In re Lee
| Decision Date | 17 October 1997 |
| Docket Number | BAP No. CC-96-1959-JSH,Bankruptcy No. SA 95-10514-JW. |
| Parties | In re Kyoo Jung LEE and Ann Soon Lee, Debtors. Kyoo Jung LEE and Ann Soon Lee, Appellants, v. HOME SAVINGS OF AMERICA, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Andrew S. Bisom, Irvine, CA, for Appellants.
Hal M. Marzell, Irwindale, CA, for Appellee.
Before JONES, SNYDER1, and HAGAN, Bankruptcy Judges.
Kyoo Jung Lee and Ann Soon Lee ("Debtors"), sought to strip Home Savings of America's ("Home Savings") deed of trust on the Debtors' residence. The Debtors contended that Home Savings' deed of trust took a security interest in property other than the Debtors' principal residence, thereby preventing Home Savings from claiming the protections of § 1123(b)(5).2 The bankruptcy court disagreed and ruled that the bank's deed of trust was secured solely by the Debtors' principal residence. The Debtors appealed and we AFFIRM.
In July of 1990, the Debtors purchased their home in Laguna Hills, California. On July 2, 1990, the Debtors executed a note and deed of trust in favor of Home Savings in the principal amount of $1,050,000.
On January 17, 1995, the Debtors filed their chapter 11 petition. At the time the case was commenced, the Debtors claimed their home was worth approximately $900,000. On February 8, 1995, Home Savings filed a proof of claim for $1,036,522.11 as the amount owing on the deed of trust. The Debtors filed an objection to Home Savings' claim and attempted to strip down the amount of Home Savings' secured claim to the present value of the property. The Debtors contended that the deed of trust attempted to take a security interest in property other than the Debtors' principal residence and therefore the anti-modification provisions of 1123(b)(5) did not protect Home Savings' claim.
Home Savings responded that the deed of trust was secured solely by the Debtors' residence and therefore the Debtors could not reduce the value of Home Savings' secured claim. On September 11, 1996, the bankruptcy court held a hearing on the Debtors' motion and found that Home Savings' loan was secured by the Debtors' residence and therefore ruled that the deed of trust could not be stripped. The Debtors timely appealed.
Whether the bankruptcy court erred in holding that Home Savings' deed of trust was secured solely by the Debtors' residence thereby preventing Home Savings' secured claim from being stripped.
We review a bankruptcy court's statutory construction de novo. In re Consolidated Pioneer Mortgage, 178 B.R. 222, 225 (9th Cir. BAP 1995), aff'd, 91 F.3d 151 (9th Cir.1996). We review a bankruptcy court's conclusions of law de novo and its findings of fact for clear error. In re Alsberg, 68 F.3d 312, 314 (9th Cir.1995), cert. denied, ___ U.S. ____, 116 S.Ct. 1568, 134 L.Ed.2d 667 (1996).
The amount of a creditor's claim which will be allowed as a secured claim is governed by § 506(a). Section 506(a) defines allowed secured and unsecured claims as follows:
An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor\'s interest in the estate\'s interest in such property, . . . and is an unsecured claim to the extent that the value of such creditor\'s interest . . . is less than the amount of such allowed secured claim.
11 U.S.C. § 506(a) (1994). Thus, 506(a) bifurcates an under-secured creditor's claim into two parts — a secured claim to the extent of the value of the collateral and an unsecured claim for the balance of the creditor's claim. H.R.Rep. No. 95-595, 356 (1977), reprinted in Norton Bankruptcy Code Pamphlet 1996-1997 Edition, 438. In the present case, the Debtors claimed that the subject property was only worth $900,000. As Home Savings had filed a proof of claim for $1,036,522.11, the Debtors contended that Home Savings secured claim should be "stripped" down to the value of the property securing the deed of trust (i.e. $900,000), with the remainder of Home Savings' claim to be unsecured.3
However, in 1994 Congress amended the bankruptcy code to create a exception to lien stripping under § 506(a) for chapter 11 home mortgage lenders. Section 1123(b)(5) provides that a plan of reorganization may "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. . . . " 11 U.S.C. § 1123(b)(5) (1994) (emphasis added). Thus, if the home mortgage lender's claim is secured only by an interest in the debtor's principal residence, the lien stripping provisions of § 506(a) cannot be used to modify the under-secured creditor's lien into secured and unsecured portions.
