Minnesota Housing Finance Agency v. Schmidt et al
Filing
16
MEMORANDUM OPINION AND ORDER Affirming the Bankruptcy Court's Order Confirming Chapter 13 Plan [Docket No. 1, Attach. 8], and Amended Order Regarding Motion to Value Claim of MHFA [Docket No. 1, Attach. 9]; MHFA's Appeals [Docket No. 1, Attach. 10] and [Docket No. 10] are DENIED (Written Opinion). Signed by Judge Ann D. Montgomery on 06/07/2013. (TLU)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
In re: Jamey Albert Schmidt and
Keeley Ariel Schmidt,
Bky. No. 12-33918
Chapter 13 Bankruptcy
Debtors.
_________________________________
Minnesota Housing Finance Agency,
Appellant,
MEMORANDUM OPINION
AND ORDER
Civil No. 13-434 ADM
v.
Jamey Albert Schmidt and
Keeley Ariel Schmidt,
Appellees.
______________________________________________________________________________
Mychal A. Bruggeman, Esq., Mackall, Crounse & Moore, PLC, Minneapolis, MN, on behalf of
Appellant.
Timothy C. Theisen, Esq., Timothy Casey Theisen PA, Anoka, MN, on behalf of Appellees.
______________________________________________________________________________
I. INTRODUCTION
Appellant Minnesota Housing Finance Agency (“MHFA”) appeals the United States
Bankruptcy Court’s Orders: (1) valuing MHFA’s claim [Docket No. 1, Attach. 9] and (2)
confirming the modified Chapter 13 plan of Appellees Jamey Albert Schmidt and Keeley Ariel
Schmidt (“Debtors”) [Docket No. 1, Attach. 8].1 MHFA is the holder of a third-priority
mortgage against the Debtors’ principal residence. The value of the first mortgage exceeds the
value of the Debtors’ home, leaving no equity to support MHFA’s mortgage. The Bankruptcy
1
MHFA filed separate appeals for each Order, resulting in two district court cases, which
are docketed as Civ. No. 13-433 ADM and Civ. No. 13-434 ADM. The appeals are based on the
same issue of law and were consolidated under Civ. No. 13-434 ADM at the stipulated request of
the parties. See Order to Consolidate Cases, March 8, 2013 [Docket No. 6]. Unless otherwise
specified, all docket references are to Civ. No. 13-434 ADM.
Court Orders permit the Debtors to treat MHFA as an unsecured creditor under the Debtors’
modified Chapter 13 plan and to avoid, or “strip off,” MHFA’s mortgage upon the Debtors’
successful completion of their Chapter 13 plan. MHFA appeals, arguing the Chapter 13 plan
violates the Bankruptcy Code because MHFA’s claim is secured solely by a lien in the Debtors’
residence, and 11 U.S.C. § 1322(b)(2) protects such claims from modification. For the reasons
set forth below, the Orders of the Bankruptcy Court are affirmed.
II. BACKGROUND
The facts in this case are undisputed by the parties, who agree this appeal presents a
question of law only.
On June 29, 2012, Debtors filed for relief under Chapter 13 of the Bankruptcy Code.
Bankruptcy Petition [Docket No. 1, Attach. 1]. The Debtors’ bankruptcy schedules show their
home is encumbered by three mortgages. Id. at 19 (Bankruptcy Schedule D). The senior
mortgage is held by U.S. Bank Home Mortgage in the amount of $154,578.20. Id. This amount
exceeds the home’s appraised value of $140,000. See id. The second priority mortgage, also
held by U.S. Bank Home Mortgage, is for $39,451.99. Id. MHFA holds the third priority
mortgage in the amount of $26,469.31. Id.; Aff. of Mary Puertos [Docket No. 1, Attach. 6] at
28-29 (“Puertos Aff.”) ¶ 1, Exs. A-C. The Debtors’ home is the only collateral securing the
indebtedness owed to MHFA. Puertos Aff. ¶ 5.
