In re Zimmer

• Decision Date: 24 December 2002
• Docket Number: No. 01-56950.,01-56950.
• Citation: 313 F.3d 1220
• Parties: In re Sieglinde M. ZIMMER, Debtor, Sieglinde M. Zimmer, Appellant, v. PSB Lending Corporation, Appellee.<SMALL><SUP>*</SUP></SMALL>
• Court: U.S. Court of Appeals — Ninth Circuit

313 F.3d 1220

In re Sieglinde M. ZIMMER, Debtor Sieglinde M. Zimmer, Appellant, v. PSB Lending Corporation, Appellee.^*

No. 01-56950.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 5, 2002.

Filed December 24, 2002.

Steven R. Houbeck, Cardiff, CA, and Nathan Shilberg, El Cajon, CA, for appellant.

Michael M. Wintringer, Solomon, Grindle, Silverman & Spinella, San Diego, CA, for appellee.

Appeal from the United States District Court for the Southern District of California; Napoleon A. Jones, District Judge, Presiding. D.C. No. CV-00-01964-NAJ.

Before: D.W. NELSON and T.G. NELSON, Circuit Judges, and SCHWARZER,^** District Judge.

OPINION

D.W. NELSON, Senior Circuit Judge.

Appellant Sieglinde Zimmer, a Chapter 13 bankruptcy petitioner, filed suit against PSB Lending Corporation ("PSB Lending") to avoid a lien against her home. PSB Lending holds a second position deed of trust on Zimmer's primary residence, which is entirely unsecured because the value of the first deed of trust exceeds the value of the home. The district court dismissed Zimmer's complaint for failure to state a claim, finding that 11 U.S.C. § 1322(b)(2) prohibits avoidance of any lien on the debtor's primary residence, even where the lien is wholly unsecured. We reverse, joining with the majority of other jurisdictions in holding that a wholly unsecured lienholder is not entitled to the protections of 11 U.S.C. § 1322(b)(2).

FACTUAL AND PROCEDURAL BACKGROUND

On or about October 8, 1997, Zimmer executed a promissory note for a $39,000 loan, secured by a deed of trust on Zimmer's residence in San Diego. Although different in form, a deed of trust is similar to a mortgage in purpose and effect. The deed of trust was assigned to PSB Lending; the outstanding loan value was $37,411.19 when Zimmer filed this case. Zimmer's residence was already encumbered by a first deed of trust securing a loan of $123,000 that was used to purchase the property.

On December 29, 1999, Zimmer filed a petition under Chapter 13, which allows a bankrupt debtor with regular income to restructure her debts and repay or discharge them as necessary. In her petition, she stated the value of her residence as $110,000. Because the first mortgage exceeded the value of the residence, Zimmer listed PSB Lending's claim for the repayment of its loan as unsecured.

On April 21, 2000, Zimmer filed an adversary complaint with the bankruptcy court seeking to avoid PSB Lending's lien on her home. In general, Chapter 13 allows debtors to avoid liens, but there is an exception for homestead liens that attach only to the debtor's primary residence. See 11 U.S.C. § 1322(b)(2). Relying on our Bankruptcy Appellate Panel's decision in Lam v. Investors Thrift (In re Lam), 211 B.R. 36 (1997),¹ Zimmer argued that even though PSB Lending's claim was secured by her primary residence, its lien was nonetheless avoidable because the claim was wholly unsecured.

PSB Lending filed a motion to dismiss for failure to state a claim under Federal Rule of Bankruptcy Procedure 7012(b), which makes Federal Rule of Civil Procedure 12(b)(6) applicable to adversary proceedings in bankruptcy court. Concluding that it was not bound by Lam, the bankruptcy court held that PSB Lending's claim was protected from modification under § 1322(b)(2), and granted the motion to dismiss.

After Zimmer initially filed an appeal to the Bankruptcy Appellate Panel, PSB Lending elected to transfer the appeal to the district court. In an unpublished order, the district court affirmed the bankruptcy court's dismissal of the complaint, agreeing that liens against the debtor's primary residence are protected from modification under § 1322(b)(2) even if the underlying claim is wholly unsecured. This appeal followed.

JURISDICTION AND STANDARD OF REVIEW

The district court had jurisdiction to hear the appeal from the bankruptcy judge under 28 U.S.C. § 158(a). We have jurisdiction to hear the appeal from the district court under 28 U.S.C. § 158(d) and 28 U.S.C. § 1291.

