Lomas Mortg., Inc. v. Louis

• Decision Date: 07 March 1996
• Docket Number: No. 95-1956,95-1956
• Citation: 82 F.3d 1
• Parties: , 35 Collier Bankr.Cas.2d 1215, 28 Bankr.Ct.Dec. 1246, Bankr. L. Rep. P 76,925 LOMAS MORTGAGE, INC., Appellant, v. Esperandieu & Antonine LOUIS, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1

82 F.3d 1

64 USLW 2663, 35 Collier Bankr.Cas.2d 1215,

28 Bankr.Ct.Dec. 1246, Bankr. L. Rep. P 76,925

LOMAS MORTGAGE, INC., Appellant, v. Esperandieu & Antonine LOUIS, Appellees.

No. 95-1956.

United States Court of Appeals, First Circuit.

Heard March 7, 1996.

Decided April 18, 1996.

Appeal from the United States District Court for the District of Massachusetts [Hon. Edward F. Harrington, U.S. District Judge].

John J. Monaghan, with whom Deborah Paige Stone and Sherburne, Powers & Needham, P.C. were on brief, Boston, MA, for appellant Lomas Mortgage, Inc.

Gary Klein, Boston, MA, with whom National Consumer Law Center, Joseph G. Albiani and Joseph G. Albiani and Associates were on brief, Winchester, MA, for appellees Esperandieu and Antonine Louis.

Before LYNCH, Circuit Judge, ALDRICH and BOWNES, Senior Circuit Judges.

LYNCH, Circuit Judge.

At issue is the important question of whether § 1322(b)(2) of the Bankruptcy Code, 11 U.S.C. § 1322(b)(2), prevents Chapter 13 debtors from "stripping down" their primary residence mortgages when the debtors reside in a multi-family house. "Stripping down" would advantage such homeowners by permitting them to cap the dollar amount of the security interest in the home to the home's actual value rather than the higher amount of the note itself. The difference would be treated as unsecured debt. That advantage is denied to resident single-family homeowners by § 1322(b)(2).

This case thus raises the question of whether the "strip down" ¹ protections which Congress denied to owners residing in single-family homes, in order to encourage the flow of residential mortgage funds, are nonetheless available to owner occupants of multi-family housing. We hold that Congress intends exactly such different results and that the antimodification provision of § 1322(b)(2) does not bar modification of a secured claim on a multi-unit property in which one unit is the debtor's principal residence and the security interest extends to the other income-producing units.

Esperandieu and Antonine Louis own a three-family home at 221 Spring Street in Brockton, Massachusetts. Lomas Mortgage, Inc. holds the mortgage on the property. The mortgage secures a note executed on February 19, 1987, for $159,300. The mortgage is in the standard FNMA form for single-family dwellings, with the standard FNMA one- to four-family rider, including an assignment of rents. The Louises hold a one-half interest in the property. The other half is owned by Mr. Louis's brother, who occupies a second unit. The third unit is leased to tenants.

Between the time of the 1987 mortgage and the filing of the bankruptcy petition on January 22, 1995, Massachusetts suffered a severe recession. The recession resulted in a general decline in property values, in unemployment, and other harsh realities. The Louises' neighborhood in Brockton was not immune and foreclosures in the neighborhood became common. Eventually, the Louises themselves could not meet their mortgage payments. They defaulted on the note held by Lomas, and Lomas started foreclosure proceedings. The Louises filed a voluntary petition under Chapter 13, and the foreclosure was stayed.

The Louises then moved to bifurcate or "strip down" Lomas's claim into a secured claim for the actual value of the property, agreed to be $80,000, and an unsecured claim for the balance, citing 11 U.S.C. § 506(a). ² The Louises could not take advantage of § 506(a), however, if Lomas's security for the note extended only to real property that is the Louises' principal residence. That is because § 1322(b)(2), which governs Chapter 13 plans, provides:

(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) (emphasis supplied).