On November 28, 2012, the Debtors filed a motion (the “Motion to Value”) in
bankruptcy court seeking: a determination that there was no equity in their home to support
MHFA’s lien; reclassification of MHFA’s claim from a secured claim to a non-priority
unsecured claim; and avoidance of MHFA’s lien upon the Debtors’ successful completion of
2
their Chapter 13 plan. See generally Mot. Value [Docket No. 1, Attach. 5]. The Debtors also
filed a modified Chapter 13 plan (the “Modified Plan”) that treats MHFA as an unsecured
creditor and requires MHFA’s mortgage lien be removed from the home upon the Debtors’
bankruptcy discharge. Modified Plan [Docket No. 1, Attach. 4] ¶ 13.C. MHFA objected to the
Motion to Value and to the Modified Plan. See MHFA Resp. Debtors’ Mot. Value [Docket No.
1, Attach. 7]; MHFA Obj. Debtors’ Modified Chapter 13 Plan [Docket No. 1, Attach. 6].
On January 10, 2013, the Bankruptcy Court held a hearing on the Motion to Value and
the Modified Plan. See Appellant’s Br. [Docket No. 5] ADD-7 (Hr’g Tr.). At the hearing,
Bankruptcy Judge Dennis D. O’Brien voiced his personal agreement with MHFA’s position that
its lien should not be stripped. Hr’g Tr. at ADD-8—ADD-11. Nevertheless, Judge O’Brien
stated his legal obligation was to follow the Eighth Circuit Bankruptcy Appellate Panel’s
(“BAP”) decision in Fisette v. Keller (In re Fisette), 455 B.R. 177 (B.A.P. 8th Cir. 2011), which
held that a bankruptcy debtor may strip off a lien on the debtor’s primary residence if there is no
equity in the residence to support the lien. See id. at ADD-10. Accordingly, Judge O’Brien
granted the Motion to Value and confirmed the Modified Plan.2 Id. at ADD-11. MHFA appeals
both rulings.
III. DISCUSSION
A. Jurisdiction, Standard of Review
A district court has jurisdiction over appeals from final orders of bankruptcy judges. 28
U.S.C. § 158(a)(1). An order confirming a Chapter 13 plan is a final, appealable order. In re
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The Order confirming the Modified Plan was signed by Chief Bankruptcy Judge
Gregory F. Kishel, who is assigned to the Debtors’ bankruptcy case but did not preside over the
hearing due to a standing conflict of interest with cases involving U.S. Bank.
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Zahn, 526 F.3d 1140, 1143 (8th Cir. 2008). Rulings leading to a confirmation order are also
reviewable in conjunction with the appeal of a confirmation order. Id. A district court reviews a
bankruptcy court’s legal conclusions de novo. In re MBA Poultry, LLC, 291 F.3d 528, 533 (8th
Cir. 2002).
B. Appeal
The single legal issue presented by MHFA’s appeals is whether a Chapter 13 debtor can
strip off a lien on the debtor’s principal residence if no equity exists to support the lien. The
issue “turns on the interplay between 11 U.S.C. § 506(a)(1) . . . and the anti-modification
provision in § 1322(b)(2).” Fisette v. Keller (In re Fisette), 695 F.3d 803, 804 n.2 (8th Cir.
2012).
1. Section 506(a)(1)
Section 506(a)(1) of the Bankruptcy Code divides creditors’ claims against a debtor into
“secured” and “unsecured” claims based on the value of the underlying collateral. Harmon v.
United States, 101 F.3d 574, 578 (8th Cir. 1996). Under § 506(a)(1), an allowed claim secured
by a lien on the debtor’s property “is a secured claim to the extent of the value of [the] creditor’s
interest in the estate’s interest in such property . . . and is an unsecured claim to the extent that
the value of [the] creditor’s interest . . . is less than the amount of such allowed claim.” 11
U.S.C. § 506(a)(1).
In other words, a claim secured by a lien is a “secured claim” under § 506(a) “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 Enters., Inc., 489 U.S. 235, 239 (1989). Thus,
“secured claim” is a term of art under the Bankruptcy Code, and not every claim that is secured
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by a lien on collateral is a “secured claim” in bankruptcy. Zimmer v. PSB Lending Corp. (In re
Zimmer), 313 F.3d 1220, 1223 (9th Cir. 2002); see also In re Sanders, 202 B.R. 986, 988 (Bankr.
