In re Hirsch

• Decision Date: 30 March 1994
• Docket Number: Civ. A. No. 93-4861.
• Citation: 166 BR 248
• Parties: In re Steven Paul HIRSCH, Cheryl Kane. CITICORP MORTGAGE, INC., Appellant, v. Steven Paul HIRSCH, Appellee, CITICORP MORTGAGE, INC., Appellant, v. Cheryl KANE, Appellee.
• Court: U.S. District Court — Eastern District of Pennsylvania

166 B.R. 248 (1994)

In re Steven Paul HIRSCH, Cheryl Kane.

CITICORP MORTGAGE, INC., Appellant, v. Steven Paul HIRSCH, Appellee, CITICORP MORTGAGE, INC., Appellant, v. Cheryl KANE, Appellee.

Civ. A. No. 93-4861.

United States District Court, E.D. Pennsylvania.

March 30, 1994.

David C. Pollack, Stroock & Stroock & Lavan, Miami, FL, for Citicorp Mortg., Inc.

William D. Schroeder, Jr., Brown & Goldman, P.C., Lansdale-Colmar, PA, for Steven Paul Hirsch.

Walter A. Steinbacher, Philadelphia, PA, for Cheryl Kane.

MEMORANDUM

DALZELL, District Judge.

This is a consolidated appeal from the Orders of the Bankruptcy Court for the Eastern District of Pennsylvania allowing appellees Steven Hirsch and Cheryl Kane to bifurcate appellant Citicorp Mortgage, Inc.'s claims against them into secured and unsecured amounts under Chapter 13 plans and confirming their Chapter 13 plans of reorganization. For the following reasons, we will vacate the Bankruptcy Court's Orders and remand the cases for further proceedings consistent with this opinion.

I. Factual Background

These appeals involve a practice known to bankruptcy cognoscenti as "lien-stripping." This term refers to the splitting of a secured lender's lien into secured and unsecured components. The secured part equals the fair market value of the underlying real property at the time of the splitting, and the debtor in such lien-stripped plans pays this amount to the lender in monthly installments, typically over five years. The unsecured part constitutes the remainder that the debtor owes the lender, and this portion is lumped with the rest of the debtor's unsecured obligations. The lender seldom receives a cent from this unsecured part.

As will be seen, both appeals involve the precise situation just described.

In Re: Hirsch

Hirsch and his non-debtor wife purchased a home and financed the purchase with a $92,000 loan from Citicorp. On September 29, 1989, Mr. and Mrs. Hirsch executed a note in the amount of $92,000, as well as a mortgage secured by the house,

together with all the improvements now or hereafter erected on the property, and all easements, rights, appurtenances, rents, royalties, mineral, oil and gas rights and profits, water rights and stock and all fixtures now or hereafter a part of the property. All replacements and additions shall also be covered by this Security Instrument.

Hirsch Record on Appeal, Document 8.¹

Hirsch defaulted on the loan. On April 3, 1992, the Court of Common Pleas of Philadelphia County entered a foreclosure judgment in favor of Citicorp in the amount of $122,898.39.² On March 9, 1993, Hirsch filed a petition under Chapter 13 of the Bankruptcy Code, 11 U.S.C. § 1301 et seq. Hirsch's Chapter 13 plan, filed the same day, proposed that he pay $2,300 per month for 60 months, enough to pay off the fair market value of the house, but not enough to pay off the full amount of the foreclosure judgment. The parties stipulated that the fair market value of the house was $88,000. Hirsch brought an adversary proceeding to avoid Citicorp's lien to the extent that it exceeded the fair market value of the home pursuant to 11 U.S.C. § 506(a) and (d).

On June 25, 1993, the Bankruptcy Judge entered judgment in favor of Hirsch and ordered that Citicorp's claim be bifurcated into an $88,000 secured claim and a $34,898.39 unsecured claim. Citicorp filed a motion for reconsideration, and on July 30, 1993, the Bankruptcy Court denied the motion. On August 6, 1993, the Bankruptcy Court entered an Order confirming Hirsch's plan. On August 9, 1993, Citicorp filed a Notice of Appeal from the Hirsch reconsideration Order and, on August 16, 1993, filed one from the Hirsch confirmation Order.

In Re: Kane

Kane bought a house and financed her purchase with a $26,400 loan from Citicorp. On April 22, 1985, Kane executed a note to Citicorp for $26,400, and a mortgage covering the house,

together with all and singular the Buildings and Improvements on said premises, as well as all alterations, additions or improvements now or hereafter made to said premises, and any and all appliances, machinery, furniture and equipment (whether fixtures or not) of any nature whatsoever now or hereafter installed in or upon said premises, Streets, Alleys, Passages, Ways, Waters, Water Courses, Rights, Liberties, Privileges, Hereditaments and Appurtenances whatsoever thereunto belonging or in any wise appertaining and the Reversions and Remainders, Rents, Issues and Profits thereof.

Kane Record on Appeal, Document 5.

