that provision by the 1984 Act, we are not bound by that result.
GNMA's second basis for not allowing lien avoidance is also predicated on the district court's opinion in Nefferdorf. The court held there that the debtor was not a party in interest within the meaning of § 506 since she did not have a pecuniary interest in the estate to be distributed. It relied on the rule that a debtor generally lacks standing to challenge a distribution of the estate when the debtor is not properly entitled to any possible dividend from it. The basis of the rule is that since the debtor "is normally insolvent, he is considered to have no interest in how his assets are distributed among his creditors and is held not to be a party in interest." Kapp v. Naturelle, Inc., 611 F.2d 703, 706-07 (8th Cir.1979). But if the debtor demonstrates some pecuniary interest in the outcome of an objection to a claim, he has thus met the criterion for standing. Id.; Woodmar Realty v. McLean, 241 F.2d 768 (7th Cir.1957). In the case at bench the debtor has a real and substantial interest in succeeding in an...
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