In re Richards

• Decision Date: 19 February 1993
• Docket Number: 92-14857 and 92-14371,Bankruptcy No. 91-10849,Adv. No. 92-1184,92-1392 and 92-1391.
• Citation: 151 BR 8
• Parties: In re Mordred J. RICHARDS, Debtor. Mordred J. RICHARDS, Plaintiff, v. CITICORP MORTGAGE, INC., Defendant. In re Renand DUROSIER and Adrienne Durosier, Debtors Renand DUROSIER and Adrienne Durosier, Plaintiffs, v. FIRST NH MORTGAGE CORP., Defendant. In re Jean N. SYVERIN and Maude J. Syverin, Debtors. Jean N. SYVERIN and Maude J. Syverin, Plaintiffs, v. FEDERAL HOME LOAN MORTGAGE CORP., Defendant.
• Court: U.S. Bankruptcy Court — District of Massachusetts

151 B.R. 8 (1993)

In re Mordred J. RICHARDS, Debtor.

Mordred J. RICHARDS, Plaintiff, v. CITICORP MORTGAGE, INC., Defendant.

In re Renand DUROSIER and Adrienne Durosier, Debtors

Renand DUROSIER and Adrienne Durosier, Plaintiffs, v. FIRST NH MORTGAGE CORP., Defendant.

In re Jean N. SYVERIN and Maude J. Syverin, Debtors.

Jean N. SYVERIN and Maude J. Syverin, Plaintiffs, v. FEDERAL HOME LOAN MORTGAGE CORP., Defendant.

Bankruptcy Nos. 91-10849, 92-14857 and 92-14371, Adv. Nos. 92-1184, 92-1392 and 92-1391.

United States Bankruptcy Court, D. Massachusetts.

February 19, 1993.

Andrew C. Schultz, Boston, MA, for debtors, plaintiffs.

Richard C. Follender, Nashua, NH, for defendant First NH Mortg. Corp.

G. Matthew Kerns, Boston, MA, for defendant Federal Home Loan Mortg. Corp.

Donald H. Carvin, Braintree, MA, for defendant Citicorp Mortg., Inc.

MEMORANDUM ON BIFURCATION OF CLAIMS SECURED BY DEBTORS' RESIDENTIAL REAL ESTATE

JOAN N. FEENEY, Bankruptcy Judge.

I. INTRODUCTION

These adversary proceedings involve common issues of law. The plaintiffs, who are Chapter 13 debtors, seek to determine the amount of the defendants' claims secured by mortgages on their personal residences. The plaintiffs also seek to bifurcate the determined secured portion of the claims from the undersecured portion pursuant to 11 U.S.C. § 506(a)¹ and to satisfy the claims accordingly in their Chapter 13 plans. The defendants oppose bifurcation on the ground that section 1322(b)(2)² prohibits modification of a mortgage on real property that is a debtor's home.

The complaints in these adversary proceedings were filed by Andrew C. Schultz, Esq., counsel to all the debtors in these cases. Each complaint is captioned "Complaint to Determine Secured Status." Through their nearly identical complaints, the debtors ask the Court only to establish "the appropriate bifurcation" of the mortgagees' claims "so that the same may be separated into secured and unsecured portions." The debtors do not expressly ask the Court to avoid the mortgagees' liens to the extent that the mortgagees' claims exceed the judicially determined value of their collateral. Additionally, the debtors through their Chapter 13 plans, which are similar in both format and inartful draftsmanship, do not refer to lien avoidance. However, the issue of lien avoidance is addressed by the parties in their memoranda and is related inextricably to bifurcation and cannot be ignored.

The parties have filed stipulations and memoranda in each adversary proceeding. They agree that the Court should determine the legal issues before hearing evidence as to facts, if any, that are in dispute. Accordingly, the Court shall treat the stipulations as plaintiffs' motions for partial summary judgment.

The issues articulated by the parties are ones of first impression in the eastern division of this district. Their resolution will have a significant impact on the administration of Chapter 13 cases, the confirmation of Chapter 13 plans and the outcome of numerous other pending adversary proceedings involving the identical issues.³

The primary issue before the Court is whether the use by Chapter 13 debtors of section 506(a) to bifurcate claims is an impermissible modification of the rights of mortgagees under section 1322(b)(2). Subsidiary issues arise with respect to the date for determining the value of the principal residence and the appropriate valuation standard. The subsidiary issues are not before the Court and are reserved for future determination. The treatment of prepetition arrearages, however, is a subject that the Court must of necessity address since, like lien avoidance, it is integral to the administration of Chapter 13 cases and confirmation of Chapter 13 plans. Notably, final determination of all issues before the Court must await a decision by the United States Supreme Court resolving the present split among the circuit courts as to bifurcation or Congressional action amending applicable provisions of the Bankruptcy Code.

