In Re: McDonald v. Master Fin.

• Decision Date: 09 March 2000
• Docket Number: No. 99-1381,99-1381
• Citation: 205 F.3d 606
• Parties: (3rd Cir. 2000) IN RE: STEPHEN J. MCDONALD; ROSEMARIE J. MCDONALD, Debtors STEPHEN J. MCDONALD; ROSEMARIE J. MCDONALD v. MASTER FINANCIAL, INC. FREDERICK L. REIGLE, ESQ., STANDING CHAPTER 13 TRUSTEE; FREDERIC J. BAKER, ESQ., ASSISTANT U.S. TRUSTEE, Trustees Stephen J. McDonald; Rosemarie J. McDonald, Appellants
• Court: U.S. Court of Appeals — Third Circuit

Page 606

205 F.3d 606 (3rd Cir. 2000)

IN RE: STEPHEN J. MCDONALD; ROSEMARIE J. MCDONALD, Debtors

STEPHEN J. MCDONALD; ROSEMARIE J. MCDONALD v. MASTER FINANCIAL, INC.

FREDERICK L. REIGLE, ESQ., STANDING CHAPTER 13 TRUSTEE; FREDERIC J. BAKER, ESQ., ASSISTANT U.S. TRUSTEE, Trustees

Stephen J. McDonald; Rosemarie J. McDonald, Appellants

No. 99-1381

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued December 6, 1999

Filed March 9, 2000

On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil No. 99-cv-00149) District Judge: Honorable James T. Giles

Dexter K. Case, Esq. Alisa R. Hobart, Esq. (Argued) 541 Court Street Reading, PA 19601

Counsel for Appellants: Michael A. Tier, Esq. (Argued) 215 Route 9 Bayville, NJ 08721

Counsel for Appellee: Joseph A. Diorio, Esq. 7979 Oxford Avenue, 2nd Floor Philadelphia, PA 19111

Before: SLOVITER, ROTH and COWEN, Circuit Judges

OPINION OF THE COURT

COWEN, Circuit Judge.

In this appeal we must determine whether the so-called "antimodification provision" in 11 U.S.C.S1322(b)(2) applies to a second, wholly unsecured mortgage on a Chapter 13 debtor's home. In Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106 (1993), the Supreme Court held that a Chapter 13 debtor who had a single mortgage with an outstanding balance greater than the value of the debtor's residence could not divide the mortgage, pursuant to 11 U.S.C. S 506(a), into secured and unsecured parts and treat only the secured part as subject to the antimodification clause. According to Nobelman, the full outstanding balance of the mortgage is governed by the antimodification clause. Justice Thomas's opinion for the Court left unresolved, however, whether the antimodification clause applies to a second or junior mortgage if that mortgage is wholly unsecured by any remaining value in the residence.¹

In interpreting Nobelman the Bankruptcy and District Courts both concluded that the second mortgage on the McDonalds' residence is subject to the antimodification clause, even if the value of their home is less than the outstanding balance of the first mortgage, leaving the second mortgage wholly unsecured. Because we conclude that this interpretation fails to take into account several strands of the Supreme Court's reasoning in Nobelman, we will reverse.

I

Before reaching when the antimodification clause applies, we must address a question about our jurisdiction. In the Bankruptcy Court the parties purportedly entered into a stipulation of facts specifying that the outstanding balance of the first mortgage is greater than the value of the McDonalds' home. At oral argument before this court, however, Master Financial, the appellee and holder of the second mortgage on the McDonalds' home, asserted that their "stipulation" is not binding. On Master Financial's view if the Bankruptcy Court had held that the antimodification provision does not apply to wholly unsecured mortgages, then Master Financial would have contested whether the value of the home was indeed less than the outstanding balance of the first mortgage. Master Financial's interpretation of the "stipulation" apparently captured the Bankruptcy Court's understanding of the case, for that Court's opinion simply noted that Master Financial disputed the value of the home and stated that no evidentiary hearing had been held on the issue. Thus, as matters stand, we can only say that the McDonalds have alleged that the value of their home is $126,400, the balance of the first mortgage is $127,633.33, and the balance of the second is $46,846.42.

In light of Master Financial's disavowal of any binding stipulation, we raised the issue of whether the bankruptcy court's decision amounted to an advisory opinion and consequently whether we have jurisdiction to hear this appeal. Federal courts are not authorized to issue advisory opinions. See, e.g., United States Nat'l Bank v. Independent Ins. Agents of America, Inc., 508 U.S. 439, 446, 113 S.Ct. 2173, 2178 (1993); Coffin v. Malvern Federal Savings Bank, 90 F.3d 851 (3d Cir. 1996).