D. Neb. 1996) (distinguishing “secured claim” in the literal sense from “secured claim” in the
bankruptcy code sense). Here, the parties do not dispute that MHFA holds only an unsecured
claim under § 506(a)(1) because the value of the Debtors’ home is less than the amount owed on
the first mortgage, and thus no value exists to support MHFA’s lien.
2. Section 1322(b)(2)
Section 1322(b)(2) of the Bankruptcy Code allows a debtor’s Chapter 13 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, 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). MHFA argues its rights may not be modified under § 1322(b)(2)
because its claim is secured only by a security interest in the Debtors’ principal residence, and
thus the claim qualifies for the exception to modification found in the “other than” clause of §
1322(b)(2). MHFA further contends its rights are protected from modification regardless of the
value of the Debtors’ residence, because the protection given to residential mortgagees under §
1322(b)(2) is not conditioned upon a determination that the mortgagee holds a secured claim
under § 506(a). Debtors respond that a residential mortgagee must be the holder of a secured
claim under § 506(a) to qualify for the exception to modification under § 1322(b)(2). Debtors
therefore contend that MHFA, which holds only an unsecured claim, is not protected under the
statute.
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3. Supreme Court’s Nobelman Decision
The interplay of § 506(a) and § 1322(b)(2) was examined by the Supreme Court in
Nobelman v. Am. Sav. Bank, 508 U.S. 324 (1993). The issue in Nobelman was whether the
debtors’ Chapter 13 plan could modify the claim of a bank holding a partially secured junior
mortgage on the debtors’ homestead. The Chapter 13 plan proposed to bifurcate the
undersecured claim into secured and unsecured components under § 506(a), and to pay the bank
only the amount of the secured claim, thereby stripping down the mortgage to its secured value.
Id. at 326. The debtors argued the bank’s claim could be modified in this manner because §
1322(b)(2)’s “other than” clause, also known as the anti-modification provision, applied only to
the secured portion of the undersecured mortgage, and not to the bank’s entire claim. Id. at 328.
The Fifth Circuit had rejected the debtors’ argument by holding that the bank’s rights as a
residential mortgagee could not be modified. See Nobelman v. Am. Sav. Bank (In re
Nobelman), 968 F.2d 483, 489 (5th Cir. 1992). The Fifth Circuit viewed § 506(a) and §
1332(b)(2) as being in conflict, and concluded that the more specific provision of § 1332(b)(2)
should prevail over the more general provision of § 506(a). Id. at 488.
The Supreme Court affirmed the holding that § 1322(b)(2) prohibited the debtors from
stripping down the partially secured lien, but the high court used a different rationale to arrive at
this conclusion. See Bartee v. Tara Colony Homeowners Ass’n (In re Bartee), 212 F.3d 277, 286
(5th Cir. 2000) (stating the Supreme Court rejected the Fifth Circuit’s reasoning that § 506(a)
was nullified by § 1322(b)(2), but nevertheless agreed with the end result).
The Supreme Court began its analysis of § 1322(b)(2) by observing that the statute’s
prohibition on modification does not apply to claims, but rather to the “rights of holders” of
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secured claims. Nobelman, 508 U.S. at 328 (emphasis in original). The Court next determined
the bank was the holder of a claim secured by a lien on the debtors’ home, and was also the
holder of a secured claim under § 506(a):
By virtue of its mortgage contract with [debtors], the bank is
indisputably the holder of a claim secured by a lien on [the debtors’]
home. [Debtors] 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 [debtors] to seek a valuation in
proposing their Chapter 13 plan, since § 506(a) states that “such
value shall be determined . . . in conjunction with any hearing . . . on
a plan affecting such creditor’s interest.” But even if we accept
petitioner’s valuation, the bank is still the “holder” of a “secured
claim,” because [debtors’] home retains $23,500 of value as
collateral. The portion of the bank’s claim that exceeds $23,500 is an
“unsecured claim component” under § 506(a); 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.
Id. at 328-29 (internal citations and alterations omitted).
