In re Young

• Decision Date: 23 August 1996
• Docket Number: Bankruptcy No. 96-20202.
• Citation: 199 BR 643
• Parties: In re Brian YOUNG and Ruth A. Young, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

199 B.R. 643 (1996)

In re Brian YOUNG and Ruth A. Young, Debtors.

Bankruptcy No. 96-20202.

United States Bankruptcy Court, E.D. Tennessee.

August 23, 1996.

COPYRIGHT MATERIAL OMITTED

Alan C. Lee, Morristown, Tennessee, for Brian Young and Ruth A. Young.

Mark A. Cowan, Bacon, Jessee, Perkins & Swanson, Morristown, Tennessee, for Appalachian Real Estate.

MEMORANDUM

MARCIA PHILLIPS PARSONS, Bankruptcy Judge.

This case is before the court upon the objection to confirmation filed by the holder of a second mortgage on the debtors' residence. The issue presented by the objection is whether 11 U.S.C. § 1322(c)(2), which was enacted as part of the Bankruptcy Reform Act of 1994, permits a "cramdown"¹ of an undersecured residential mortgage if final payment under the mortgage falls due during the life of the plan, notwithstanding 11 U.S.C. § 1322(b)(2) and the U.S. Supreme Court's ruling in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). The court answers the question in the affirmative. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(L).

I.

This chapter 13 case was filed on February 8, 1996. According to the debtors' schedules filed shortly thereafter, the only real property owned by the debtors is their home which is located on six acres of land. The schedules indicate that the house and acreage together have a current market value of $50,000.00, subject to a first mortgage held by Home Federal Bank ("Home Federal") in the amount of $42,000.00 and a second mortgage held by Appalachian Real Estate ("Appalachian") in the amount of $13,000.00. The debtors' proposed chapter 13 plan provides for continued maintenance payments to Home Federal on the first mortgage with the arrearage owed to Home Federal to be paid in full at the rate of $60.00 per month. With respect to the second mortgage held by Appalachian, however, the debtors seek to "cramdown" the mortgage to the difference between the value of the debtors' real property and the amount of the first mortgage ($50,000.00 — $42,000.00). The plan proposes for Appalachian to retain its lien and to be paid a value of $8,000.00 at $175.00 per month plus 9% interest, with the remainder of Appalachian's claim to be paid in accordance with the proposed treatment of unsecured claims. Prepetition allowed unsecured claims will receive the greater of 20% or funds available, with the debtors making monthly payments into the plan of $820.00 for sixty months.

Appalachian objected to the plan contending that the debtors' proposed treatment of its claim impermissibly modifies the claim in violation of 11 U.S.C. § 1322(b)(2) which prohibits the modification of claims that are secured "only by a security interest in real property that is the debtor's principal residence." In the alternative, Appalachian maintained that the debtors' real property is worth more than $50,000.00 and that, accordingly, the debtors have undervalued Appalachian's interest in the debtors' home. The debtors responded that their valuation is correct and that modification of Appalachian's claim is authorized by 11 U.S.C. § 1322(c)(2) because final payment of the Appalachian mortgage falls due prior to the completion of the debtors' proposed five-year plan.

A hearing on the objection was held on June 4, 1996, wherein the court found that the value of the debtors' real property was $55,000.00. By the time of the hearing, Home Federal had filed a proof of claim which indicated that the amount owed on the first mortgage as of the date of the filing of the petition was $43,573.54. Thus, to the extent that Appalachian's second mortgage can be reduced to the difference between the value of the residence and the first mortgage, Appalachian is secured to the extent of $11,426.46. Because the debtors' proposed plan provides for a value of only $8,000.00, the court sustained the objection of Appalachian as to value. The court reserved, however, the issue of whether § 1322(c)(2) of the Bankruptcy Code permits modification of Appalachian's claim as proposed by the debtors and requested that the parties file memoranda of law on the issue. Briefs having now been filed, the issue is ready to be resolved by the court.

II.

