In re Witt
| Decision Date | 19 April 1996 |
| Docket Number | No. 695-00597-WA1-13. Civil Action No. 95-73-L.,695-00597-WA1-13. Civil Action No. 95-73-L. |
| Citation | 199 BR 890 |
| Parties | In re Clarence Gordon WITT, and Carolyn Sue Witt, Debtors. UNITED COMPANIES LENDING CORP., Appellant, v. Clarence Gordon WITT, and Carolyn Sue Witt, Appellees. |
| Court | U.S. District Court — Western District of Virginia |
Paul J. Feinman, Fralin, Feinman, Coates & Kinnier, P.C., Lynchburg, VA, for appellant.
Robert Mitchell Garbee, Wilson, Garbee & Rosenberger, Lynchburg, VA, for appellees.
This is an appeal by the United Companies Lending Corporation ("United"), from an Order of the United States Bankruptcy Court for the Western District of Virginia confirming the debtors' proposed bankruptcy plan over United's objections. This court has jurisdiction pursuant to 28 U.S.C. § 158. United raises two issues on appeal. First, it contends that the appellees have shown no cause to extend the period of repayment over five years. Second, United asserts that the lien it holds on the debtor's mobile home cannot be bifurcated and stripped down in the manner proposed by the debtor's plan. The Witts maintain that their near destitute financial situation provided more than just cause for extending their debt payment period over a five year interval. They also claim that 11 U.S.C. § 1322(c)(2) (1994) allows the Bankruptcy Court to bifurcate United's lien into secured and unsecured portions and requires them only to completely satisfy the lien on the secured portion of their note. The court finds that the Bankruptcy Court's Order must be reversed on the strip down issue and the case remanded for findings of fact which would justify extending the plan's life beyond three years and for the confirmation of a plan in keeping with this Opinion.
The facts of the case are essentially undisputed. The debtors, Clarence Gordon Witt and Carolyn Sue Witt, presented this, their fifth bankruptcy petition on April 13, 1995.1 Their principal outstanding obligation is the $22,561.02 due to United on a note which was executed on September 15, 1989 and matures on October 1, 1999. Other debts include a secured claim of $600, priority claims totaling $663.70, and unsecured claims totaling $1,832.48. Although the appellees originally listed United's claim as only $14,063.22, they later withdrew their objection to the proof of claim filed by United. Accordingly, United's proof of claim of $22,561.02, became the allowed amount of its claim when the debtors withdrew their objection. See 11 U.S.C. § 502 (1994).
The Witts originally proposed a plan which would value United's secured claim at only $13,100 and proposed payment of that amount plus ten percent (10%) interest per annum over a sixty month period beginning July 1, 1995. United objected to confirmation because the plan had a five year period and stripped down its claim under § 506(a) into secured and unsecured portions and only called for the payment of the mobile home's fair market value as a secured claim. The Bankruptcy Court found approved the five year payout period proposal. It also held that recently enacted 11 U.S.C. § 1322(c)(2) overruled the Supreme Court decision, Nobelman v. American Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), and allowed debtors to bifurcate undersecured interests on principal residences in the manner proposed by the Witts, save that the fair market value of the residence would be determined at a later date. United appealed both the plan period extension and the strip down rulings.
United appeals two rulings by the Bankruptcy Court: 1) confirmation of a plan in excess of three years pursuant to 11 U.S.C. § 1322(d), and 2) modification of its deed of trust on the debtor's mobile home pursuant to § 1322(c)(2). The issue of what constitutes a reasonable cause to extend a plan beyond three years under § 1322(d) is a question of fact that must be decided by bankruptcy courts on a case by case basis. See Grundy Nat'l Bank v. Stiltner, 58 B.R. 593 (W.D.Va.1986). In this case, the Bankruptcy Court made only an implicit ruling that cause existed to extend the plan beyond the generally allowable three year period and failed to state any findings of fact which justified the extension.2 Determining what the findings of fact should be is appropriately left to the Bankruptcy Court, not to this tribunal on appeal.3 Accordingly, the case must be remanded to the Bankruptcy Court on this issue so that a hearing on cause pursuant to § 1322(d) can be undertaken.