The Supreme Court proceeded to analyze whether § 1322(b)(2)’s exception to
modification was limited to the bank’s rights in the secured component of the claim described in
the “other than” clause, or whether the exception also applied to the unsecured component. Id.
at 330-32. The debtors argued that the “other than” clause must be read to refer to its immediate
antecedent, “secured claims.” Id. at 330. Under this interpretation, the protection in the “other
than” clause was limited to the portion of the homestead lien that was a “secured claim” as
determined under § 506(a). Id. The Supreme Court rejected this argument, noting that
“Congress chose to use the phrase ‘claim secured . . . by’ in § 1322(b)(2)’s exception, rather than
repeating the term of art ‘secured claim’” used in the preceding clause. Id. at 331. The word
“claim” is broadly defined by the Bankruptcy Code to include any right to payment, whether
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secured or unsecured. Id. Thus, a “claim secured only by a [homestead lien],” referenced in the
second clause of § 1322(b)(2), is broader than a “secured claim” referenced in the first clause,
and includes both the secured and the unsecured components of an undersecured claim. Id.
The Supreme Court viewed this interpretation—that the anti-modification clause protects
both the secured and unsecured components of an undersecured lienholder’s claim—as the more
reasonable reading of § 1322(b)(2). Id. The debtors’ interpretation was administratively
impossible, because the rights protected under the anti-modification clause stemmed from a
single mortgage contract covering the entire claim, and the debtors could not modify the contract
terms of the unsecured component “without also modifying the terms of the secured component.”
Id. Therefore, the Court held that § 1322(b)(2) prohibited the debtors’ Chapter 13 plan from
stripping down the bank’s mortgage to its secured value. Id. at 332.
4. Appellate Courts’ Application of Nobelman to Completely Unsecured Mortgages
After Nobelman, all circuit courts of appeal and all bankruptcy appellate courts to have
considered whether the anti-modification provision of § 1322(b)(2) prohibits a debtor from
stripping an entirely (as opposed to partially) unsecured mortgage on the debtor’s residence have
held that the statute does not protect such mortgages. See Branigan v. Davis (In re Davis), No.
12-1184, 2013 WL 1926407, at *4 (4th Cir. May 10, 2013); Zimmer, 313 F.3d at 1226-27; Lane
v. W. Interstate Bancorp (In re Lane), 280 F.3d 663, 669 (6th Cir. 2002); Pond v. Farm Specialist
Realty (In re Pond), 252 F.3d 122, 127 (2d Cir. 2001); Tanner v. FirstPlus Fin., Inc. (In re
Tanner), 217 F.3d 1357, 1360 (11th Cir. 2000);3 Bartee, 212 F.3d at 291; McDonald v. Master
3
In a subsequent decision, the Eleventh Circuit stated that it felt constrained to follow
Tanner, but were it to write on a clean slate it would adopt the view that a completely unsecured
mortgagee is entitled to anti-modification protection. See Am. Gen. Fin., Inc. v. Dickerson (In re
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Fin., Inc. (In re McDonald), 205 F.3d 606, 610-12 (3d Cir. 2000); Fisette, 455 B.R. at 182-84;
Griffey v. U.S. Bank (In re Griffey), 335 B.R. 166, 170 (B.A.P. 10th Cir. 2005); Domestic Bank
v. Mann (In re Mann), 249 B.R. 831, 840 (B.A.P. 1st Cir. 2000).
The Eighth Circuit Court of Appeals has not ruled on this issue; however, the Eighth
Circuit BAP recently agreed with the appellate decisions holding that the anti-modification
clause of § 1332(b)(2) does not apply to a creditor who does not hold a secured claim under §
506(a)(1). Fisette, 455 B.R. at 182-84.4 Prior to the BAP’s decision in Fisette, bankruptcy court
decisions in the District of Minnesota had consistently held that residential mortgage holders are
entitled to protection under § 1322(b)(2) regardless of the value of a debtor’s residence. See,
e.g., In re Loban, 426 B.R. 805, 806 (Bankr. D. Minn. 2010); In re Hughes, 402 B.R. 325, 326
(Bankr. D. Minn. 2009); In re Henline, 242 BR. 459, 464 (Bankr. D. Minn. 1999); In re Mattson,
210 B.R. 157, 158 (Bankr. D. Minn. 1997); In re Hussman, 133 B.R. 490, 493 (Bankr. D. Minn.
1991).