The precise analytical contours of what constitutes an advisory opinion, however, are less than clear. For example, Fed.R.Civ.P. 12(b)(6) allows a court to resolve certain legal disputes in advance of factual disputes. Even though allowing discovery and conducting a hearing on the facts could have provided an alternative, and perhaps in some sense narrower, ground for resolving the suit, a court can still consider a legal issue that, if decided in the defendant's favor, would be dispositive on a motion to dismiss. Doing so conserves both the court's and the parties' resources. In keeping with this logic we appreciate that in the context of a Chapter 13 bankruptcy involving comparatively small sums of money, the parties understandably wanted to avoid expenses, such as the cost of expert testimony, that would have been incurred contesting the value of the home if in the end the evidence produced would be legally irrelevant.

While the record is not entirely clear, we conclude that this case was decided on a motion to dismiss, notwithstanding the parties' odd references to a nonbinding stipulation of facts. The Bankruptcy Court's opinion accepted as true the McDonalds' allegations that the second mortgage was wholly unsecured and still held as a matter of law that the debtors must lose their adversary proceeding. Under these circumstances, it is clear that the Bankruptcy Court's interpretation of Nobelman conclusively resolved the litigation and did so without improperly issuing an advisory opinion.

Accordingly, we conclude that we are authorized to hear this appeal. We have jurisdiction pursuant to 28 U.S.C. S 158(d), and since we are presented with a purely legal issue, we exercise plenary review over the District Court's determination, a determination that in turn resulted from a plenary review of the Bankruptcy Court's conclusions of law. See, e.g., In re Anes, 195 F.3d 177, 180 (3d Cir. 1999).

II

Our analysis of the merits of this appeal begins with two provisions of the bankruptcy code. The first, 11 U.S.C. S 506(a), applies to bankruptcies under all chapters, see 11 U.S.C. S 103(a), and sorts creditors' allowed claims against the debtor into secured and unsecured claims. Under S 506(a) any allowed claim that is secured by a lien on the debtor's property "is a secured claim to the extent of the value of [the] creditor's interest in the estate's interest in such property," and is deemed an unsecured claim to the extent it exceeds that value. An undersecured claim is thus treated as a secured claim only up to the value of the collateral; the excess debt becomes an unsecured claim.

The second relevant provision, the antimodification clause, applies only to Chapter 13 bankruptcies. The antimodification clause states that a Chapter 13 plan 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. S 1322(b)(2). Put more directly, the antimodification clause bars a debtor from modifying the rights of a creditor who has a claim secured only by the debtor's principal residence.

Before Nobelman some courts had concluded that in a Chapter 13 bankruptcy they should look first to S 506(a) to determine both the value of a debtor's residence and how much of the mortgage remained secured. The courts would then treat only the portion deemed secured under S 506(a) as subject to the antimodification provision in S 1322(b)(2). See, e.g., In re Bellamy, 962 F.2d 176 (2d Cir. 1992); In re Hart, 923 F.2d 1410 (10th Cir. 1991); Wilson v. Commonwealth Mortgage Corp., 895 F.2d 123 (3d Cir. 1990); and In re Hougland, 886 F.2d 1182 (9th Cir. 1989). Other courts, by contrast, concluded that there was a conflict between S 506(a) and S 1322(b)(2) and decided that S 1322(b)(2) should prevail as the more specific provision. See, e.g., In re Nobleman, 968 F.2d 483 (5th Cir. 1992).

In reviewing the Fifth Circuit opinion, the Supreme Court agreed that S 1322(b)(2) applies to both the part of a mortgage that is currently secured by value in the residence and the part that is unsecured, but significantly the Court nevertheless rejected the Fifth Circuit's position that S 506(a) does not apply. Justice Thomas began his analysis by pointing out that it is "correct to look to S 506(a) for a judicial valuation of the collateral to determine the status of the bank's secured claim," and doing so in Nobelman, he continued, showed that the mortgage holder, American Savings Bank, was "still the `holder' of a `secured claim,' because petitioner's home retains $23,500 of value as collateral." 508 U.S. at 329, 113 S.Ct. at 2110.

Once it was clear that American Savings was a holder of a claim secured by the debtor's principal residence, Justice Thomas reasoned that S 1322(b)(2) dictates that none of the bank's "rights" could be "modified" for its claim, even though part of the bank's claim was deemed unsecured under S 506(a). Finding that the term "rights" was not defined by the Bankruptcy Code, Justice Thomas invoked state law to determine the word's meaning and therefore concluded that, when the antimodification clause applies, it prevents the debtor's Chapter 13 plan from modifying the mortgage holder's state-law rights to repayment. What counts as impermissibly "modifying" a creditor's rights, however, should not be understood too broadly. Justice Thomas hastened to add that the mortgage holder's rights are still "affected" by the bankruptcy. The automatic stay, for example, still blocks the creditor's right to foreclose, and debtors can cure prepetition defaults on a home mortgage under S 1322(b)(5). See Nobelman, 508 U.S. at 330, 113 S.Ct. at 2110.

The McDonalds argue that because Nobelman stated that S 506(a) still applies and determines the "status" of a creditor's claim, it follows...