In re Lam, BAP No. NC-96-1773-HRyO
| Decision Date | 03 July 1997 |
| Docket Number | Adversary No. 95-5398.,BAP No. NC-96-1773-HRyO,Bankruptcy No. 94-57338 JRG |
| Citation | 211 BR 36 |
| Parties | In re Tam Ly LAM and Mai Thi Lam, Debtors. Tam Ly LAM and Mai Thi Lam, Appellants, v. INVESTORS THRIFT and United States Trustee, Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
David A. Boone, San Jose, CA, for debtors.
Before: HAGAN, RYAN, and OLLASON, Bankruptcy Judges.
Tam Ly and Mai Thi Lam ("Debtors") appeal an order of the bankruptcy court denying their request for entry of a default judgment against Investor's Thrift ("Thrift"), and an order dismissing the Debtor's adversary proceeding. We reverse and remand.
On November 17, 1994, the Debtors filed for relief under chapter 13, title 11, United States Code.1 In their schedules they listed one parcel of real property, located in Milpitas, California. The property, the Debtors' primary residence, has an undisputed fair market value of $300,000.00. The property is encumbered as follows:
These encumbrances total $803,239.00. There is no dispute as to the value of the amounts remaining due on the encumbrances, or that the Chase Manhattan, Boston Company, and Tracy Federal liens are superior to Thrift's deed of trust.
On August 9, 1995, the Debtors filed an adversary proceeding, the subject of this appeal, against Thrift. The prayer of the complaint asked the bankruptcy court to enter a judgment holding the Thrift lien to be an "unsecured lien and therefore to be treated as an unsecured claim" and that the lien has "no further force and effect as a secured lien against the Debtors' residential property."2
The Debtors applied for the entry of default against Thrift for failure to file an answer or otherwise appear in the adversary proceeding.3 On August 8, 1996, the bankruptcy court in a written decision denied the request for entry of the default judgment and, further, dismissed the adversary proceeding based on the United States Supreme Court case of Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). The Debtors timely appealed both orders. Thrift, in addition to not appearing in the adversary proceeding in the bankruptcy court, has not appeared in the appeal.
Did the court err in ruling that Nobelman prohibited the removal of a totally unsecured lien from the Debtors' personal residence, resulting in the denial of the Debtors' request for the entry of default and the dismissal of the Debtors' adversary proceeding.
A bankruptcy court's conclusions of law are reviewed de novo. Tully v. Taxel (In re Tully), 202 B.R. 481, 483 (9th Cir. BAP 1996); In re United States Trustee, 32 F.3d 1370, 1372 (9th Cir.1994). We review the denial of a default judgment under Rule 55(b), Fed.R.Civ.P., for abuse of discretion. Eitel v. McCool, 782 F.2d 1470, 1471 (9th Cir.1986); Aldabe v. Aldabe, 616 F.2d 1089, 1092-93 (9th Cir.1980).
The facts are undisputed. Based on the current fair market value of the Debtors' real property, the fourth deed of trust held by Thrift is wholly unsecured.
Section 1322(b)(2) allows a debtor's plan to "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."4 The Debtors wish to modify Thrift's purported secured claim by having it declared an unsecured claim. The Thrift claim is a totally unsecured claim since no security interest attaches to Thrift's lien.
The Nobelman case settled a conflict between the Circuit Courts of Appeal by holding that section 1322(b)(2) prohibits the removal or "strip off" of the unsecured portion of an undersecured claim from a chapter 13 debtor's personal residence.
In Nobelman, the debtors had proposed, in their chapter 13 plan, to bifurcate a creditor's undervalued claim of $71,335, secured by the debtor's principal residence, into a secured claim of $23,500, the uncontroverted valuation of the home, with the remainder unsecured. The debtor's plan then provided for the removal of the unsecured remainder, under sections 506 and 1322(b)(2), reducing the mortgage to its fair market value.
Nobelman held that section 1322(b)(2) bars a chapter 13 plan from modifying the rights of holders of claims, secured only by the debtor's principal residence including the undervalued claim. In reaching this holding, the Supreme Court analyzed the language of section 1322, and found it focused on the rights of holders of secured claims rather than on the value of the claim.
