Nobelman v. American Savings Bank

• Court: U.S. Supreme Court
• Writing for the Court: THOMAS, J., delivered the opinion for a unanimous Court. STEVENS
• Citation: Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993)
• Decision Date: 01 June 1993
• Docket Number: No. 92-641,92-641
• Parties: Leonard NOBELMAN, et ux., Petitioners, v. AMERICAN SAVINGS BANK et al

508 U.S. 324

113 S.Ct. 2106

124 L.Ed.2d 228

Leonard NOBELMAN, et ux., Petitioners,

v AMERICAN SAVINGS BANK et al.

No. 92-641.

Argued April 19, 1993.

Decided June 1, 1993.

Syllabus ^*

In their debt repayment plan under Chapter 13 of the Bankruptcy Code, petitioners relied on 11 U.S.C. § 506(a)—which provides, inter alia, that an allowed claim secured by a lien on the debtor's property "is a secured claim to the extent of the value of [the] property," and "is an unsecured claim" to the extent it exceeds that value—to propose that the mortgage on their principal residence in Texas be reduced from $71,335 to the residence's $23,500 fair market value. Respondents, the mortgage lender and the Chapter 13 trustee, objected to the plan, arguing that the proposed bifurcation of the lender's claim into a secured claim for $23,500 and an effectively worthless unsecured claim modified its rights as a homestead mortgagee in violation of § 1322(b)(2), which, among other things, allows a plan to "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." The Bankruptcy Court agreed with respondents and denied confirmation of the plan. The District Court and the Court of Appeals affirmed.

Held: Section 1322(b)(2) prohibits a Chapter 13 debtor from relying on § 506(a) to reduce an undersecured homestead mortgage to the fair market value of the mortgaged residence. Although petitioners were correct in looking to § 506(a) for a judicial valuation of their residence to determine the status of the lender's secured claim, that valuation does not necessarily limit the lender's "rights [as a claim] holde[r]," which are the focus of § 1322(b)(2)'s protection. In the absence of a controlling Bankruptcy Code definition, it must be presumed that Congress left the determination of property "rights" in estate assets to state law. Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136. The mortgagee's "rights," therefore, are reflected in the relevant mortgage instruments, which are enforceable under Texas law. Those rights include, among others, the right to repayment of the principal in monthly installments over a fixed term at specified adjustable interest rates, and they are protected from modification by § 1322(b)(2). That section's "other than" exception cannot be read to protect only that subset of allowed "secured claims," determined by application of § 506(a), that are secured by a lien on the debtor's home. Rather, the more reasonable interpretation is to read "a claim secured only by a [homestead lien]" as referring to the lienholder's entire claim, including both its secured and unsecured components, since it would be impossible to reduce petitioners' outstanding mortgage principal to $23,500 without modifying the mortgagee's contractual rights as to interest rates, monthly payment amounts, or repayment term. Pp. ____.

968 F.2d 483 (CA5 1992), affirmed.

THOMAS, J., delivered the opinion for a unanimous Court. STEVENS, J., filed a concurring opinion.

Philip Palmer, Dallas, TX, for petitioners.

Michael J. Schroeder, Dallas, TX, for respondents.

Justice THOMAS delivered the opinion of the Court.

This case focuses on the interplay between two provisions of the Bankruptcy Code. The question is whether § 1322(b)(2) prohibits a Chapter 13 debtor from relying on § 506(a) to reduce an undersecured homestead mortgage to the fair market value of the mortgaged residence. We conclude that it does and therefore affirm the judgment of the Court of Appeals.

I

In 1984, respondent American Savings Bank loaned petitioners Leonard and Harriet Nobelman $68,250 for the purchase of their principal residence, a condominium in Dallas, Texas. In exchange, petitioners executed an adjustable rate note payable to the bank and secured by a deed of trust on the residence. In 1990, after falling behind in their mortgage payments, petitioners sought relief under Chapter 13 of the Bankruptcy Code. The bank filed a proof of claim with the Bankruptcy Court for $71,335 in principal, interest, and fees owed on the note. Petitioners' modified Chapter 13 plan valued the residence at a mere $23,500—an uncontroverted valuation—and proposed to make payments pursuant to the mortgage contract only up to that amount (plus prepetition arrearages). Relying on § 506(a) of the Bankruptcy Code,¹ petitioners proposed to treat the remainder of the bank's claim as unsecured. Under the plan, unsecured creditors would receive nothing.

