Opinion
Introduction.
The Debtors have filed a complaint pursuant to 11 U.S.C. § 506(a) and Bankruptcy Rule 3012 to determine the value of a creditor’s security, and hence its allowed claim. This adversary proceeding presents two legal issues, each of which is at once straightforward but deceptively complex. The legal issues are succinctly set forth in the parties’ pre-trial memorandum, as follows: first, may the defendant/creditor’s second lien residential mortgage. be modified under 11 U.S.C. § 1322(b)(2) on the grounds that the mortgage of the creditor, Essex, includes a security interest in property other than real property that is the debtors’ residence; second, can Essex’s lien be avoided because it is completely unsecured; that is to say, because there is no equity to support the second lien since the amount of the first lien exceeds the value of the property?
The parties agree that there are no facts in dispute. Their Pre-Trial Statement offers the following statement of uncontested facts:
1. The plaintiffs, William E. Boehmer and Theresa A. Boehmer, filed a Voluntary Chapter 13 Petition on November 30,1999.
2. The real property located at 3314 Kayford Circle, Philadelphia, PA, is owned by William E. Boehmer and Theresa McGlinn Boehmer, (h/w), and was acquired on August 23, 1996. (Deed to real property is attached hereto). This is Plaintiffs principal residence.
3. The defendant, Essex, holds a second mortgage dated September 3, 1997 on real property and recorded in Mortgage Book JTD 835, page 341, on November 4, 1997, in the amount of Twenty Five Thousand ($25,000.00) Dollars.
4. Defendant, Essex, filed a Proof of Claim on February 19, 1999, for the sum of $28,747.34 (Essex’s Proof of Claim and mortgage are attached hereto).
*839 5. EMC Mortgage Corp. is the first bsted mortgagee by mortgage dated August 23, 1996, and recorded in Mortgage Book JTD 250, page 582 on October 30,1996.
6. EMC Mortgage Corp. filed a Proof of Claim on March 31, 1999, in the amount of $91,464.54. (EMC’s Proof of Claim and mortgage are attached hereto).
7. The real property is encumbered by a third mortgage held by Household Finance Corp., dated November 19, 1997, and recorded in Mortgage Book JTD 945, Page 529, on December 31, 1997, in the amount of $16,-000.00.
8. A Proof of Claim was filed on December 7, 1998, in the amount of $18,110.42, by Household Finance Corp. (Household’s Proof of Claim and mortgage are attached hereto).
9. The fair market value of the real property according to Plaintiff is Ninety Thousand ($90,000.00) Dollars as provided by an appraisal obtained by Plaintiff dated July 2, 1999. (Appraisal attached hereto).
Appended to the Pre-Trial Statement are the exhibits referenced above.
Trial was held September 29, 1999, at which time the parties offered legal argument only. For the reasons discussed herein, the Court finds in favor of Essex on both of the issues in dispute. Judgment will accordingly be entered in favor of Essex and against the Debtors.
A. Additional Security as Basis for Modification of Mortgage.
The Debtors’ position on this issue is predicated upon language in the mortgage instrument which requires the payment of funds to be held in escrow by the mortgagee for the payment of taxes and insurance on the mortgaged property. The presence of this language, it is argued, renders the anti-modification provisions of 11 U.S.C. § 1322(b)(2) inapplicable, notwithstanding the opinion of the Supreme Court in
Nobelman v. American Savings Bank,
B. Essex’s Wholly Unsecured Claim.
The parties’ statement of uncontested facts recites that the fair market value of the subject property is $90,000, but that such figure is “according to plaintiff.” No other challenge to value has been interposed by Essex. The Court will therefore presume that the fair market value of the property, and hence the fact that Essex’s claim is indeed wholly unsecured under 11 U.S.C. § 506(a), is undisputed.
The legal question presented has generated substantial case law which is every bit as difficult to reconcile as those cases addressing the preceding question of mortgagees and the taking of additional security. Judges and commentators alike have noted that the relevant statutory language is simply not dispositive and, indeed, the issue is susceptible to reasonable argument either way. See: Lawrence Ponoroff, Modifying Wholly Unsecured Home Mortgage Loans in Chapter 13: If They’re Under Water, Let ‘Em Drown., 7 Journal of Bankruptcy Law and Practice, 625, _ — ___ (1998).
