In re Nobelman
| Decision Date | 24 June 1991 |
| Docket Number | Civ. A. No. 3-91-0753-H. |
| Citation | 129 BR 98 |
| Parties | In re Leonard NOBELMAN and Harriet Nobelman, Debtors. Leonard NOBELMAN and Harriet Nobelman, Appellants, v. AMERICAN SAVINGS BANK and Tim Truman, Trustee, Appellees. |
| Court | U.S. District Court — Northern District of Texas |
Rosemary J. Zyne, Dallas, Tex., for debtors.
Michael Schroeder Settle & Pou, Dallas, Tex., for American Sav. Bank.
Charles L. Kennon, III, Ft. Worth, Tex., for Truman.
This is an appeal from a final order of the United States Bankruptcy Court of the Northern District of Texas, Dallas Division in an action brought under the United States Bankruptcy Code. The Court has jurisdiction over the appeal pursuant to 28 U.S.C. § 158(a).
The present appeal, a matter of first impression in this District, concerns the bankruptcy court's denial of confirmation of a Chapter 13 Plan of Reorganization that used the provisions of 11 U.S.C. § 506 to bifurcate a mortgage lien claim on the principal residence of Debtors Leonard and Harriet Nobelman into allowed secured and allowed unsecured claims for purposes of treatment under the Plan. The Court concluded that using section 506 to bifurcate the claim impermissibly modified the rights of Appellee, American Savings Bank, N.A. ("ASB"), in violation of 11 U.S.C. § 1322(b)(2).
The facts of this case are uncontested. On June 21, 1984, the Nobelmans executed a note in the amount of $68,250.00 payable to ASB, secured by a deed of trust on their primary residence. Murray Mortgage Company is the servicing agent of ASB. The deed of trust also provides for a security interest in an undivided .67% interest in the common areas of the condominium complex, escrow funds, proceeds of hazard insurance, and rents.
On August 6, 1990, the Nobelmans filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code. On August 14, 1990, ASB filed its proof of claim for $71,265.04, which was subsequently amended to $71,335.04. ASB's proof of claim provides that ASB's claim is secured only to the extent that its security interest is sufficient to satisfy the full amount of the claim, and that it is unsecured to the extent that it is insufficient.
The Nobelmans filed their Chapter 13 Plan of Reorganization (the "Plan") on August 31, 1990, which was later modified. The Plan values the residence at $23,500.00. The Nobelmans filed a motion for valuation pursuant to 11 U.S.C. § 506 along with the modifications to their Plan. At confirmation, Leonard Nobelman testified as to the value of the property; no controverting evidence of its value was offered by any other party.
The Plan proposes to make direct payments to ASB at the mortgage contract rate only up to the scheduled value of the collateral. The balance of ASB's claim — $41,257.66 — is treated as a general unsecured claim under the Plan, payable pari passu. The unsecured creditors receive nothing under the Plan. The Nobelmans propose to cure the prepetition arrearages owed to ASB through their Plan.
Both ASB and the Standing Chapter 13 Trustee objected to the confirmation of the Plan on the grounds that, inter alia, the Plan purports to alter the lienholders' rights in violation of 11 U.S.C. § 1322(b)(2).
On February 13, 1991 the Bankruptcy Court entered its findings of fact and conclusions of law. The findings of fact are undisputed and are recited above. The bankruptcy court's conclusions of law find that "the Plan impermissibly proposes to modify ASB's claim into secured and unsecured claims in violation of § 1322(b)(2)." Findings of Fact and Conclusions of Law entered February 14, 1991, at 3. Accordingly, on March 12, 1991 the bankruptcy court entered its order denying confirmation of the Nobelman's modified Chapter 13 Plan.
On March 21, 1991, the Nobelmans filed their Notice of Appeal.
This Court reviews the bankruptcy court's findings of fact under the clearly erroneous standard, but the bankruptcy court's conclusions of law are subject to de novo review. See In re Consolidated Bancshares, Inc., 785 F.2d 1249, 1252 (5th Cir.1986); Lawler v. Guild, Hagen & Clark, Ltd. (In re Lawler), 106 B.R. 943, 952 (N.D.Tex.1989) hereinafter In re Lawler. Because the facts of this case are undisputed, the sole subject of review are the bankruptcy court's conclusions of law. De novo review requires the Court to make a judgment independent of the bankruptcy court's, without deference to that court's analysis and conclusions. See In re Lawler, 106 B.R. at 952, citing Moody v. Amoco Oil Co., 734 F.2d 1200, 1210 (7th Cir.), cert. denied, 469 U.S. 982, 105 S.Ct. 386, 83 L.Ed.2d 321 (1984).