The other issue before the Bankruptcy Court was whether United's rights, as a holder of a claim secured by a note on real property which is the debtors' principal residence,4 could be bifurcated in the Chapter 13 reorganization plan. Debtors contend that their mobile home is only worth $13,100, and they wish to pay that amount with full interest at ten percent (10%) per annum and seek to pay the remaining portion of their debt to United as an unsecured claim. Essentially, the Witts' position is that the addition of (c)(2) to section 1322 of the Bankruptcy Code in 1994 overturned the Supreme Court decision of Nobelman v. American Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) in its entirety, thus permitting a bankruptcy judge to confirm a plan calling for a payment period extending beyond the date of the loan's maturation and to bifurcate the claim on the debtor's principal residence into secured and unsecured claims. With that accomplished, the Witts assert that they can reduce their secured mortgage debt to the fair market value of their mobile home. Modification of a secured creditor's deed of trust in the fashion sought involves pure questions of statutory interpretation and the court reviews such bankruptcy findings de novo. In re Tudor Assoc., Ltd., 20 F.3d 115, 119 (4th Cir.1994).
Before the enactment of the Bankruptcy Reform Act of 1994,5 debtors were generally allowed to modify the rights of holders of secured claims except for those which were secured by a security interest in real property that is the debtor's principal residence. 11 U.S.C. § 1322(b)(2). Thus, a debtor was not permitted to modify the contract rights of a creditor in a Chapter 13 plan with respect to claims secured by a debtor's principal residence. See Nobelman, 508 U.S. at 330-31, 113 S.Ct. at 2111. In Nobelman, the Supreme Court held that a mortgage creditor's rights are reflected in the debt instrument and enforceable under state law. Id. at 328-29, 113 S.Ct. at 2110. Those rights, including re-payment of the principal and interest in specified monthly installments, are bargained for in the exchange between the mortgagor and mortgagee and stay with the real property until foreclosure, or the intervention of an applicable bankruptcy provision. Id.; see Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773, 778, 116 L.Ed.2d 903 (1992). The unanimous Court then held that § 506(a) could not work to strip down a secured claim on real property used as a debtor's principal residence because of the exception carved out in § 1322(b)(2). Nobelman, 508 U.S. at 328-31, 113 S.Ct. at 2110-11. Justice Stevens concurred, specifically pointing out that the strange result of providing less favorable treatment to debtors on their residential mortgages than was given to other secured claims was intended to encourage capital flow into the home lending market. Id. at 330-32, 113 S.Ct. at 2111-12 (Stevens, J., concurring), citing Grubbs v. Houston First Amer. Sav. Ass'n., 730 F.2d 236, 245-46 (5th Cir.1984).
The newly enacted § 1322(c)(2) of the Bankruptcy Code carved out an exception to the principal residence exception and the debtors assert that now they can do what was contemplated by the losing petitioners in Nobelman. Section § 1322(c)(2) states:
Notwithstanding subsection (b)(2) and applicable non-bankruptcy law — 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 the payment of the claim as modified pursuant to section 1325(a)(5) of this title.
Accordingly, this court must decide whether the Witts' proposal imagines the sort of modification contemplated by Congress when it enacted § 1322(c)(2). Several courts have construed § 1322(c)(2) and all have concluded that it allows debtors to pay off their newly matured mortgages over the life of their Chapter 13 plan. See In re Sarkese, 189 B.R. 531, 534-35 (Bankr.M.D.Fla.1995); In re Lobue, 189 B.R. at 218; In re Escue, 184 B.R. 287, 292-93 (Bankr.M.D.Tenn.1995); In re Chang; 185 B.R. 50, 53 (Bankr.N.D.Ill. 1995); In re Jones, 188 B.R. 281, 281-82 (Bankr.D.Or.1995). Indeed, the legislative history of 11 U.S.C. § 1322(c)(2) states that the subsection was intended to overrule First National Fidelity Corp. v. Perry, 945 F.2d 61 (3d Cir.1991) in which the Third Circuit held that Chapter 13 did not allow a debtor to stretch out a past due mortgage debt and pay it over the life of the plan. See King, Collier on Bankruptcy ¶ 1322.14B at 1322-50 (15th ed. 1995).
However, this court is unaware of any case that has allowed an under secured mortgage to be entirely stripped down under § 1322(c)(2). Instead, the subsection has been interpreted as written, to allow modification of the payment period for certain home mortgages pursuant to § 1325(a)(5). That interpretation most closely approximates Congress' intention when it passed the Bankruptcy Reform Act of 1994, which was to assist debtors in retaining their homes through affordable extended plan payments. See Jones, 188 B.R. at 282. Moreover, as stated previously, that interpretation is entirely consistent with the statutory language itself. Section 1322(c)(2) says that payment of the claim may be modified pursuant to § 1325(a)(5), not that the entire claim could...
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