In the present case, the Debtors contend that Home Savings took a security interest in property other than the Debtors' principal residence, and therefore the anti-modification provisions of 1123(b)(5) have no effect. Home Savings responds that the language in the deed of trust is "boilerplate" and did not, nor was ever intended to, create a security interest in anything other than the Debtors' principal residence.
Before analyzing whether the deed of trust language created a security interest in property other than the Debtors' principal residence, we note that Congress added section 1123(b)(5) to harmonize the treatment of home mortgage loans in chapter 11 and chapter 13 cases.4 In re Lievsay, 199 B.R. 705, 708 (9th Cir. BAP 1996), appeal dismissed, 118 F.3d 661 (9th Cir.1997). As § 1123(b)(5) is relatively new, there are few cases interpreting its scope. There are, however, a number of cases interpreting the interplay between § 506(a) and chapter 13's anti-modification provision found in § 1322(b)(2). Given Congress' intent to harmonize the two chapters' treatment of home mortgages, and the nearly identical language contained in the two sections, we will refer to both chapter 11 and chapter 13 cases to guide us. In re Lievsay, 199 B.R. at 708.
The bankruptcy court ruled that the deed of trust was secured by the Debtor's principal residence. We review the bankruptcy court's interpretation of § 1123(b)(5) de novo. In re Consolidated Pioneer Mortgage, 178 B.R. at 225. The specific issue before this panel is whether the additional language in Home Savings' deed of trust creates a security interest in other property sufficient to remove the deed of trust from the anti-modification provisions of 1123(b)(5). In deciding this case, we must briefly review the history of 1322(b)(2) in order to establish an analytical framework.
In 1993, the United States Supreme Court heard the case of Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). In that case the debtor argued that the anti-modification provisions of § 1322(b)(2) merely prevented the modification of the secured portion of a loan which had already been stripped pursuant to § 506(a). Id. at 327-28, 113 S.Ct. at 2109-10. The Supreme Court rejected this argument and held that 1322(b)(2) precluded the use of § 506(a) when the loan was secured by the debtor's principal residence. However, in the Nobelman case, the lender had also taken a security interest in "an undivided .67% interest in the common areas of the condominium complex, escrow funds, proceeds of hazard insurance, and rents, in addition to the residence itself." Nobelman v. American Sav. Bank (In re Nobelman), 129 B.R. 98, 104 (N.D.Tex.1991), aff'd, 968 F.2d 483 (5th Cir.1992), aff'd, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). In denying the debtor the use of § 506(a) to strip down the loan, the Supreme Court did not address the issue of whether the "additional security" removed the mortgage from the anti-modification provisions of § 1322(b)(2). Consequently, there arose a split of authority on the question of whether additional security in a deed of trust removes the anti-modification protections of the bankruptcy code.
On one side of the split are courts which read the language "secured only by a security interest in real property that is the debtor's principal residence" as prohibiting mortgage lenders from taking any other type of security interest. These courts contend that any additional security beyond the debtor's principal residence removes the anti-modification protection afforded mortgage lenders. See Lomas Mortgage v. Louis, 82 F.3d 1, 7 (1st Cir.1996); Hammond v. Commonwealth Mortgage Corp. of Am. (In re Hammond), 27 F.3d 52, 56-57 (3rd Cir.1990); In re Escue, 184 B.R. 287, 291-92 (Bankr.M.D.Tenn. 1995).
On the other side of the issue are courts which adhere to the legislative intent of Congress in drafting the section as a protection to mortgage lenders. These courts note that while there may be other items included in the deed of trust, if these items are "inextricably bound to the real property itself as part of the possessory bundle of rights," In re Davis, 989 F.2d 208, 213 (6th Cir.1993), or if the additional collateral is "nothing more than an enhancement which is or can, by agreement of the parties, be made a component part of the real property or is of little or no independent value," In re French, 174 B.R. 1, 7 (Bankr.Mass.1994), then these additional items will not remove the deed of trust from the anti-modification provisions of the bankruptcy code. These courts emphasize the public policy behind the anti-modification provisions which is to "encourage the flow of capital into the home lending market." Nobelman, 508 U.S. at 332, 113 S.Ct. at 2112 (Stevens, J., concurring). These courts note that a strict interpretation of the anti-modification provisions of the bankruptcy code would seriously undermine the availability of funds provided to mortgage borrowers. See In re Fountain, 197 B.R. 748, 751 ...
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