In re Tanner
| Decision Date | 30 October 1981 |
| Docket Number | Adv. No. 81-340.,Bankruptcy No. 80-1832 |
| Citation | 14 BR 933 |
| Parties | In re Evelyn TANNER, a/k/a Evelyn J. Tanner, Debtor. Evelyn TANNER, Plaintiff, v. FINANCEAMERICA CONSUMER DISCOUNT COMPANY, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Pennsylvania |
J. Lauson Cashdollar, Beaver, Pa., for the debtor/plaintiff.
Joseph J. Bernstein, Apple & Bernstein, Pittsburgh, Pa., for the defendant.
JOSEPH L. COSETTI
Evelyn Tanner filed a Voluntary Petition for relief under Chapter 7, Title 11, of the United States Code on November 10, 1980. The Debtor alleged the market value of her home was $20,000. The property is encumbered with three mortgages, the first two totaling $23,980 and therefore exhausting the alleged market value of the home. Defendant, FinanceAmerica Consumer Discount Company, owns the third mortgage which it acquired April 9, 1980. The Debtor filed a Complaint on March 13, 1981, requesting the Court to declare the third mortgage unsecured and void pursuant to Section 506 of the Bankruptcy Code. A hearing was held on April 28, 1981. The Court after hearing evidence found the value of the house to be $20,000, the same as admitted by the Defendant in his Answer to the Complaint. The Defendant averred in its Answer that no provision under the Bankruptcy Code allows the Debtor to avoid the lien of the Defendant's mortgage.
The issue before the Court is whether Section 506(d) of the Bankruptcy Code allows for the avoidance of a real property mortgage acquired after the effective date of the Code to the extent the mortgage exceeds the value of the collateral? Section 506(d) reads:
The Debtor relies on the plain language of subsection (d) as sufficient support for the right to avoid a mortgage. The Defendant argues that Congress did not intend real property mortgages to be voidable and that "lien" as used in Section 506(d) does not refer to a lien of a mortgage on real property. The crux of the Defendant's argument is that a real property mortgage is a security interest with the highest dignity and that Congress would have specifically stated that real property mortgages were voidable if it so intended. It is necessary to apply basic principles of statutory construction and to review pertinent case law to determine the proper application of Section 506(d).
The initial focal point for determining the intended meaning of Section 506(d) is its plain language. Congress used the word "lien" without qualification which indicates an intention the definition provided in Section 101(28) is applicable. Lien is defined as follows:
a charge against or interest in property to secure payment of a debt or performance of an obligation.
It is unlikely that Congress would define a lien broadly and then use the word in a narrower sense without so indicating. Further indications of Congressional intent that a real property mortgage is included within the meaning of lien in Section 506(d) are apparent from language elsewhere in the Code. Congress defined judicial lien in Section 101(27), security interest in Section 101(37) and statutory lien in Section 101(38). These are specific types of liens within the general definition of lien. These terms are used throughout the Code indicating Congress knew how to designate subspecies of lien when it so desired. In addition, Congress has demonstrated that when it desired to single out a real property mortgage for special treatment, it will clearly so indicate. An example is Section 1322(b)(2):
the 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 . . .
A reading of subsection 506(d) in context with Section 506 as a whole supports the conclusion that "lien" includes the lien of a real property mortgage. Section 506 is composed of four subsections. Subsection (a) deals with the determination of whether an allowed claim of a creditor secured by a lien on property is an allowed secured claim. Subsection (b) provides for a holder of an allowed secured claim to recover reasonable fees, costs or charges provided under the mortgage agreement to the extent the allowed secured claim exceeds the value of the property and after the Trustee has recovered certain costs specified in subsection (c).
We conclude that subsections (a), (b) and (c) do pertain to real property mortgages. We consider this position as consistent with the entire scheme for determining a valid secured creditor under the Code. To do otherwise would lead to the conclusion that a real property mortgage is a "claim" under Section 101(4) which must be filed under Section 501 and "allowed" under Section 502, but not within the meaning of "an allowed secured claim" in Sections 506(a)(b)(c).
