In re Harris, Civ. A. No. 86-2952.
| Decision Date | 19 January 1989 |
| Docket Number | Civ. A. No. 86-2952. |
| Citation | 94 BR 832 |
| Parties | In re Stanley HARRIS, Sr. and Deborah Harris. |
| Court | U.S. District Court — District of New Jersey |
Brad J. Spiller, Camden, N.J., for appellant.
Mark H. Kelly, Fischer, Kagan, Fredericks, Ascione, Zaretsky & Scarinci, Clifton, N.J., for appellee, American Nat. Funding and Investment Co., Inc.
Debtors Stanley and Deborah Harris appeal an order by the bankruptcy court denying confirmation of debtors' proposed Chapter 13 plan. The bankruptcy court denied the plan because it included the cramdown of two mortgages secured only by the debtors' principal residence in violation of the provisions set forth in 11 U.S.C. § 1322(b)(2). This section prohibits modification of the rights of a holder of a claim that is secured only by a security interest in real property that is the debtor's principal place of residence. Appellants argue, however, that the two mortgages are unsecured under the definition of 11 U.S.C. § 506 and that 11 U.S.C. § 1322(b)(2) does not apply to unsecured or undersecured claims. In addition, debtors claim that the protection afforded by 11 U.S.C. § 1322(b)(2) does not apply to short-term home improvement loans.
For the reasons stated herein, this court holds that the protection afforded under § 1322(b)(2) does not apply to unsecured and undersecured loans. In addition, the court holds that the § 1322(b)(2) protection does apply to home improvement loans. Because the bankruptcy court held that the section protects any claim secured only by the debtor's principal residence, the bankruptcy court is reversed and the case is remanded.
The first mortgage on debtors' residence is held by United First Mortgage Corporation (hereinafter "United"). In May 1983, debtors executed a home repair installment sale contract and consumer note in favor of American National Funding and Investment Co. in order to finance installation of a swimming pool for debtors' residence. The note was assigned to Metropolitan Federal Savings and Loan Association (hereinafter "Metropolitan"). Debtors also executed a second mortgage, recorded on June 20, 1983, on their residence to Metropolitan as security for the note. A third mortgage on debtors' residence is held by Broadway Bank and Trust (hereinafter "Broadway").1 Debtors' brief indicates that this mortgage was issued to Broadway in order to finance the installation of home siding.
Debtors value their residence at $43,000.00, with an estimated amount due to United under the first mortgage of $44,000.00. Debtors estimate the amount due to Metropolitan under the second mortgage to be $11,212.86. Debtors value the amount due Broadway under the third mortgage to be $9,435.82.
Under the debtors' proposed plan, United would receive the sum of $9,565.52, the amount necessary to cure debtors' default under the first mortgage. Debtors also would make regular monthly mortgage payments to United outside of the Chapter 13 plan. Metropolitan would receive the sum of $2,000.00 which would cure debtors' default on the second mortgage. The plan also provided for the cramdown of the unsecured balance of $9,212.86 owed to Metropolitan. Debtors' plan further provided for the cramdown of the entire amount owed to Broadway under the third mortgage and for the payment of 20 percent of the claims held by unsecured creditors.
The bankruptcy court denied confirmation of the plan holding that the plan modified claims in violation of 11 U.S.C. § 1322(b). The court based its decision on the reasoning articulated in In re Hynson, 66 B.R. 246 (Bankr. D.N.J.1986). In Hynson, the court, after a lengthy analysis, held that the language of § 1322(b)(2) does not specifically limit its protection to a secured claim secured only by a security interest in real property that is the debtor's principal residence. Hynson, 66 B.R. at 253.
Debtors claim that 11 U.S.C. § 1322(b)(2) does not prohibit the modification of claims that are not "secured" claims as defined by 11 U.S.C. § 506(a). Debtors argue that part of their second mortgage and 100 percent of their third mortgage are unsecured since debtors' residence lacks sufficient value to support those claims. For this reason, debtors claim that the bankruptcy court erred in denying confirmation.