5. Completely Unsecured Mortgages Not Protected
This Court will follow the appellate court decisions holding the anti-modification
provision does not apply to a residential mortgagee whose claim is wholly unsecured under §
506(a). This ruling adheres to the structure and text of § 1322(b)(2), the logic of the Supreme
Court’s Nobelman decision, and the policy favoring Chapter 13 reorganization over Chapter 7
Dickerson), 222 F.3d 924, 926 (11th Cir. 2000).
4
The Eighth Circuit BAP’s Fisette decision was appealed to the Eighth Circuit, but the
appeal was dismissed for lack of jurisdiction. See Fisette, 695 F.3d at 805-07. The Eighth
Circuit determined the BAP’s decision was not a final order because the BAP had remanded the
case to the bankruptcy court for further consideration of the debtor’s plan. Id.
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liquidation.
a. Statutory Structure
The structure of § 1322(b)(2) consists of four clauses, which provide that 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). The first clause generally permits a Chapter 13 plan to modify the rights
of holders of secured claims. The second clause—the anti-modification provision—creates an
exception to this general rule for claims secured only by a debtor’s principal residence. The
third clause permits, without exception, modification of the rights of holders of unsecured
claims. The final clause permits a Chapter 13 plan to leave the rights of holders of any class of
claims unaffected. As the statutory framework demonstrates, the exception to modification
applies only to holders of secured claims. In re Hornes, 160 B.R. 709, 711 (Bankr. D. Conn.
1993); see also Fisette, 695 F.3d at 804 (“In a Chapter 13 case, if th[e] anti-modification proviso
does not protect a secured claim, lien-stripping is permissible.”) (emphasis added) (internal
quotation marks omitted). Holders of unsecured claims receive no protection under the statute.
Hornes, 160 B.R. at 711.
b. Text
Not only does the framework of § 1322(b)(2) establish that only holders of secured
claims are entitled to protection, the text of the statute demonstrates that the holder of a “claim
secured only by a lien on the debtor’s principal residence” is not automatically the holder of a
“secured claim” under § 1322(b)(2). As the Nobelman Court observed, “Congress chose to use
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the phrase ‘claim secured . . . by’ in § 1322(b)(2)’s exception, rather than repeating the term of
art ‘secured claim’” that was used in the preceding clause. Nobelman, 508 U.S. at 331. The
phrase “claim secured only by a [homestead lien]” is broader than a secured claim and refers to
“the lienholder’s entire claim, including both the secured and the unsecured components of the
claim.” Id. A homestead lien with no equity has only an unsecured component, and thus the
lienholder is not the holder of a secured claim under § 1322(b)(2). Instead, the lienholder holds
only an unsecured claim, and “Section 1322(b)(2) says, without qualification and in the plainest
of English, that a Chapter 13 plan ‘may’ modify the rights of ‘holders of unsecured claims.’”
Lane, 280 F.3d at 668.
c. Nobelman Logic
The logic of Nobelman further buttresses the position that an entirely unsecured
residential mortgage is not protected under § 1322(b)(2). A “key element” of the Supreme
Court’s conclusion in Nobelman that the mortgage could not be modified was the fact that the
creditor was the holder of a secured claim under § 506(a). Bartee, 212 F.3d at 286; see also 8
Collier on Bankruptcy ¶ 1322.06[1][a] at 1322-25 (Allan N. Resnick & Henry J. Sommer eds.,
16th ed. 2013) (“The opinion relies on the fact that, even after bifurcation, the creditor in the
case was ‘still the holder’ of a ‘secured claim’ . . . .”). Because the mortgagee was the holder of
a secured claim under § 506(a), the anti-modification provision applied and protected the
mortgagee’s entire undersecured claim. 8 Collier, supra, ¶ 1322.06[1][a] at 1322-25. Under this
rationale, had the creditor’s lien been completely without value, the creditor would not have been
the holder of a secured claim under § 506(a), and thus not entitled to protection under §
1322(b)(2)’s anti-modification clause. Id.
