In re Paschen

• Decision Date: 10 July 2002
• Docket Number: No. 01-16353.,01-16353.
• Parties: In Re: Richard W. PASCHEN, Debtor. American General Finance, Inc., Plaintiff-Appellant, v. Richard W. Paschen, Doreen A. Paschen, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1203

296 F.3d 1203

In Re: Richard W. PASCHEN, Debtor.

American General Finance, Inc., Plaintiff-Appellant, v. Richard W. Paschen, Doreen A. Paschen, Defendants-Appellees.

No. 01-16353.

United States Court of Appeals, Eleventh Circuit.

July 10, 2002.

Larry W. Johnson, Morris, Schneider & Prior, L.L.C., Atlanta, GA, for Plaintiff-Appellant.

William A. Edwards, Columbus, GA, for Defendants-Appellees.

D. Jean Ryan, Law Office of D. Jean Ryan, Miami, FL, for Amicus National Association of Consumer Bankruptcy Attorney.

Appeal from the United States District Court for the Middle District of Georgia.

Before WILSON, HILL and ALARCON^*, Circuit Judges.

WILSON, Circuit Judge:

This case presents an issue of first impression in this Circuit: Does 11 U.S.C. § 1322(c)(2) permit Chapter 13 debtors to bifurcate undersecured, short-term¹ home mortgages into secured and unsecured claims, with the unsecured claim subject to "cramdown" pursuant to 11 U.S.C. § 1325(a)(5)? The bankruptcy court, in confirming Richard and Doreen Paschen's (Debtors') Chapter 13 plan, held that § 1322(c)(2) did indeed permit Debtors to modify undersecured, short-term home mortgages through bifurcation and "cramdown." The district court affirmed the bankruptcy court's confirmation of Debtors' Chapter 13 plan. For the foregoing reasons, we affirm.

I.

Debtors purchased a home in Columbus, Georgia in May of 1997. Two years later, Debtors encountered serious financial difficulties. Needing an immediate infusion of cash to pay off their debts, Debtors sought to borrow money from American General Finance, Inc. (AGF), a financial services corporation with a specialty in consumer finance. In August of 1999 AGF approved a loan to Debtors for $12,377.08, secured by the equity Debtors held in their home.

In December of 1999 Debtors' financial situation became untenable, and they filed for protection from their creditors under Chapter 13. AGF filed a proof of claim with the bankruptcy court in the amount of $11,392. Debtors then submitted a Chapter 13 plan, which proposed modifying AGF's claim by bifurcating AGF's loan into its secured and unsecured components, with only the secured portion to be paid back in a series of monthly installments. Debtors valued the secured component at $2752, which Debtors claimed reflected the actual amount of equity they then held in their home.

AGF filed a motion to deny confirmation of the plan, arguing that the plan failed to assess the value of AGF's secured debt properly. AGF further contended that the applicable law prevented Debtors from bifurcating AGF's loan into secured and unsecured parts and cramming down the unsecured part, as AGF's lien was secured by an interest in Debtors' primary residence. Such loans, AGF argued, are excepted from the general rule permitting modification of secured claims pursuant to a Chapter 13 plan. See id. § 1322(b)(2).

In a written opinion dated August 10, 2000, the United States Bankruptcy Court for the Middle District of Georgia rejected AGF's legal argument that claims involving short-term loans secured by liens against a debtor's primary residence could not be bifurcated into secured and unsecured parts, with the unsecured part crammed down, in a Chapter 13 proceeding. The court found that § 1322(c)(2) explicitly permitted the bifurcation and "cramdown" of claims involving short-term mortgages such as the one at issue in this case. The August 10th opinion was incorporated into the court's ultimate findings of fact and conclusions of law, which, pursuant to Bankruptcy Rule 7052, were announced from the bench after a confirmation hearing on August 25, 2000. The court confirmed a modified version of Debtors' Chapter 13 plan, which valued AGF's lien at six thousand dollars and required Debtors to repay that amount at twelve percent interest over a sixty-month period.

AGF appealed the bankruptcy court's confirmation of Debtors' plan to the United States District Court for the Middle District of Georgia, which rejected AGF's arguments and affirmed the bankruptcy court's decision. AGF filed a timely notice of appeal with this Court.

II.

We review both the bankruptcy court's and the district court's factual findings under the clearly erroneous standard. Gen. Trading, Inc. v. Yale Materials Handling Corp., 119 F.3d 1485, 1494 (11th Cir.1997). The legal determinations of both of these courts are subject to de novo review.² Id.