In a publication entitled Recent Developments in Chapter 13, the authors, Bankruptcy Judge Keith M. Lundin of Tennessee, along with Henry C. Hildebrand, III, the region’s Chapter 13 Trustee, have sy-nopsized and discussed a sampling of cases on each side of this question, as follows:
c. Claim splitting under § 506
(1) Nobelman and “unsecured mortgages”
(a) Protected from modification
Tanner v. Firstplus Financial Inc. (In re Tanner),223 B.R. 379 , 381-82 (Bankr.M.D.Fla.1998) (wholly unsecured second mortgage is protected from modification by Nobelman and § 1322(b)(2). Nobelman notes that § 1322(b)(2) ‘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 modifications of the “rights of holders of such claims.” ’ ... The rights of an undersecured creditor included the right to repayment over the term of the loan, to retain the lien until full payment is made, to accelerate and foreclose on the residence if the debtor defaults on its payments, and to recover any deficiency after foreclosure ... The plain meaning of § 1322(b)(2) prohibiting modification of “a claim secured only by a security interest in ‘real property’ shows Congress’s intent to except the ‘claim’ from modification .... The prohibition against claim modification protects both unsecured and secured encumbrances on the Debtor’s home.... The expansive definition of ‘rights’ afforded to secured creditors under Florid law, even without equity in the mortgaged property, protects the mortgagee from modification pursuant to Nobel-man. ”)
Lewandowski v. U.S. Dep’t of Housing & Urban Dev. (In re Lewandowski),219 B.R. 99 , 105 (Bankr.W.D.Pa.1998) (completely unsecured second *841 mortgage is protected from modification by Nobelman and § 1322(b)(2). “After careful review of the cases, we join the minority insofar as it declares that, in a chapter 13 case, the mortgage lien cannot be avoided based on the valuation of the claim under § 506(a), even where there is no equity to support the claim. We find that any other holding would not fairly apply the dictate of the Supreme Court in Nobelman. ”)
In re Bauler,215 B.R. 628 , 632-33 (Bankr.D.N.M.1997)(“authorities holding that a completely unsecured mortgage on a principal residence is nevertheless protected under § 1322(b)(2) from modification is the most logical and reasoned approach, and the most consistent with the Supreme Court decision in Nobelman .... This result is also supported by policy considerations.”)
(b) Not protected from modification.
Lam v. Investors Thrift (In re Lam),211 B.R. 36 , 40-41 (9th Cir. BAP 1997) (wholly unsecured mortgage is not protected from modification by § 1322(b)(2) or Nobelman. “[T]he state law ‘rights’ afforded a holder of an unsecured ‘lien’, if such a situation exists, indicates these rights are empty rights from a practical, if not a legal, standpoint.... The policies behind section 1322(b)(2) lend further support to this view.... [Extending section 1322(b)(2)’s protection to secured creditors holding completely unsecured claims ‘might induce more debtors who would qualify for chapter 13 relief to file chapter 11 cases’ .... A point of concern is that ... outcomes of cases will turn on appraisers’ estimates of property values... [A][ ] one dollar difference in property value could have a profound effect on a secured creditor’s rights.... We believe this concern to be unfounded.”)
Johnson v. Asset Management Group, LLC,226 B.R. 364 (D.Md.1998) (wholly unsecured junior lien on residence can be stripped off and treated as an unsecured debt without violating the anti-modification provisions of § 1322(b)(2) or Nobelman).
In re Phillips,224 B.R. 871 , 872-73 (Bankr.W.D.Mich.1998) (citing Hornes,160 B.R. 709 (Bankr.D.Conn.1993), “A creditor must hold a secured claim in both the literal and the code senses in order to come within the anti-modification provision of § 1322(b)(2) ... Policy reasons also support this position... [T]he congressional intent of encouraging home lending by residential mortgagees does not apply to second mortgagees because they are not in the business of lending money for home purchases.”)
In re Cerminaro,220 B.R. 518 , 522-24 (Bankr.N.D.N.Y.1998) (reaffirming Scheuer,213 B.R. 415 (Bankr.N.D.N.Y.1997) and disagreeing with Pond v. Farm Specialist Realty (In re Pond), Case No. 96-10015, Advs. 96-91213 (Bankr.N.D.N.Y Jan. 29, 1998), wholly unsecured junior mortgages are not protected from modification by § 1322(b)(2). “A majority of courts, including this Court in Scheuer, ... have interpreted Nobel-man as indicating that a mortgagee must first qualify under Code § 506(a) as a holder of a secured claim in order to obtain the protection of Code § 1322(b)(2) .... [A] holder of a security interest in the debtors’ principal residence that is determined to have a completely unsecured claim is not entitled to the protection of Code § 1322(b)(2).”)
