In re Neal, Bankruptcy No. 2-80-02063.
| Decision Date | 03 March 1981 |
| Docket Number | Bankruptcy No. 2-80-02063. |
| Citation | 10 BR 535 |
| Parties | In re Morton Leon NEAL, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of Ohio |
Milton A. Puckett, Columbus, Ohio, for Ford Motor Credit Company.
Samuel L. Calig, Esq. Columbus, Ohio, for Debtor.
Frank Pees, Worthington, Ohio, Trustee.
ORDER ON OBJECTION TO CONFIRMATION
This matter is before the Court on the objection to confirmation, filed by Ford Motor Credit Company, to the Chapter 13 plan proposed by Morton Neal. The Chapter 13 plan calls for payment of $142.00 bi-weekly to the Chapter 13 trustee for a period of fifty-eight (58) months and a payment of a 100% dividend to all creditors provided for by the plan. One of the creditors, Ford Motor Credit Company, is owed the sum of $14,066.47 and holds as security for the obligation a second mortgage on the residential real estate of Neal. Ford Motor Credit Company has invoked the provisions of § 1322(b)(2) of the Bankruptcy Code in its opposition to confirmation of the plan. That section provides:
Ford Motor Credit Company ("FMCC") asserts that it is a holder of a claim secured only by a security interest in real property that is debtor's principal residence, and thus, under the provisions of the cited section, may not have its rights modified by a Chapter 13 plan.
The original terms of Neal's obligation to FMCC called for payments over a seven-year period commencing May of 1980. The payment was set at $290.00 per month. The obligation thus extends, by its terms, beyond the length of the proposed plan (scheduled at fifty-eight (58) months). However, the plan seeks to compress the term of the obligation to fifty-eight months through an alteration of the contractual interest rate of 18% per annum to a discount rate of 8% per annum, simple interest. See, 11 U.S.C. §§ 1322(b)(2) and 1325(a)(5). The full principal amount of the obligation to FMCC (as it existed on the date of the petition) is proposed to be paid under the debtor's plan. It is only the contractual interest rate which is proposed to be altered.
The debtor contends that the terms of his proposed plan do not modify the rights of FMCC as that term is used in § 1322(b)(2) of the Bankruptcy Code and that the terms of the plan do not violate either the spirit or letter of § 1325(a)(5) of the Bankruptcy Code, a provision which mandates a certain treatment for holders of secured claims. The debtor further alleges that in fact the real estate mortgage held by FMCC might not be fully secured in the residential real estate in light of the present value of the real estate and the balance owed on the first mortgage by the debtor, and that FMCC is not able to insist on full compliance with the terms of its pre-petition contract.
The legislative history on the enactment of this particular provision of the Bankruptcy Code § 1322(b)(2) is sparse. Without explanation, the clause relating to the inability of a Chapter 13 debtor to modify the rights of the holder of a claim secured only by a security interest in residential real estate was inserted during the process of legislative debate and compromise over the final version of the legislation. The insertion of this clause was, in the Court's opinion, premised in part on the assumption, not always valid, that a claim secured in real property was fully secured and thus deserved full payment at the agreed upon contract rate. There apparently was a fear on the part of the drafters of the legislation, perhaps imparted by that portion of the creditor community dealing with mortgages on residential real estate, of a wholesale revision of the repayment terms of home mortgages to the substantial financial detriment of the lending institutions. At least one court has presumed this to be the purpose of the clause. See, United Companies Financial Corporation v. Brantley, 6 B.R. 178, 179 at 189 (N.D.Fla.1980). No clue is given as to why this added protection was merited by a lender who may have only taken real estate as security, as opposed to a lender who may have required additional security in the form of stock, accounts receivable, motor vehicles, or other personal property.
