In re Hammond
| Decision Date | 02 July 1993 |
| Docket Number | Civ. A. No. 90-5606.,Bankruptcy No. 90-10093,Adv. No. 90-0042 |
| Citation | 156 BR 943 |
| Parties | In re Michael HAMMOND and Jeanette Hammond, Debtors. In re Michael HAMMOND and Jeanette Hammond, Plaintiffs, v. COMMONWEALTH MORTGAGE COMPANY OF AMERICA, L.P., Defendant. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Leslie J. Carson, Jr., Lawrence T. Phelan, Federman & Phelan, Philadelphia, PA, for Commonwealth Mortgage Co. of America, appellant.
Jane B. Mac Elhenney, Philadelphia, PA, for Michael Hammond, Jeanette Hammond, appellee/debtor.
Edward Sparkman, Philadelphia, PA, trustee.
This is a bankruptcy appeal. The appellant-mortgagee, Commonwealth Mortgage Company of America, L.P. ("Commonwealth"), has sought appellate review of the bankruptcy court's July 30, 1990 order limiting its secured claim against Michael and Jeanette Hammond ("the Debtors") to $25,000.
Jurisdiction over this bankruptcy appeal in this Court is pursuant to 28 U.S.C. § 158(a). Having reviewed the appellate briefs submitted by the parties (Document Nos. 3-5), as well as the record on appeal (Document No. 1), which includes the July 30, 1990 order of the bankruptcy court and a stipulation of facts, and for the reasons set forth below, I shall affirm the bankruptcy court's judgment allowing the bifurcation of Commonwealth's claim into secured and unsecured components, and remand this case for an inquiry into whether any adjustment of the secured component of Commonwealth's claim is required in accordance with the discussion which follows.
Commonwealth is the holder of a residential mortgage given by the Debtors. The Debtors filed a bankruptcy petition on January 8, 1990 under Chapter 13 of the Bankruptcy Code. Commonwealth subsequently filed a Proof of Claim form in the Debtors' bankruptcy on the debt secured by the mortgage in the amount of $42,969.93.1 The Debtors thereafter filed a so-called adversary proceeding in their bankruptcy seeking to limit Commonwealth's allowed secured claim to the fair market value of the premises secured by the mortgage under 11 U.S.C. § 506 by bifurcating this claim into secured and unsecured components. The bankruptcy court agreed with the Debtors and entered an order on July 30, 1990 limiting Commonwealth's secured claim to the fair market value of the premises securing the mortgage.2See Hammond v. Commonwealth, No. 90-10093 (Bankr.E.D.Pa. July 30, 1990), Record on Appeal, at Tab 7.
Commonwealth has appealed the bankruptcy court's order, arguing that the court should have denied the bifurcation of its claim, because 11 U.S.C. § 1322(b)(2) proscribes modification of a claim secured only by a security interest in real property that is the debtor's principal residence. Commonwealth, which is statutorily insured by the United States Department of Housing and Urban Development ("HUD") against loss as a holder of the Debtors' mortgage pursuant to Sections 203 and 204 of the National Housing Act, 12 U.S.C. §§ 1709-10, has also argued that the bankruptcy court should have found it to be secured to the full extent of its statutory mortgage insurance.3
The scope of review of the district court here is well-settled. Findings of fact of a bankruptcy court may not be set aside unless clearly erroneous. See Sapos v. Provident Inst. of Sav., 967 F.2d 918, 922 (3d Cir.1992) (citing Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d Cir.1988)). The clearly erroneous standard of review for findings of fact does not apply, however, in examining conclusions of law by a bankruptcy court. Legal conclusions of a bankruptcy judge are subject to a plenary review by a district court on appeal. See Id.
11 U.S.C. § 1322(b)(2) (emphasis added). Section 506(a), which defines allowed secured and allowed unsecured claims in bankruptcy, provides as follows:
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.
11 U.S.C. § 506(a) (emphasis added). The Supreme Court has summarized this provision by explaining that it "provides that a claim is secured only to the extent of the value of the property on which the lien is affixed; the remainder of that claim is unsecured." United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 239, 109 S.Ct. 1026, 1029, 103 L.Ed.2d 290 (1989).