In re Bivvins,216 B.R. 622 , 625 (Bankr.E.D.Tenn.1997) (wholly unsecured third mortgage is not protected from modification by § 1322(b)(2) of Nobelman. “The court realizes that its interpretation of the statute creates a cut-off point that depends on the valuation of the debtor’s home.... *842 The law sometimes uses cut-off points such as this even if they appear to unfair.”)
Smith v. First Citizens Bank (In re Smith),215 B.R. 716 , 718-19 (Bankr.W.D.Tenn.1998) (wholly unsecured third mortgage is not protected from modification by § 1322(b)(2) or Nobel-man. “To agree with Greentree’s argument, the court must interpret the home mortgage exception as broader than the rule to which it is an exception. According to the Supreme Court, the general rule provides that a plan can modify the rights of allowed secured claims. Greentree contends the exception applies to the rights of a claimholder who has only an unsecured claim ‘secured only by’ a home mortgage. This is the same things as saying that § 1322(b)(2) silently repeats the home mortgage exception in the subsequent portion of the statute that allows a plan to modify the rights of holders of unsecured claims.... Greentree is not the holder of an allowed secured claim. Therefore, the •portion of § 1322(b)(2) that allows a plan to modify the rights of holders of allowed secured claims is irrelevant to how the plan can deal with Green-tree’s claim. Likewise, the home mortgage exception is irrelevant since it is contained within the portion of § 1322(b)(2). The plan can modify Greentree’s rights as the holder of an unsecured claim.”) ** Id. @ page 53.
The above list is hardly exhaustive, although the cases set forth the principal arguments which have been advanced on this question. As Professor Ponoroff notes in his recent article, as matters now stand, some Chapter 13 debtors obviously will be able to strip wholly unsecured liens, and some will not, and the issue may turn not simply on which district they are required to file in, but on which judge they draw. (Ponoroff
supra
at Footnote 52 comparing
In re Cervelli,
In this vein, the Court notes the recent thorough opinion by Judge Fox in
In re Meade,
Bankr.No. 98-32648 (Bankr.E.D.Pa., June 3, 1999), the briefer decision of Judge Woodside of the Middle District in
In re Warkoski v. American General Finance Corp.
Bankr.No. 1-97-00013, Advs. NO. 1-97-00159 (Bankr.M.D.Pa. July 6, 1998),
In re Neverla,
This court cannot ascribe to Congress the odd intent to extend the antimodifi-cation protection in § 1322(b)(2) to residential mortgage holders with any toehold on the debtor’s property and to refuse that same protection where collateral values have shifted a peppercorn below the creditor’s position. The lien rights of either creditor under state law ... are typically the same whether the mortgage holders is a dollar above or a dollar below the allowed secured claim threshold. This reading in Nobelman puts an undeserved premium on valuation of residential real property — it assumes a degree of accuracy in the valuation process that is without foundation in reality. Id. at 832.
The above point seems quite well taken, and the Court believes that proponents of the permissive theory have indeed adopted a questionably overbroad reading of the Supreme Court decision in
Nobelman v. American Savings Bank,
For all of the foregoing reasons, this Court concludes that Essex’s lien, although wholly unsecured, may not be stripped due to the prohibition found in 11 U.S.C. § 1322(b)(2). Thus, the value of the Debtors’ realty is declared to be $90,000, the request to declare the lien of Essex avoided will be denied, and Essex’s claim will be allowed, in the filed amount, albeit as a general unsecured claim without priority.
Notes
. An illustration of the difficulties which abound in § 1322(b)(2) litigation exists in the Lewandowski decision, which is supportive of the Debtor’s position on the additional property issue, but adverse to the Debtor’s position on the lien stripping issue discussed infra.
Hon. Keith M. Lundin, & Henry E. Hildebrand, III, Recent Developments in Chapter 13 (The FJC Workshop for Bankruptcy Judges, Baltimore, MD April 6-8, 1999).