Appellees argue that the Bankruptcy Court was correct in applying § 1322(b)(2) so as to deny confirmation of debtors' proposed Chapter 13 plan. Appellees maintain that the plain language of § 1322(b)(2) does not allow a debtor to modify any mortgage debt which is secured only by the debtor's principal residence.
The issue on appeal concerns conclusions of law that are subject to de novo review by the district court.2
Determining whether the protection afforded under § 1322(b)(2) applies to undersecured and unsecured claims requires analysis of two sections of the Bankruptcy Reform Act of 1978, as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984 (Bankruptcy Code). The conflict arises between the general definition section, 11 U.S.C. § 506, and the more specific chapter 13 provision contained in 11 U.S.C. § 1322(b)(2).
Section 506(a) of the Bankruptcy Code dictates to what extent a claim is a "secured claim" for bankruptcy purposes. The section is one of general applicability that applies in cases under Chapters 7, 11 and 13 of the Bankruptcy Code. 11 U.S.C. § 103(a). Section 506(a) provides:
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 added.)
Section 1322(b)(2), which applies only in cases filed under Chapter 13 of the Bankruptcy Code, defines whether a plan may modify rights of holders of claims. Specifically, the section provides:
The crucial issue is whether the above emphasized language of § 1322(b)(2) is specifically limited to protection of "secured" claims as defined by § 506(a), or whether such language includes any "claims" that are secured only by a security interest in the debtor's principal residence, including undersecured claims.
A number of bankruptcy courts have attempted to reconcile the two sections. The cases are split in determining whether the protection afforded by § 1322(b)(2) applies only to fully secured claims or whether it also applies to undersecured claims. Some bankruptcy courts, including the United States Bankruptcy Court, District of New Jersey, have held that the protection does apply to undersecured claims. See, e.g., In re Hynson, 66 B.R. 246, 253 (Bankr.D.N.J. 1986); In re Hemsing, 75 B.R. 689, 692 (Bankr. D.Mont.1987). Other bankruptcy courts have held that such protection applies only to claims that meet the § 506(a) secured claim definition. See, e.g., In re Simmons, 78 B.R. 300, 303 (Bankr.D.Kan. 1978); In re Neal, 10 B.R. 535, 540 (Bankr. S.D.Ohio 1981); In re Spadel, 28 B.R. 537, 540 (Bankr.E.D.Pa.1983).
Two recent district court cases have reached opposite conclusions. In In re Hougland, 93 B.R. 718 (D.Or.1988), the court held that the no-modification clause of § 1322(b)(2) protects a claim only to the extent "that the claim is actually secured." Id. To the contrary, the court in In re Russell, 93 B.R. 703 (D.N.D.1988) following the reasoning of In re Hynson, held that § 1322(b)(2) prevented modification of a claim secured only by a security interest in the debtor's principal residence "without regard to the value of the collateral." Id.
In determining whether the protection of § 1322(b)(2) applies to all claims secured only by the debtor's principal residence, the court must examine the legislative intent behind the statute through analysis of the statutory language and policy behind the statute. In analyzing the construction of the statute, "the starting point" is the "language itself." Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756, 95 S.Ct. 1917, 1935, 44 L.Ed.2d 539 (1975) (Powell, J., concurring). In addition, the "plain meaning" of the language is the "primary, and ordinarily the most reliable, source of interpreting the meaning of a statute." Watt v. Alaska, 451 U.S. 259, 266, n. 9, 101 S.Ct. 1673, 1678, n. 9, 68 L.Ed.2d 80 (1981), quoting Cabell v. Markham, 148 F.2d 737, 739 (2d Cir.) aff'd, 326 U.S. 404, 66 S.Ct. 193, 90 L.Ed. 165 (1945).
On its face, § 1322(b)(2) allows "modification of 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." 11 U.S.C. § 1322(b)(2) (emphasis added). However, it is ambiguous whether the term "secured claim" applies only to claims that meet the § 506 definition for secured claims or whether it applies to any claim secured by the residence. For example, in Hynson, the court focused on whether the creditor had a "claim" secured by the principal residence rather than a "secured claim" secured by the residence as defined by § 506. 66 B.R. at 253. Conversely, the Simmons court focused on the...
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