Kane defaulted on the mortgage, and Citicorp sued to foreclose. On August 8, 1989, Citicorp obtained a foreclosure judgment in its favor for $61,731.27. On April 1, 1993, Kane filed a Chapter 13 bankruptcy petition, and simultaneously submitted a plan to pay the alleged fair market value of the house over five years. The parties stipulated that the fair market value of Kane's house was $30,000.

Like Hirsch, Kane commenced an adversary proceeding to avoid Citicorp's lien to the extent that it exceeded the fair market value of her home, pursuant to 11 U.S.C. § 506(a). On July 15, 1993, the Bankruptcy Court issued an Order bifurcating Citicorp's claim into a $30,000 secured claim and a $34,569.25 unsecured claim. Citicorp moved for reconsideration, and on August 20, 1993 the Bankruptcy Court denied Citicorp's motion. On August 24, 1993, the Bankruptcy Court entered an Order confirming Kane's plan of reorganization, and three days later Citicorp filed a Notice of Appeal from the Kane reconsideration Order and the Kane confirmation Order.

We consolidated the two Hirsch appeals on September 23, 1993. On October 22, 1993 Judge Weiner issued an Order consolidating the Kane appeal with the Hirsch appeals, and both were assigned to us for disposition.

We heard oral argument on March 14, 1994, and ordered Citicorp to make supplemental submissions from the Nobelman record in the Supreme Court, described below.³

II. Jurisdiction

The parties do not dispute that the Hirsch reconsideration Order of August 6, 1993 and the confirmation Order of August 16, 1993 and the Kane reconsideration Order of August 20, 1993 and the confirmation Order of August 24, 1993 are final Orders. It is also undisputed that Citicorp filed timely notices of appeal. Pursuant to 28 U.S.C. § 158(a), which grants district courts jurisdiction to hear appeals from final orders of the Bankruptcy Court, we have jurisdiction over these appeals. See, In re Jean R. DeSeno, 17 F.3d 642 (3d Cir.1994).

III. Discussion

A. Standard of Review on Appeal

A District Court's scope of review on such appeals is well-settled. A Bankruptcy Court's findings of fact may only be set aside if they are clearly erroneous. Sapos v. Provident Inst. of Sav., 967 F.2d 918, 922 (3d Cir.1992); In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir.1989). A Bankruptcy Judge's legal conclusions are subject to a plenary and de novo review by a District Court on appeal. Id. Because both Hirsch and Kane submitted their case on a stipulated record of facts, we need only review the Bankruptcy Judge's legal analysis and conclusions.

B. Modification of a Claim Secured by a Residential Mortgage

The crux of this dispute revolves around the interplay between sections 11 U.S.C. 506(a)⁴ and 11 U.S.C. 1322(b)(2)⁵ of the Bankruptcy Code. Section 506(a) allows the bifurcation of a claim into a partially secured claim and a partially unsecured claim when the lender's secured claim exceeds the value of the collateral. Section 1322(b)(2) provides, however, that a Chapter 13 debtor's plan may not modify the rights of a mortgage lender whose claim is "secured only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)(2).

Prior to the Supreme Court's recent decision in Nobelman v. American Sav. Bank, ___ U.S. ___, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), there had been a split among the Circuits on the propriety of allowing a bifurcation of home mortgage debt pursuant to § 506(a) in a Chapter 13 plan in the face of § 1322(b)(2). Nobelman, ___ U.S. at ___, 113 S.Ct. at 2109. In Nobelman, the mortgagee, American Savings Bank, had a claim on the Nobelmans' condominium, and the Nobelmans' deed of trust to the Bank provided for an additional security interest in .67 percent interest in the common areas of the condominium complex, escrow funds, proceeds of hazard insurance,

together with all the improvements now or hereafter erected on the property, and all easements, rights, appurtenances, rents, ... royalties, mineral, oil and gas rights and profits, water, water rights, and water stock, and all fixtures now or hereafter attached to the property, all of which, including replacements and additions thereto, shall be deemed to be and remain a part of the property covered by this Deed of Trust.

Nobelman Deed of Trust, p. 1, attached to the Brief of Molly W. Bartholow, Standing Chapter 13 Trustee, in Nobelman v. American Savings Bank, U.S.Sup.Ct. No. 92-641. The bankruptcy court denied the confirmation of the Chapter 13 plan of reorganization that bifurcated American Savings Bank's mortgage claim on the Nobelmans' residence into a secured and unsecured claim on the ground that it was a violation of 11 U.S.C. § 1322(b)(2). The District Court and the Court of Appeals for the Fifth Circuit each affirmed that decision. In re Nobleman, 129 B.R. 98 (N.D.Tex.1991) and 968 F.2d 483 (5th Cir.1992).

The Supreme Court also affirmed, and in so doing construed the language of § 1322(b)(2) to mean that the words "claim secured by" referred to "the lienholder's entire claim, including both the secured and unsecured components of the claim." Nobelman, ___ U.S. at ___, 113 S.Ct. at 2111. Because of its importance to our resolution of these appeals, we will rehearse Nobelman's analysis in some detail.

The petitioners in Nobelman had argued that lenders in an under-secured home mortgage case could only be regarded as...