The bank and the Chapter 13 trustee, also a respondent here, objected to petitioners' plan. They argued that the proposed bifurcation of the bank's claim into a secured claim for $23,500 and an effectively worthless unsecured claim modified the bank's rights as a homestead mortgagee, in violation of 11 U.S.C. § 1322(b)(2). The Bankruptcy Court agreed with respondents and denied confirmation of the plan. The District Court affirmed, In re Nobelman, 129 B.R. 98 (ND Tex.1991), as did the Court of Appeals, 968 F.2d 483 (1992). We granted certiorari to resolve a conflict among the Courts of Appeals.² 506 U.S. ----, 113 S.Ct. 654, 121 L.Ed.2d 580 (1992).

II

Under Chapter 13 of the Bankruptcy Code, individual debtors may obtain adjustment of their indebtedness through a flexible repayment plan approved by a bankruptcy court. Section 1322 sets forth the elements of a confirmable Chapter 13 plan. The plan must provide, inter alia, for the submission of a portion of the debtor's future earnings and income to the control of a trustee and for supervised payments to creditors over a period not exceeding five years. See 11 U.S.C. §§ 1322(a)(1) and 1322(c). Section 1322(b)(2), the provision at issue here, allows modification of the rights of both secured and unsecured creditors, subject to special protection for creditors whose claims are secured only by a lien on the debtor's home. It provides that 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, 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 added).

The parties agree that the "other than" exception in § 1322(b)(2) proscribes modification of the rights of a homestead mortgagee. Petitioners maintain, however, that their Chapter 13 plan proposes no such modification. They argue that the protection of § 1322(b)(2) applies only to the extent the mortgagee holds a "secured claim" in the debtor's residence and that we must look first to § 506(a) to determine the value of the mortgagee's "secured claim." Section 506(a) provides that an allowed claim secured by a lien on the debtor's property "is a secured claim to the extent of the value of [the] property"; to the extent the claim exceeds the value of the property, it "is an unsecured claim." ³ Petitioners contend that the valuation provided for in § 506(a) operates automatically to adjust downward the amount of a lender's undersecured home mortgage before any disposition proposed in the debtor's Chapter 13 plan. Under this view, the bank is the holder of a "secured claim" only in the amount of $23,500—the value of the collateral property. Because the plan proposes to make $23,500 worth of payments pursuant to the monthly payment terms of the mortgage contract, petitioners argue, the plan effects no alteration of the bank's rights as the holder of that claim. Section 1322(b)(2), they assert, allows unconditional modification of the bank's leftover "unsecured claim."

This interpretation fails to take adequate account of § 1322(b)(2)'s focus on "rights." That provision does not state that a plan may modify "claims" or that the plan may not modify "a claim secured only by" a home mortgage. Rather, it focuses on the modification of the "rights of holders " of such claims. By virtue of its mortgage contract with petitioners, the bank is indisputably the holder of a claim secured by a lien on petitioners' home. Petitioners were correct in looking to § 506(a) for a judicial valuation of the collateral to determine the status of the bank's secured claim. It was permissible for petitioners to seek a valuation in proposing their Chapter 13 plan, since § 506(a) states that "[s]uch value shall be determined . . . in conjunction with any hearing . . . on a plan affecting such creditor's interest." But even if we accept petitioners' valuation, the bank is still the "holder" of a "secured claim," because petitioners' home retains $23,500 of value as collateral. The portion of the bank's claim that exceeds $23,500 is an "unsecured claim componen[t]" under § 506(a), United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 239, n. 3, 109 S.Ct. 1026, 1030 n. 3, 103 L.Ed.2d 290 (1989) (internal quotation marks omitted); however, that determination 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.

The term "rights" is nowhere defined in the Bankruptcy Code. In the absence of a controlling federal rule, we generally assume that Congress has "left the determination of property rights in the assets of a bankrupt's estate to state law," since such "[p]roperty interests are created and defined by state law." Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). See also Barnhill v. Johnson, 503 U.S. ----, ----, 112 S.Ct. 1386, 1389, 118 L.Ed.2d 39 (1992). Moreover, we have specifically recognized that "[t]he justifications for application of state law are not limited to ownership interests," but "apply with equal force to security interests, including the interest of a mortgagee." Butner, supra, at 55, 99 S.Ct., at 918. The bank's "rights," therefore, are reflected in the relevant mortgage...