Chapter 13 debtors enjoy "broad power to modify the rights of the holders of secured claims." In re Eubanks, 219 B.R. 468, 470 (B.A.P. 6th Cir.1998). The manner in which secured claims may be modified in an acceptable Chapter 13 plan is governed by § 1325(a)(5). Section 1325(a)(5) specifies the conditions under which Chapter 13 plans must address "allowed secured claim[s]" if the plans are to be confirmed, essentially by ensuring that creditors receive appropriate value for each of their secured claims. The phrase "allowed secured claim[s]" is a reference to 11 U.S.C. § 506(a), which has been interpreted as providing that "a claim is secured only to the extent of the value of the property on which the lien is fixed; the remainder of that claim is considered unsecured." United States v. Ron Pair Enters., Inc., 489 U.S. 235, 238-39, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). Thus, taken together, these provisions permit the bifurcation of an undersecured claim into its secured and unsecured parts, with creditors only assured of receiving full value for the secured portion of the claim. Section 1325(a)(5) is recognized as the source of a Chapter 13 debtor's authority to bifurcate secured claims and to "strip down" the value of the claim to an amount equal to the value of the collateral. In re Young, 199 B.R. 643, 647 (Bankr.E.D.Tenn.1996) ("The very essence of a § 1325(a)(5) modification is the write down or `cramdown' of a secured claim to the value of the collateral securing the debt.").

In the instant case, Debtors' proposed plan included an assertion that AGF's debt was undersecured, because the value of Debtors' collateral (equity in their home) was substantially exceeded by the value of the debt. Relying upon the provisions of § 1325(a)(5), Debtors sought to bifurcate AGF's claim, with the secured portion paid back in monthly installments and the unsecured component crammed down. While the bankruptcy court disagreed with Debtors' valuation of AGF's collateral, it agreed with the premise of Debtors' proposal and permitted AGF's claim to be bifurcated, with only the value of the secured portion returned to AGF.

AGF argues that another provision of the Bankruptcy Code precludes the modification of its claim. According to AGF, § 1322(b)(2) expressly prohibits the modification of any claim in a Chapter 13 proceeding "secured only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)(2). The Supreme Court has interpreted this provision to exclude mortgages against a debtor's principal residence from the general rule permitting modification of secured claims in Chapter 13 proceedings. Nobelman v. Am. Savings Bank, 508 U.S. 324, 331-32, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), superseded by statute as stated in In re Escue, 184 B.R. 287 (Bankr.M.D.Tenn.1995). In the instant case, AGF holds a note secured solely by a lien on the real property that constitutes Debtors' principal residence. Hence, AGF contends that its claim cannot be modified pursuant to § 1325(a)(5).

Debtors rely upon what they term "an exception to the section 1322(b)(2) exception" to support their contention that AGF's claim should be subject to modification. The relevant provision is found at § 1322(c)(2), which provides as follows:

Notwithstanding subsection (b)(2) and applicable nonbankruptcy law —

....

(2) in a case in which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor's principal residence is due before the date on which the final payment under the plan is due, the plan may provide for payment of the claim as modified pursuant to section 1325(a)(5) of this title.

11 U.S.C. § 1322(c)(2). Debtors contend that this provision unambiguously provides that short-term mortgages that mature prior to the final payment on a Chapter 13 plan are subject to modification, notwithstanding the general prohibition on modification of claims secured by an interest in a debtor's primary residence found in § 1322(b)(2). Debtors note that the debt at issue here is a short-term mortgage that matures prior to the completion of the proposed Chapter 13 plan and thus argue that their debt to AGF is subject to modification. AGF rejects this reading of § 1322(c)(2); argues that the language of § 1322(c)(2) is ambiguous; and avers that the legislative history indicates that Congress did not intend for § 1322(c)(2) to permit the modification of claims secured by short-term mortgages, but rather intended to permit only the schedule of payments for those claims to be modified. Our task in this case is to evaluate these competing views of § 1322(c)(2) to determine which view best effects the will of Congress.

III.

"In construing a statute we must begin, and often should end as well, with the language of the statute itself." United States v. Steele, 147 F.3d 1316, 1318 (11th Cir.1998) (en banc) (internal quotation marks omitted). When the language of a statute is unambiguous, we need go no further, because we must presume that Congress "said what it meant and meant what it said." Id. "The plain meaning of legislation should be conclusive, except in the rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters." Ron Pair Enters., Inc., 489 U.S. at 242, 109 S.Ct. 1026 (alteration in original) (internal quotation marks omitted). The import of these authorities is that we need not resort to extrinsic...