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MHFA argues the Supreme Court’s statements that the debtors “were correct in looking
to § 506(a) . . . to determine the status of the bank’s secured claim,” and that the bank was “still
the ‘holder’ of a ‘secured claim,’” are merely dicta, because the holding in Nobelman states
without qualification that “Section 1322(b)(2) prohibits . . . modification where, as here, the
lender’s claim is secured only by a lien on the debtor’s residence.” Nobelman, 508 U.S. at 332.
MHFA contends that the lack of any reference to § 506(a) in the holding establishes that
valuation under § 506(a) is not a condition precedent to establishing protection under §
1322(b)(2). Dicta are peripheral statements that may be deleted from an opinion “without
seriously impairing the analytical foundation of the holding,” as the statements may not have
been completely and carefully considered by the court. McDonald, 205 F.3d at 612 (quoting
Sarnoff v. Am. Home Prods. Corp., 798 F.2d 1075, 1084 (7th Cir. 1986). Here, the statements
pertaining to valuation under § 506(a) are not peripheral. As the very first sentence of the
Nobelman opinion informs, the case centered on the interrelationship of § 506(a) and §
1322(b)(2). Nobelman, 508 U.S. at 325 (“This case focuses on the interplay between two
provisions of the Bankruptcy Code.”). In declaring that the debtors were correct to rely on §
506(a) and that the bank was the holder of a secured claim, the Supreme Court rejected the Fifth
Circuit’s view that one must ignore § 506(a) when applying the anti-modification clause in §
1322(b)(2). Bartee, 212 F.3d at 286. The Court confirmed that § 506(a) is the “starting point”
for determining whether § 1322(b)(2)’s anti-modification provision applies. Id. Thus, the
statements are critical to the analytical foundations of Nobelman’s holding and are not dicta.
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McDonald, 205 F.3d at 612.5
d. Policy
Interpreting § 1322(b)(2) to protect only holders of secured claims under § 506(a) also
advances the policy consideration of encouraging debtors to attempt to repay their debts through
a Chapter 13 reorganization. Bartee, 212 F.3d at 294-95. Were the statute interpreted otherwise,
a debtor whose home is burdened with multiple mortgages exceeding the home’s value might
understandably opt for a Chapter 7 bankruptcy and allow the home to be sold in liquidation
rather than attempt to keep the heavily encumbered home. McDonald, 205 F.3d at 614. For
example, under MHFA’s reading of § 1322(b)(2), the Debtors would have to pay $220,500 to
keep a home worth $140,000. “A rational debtor might well decide to switch to Chapter 7, lose
the home, and start over.” Id.
6. MHFA’s Arguments
MHFA advances several arguments to support its position that § 1322(b)(2) provides
protection for wholly unsecured mortgagees, but none are persuasive.
a. Legislative History
MHFA contends the legislative history of § 1322(b)(2) does not distinguish between
secured and unsecured residential mortgagees when discussing protection for residential lenders,
and thus Congress intended to protect all residential lenders whose liens were secured solely by a
5
The Supreme Court’s view that § 506(a) and § 1322(b)(2) operate in tandem, and not in
isolation as MHFA argues, is also found in the high court’s statements that “§ 1322(b)(2) cannot
operate in combination with § 506(a) in the manner theorized by [debtors],” and that “to give
effect to § 506(a)’s valuation and bifurcation of secured claims through a Chapter 13 plan in the
manner [debtors] propose” would violate § 1322(b)(2). Nobelman, 508 U.S. at 332 (emphases
added). Had the Supreme Court viewed § 506(a) as operating independently from and having no
effect on § 1322(b)(2), the italicized language would not have been necessary.
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debtor’s home, regardless of whether those liens had value.
However, “the legislative history and Congressional intent can be read to support both
positions on this issue . . . .” Hussman, 133 B.R. at 493. A majority of courts have concluded
that Congress enacted § 1322(b)(2) to increase lending for home purchases. Bartee, 212 F.3d at
292. Loans by junior mortgagees are rarely used to finance the purchase of a home, and thus
junior mortgagees are more similar to other general creditors and less like the home purchase
lenders Congress arguably intended to protect. Id. Absent a clear intent by Congress to protect
wholly unsecured junior mortgagees, the plain meaning of § 1322(b)(2) will be followed. See
Harmon, 101 F.3d at 583 (“We interpret the Code according to its plain meaning unless doing so
would produce a result clearly contrary to the intent of its drafters.”) (citing Ron Pair Enters.,
Inc., 489 U.S. at 241-42).
b. Arbitrary and Unfair
MHFA further argues that interpreting § 1322(b)(2) to exclude wholly unsecured
mortgagees from protection leads to an unfair and arbitrary result because, under this
interpretation, a mortgagee whose lien is supported by only a penny of equity will have its entire
lien protected, while a mortgagee with no equity in its lien will have its entire lien stripped.