The question that arises from the interplay between sections 506(a) and 1322(b)(2) is whether section 1322(b)(2) precludes a debtor from relying upon section 506(a) to modify the unsecured portion of an undersecured homestead mortgage claim. On the two occasions that the Court of Appeals for the Third Circuit has considered this issue, it answered it in the negative, thus allowing debtors to invoke section 506(a) to bifurcate an undersecured homestead mortgage claim into secured and unsecured portions based on the fair market value of the residence at the time of the modification and the value of any additional securities. Sapos, 967 F.2d at 928; Wilson v. Commonwealth Mortgage Corp., 895 F.2d 123, 128 (3d Cir.1990). In both Sapos and Wilson, the court of appeals relied upon alternative holdings to permit the bifurcation of the mortgagee's claim. First, the court in these cases held that section 1322(b)(2) does not prohibit modification of the unsecured component of an undersecured mortgage debt. Sapos, 967 F.2d at 926; Wilson, 895 F.2d at 128. In support of its holding in Wilson, the court of appeals agreed with the Ninth Circuit's view that "because the `other than' phrase of section 1322(b)(2) is best read to refer to secured claims, the `other than' phrase should be read to limit modification only to that portion of the claim that is secured." Wilson, 895 F.2d at 127 (citing In re Hougland, 886 F.2d 1182, 1184 (9th Cir.1989)). In addition, the court in both Wilson and Sapos also held that the anti-modification provision of 1322(b)(2), which by its express terms applies to claims "secured only by a security interest in real property that is the debtor's principal residence," does not apply when the creditor is secured by collateral in addition to the real property covered in the mortgage. Sapos, 967 F.2d at 925-26; Wilson, 895 F.2d at 128.4
The first holding of the Court of Appeals in Wilson and Sapos, that 1322(b)(2) does not preclude a debtor from modifying the unsecured portion of an undersecured homestead mortgage, has recently been invalidated by the United States Supreme Court in Nobelman v. American Sav. Bank, ___ U.S. ___, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). The Supreme Court granted certiorari in Nobelman to resolve a conflict among the courts of appeals concerning the following question: "whether section 1322(b)(2) prohibits a Chapter 13 debtor from relying upon section 506(a) to reduce an undersecured homestead mortgage to the fair market value of the mortgaged residence."5 Id. at ___, 113 S.Ct. at 2108.
Commenting on the interpretation of section 1322(b)(2) adopted by the Third Circuit, the Supreme Court in Nobelman stated that although this reading of section 1322(b)(2) is "quite sensible as a matter of grammar," it is not necessarily the correct interpretation. Id. at ___, 113 S.Ct. at 2111. The Supreme Court explained that because "Congress chose to use the phrase `claim secured . . . by' in section 1322(b)(2)'s exception, rather than repeating the term of art `secured claim,'" a more reasonable interpretation of the homestead mortgage exception precluding modification of a claim is that it refers "to the lienholder's entire claim, including both the secured and unsecured components of the claim." Id. at ___-___, 113 S.Ct. at 2111. Applying this interpretation of the clause, the Nobelman Court held that when the lender's claim is secured only by a lien on the debtor's principal residence, "section 1322(b)(2) prohibits a Chapter 13 debtor from relying on section 506(a) to reduce an undersecured homestead mortgage to the fair market value of the mortgaged residence." Id. at ___, 113 S.Ct. at 2108. In light of Nobelman, the Third Circuit's first holding in Wilson and Sapos — that section 1322(b)(2) does not prohibit modification of the unsecured portion of any undersecured homestead mortgage — has clearly been invalidated.
Although the impact Nobelman has on the Third Circuit's first holding in Wilson and Sapos is unmistakable, the affect it has on the Third Circuit's second or alternative holding in those cases is not nearly as lucid. As stated above, because the claims held by the mortgagees in Wilson and Sapos were secured not only by realty, but also by personalty, the court of...
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