While the fear of mortgage loan revision was not necessarily unfounded, the practical application of the statutory language presents a problem. In the present case, for instance, the debtor proposes to repay a second mortgage by compressing its term from approximately seven years to five years and by altering the contractual rate of interest from 18% per annum to a rate which would presumably satisfy the requirements of § 1325(a)(5)(B)(ii) of the Bankruptcy Code by paying the value, as of the effective date of the plan, of property to be distributed under the plan on account of the second mortgage claim. This would involve the calculation of a discount factor to be added to the gross principal amount owed on the second mortgage at the time of the filing of the petition. This factor has been determined in this case to be 8% simple interest. The position of FMCC is apparently not that this discount factor is not fair or sufficient to satisfy the § 1325(a)(5)(B)(ii) standard. This is an entirely separate issue which has produced judicial decisions of its own see, for example, GMAC v. Hyden (In re Hyden), 10 B.R. 21, 6 B.C.D. 1392 (S.D.Ohio 1980); In re Anderson, 6 B.R. 601, 6 B.C.D. 1155 (S.D.Ohio 1980); In re Ziegler, 6 B.R. 3, 6 B.C.D. 194 (S.D.Ohio 1980); and In the Matter of Crockett, 3 B.R. 365, 6 B.C.D. 226 (N.D.Ill.1980). The Court has not been asked to rule upon this issue. The position of FMCC relates solely to whether any change in the terms of repayment of its obligation, as those terms are embodied in the pre-petition contract between FMCC and the debtor, is barred by the provisions of § 1322(b)(2) of the Bankruptcy Code.
The treatment proposed to be given to the second mortgagee in this case is further complicated by the fact that a portion of the claim of the second mortgagee is, in fact, unsecured. It is not consistent with the statutory scheme of Chapter 13, and the Bankruptcy Code's bifurcated treatment of a secured and unsecured claims, for instance, to assume that a junior mortgagee on real property which is already overburdened by senior mortgages, could insist on being treated as a creditor with a secured claim and insist on full payment of its claim based upon the pre-petition contractual arrangement with the debtor. It would appear that in that instance the Court would be constrained to find, pursuant to § 506(a) of the Bankruptcy Code, that the junior mortgagee was in fact the holder of an unsecured claim and thus unable to invoke the protection of § 1322(b)(2) and prevent confirmation of a Chapter 13 plan.
To a lesser degree that same problem exists in the present case. FMCC, as second mortgagee, is, at least partially, the holder of an unsecured claim. The best and only available evidence before the Court with respect to the valuation of the residential real estate of this debtor is the $25,000 valuation contained in the debtor's Chapter 13 Statement filed with the petition. Given the approximate $10,000 balance still owed on the first mortgage and an estimated cost of sale figure of ten percent of the gross selling price, it is this Court's finding that the $14,066 owed to FMCC would be at least partially unpaid if the residential real estate of this debtor were presently sold in a normal market setting. The Court hereby allows the claim of FMCC as a secured claim to the extent of $12,500 and as an unsecured claim for the balance owed. See, 11 U.S.C. § 506(a). In a forced sale setting (either a state court foreclosure or a Chapter 7 liquidation), FMCC's secured claim would most likely be substantially smaller, and its unsecured claim correspondingly substantially larger.
The questions then become (1) what is the meaning of the word "modify" as used in § 1322(b)(2) of the Bankruptcy Code and (2) what is the relationship of that statutory provision to § 1325(a)(5)(B)(i) & (ii) of the Bankruptcy Code? In a situation in which a mortgagee is fully secured in residential real estate, the unanalyzed language of the statute would appear to prohibit any change in the terms and conditions of the contractual agreement between the debtor and the second mortgagee. This Court assumes that § 1325(a)(5)(A) would allow, however, such a mortgagee to consent to a modification of its rights notwithstanding the apparently blanket prohibition of § 1322(b)(2). Where there is, however, a portion of the claim which may be deemed unsecured (because the value of the property is inadequate to fully cover all claims secured in the real estate), the question of the definition of "modify" as used in § 1322(b)(2) takes on a different perspective.
Certainly the drafters of the Bankruptcy Code recognized that the holders of secured claims had rights superior to other creditors in a Chapter 13 proceeding only to the extent that they held liens on property of the debtor which had value. Quite clearly the provisions of § 1325(a)(5)(B), the "cram down" provisions, can be justified by the guarantee that holders of secured claims would be, in fact, paid the full value of the collateral held as security as of the date of the filing of the petition, with an appropriate discount factor for deferred payment over time. The secured creditor, at least, as envisioned by the statutory scheme of § 1325, is entitled to no more.
"If a secured creditor is protected to the extent of the value of his collateral, there is no reason why he should be able to prevent the confirmation and consummation of a plan...
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