Where a bankruptcy court has dismissed a complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), and the dismissal has been affirmed by the district court, appellate review is de novo. Blyler v. Hemmeter (In re Hemmeter), 242 F.3d 1186, 1189 (9th Cir.2001). A motion to dismiss for failure to state a claim should only be granted if it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); see also Hemmeter, 242 F.3d at 1189.

DISCUSSION

The district court erred in holding that a wholly unsecured lien on a primary residence may not be avoided in a Chapter 13 proceeding. The plain language of 11 U.S.C. § 1322(b)(2) provides that antimodification protection is only available to holders of secured claims. PSB Lending is not the holder of a secured claim under the definitions provided in the Bankruptcy Code, and therefore its rights may be modified under § 1322(b)(2).

The Bankruptcy Code

This case turns on the interpretation and application of two provisions of the Bankruptcy Code, 11 U.S.C. § 506(a) and 11 U.S.C. § 1322(b)(2). Section 506(a) divides creditors' claims into "secured claims" and "unsecured claims." Although the conventional interpretation of "secured" might include any claim in which the creditor has a security interest in the debtor's property, § 506(a) makes clear that the status of a claim depends on the valuation of the property:

An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ... and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim.

11 U.S.C. § 506(a). To put it more simply, a claim such as a mortgage is not a "secured claim" to the extent that it exceeds the value of the property that secures it. Under the Bankruptcy Code, "secured claim" is thus a term of art; not every claim that is secured by a lien on property will be considered a "secured claim." Here, it is plain that PSB Lending's claim for the repayment of its loan is an unsecured claim, because its deed of trust is junior to the first deed of trust, and the value of the loan secured by the first deed of trust is greater than the value of the house.

In general, Chapter 13 allows the modification of the rights of creditors, including the avoidance of liens against the debtor's property, but protects homestead liens from modification:

[A Chapter 13 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, 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). Assuming that PSB Lending holds "a claim secured only by a security interest in real property that is the debtor's principal residence," it might qualify for protection against modification.² If so, its lien would survive bankruptcy and could not be avoided by Zimmer.

Although it seems paradoxical on its face, PSB Lending's claim is arguably an "unsecured claim" that is also "a claim secured only by a security interest in real property that is the debtor's principal residence." Whether the antimodification clause of § 1322(b)(2) applies to the holder of such a claim is a question of first impression in this Circuit. Numerous other jurisdictions, however, have addressed this question in dozens of published opinions. The position adopted by a majority of courts is that the antimodification clause does not apply to wholly unsecured homestead liens, but a substantial minority of courts has taken the contrary position. See, e.g., Bartee v. Tara Colony Homeowners Ass'n (In re Bartee), 212 F.3d 277, 288-89 n. 15 & n. 16 (5th Cir.2000) (collecting cases). Both camps believe their preferred result to be compelled by the Supreme Court's decision in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993).

The Supreme Court's decision in Nobelman

In Nobelman, the Supreme Court considered the question of whether a partially-secured claim secured by a homestead lien could be bifurcated into its secured and unsecured components, and "stripped down" to the value of the secured claim. See id. at 326-27, 113 S.Ct. 2106. The debtors argued that, under § 506(a), the holder of an undersecured mortgage — for which the value of the claim exceeds the value of the property — only holds a "secured claim" to the extent of the value of the property, and holds an "unsecured claim" for the excess value of the mortgage. Id. at 328, 113 S.Ct. 2106. Because § 1322(b)(2) only protects the rights of "holders of secured claims," they maintained that only the secured portion of the mortgage was entitled to protection and, therefore, that the value of the mortgage could be effectively reduced to its secured value. Id.

The Supreme Court rejected this approach of bifurcation and stripping down, primarily because the debtors' argument failed to consider the fact that § 1322(b)(2) "focuses on the modification of the `rights of holders,'" id., not the status of claims. Although the Court found that it was proper to look to § 506(a) "for a judicial valuation of the collateral to determine the status of the [creditor's] claim," id., because the creditor's claim was partially secured, the creditor was "still the `holder' of a `secured claim.'" Id. at 329, 113 S.Ct. 2106. Therefore, it was entitled to the protections of the antimodification clause.

The Court's interpretation of § 1322(b)(2) is worth considering in detail. The Fifth Circuit, in the decision reviewed by Nobelman, had concluded that "section 1322(b)(2...