Subsections (a), (b) and (c) determine the extent a "lien on property", including a real property mortgage, gives rise to an allowed secured claim. Subsection (d) deals with a "lien on property" to the extent it does not effect an allowed secured claim. An interpretation which prevents the avoidance of a real property mortgage by excepting it from the meaning of a "lien on property" as used in (a), (b) and (c) is unjustified if subsection (d) is read in context with the prior subsections and the entire scheme for determining secured claims. The construction urged by the Defendant not only requires reading out a real property mortgage from subsection (d) but, to be consistent, also from subsection (a). The result is an anomaly in that an allowed claim of a creditor secured by a real property mortgage is not subject to a determination of secured status under Section 506 as are all other creditors. If subsection (d) is construed in light of the definitional section, Section 506 in its entirety, and the overall scheme of the Code, the reasonable conclusion is Congress intended a real property mortgage to be avoidable to the extent it exceeds the value of the collateral.
Legislative history on subsection (d) is sparse. A comparable section to (d) did not exist under the Bankruptcy Act. The legislative history, however, reveals the following:
Subsection (d) permits liens to pass through the bankruptcy case unaffected. However, if a party in interest requests the court to determine and allow or disallow the claim secured by the lien under section 502 and the claim is not allowed, then the lien is void to the extent that the claim is not allowed. H.R.Rep.No. 595, 95th Cong., 1st Sess. 357, U.S.Code Cong. & Admin.News 1978, pp. 5787, 6313 (1977).
The word "lien" is used three times without qualification in successive sentences in describing the operation of Section 506(d). Absent a clear indication to the contrary, it is reasonable to presume its meaning is the same throughout the description. The Defendant does not argue that "lien" in the first sentence does not refer to real property mortgages since such an interpretation would defeat his position. A fair reading of the House Report requires a consistent interpretation of "lien" in the second sentence. Legislative history, as well as the language of Section 506(d) supports the construction that a real property mortgage is avoidable under subsection (d).
The final step in statutory construction is to determine whether a particular interpretation is consistent with the overall purpose of the statute. In particular, is the avoidance of a real property mortgage to the extent it exceeds the value of the collateral consistent with the Code's policy of a "fresh start" for an "honest but unfortunate debtor?"
The assets of the Debtor are determined at time of filing. Apart from allowable exemptions, the remainder of the Debtor's assets are distributed to his creditors. The Debtor receives a discharge and a new beginning. Property acquired afterward is not subject to claims of pre-petition creditors. Appreciation of property or an increase of equity ownership by the reduction of an outstanding mortgage are examples of after acquired property which are attributable to the Debtor's post-bankruptcy efforts. If a real property mortgage is not avoidable to the extent it is undersecured, a pre-petition creditor will impair the Debtor's fresh start by partaking in his post-petition property acquisitions.
The Code scheme of Section 506 is that creditors receive through the valuation procedure of the Bankruptcy Court the same property value that they would receive through a non-bankruptcy forced sale of the Debtor's non-exempt assets as of the petition date. Assuming the sale price is the market value, the Defendant would receive nothing under a forced sale. The property would pass to the purchaser free of Defendant's lien. The operation of Section 506(d) merely effectuates the market place.
At a forced sale the Debtor does not retain title to the property and the overvalued lien holder would not gain from future appreciation or increases in the equity. The Defendant's argument requires attributing to Congress an intent to benefit the real property mortgage holder more under a bankruptcy proceeding than under a non-bankruptcy forced sale. Clearly that is not consistent with the intent of Congress in providing for Debtor "relief" under the Bankruptcy Code.
The operation of subsection (d) to avoid undersecured real property mortgages is consistent with the Code's policy of providing the Debtor a fresh start. On the basis of the plain meaning of the language of Section 506 and elsewhere in the Code, the legislative history of subsection (d), and the fresh start policy of the Code, the only...
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In re Cleveringa, Bankruptcy No. 85-00973S
...not be entitled to avoid the lien on his real property under Section 506(d). The leading case in this area appears to be In re Tanner, 14 BR 933 (Bkrtcy WD Penn.1981). That court held that the legislative history and plain language of Section 506 clearly supports the finding that a "lien" i......