In Nobelman, the debtors had argued that since § 506(a)5 designates a claim as secured only to the extent of the value of the property, the unsecured portion of the claim could be "modified" or removed under section 1322(b)(2). Since the debtors' plan was to pay off the secured portion of the mortgage through payments, section 1322(b)(2) allowed unconditional modification of the bank's leftover, unsecured claim. The Supreme Court held the interpretation by the debtors:
Fails to take adequate account of § 1322(b)(2)\'s focus on `rights.\' That provision does not state that a plan may modify `claims\' or that the plan may not modify `a claim secured only by\' a home mortgage. Rather, it focuses on the modification of the `rights of holders\' of such claims. By virtue of its mortgage contract with petitioners, the bank is indisputably the holder of a claim secured by a lien on petitioner\'s home.
Nobelman, 508 U.S. at 328, 113 S.Ct. at 2109-10.
Justice Thomas, writing for a unanimous court, noted that the bank was the holder of a secured claim because Id. at 329, 113 S.Ct. at 2110 (citing United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 239 n. 3, 109 S.Ct. 1026, 1029 n. 3, 103 L.Ed.2d 290 (1989)).
The Supreme Court assumed that Congress had left the interpretation of the mortgagor's rights to state law, since "property interests are created and defined by state law." Id. at 329, 113 S.Ct. at 2110. The Court then held that under Texas law, the mortgagor had rights reflected in the mortgage documents, enforceable under state law.
They included the right of repayment of the principal and monthly installments over a fixed term and specified adjustable rates of interest, the right to retain the lien until the debt is paid off, the right to accelerate the loan upon default and to proceed against petitioners\' residence by foreclosure and public sale, and the right to bring an action to recover any deficiency remaining after foreclosure. . . . These are the rights that were `bargained for by the mortgagor and the mortgagee.\'
In the instant case, the bankruptcy court concluded the foregoing language, quoted from Nobelman, prohibited the Debtors from removing the unsecured Thrift lien regardless of the fact that the claim of the creditor, Thrift, was totally unsecured, as opposed to the partially unsecured situation in Nobelman. In the order denying request for default judgment, issued on August 8, 1996, the bankruptcy court focused on the "rights" of a holder of a claim secured by real property and concluded the holding of Nobelman provides:
Even wholly unsecured creditors with a security interest in real property that is the debtor\'s principal residence have State law rights which cannot be modified in a Chapter 13 plan. Plaintiffs\' request for a default judgment must be denied on the basis that the substantive merits of plaintiffs\' claim do not entitle them to judgment. Since plaintiffs are not entitled to a judgment, the action must be dismissed.
The bankruptcy court further adopted the interpretation of Nobelman advanced by Judge Keith M. Lundin in his treatise on chapter 13 bankruptcy. See Lundin, Keith M., Chapter 13 Bankruptcy, 2nd Edition, § 4.46, p. 4-56. In that treatise, Judge Lundin concludes the protection of section 1322(b) extends to the wholly undersecured lien creditor based on the rights analysis of Nobelman. Judge Lundin's analysis, quoted by the bankruptcy court in its decision, states:
Although the bank\'s claim in Nobelman was partially secured by real property that was the debtor\'s principal residence, Justice Thomas\'s analysis ties the protection from modification in § 1322(b)(2) to the existence of a "claim" secured by a lien on real property, without regard to whether the claim holder would also have an allowed secured claim after valuation and analysis under § 506(a). The clear implication of this analysis is that even a completely unsecured claim holder "secured" only by a lien on real property that is the debtor\'s principal residence would be protected from modification by § 1322(b)(2), notwithstanding that such an "unsecured" lienholder could not have an allowable secured claim under § 506(a). Although the concept of an "unsecured secured claim" is impossible under § 506(a), Justice Thomas\'s focus on the "rights" of the "holders" of a "claim secured only by . . ." in § 1322(b)(2) extends the protection from modification to claims that are secured by a lien on the debtor\'s principal residence, without regard to the allowance or disallowance of secured claims under § 506(a). In other words, the trigger for Justice Thomas\'s protection of rights analysis is the existence of a lien, not the presence of value to support the...
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