The Supreme Court has held that the "other than" language of § 1322(b)(2), called an "antimodification provision," In re Hammond, 27 F.3d 52, 55 (3d Cir.1994), bars bifurcation where the creditor's secured claim "is secured only by a lien on the debtor's principal residence." Nobelman v. American Sav. Bank, 508 U.S. 324, 332, 113 S.Ct. 2106, 2111, 124 L.Ed.2d 228 (1993). In Nobelman, the Supreme Court addressed a Chapter 13 plan to modify a home mortgage lender's secured claim on joint debtors' owner-occupied condominium. The debtors owed $71,335 in principal, interest, and fees under a note payable to the lender and secured by a deed of trust on the condominium. The debtors' Chapter 13 plan proposed to make monthly payments required by the note up to $23,500, the value of the residence, and, relying on § 506(a), to treat the remainder of the lender's claim as unsecured. Id. at 326, 113 S.Ct. at 2109. The lender objected to the plan, asserting that, § 506(a) notwithstanding, § 1322(b)(2) prohibited the debtors from modifying its rights under the note secured by the deed of trust on the condominium. Although noting that the debtors were correct to seek valuation pursuant to § 506(a) in order to determine whether the lender in fact held a secured claim, the Court held that the valuation determination under § 506(a) "does not necessarily mean that the 'rights' the bank enjoys as a mortgagee, which are protected by § 1322(b)(2), are limited by the valuation of its secured claim [under § 506(a) ]." Id. at 329, 113 S.Ct. at 2110.

Determining that the term "rights" in § 1322(b)(2) refers to rights reflected in the relevant mortgage instrument enforceable by state law, the Court held that § 1322(b)(2) prohibited the debtor from bifurcating the lender's claim into secured and unsecured portions. Id. at 331-32, 113 S.Ct. at 2109-11. Because the lender's contractual rights were contained in a unitary note, it would be impossible for the debtor to modify the rights of the lender as to the unsecured portion of its claim without also modifying the terms of the secured component. Id. Thus, the court held, "to give effect to § 506(a)'s valuation and bifurcation of secured claims through a Chapter 13 plan in the manner petitioners propose would require a modification of the rights of the holder of the security interest." Id. at 332, 113 S.Ct. at 2111. Thus, Nobelman provides that if a lender's claim "is secured only by a lien on the debtor's principal residence," id., bifurcation under § 506(a) will, in most cases, be prohibited.

Nobelman, however, did not address the question of what secured claims would be considered "secured only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)(2). Nobelman noted that one of the purposes of the provision was to give special protection to home lenders in order to encourage the flow of capital into the home lending market. See Nobelman, 508 U.S. at 332, 113 S.Ct. at 2111-12 (Stevens, J., concurring) (citing Grubbs v. Houston First Am. Sav. Ass'n, 730 F.2d 236, 245-46 (5th Cir.1984)). The precise question of whether home lenders whose security interest extended beyond the principal residence to other property or other income-producing components of the principal residence could be considered to have claims secured "only by a security interest in real property that is the debtor's principal residence" was not raised in Nobelman. This case raises that question.

In their motion before the bankruptcy court, the Louises argued that the antimodification provision of § 1322(b)(2), as interpreted by Nobelman, did not reach the security interest Lomas had on 221 Spring Street because Lomas's security interest extended to the entire property, including the income-producing components. Lomas objected, arguing that § 1322(b)(2)'s antimodification provision applied because its security interest was only on 221 Spring Street and the property included the Louises' principal address. The bankruptcy court agreed with the Louises and allowed the motion to bifurcate. The district court affirmed the order and Lomas appeals. Review of the bankruptcy court's conclusion of law is de novo. See In re Winthrop Old Farm Nurseries, Inc., 50 F.3d 72, 73 (1st Cir.1995).

The Louises' "principal residence" is 221 Spring Street. Were the property a single-family house, § 1322(b)(2)'s antimodification provision surely would apply and bar bifurcation, assuming Lomas's security interest did not extend to any other property. See, e.g., In re Hammond, 27 F.3d 52 (3d Cir.1994) (note secured by home and by personal property within the home is outside scope of antimodification provision); see also 5 Collier on Bankruptcy p 1322.06[a], at 1322-21 to 1322-23 (Lawrence P. King ed., 15th ed. 1995) (a claim secured by any other real property or by personal property of the estate or debtor, or by personal property of another may be modified by the Chapter 13 plan).

Starting, as they should, with the language of § 1322(b)(2), see Consumer Prod. Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 2054, 64 L.Ed.2d 766 (1980) ("the starting point for interpreting a statute is the language of the statute itself"), Lomas and the Louises present competing constructions of the statutory language. Lomas argues that the term "only" modifies "by a security interest in real property" and the term "that is the debtor's principal residence" further modifies "real property." Lomas's reading results in § 1322(b)(2) applying when (1) the security interest is only in real property (as opposed to personal, intangible or other non-real property) and (2) the real property is the "debtor's principal residence." Under this reading, there is no need that the real property be "only" the debtor's principal residence.

The Louises, in contrast, argue (1) that "only" modifies the entire phrase "by a security interest in real...