Wilson v. Commonwealth Mortg. Corp.

• Decision Date: 26 January 1990
• Docket Number: No. 89-1746,89-1746
• Parties: , 22 Collier Bankr.Cas.2d 561, 20 Bankr.Ct.Dec. 225, Bankr. L. Rep. P 73,231 Frank and Arlene WILSON v. COMMONWEALTH MORTGAGE CORPORATION, Appellant. . Submitted Under Third Circuit Rule 12(6)
• Court: U.S. Court of Appeals — Third Circuit

Page 123

895 F.2d 123

58 USLW 2522, 22 Collier Bankr.Cas.2d 561,

20 Bankr.Ct.Dec. 225,

Bankr. L. Rep. P 73,231

Frank and Arlene WILSON v. COMMONWEALTH MORTGAGE CORPORATION, Appellant.

No. 89-1746.

United States Court of Appeals, Third Circuit.

Submitted Under Third Circuit Rule 12(6)

Jan. 26, 1990.

Decided Feb. 9, 1990.

Lawrence T. Phelan, Federman & Phelan, Philadelphia, Pa., for appellant.

Michal Fox Mivasair, Community Legal Services, Inc., Philadelphia, Pa., for appellees.

Before SLOVITER, HUTCHINSON, and COWEN, Circuit Judges.

OPINION OF THE COURT

SLOVITER, Circuit Judge.

Commonwealth Mortgage Corporation has appealed the order of the district court that Commonwealth's allowed secured claim against debtors Frank and Arlene Wilson was limited to the value of the debtors' home and certain items of personal property, that the remainder of its claim was unsecured, and that Commonwealth's rights as to the unsecured claim could be modified without violating 11 U.S.C. Sec. 1322(b)(2). We will affirm on alternative grounds. We hold (1) that the unsecured portion of Commonwealth's claim may be modified and (2) that Commonwealth's claim was secured by personal property as well as by the debtors' residence and, therefore, the anti-modification provision of section 1322 does not apply.

I.

The Wilsons financed the purchase of their home in 1983 with a loan from Commonwealth's predecessor, and executed a mortgage agreement covering not only the real estate but also "any and all appliances, machinery, furniture and equipment (whether fixtures or not) of any nature whatsoever now or hereafter installed in or upon said premises."

On June 27, 1988, the Wilsons filed a petition under Chapter 13 of the Bankruptcy Code. Commonwealth filed a proof of secured claim for $38,176.75, which was the balance the debtors owed Commonwealth. The debtors filed an adversary proceeding seeking to limit Commonwealth's allowed secured claim to the fair market value of the collateral, which was their principal residence. The parties have stipulated that the fair market value of the property securing the lien is $22,000.

The bankruptcy court agreed with the debtors' position and entered an order that limited Commonwealth's allowed secured claim to $22,000 plus the value of the debtors' appliances and furniture as scheduled. Commonwealth appealed to the district court and it affirmed. Commonwealth now appeals to us. We have jurisdiction pursuant to 28 U.S.C. Sec. 158(d). The issue before the court is one of statutory construction and our review is plenary. See Matter of Roach, 824 F.2d 1370, 1372 (3d Cir.1987).

II.

Commonwealth argues that resolution of its appeal requires an examination of the relationship between 11 U.S.C. Sec. 506(a), a generally applicable provision limiting a creditor's secured claim to the value of the collateral, and 11 U.S.C. Sec. 1322(b)(2), a provision applicable only to Chapter 13 covering modification of the rights of holders of secured claims.

Section 506(a), which we have held applies to Chapter 13 proceedings, see In re Lewis, 875 F.2d 53, 55 (3d Cir.1989), defines allowed secured and allowed unsecured claims.

An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim.

11 U.S.C. Sec. 506(a). The Supreme Court has recently explained that section 506(a) "provides that a claim is secured only to the extent of the value of the property on which the lien is fixed; the remainder of that claim is considered unsecured." United States v. Ron Pair Enterprises, Inc., --- U.S. ----, 109 S.Ct. 1026, 1029, 103 L.Ed.2d 290 (1989).

Chapter 13 of the Bankruptcy Code permits debtors to reorganize their affairs to repay their debts through future income rather than having to resort to a liquidation of their assets. Its purpose " 'is to enable an individual, under court supervision and protection, to develop and perform under a plan for the repayment of his debts over an extended period' of from three to five years." Matter of Roach, 824 F.2d 1370, 1372 (3d Cir.1987) (quoting H.R.Rep. 595, 95th Cong., 1st Sess. 118 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 6079).