MHFA contends the unfairness is compounded because the important distinction between a fully
protected and unprotected mortgagee depends upon the imprecise and uncertain valuation of
residential property outside the marketplace.
From a debtor’s standpoint, however, protecting a mortgagee whose lien is supported by
only a penny of equity is already unfair to the debtor, because the mortgagee retains the right to
full payment in bankruptcy, whereas outside of bankruptcy the mortgagee’s rights would be far
14
more limited. See Mann, 249 B.R. at 837-38 (“Outside of bankruptcy, a lien with no collateral
value cannot deliver any funds to the lienholder upon foreclosure. Such a lien should not deliver
better rights in the bankruptcy court.”).6 Entitling a completely unsecured mortgagee to the same
protection would only exacerbate this unfairness to the debtor.7 Moreover, although judicial
valuation of real property may be less than exact, valuations of real property are not overly
speculative and are regularly used in the commercial world to make lending decisions. Hornes,
160 B.R. at 716. Property valuations are often used under the Bankruptcy Code to protect,
modify, or abrogate important rights. Id.
c. Absurd Result
Finally, MHFA argues that excluding completely unsecured mortgages from protection
under § 1322(b)(2) leads to an absurd result here because improvements made to the Debtors’
home as a result of MHFA’s loan likely improved the position of the senior lienholders, thereby
allowing them to consume the benefit of MHFA’s loan. MHFA argues the senior lienholders
and the Debtors should not reap a windfall at its expense. “A windfall, however, is in the eye of
the beholder.” Harmon, 101 F.3d at 585. From the Debtors’ view, applying the antimodification clause to MHFA’s wholly unsecured mortgage in these reorganization proceedings
6
MHFA argues that wholly unsecured mortgages retain some value outside of
bankruptcy. However, MHFA does not deny that its interpretation of § 1322(b)(2) would entitle
it to greater rights and value in bankruptcy court than it would otherwise have outside of
bankruptcy.
7
The Supreme Court’s decision in Nobelman to protect the partially unsecured
mortgagee was based in part on the difficulty of modifying the unsecured component of an
undersecured lien without also modifying the secured component. Nobelman, 508 U.S. at 331.
This difficulty is absent where the mortgage lien is completely unsecured. Zimmer, 313 F.2d at
1227.
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would result in a windfall to MHFA by granting it far greater rights under the Debtors’ Modified
Plan than MHFA would have outside of bankruptcy.
This Court concludes a residential mortgagee must hold a secured claim under § 506(a)
of the Bankruptcy Code to qualify for protection under the anti-modification provision of §
1322(b)(2). MHFA is not the holder of a secured claim under § 506(a), and so its rights may be
modified. Therefore, the Bankruptcy Court did not err by allowing the avoidance of MHFA’s
wholly unsecured mortgage upon the Debtors’ successful completion of the Modified Plan. The
Orders of the Bankruptcy Court are affirmed.
IV. CONCLUSION
Based on the foregoing, and all the files, records and proceedings herein, IT IS
HEREBY ORDERED that:
1. MHFA’s Appeals [Docket No. 1, Attach. 10] and [Docket No. 10] are DENIED;
2. The Bankruptcy Court’s Order Confirming Chapter 13 Plan [Docket No. 1, Attach. 8],
and Amended Order Regarding Motion to Value Claim of MHFA [Docket No. 1, Attach. 9], are
AFFIRMED.
LET JUDGMENT BE ENTERED ACCORDINGLY.
BY THE COURT:
s/Ann D. Montgomery
ANN D. MONTGOMERY
U.S. DISTRICT JUDGE
Dated: June 7, 2013.
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