II. DEWSNUP V. TIMM

Complicating the issue is the recent and controversial United States Supreme Court decision in Dewsnup v. Timm, ___ U.S. ___, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) (hereinafter "Dewsnup").⁴ In Dewsnup, the Supreme Court ruled that a Chapter 7 debtor may not "strip down" a secured creditor's undersecured lien on real estate to the actual value of the collateral. In other words, the Supreme Court refused to allow a Chapter 7 debtor to reduce a mortgage on real property in which the estate had no interest to the judicially determined value of the collateral when that value was less than the amount of the claim secured by the lien. The Court held that section 506(d)⁵ did not permit lien stripping of allowed claims to the extent they became unsecured for purposes of section 506(a). In short, the Court determined that the phrase "allowed secured claim" in section 506(d) was not an indivisible term of art defined with reference to section 506(a), only an allowed claim secured in the ordinary sense. Accordingly, Chapter 7 debtors can use section 506(d) only to avoid liens where the claim at issue is both disallowed and unsecured.

The Supreme Court emphasized the preBankruptcy Code rule that real property liens pass through bankruptcy unaffected. It noted that the discharge of the undersecured portion of a claim only affects a debtor's personal liability. According to the Court, it does not affect the secured creditor's ability to proceed in rem against property for payment of its debt, thereby allowing appreciation in the value of property to benefit the creditor, not the debtor.

Despite the unequivocal holding with respect to Chapter 7 debtors, the Supreme Court stated:

Hypothetical applications that come to mind and those advanced at oral argument illustrate the difficulty of interpreting the statute in a single opinion that would apply to all possible fact situations. We therefore focus upon the case before us and allow other facts to await their legal resolution on another day.

Id. ___ U.S. at ___, 112 S.Ct. at 778. The Court added in a footnote another qualification: "we express no opinion as to whether the words `allowed secured claim' have different meaning in other provisions of the Bankruptcy Code." Id.

The Dewsnup opinion has fueled the existing dispute among bankruptcy and appellate courts as to whether claims splitting under section 506(a) of the Bankruptcy Code constitutes an impermissible modification of the rights of home mortgage holders under section 1322(b)(2). Indeed, Justice Scalia, dissenting in Dewsnup, predicted the necessity of this Court's ruling today when he stated "unfortunate future litigants will have to pay the price for our expressed neutrality `as to whether the words "allowed secured claim" have different meaning in other provisions of the Bankruptcy Code.'" Id. at ___, 112 S.Ct. at 788.

In light of Dewsnup, many bankruptcy courts have wrestled with the interrelationship of sections 506(a) and 1322(b)(2) and are divided on the issue of whether a Chapter 13 debtor may bifurcate an undersecured claim into secured and unsecured portions. Compare In re Govan, 139 B.R. 1017 (Bankr.N.D.Ala.1992) (bifurcation permitted); In re Sainz-Dean, 139 B.R. 739 (Bankr.D.Colo.), aff'd, 143 B.R. 784 (D.Colo.1992) (same) and Taras v. Commonwealth Mortg. Corp, (In re Taras), 136 B.R. 941 (Bankr.E.D.Pa.1992) (same) with In re Doss, 143 B.R. 952 (Bankr. E.D.Okla.1992) (bifurcation not permitted); In re Ireland, 137 B.R. 65 (Bankr.M.D.Fla. 1992) (same) and In re Davidoff, 136 B.R. 567 (Bankr.M.D.Fla.1992) (same). Moreover, some courts have attempted to reconcile Dewsnup with precedent allowing bifurcation in Chapter 13 proceedings. For example, in In re Dyer, 142 B.R. 364 (Bankr.D.Ariz.1992), the court stated the following:

In light of the Dewsnup decision, three approaches have perhaps developed concerning the creditor that only has a lien on the debtor\'s principal residence. One approach permits the bifurcation of the creditor\'s claim into a secured and unsecured claim, but prohibits the avoidance of the lien if the debtor does not propose to pay off the entire secured claim in the reorganization plan. In re Zeigler, 1992 WL 50006 (Bankr.E.D.Pa.1992); In re Taras, 136 B.R. 941 (Bankr.E.D.Pa.1992). Another approach is to follow strictly Section 1322(b)(2) (and utilize Dewsnup as further support therefor), prohibit bifurcation of the creditors\' sic claim, and prohibit any avoidance of the creditor\'s lien. In re Davidoff, 136 B.R. 567 (Bankr.M.D.Fla.1992); In re Ireland, 137 B.R. 65 (Bankr.M.D.Fla.1992). Finally, a third approach is to permit bifurcation of the claim and avoidance of the lien as to the unsecured portion of the indebtedness. At least one Court may have so ruled in dicta. In re Bellamy, 22 BCD 1476, 962 F.2d 176 (2d Cir.1992).

In re Dyer, 142 B.R. at 369 (footnote omitted). In Dyer, the court concluded that the first approach was correct. It determined that the debtor's plan could not avoid the lien secured only by the debtor's principal residence. However, the court permitted the debtor to make payments on the secured portion of the claim and the unsecured portion of the claim during the Chapter 13 plan, although the lien would continue to encumber the residence to the extent of the secured and unsecured unpaid balance of the claims of the mortgagee as an in rem liability payable upon the sale of the debtor's residence. The effect of the court's ruling would preserve any appreciation in the value of the collateral for the benefit of the mortgagee. According to the Arizona court, the benefit to the debtor would be accelerated reduction of the principal balance and minimal repayment of the unsecured portion of the claim during the course of the Chapter 13 plan. In its words, "the Debtors pay less to the creditor over the term of the Chapter 13 plan than the Debtors would have paid if the creditor had a fully secured...