Section 1322 covers debtors' plans in Chapter 13 proceedings. Subsection (b) thereof lists ten provisions that debtors may, but are not required to, include in their plans. Subsection (b)(2), which is relevant here, 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. Sec. 1322(b)(2) (emphasis added).

It is Commonwealth's position that section 1322(b)(2) was designed to protect residential mortgagees in Chapter 13 cases and that the express terms of that section prohibit any modification of the mortgagee's rights. Commonwealth construes section 1322(b)(2) as restricting the general provisions of section 506(a) permitting modification. It thus argues that the determination by the district court that the portion of Commonwealth's claim in excess of the value of the collateral is unsecured and can be modified violates the anti-modification provision of section 1322(b)(2).

The bankruptcy court did not reach this issue. Instead, it looked to the mortgage agreement which provided that a security interest was being taken in personal property as well as in the debtors' home and concluded that Commonwealth's claim was not "secured only by a security interest in real property that is the debtor's principal residence," as clearly required by section 1322. Therefore, the bankruptcy court held that the section's prohibition on modification did not apply. ¹

On appeal, the district court affirmed the bankruptcy court on two grounds. It rejected Commonwealth's argument based on section 1322(b)(2) and held instead that any portion of a claim that is unsecured under section 506(a) may be modified under section 1322(b)(2). It reasoned that "[u]nder the plain meaning of Sec. 1322(b)(2), a creditor's rights may be modified unless the creditor's claim is both (1) a secured claim and (2) one secured only by a security interest in real property that is the debtor's principal residence. Neither prerequisite is satisfied here." App. at 25 (emphasis in original). It continued, a "secured claim" for purposes of section 1322(b)(2) "means what 11 U.S.C. Sec. 506(a) says it means: that portion of the claim which does not exceed the value of the collateral." Id. Therefore, it concluded that in this case only $22,000 plus the value of the furniture and appliances is "secured" and the remainder may be modified. The district court also agreed with the bankruptcy court that Commonwealth's claim was secured by personal property as well as the debtors' residence, and held that therefore the protection to home mortgagees provided by section 1322 does not apply here.

III.

Bankruptcy and district courts in this circuit are divided over whether section 1322 precludes modification of an undersecured mortgage debt. Compare In re Harris, 94 B.R. 832 (D.N.J.1989) (Sec. 1322 prohibits modification only to extent claim is actually secured); In re Jablonski, 88 B.R. 652 (E.D.Pa.1988) (same) with In re Hynson, 66 B.R. 246 (Bankr.D.N.J.1986) (claim secured by residence cannot be modified even where the amount of the claim exceeds the value of the collateral); Matter of Smith, 63 B.R. 15 (Bankr.D.N.J.1986) (same). The Ninth Circuit has addressed the issue directly, holding that section 1322(b)(2) does not bar bifurcation of the claim of an undersecured mortgage into secured and unsecured portions under section 506 and that, accordingly, the creditor's rights under the unsecured portion can be modified. In re Hougland, 886 F.2d 1182 (9th Cir.1989). See also 5 Collier on Bankruptcy, p 1300.73 at 1300-148; p 1322.06 at 1322-15 (L. King 15th ed.1989) (hereinafter Collier ) (claim may be bifurcated and unsecured portion modified).

This court's discussion of the issue in Gaglia v. First Federal Sav. & Loan Ass'n, 889 F.2d 1304 (3d Cir.1989), although not the holding of the case, suggested that when called upon to deal with the issue, we would be likely to agree with the Ninth Circuit. In Gaglia, we held that the lien avoidance mechanism of section 506(a) was applicable in a Chapter 7 proceeding even when the property was not administered in the bankruptcy proceeding. In response to the creditor's argument that this holding would discourage the use of Chapter 13 because a provision thereof prohibits modification of a claim secured only by the debtor's residence, we stated:

This limitation, however, operates only against secured claims.... Whether the plan complies with Sec. 1322(b)(2) depends on the extent to which the claim is secured, an issue that is determined by reference to Sec. 506. See In re Lewis, 875 F.2d 53, 56 (3d Cir.1989) (in Chapter 13 proceeding, claim secured only by security interest in residence may be voided to extent it is not an allowed secured claim as defined by Sec. 506); In re Jablonski, 88 B.R. 652, 657 (E.D.Pa.1988); 5 Collier on Bankruptcy p 1322.06[a] at 1322-15 (L. King 15th ed.1989). The prohibition in Sec. 1322(b)(2) therefore operates against the same portion of the creditor's claim that remains intact even when Sec. 506 is applied in this case [i.e. the secured portion].

In re Gaglia, 889 F.2d at 1311.

To the extent that the issue remains open, we hold today...