The initial starting point in construing a statute, of course, is the language of the statute itself, which is presumed to be used in its ordinary and usual sense. Baum v. Madigan, 979 F.2d 438, 441 (6th Cir.1992), on remand, Baum v. Espy, 840 F.Supp. 493 (N.D.Ohio 1993), judgment vacated and appeal dismissed, 48 F.3d 1219 (6th Cir.1993). See also In re Sims, 185 B.R. 853, 863 (Bankr.N.D.Ala.1995), citing Caminetti v. U.S., 242 U.S. 470, 485, 37 S.Ct. 192, 194, 61 L.Ed. 442 (1917) ("The meaning of a statute must, in the first instance be sought in the language in which the act is framed and if that is plain, . . . the sole function of the courts is to enforce it according to its terms."). 11 U.S.C. § 1322(c)(2), the statute which the debtors cite as authority for their proposed treatment of Appalachian's claim, provides the following:

(c) 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 the payment of the claim as modified pursuant to section 1325(a)(5) of this title.

A plain reading of this provision indicates that a plan may modify pursuant to § 1325(a)(5) a claim secured solely by the debtor's principal residence hereinafter referred to as a "home mortgage" if the last regularly scheduled payment under the claim falls due before final payment under the plan is due, notwithstanding 11 U.S.C. § 1322(b)(2) or any contrary applicable nonbankruptcy law. Section 1322(b)(2) of the Bankruptcy Code provides the general authority for modification of secured and unsecured claims, although such authority is subject to subparts (a) and (c) of § 1322 and one important exception: the rights of home mortgage claim holders may not be modified.

(b) Subject to subsections (a) and (c) of this section, the plan may —

(2) 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, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.

11 U.S.C. § 1322(b)(2).

11 U.S.C. § 1322(c) indicates that the claim described therein may be modified "notwithstanding subsection (b)(2)," and because § 1322(b) has been made expressly subject to subpart (c), it is logical to conclude that subsection (c)(2) provides an exception to the general prohibition on home mortgage modifications for those mortgages where the last payment happens to fall due during the life of the plan. The courts construing subsection (c)(2) since its enactment in 1994 have uniformly agreed. See In re Sarkese, 189 B.R. 531, 535 (Bankr.M.D.Fla.1995) (subsection 1322(c)(2) creates an exception to subsection 1322(b)(2)); In re Lobue, 189 B.R. 216, 218 (Bankr.S.D.Fla.1995) ("The plain language of Section 1322(c) clearly and explicitly . . . removes the protection against the modification of certain mortgages. . . ."); In re Jones, 188 B.R. 281, 282 (Bankr.D.Or. 1995) ("these provisions subsection (c)(1) and (2) create further exceptions to the § 1322(b)(2) prohibition against modification of the rights of secured creditors holding only liens against the debtor's residence."). Furthermore, the Supreme Court has recognized, in a discussion of the limits on § 1322(b)(2)'s protection for home mortgages, that similar "notwithstanding (b)(2)" language found in 1322(b)(5) prefaced an exception to this protection.² This court sees no statutory basis for concluding that one "notwithstanding" provision constitutes an exception to § 1322(b)(2), yet another does not.

Appalachian does not deny that its mortgage falls within the scope of § 1322(c)(2), that is, the last regularly scheduled payment under the mortgage will fall due during the life of the debtors' chapter 13 plan, or that § 1322(c)(2) permits the modification of its mortgage pursuant to § 1325(a)(5). Appalachian contends, however, that modification under § 1325(a)(5) consists only of adjustments in the term of the mortgage, the amount of periodic payments or whatever changes may be necessary to cure a home mortgage default and that it does not include the ability to bifurcate an undersecured claim into its secured and unsecured components pursuant to § 506(a) of the Bankruptcy Code as the debtors seek to do. Appalachian notes that § 1322(c)(2) makes no reference to § 506(a) and observes that the legislative history to § 1322(c)(2) indicates that the purpose of the provision was to permit the cure of short-term mortgages which matured or ballooned prepetition. The debtors' interpretation of § 1322(c)(2), asserts Appalachian, would overrule the U.S. Supreme Court's ruling in Nobelman with respect to short-term mortgages despite there being nothing in the legislative history indicating that such a result was the intent of Congress.

Appalachian's attempt to narrowly restrict the modification authority of § 1325 is without support. 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. Arnold, 878 F.2d at 928 ("Under this section 1325(a)(5), the debtor can "cramdown" a plan repaying only the `allowed secured claim,' i.e., the amount of the debt to the extent it is secured by the present value of collateral taken by the creditor."); 2 KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY § 5.46 (2d ed. 1994). Section 1325(a)(5) is the authority for the typical chapter 13 treatment of undersecured claims of paying the secured creditor the...