The issue before the Court is whether the Nobelmans may bifurcate a claim secured only by a lien on their principal residence pursuant to section 506 and then modify the unsecured claim without violating section 1322(b)(2).
The Nobelmans rely heavily on the fact that three Courts of Appeals have addressed this issue and concluded that the type of bifurcation provided in the Nobelmans' Plan is not barred by section 1322(b)(2). For their part, appellees rely on a series of bankruptcy cases from several districts barring the sort of bifurcation contemplated by the Plan. The Court turns first to the cases cited by the Nobelmans.
The Ninth Circuit decided the seminal case that supports the Nobelmans' Plan. In In re Hougland, the Ninth Circuit stated that the plain meaning of the terms of the statutes at issue showed that "nothing in section 1322 affects the determination under section 506(a) that an undersecured claim can be divided into a secured portion and an unsecured portion." Hougland v. Lomas & Nettleton Co. (In re Hougland), 886 F.2d 1182, 1183 (9th Cir.1989) hereinafter In re Hougland.
The Hougland court started by examining section 506, stating that "it is clear that section 506(a) applies to Chapter 13 proceedings" pursuant to section 103(a), and therefore there is "no reason to believe that the phrases `secured claim' and `unsecured claim' in section 1322(b)(2) have any meaning other than those given to them by section 506(a)." Id. Accordingly, an undersecured claim has a "secured claim" component and an "unsecured claim" component. See id. at 1183-84.
The court then turned to the "other than" clause of section 1322.
That clause follows the secured claim portion of the sentence and precedes the unsecured claim portion. Certainly it refers to what preceded it, and indicates that a secured residential real estate claim will have special protection. Indeed, if the referent of the `other than\' clause is not the secured claim language that precedes it, what could the referent be? It would be most unusual if it were the unsecured claim language or the whole sentence. That strongly indicates that only the `secured claim\' portion is protected.
Id. at 1184. On the basis of this statutory construction, the Hougland court dismissed those courts that found that the "other than" clause refers to both the secured and unsecured portions of the undersecured claim as "begging the question". Id.
In Wilson v. Commonwealth Mortgage, the Third Circuit adopted the reasoning and ruling of the Ninth Circuit's Hougland decision, and held that "section 1322(b)(2) does not preclude the modification of any `unsecured' portion of an undersecured claim." Wilson v. Commonwealth Mortgage Corp., 895 F.2d 123, 127 (3rd Cir. 1990).
The statutory construction which some bankruptcy courts have used to support their position that the entire "claim," consisting of both the secured and the unsecured portion of the claim, cannot be modified has been roundly criticized by the Ninth Circuit in Hougland. We agree with the Ninth Circuit\'s view that because the "other than" phrase is best read to refer to secured claims, the "other than" phrase should be read to limit modification only of that portion of the claim that is secured.
Id. (citations omitted).
Most recently, the Tenth Circuit Court of Appeals considered this issue in In re Hart, and "joined the Third and Ninth Circuits in holding that an undersecured mortgage is, for the purposes of the bankruptcy code, two claims, and that only the secured claim is protected by section 1322(b)(2)." Eastland Mortgage Co. v. Hart (In re Hart), 923 F.2d 1410, 1415 (10th Cir.1991) hereinafter In re Hart. Furthermore, the court contended that Id. Accordingly, while recognizing contrary decisions by bankruptcy courts in the Fifth, Eighth, Tenth,1 and Eleventh Circuits, see id. at 1414, the Tenth Circuit found that "nothing in the plain language of section 1322(b)(2) . . . instructs us to go beyond the Code's statutory definition of the term `secured claims' to protect the unsecured portion of an undersecured home mortgage." Id. at 1415.
In contrast to the Third, Ninth, and Tenth Circuits, numerous bankruptcy courts have...
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