Billings and Cheryl Mann (the “Debtors”), debtors in a bankruptcy case pending in the United States Bankruptcy Court for the District of Rhode Island, have two mortgage liens on their principal residence. The value of the residence is insufficient to cover the balance on the first mortgage. The Debtors’ Chapter 13 plan treats the second mortgage as wholly unsecured and then voids or strips off 1 that lien. The bankruptcy court confirmed the Debtors’ plan over the objection of Domestic Bank (the “Bank”), the second mortgagee. The Bank appeals, asking us to opine that the antimodification clause of § 1322(b)(2) precludes the voiding of a junior mortgage lien on a debtor’s principal residence. Upon review of the bankruptcy court’s determination, we affirm.
I. FACTS
The facts in this case are not in dispute and are straightforward.
On April 9, 1999, the Debtors filed a voluntary petition under Chapter 13 of the Bankruptcy Code. Their principal residence is located in Barrington, Rhode Island. The property has a fair market value of $118,000.00 and is encumbered by two mortgages. The first mortgage in favor of Chase Manhattan Mortgage Corporation has an approximate balance due of $119,000.00. The holder of the second mortgage, appellant Domestic Bank, is owed approximately $23,800.00.
The Debtors’ Chapter 13 plan provides that: ,“[p]ursuant to 11 USC 1322(b)(2) and Section 506, the debtors hereby intend to strip off the entire second mortgage held by The Bank securing the property located at 7 Hancock Road, Barrington, Rhode Island and treat said claim as totally unsecured. The entire balance of said second mortgage shall be treated as an unsecured claim pursuant to 11 U.S.C. § 506 and the lien securing said portion of the indebtedness shall be void.” The Bank filed a timely objection to the confirmation of the Debtors’ plan, arguing that § 1322(b)(2) precludes the voiding of its hen. It was undisputed that a § 506(a) valuation would prove the second mortgage lien to be wholly unsecured.
Consistent with its previous ruling in
In re Woodhouse,
II. JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction over this appeal pursuant to 28 U.S.C. § 158. As the
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facts are not in dispute, we review the bankruptcy court’s conclusions of law de novo.
GMAC Mortgage Corp. v. Marenaro (In re Marenaro),
III. DISCUSSION
The issue before us arises from the interaction of two provisions of the Bankruptcy Code, §§ 506(a)
2
and 1322(b)(2).
3
The effect of § 506(a) is that “a claim that is ‘secured’ under commercial law [may or may not be] a ‘secured claim’ in the context of the Bankruptcy Code.”
Johnson v. Asset Management Group, LLC,
Section 1322(b)(2) permits Chapter 13 plans to modify the rights of secured claim holders. That power contains an important exception. Chapter 13 debtors may not modify “a claim secured only by a security interest in real property that is the debtor’s principal residence.” 11 U.S.C. § 1322(b)(2). But § 103(a) extends the provisions of Chapter 5 of the Bankruptcy Code to Chapter 13 cases. Therefore, what is the effect, if any, of § 506(a) on § 1322(b)(2)? Said otherwise, does the § 1322(b)(2) exception refer to the security interest as viewed under nonbankruptcy commercial law or to the allowed secured claim determined after application of § 506(a)?
In 1993, the Supreme Court first examined the interplay between §§ 506(a) and 1322(b)(2) in
Nobelman v. American Savings Bank,
The facts in Nobelman involved a residence valued at $23,500.00 and a first mortgage claim for $71,335.00. The debtors proposed in their Chapter 13 plan to bifurcate the mortgagee’s claim under § 506(a) into a secured claim of $23,500.00 and an unsecured claim of $47,835.00. They offered to pay the secured portion in full, but to pay nothing on the unsecured portion. The debtors argued that § 1322(b)(2) should be construed to apply the restrictive clause “other than a claim secured only by a security interest in ... the debtor’s principal residence” only to the allowed secured claim, after application of § 506(a), rather than to the entire lien claim.
The
Nobelman
Court rejected this argument. The Court adopted what was then the minority view that § 1322(b)(2) should be construed to prohibit a Chapter 13 debtor from stripping down an underse-cured claim secured only by the debtor’s principal residence.
5
The Supreme Court held that the creditor’s rights, enforceable under state law and “bargained for by the mortgagor and the mortgagee,” were those which Congress chose to protect in § 1322(b)(2).
Id.
at 329-330,
Nobelman
did not end the controversial relationship between § 506(a) and § 1322(b)(2). Does
Nobelman
preclude a Chapter 13 debtor from stripping off a mortgage on a principal residence where there is no collateral value whatsoever for that mortgage? That question has again led to a split in the bankruptcy and district courts.
6
At this time, they appear almost
*835
evenly divided,
McCarron v. FirstPlus Fin. (In re McCarron),
The majority decisions
8
note that the
Nobelman
Court first looked to § 506(a) to determine whether any part of the creditor’s claim was secured. They remind us that the Supreme Court rejected the creditor’s argument that § 506(a) was irrelevant, and that the Court took special note of the fact that the creditor was
“still
the ‘holder’ of a ‘secured claim,’
because
[debtors’] home retained] $ 23,500 of value as collateral.”
Nobelman,
But many courts hold that the antimodi-fication clause in § 1322(b)(2) governs even if the mortgagee’s claim is wholly unsecured.
9
By and large, these courts believe focusing on the value of the collateral underlying the mortgage is just the analysis which the Supreme Court rejected in
No-belman.
They remind us that the Court relied instead on an examination of the state law “rights” of the lender, and ruled that those rights could not be modified regardless of the status of the underlying collateral. Many of these courts also argue that it is unreasonable to place too much emphasis on valuations. They find it irrational and unfair that the outcomes of cases would turn on appraisers’ estimates of property values. They note that “if the property is valued at one penny greater than the claim of the senior mortgagee, the junior mortgagee’s claim would receive full protection. However, if the property is valued at one penny less than the claim of the senior mortgagee, the junior mortgagee would be left completely unprotected.”
In re Perry,
Of the Circuits, only the Third and Fifth have addressed the issue.
See In re McDonald,
Relying on the plain language of the statute, the Third and Fifth Circuits have rejected the reasoning that §§ 506(a) and 1322(b)(2) are in conflict.
In re McDonald,
[Debtors] were correct in looking to § 506(a) for a judicial valuation of the collateral to determine the status of the [mortgagee’s] secured claim. It was .permissible for [debtors] 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 [debtors’] valuation, the bank is still the ‘holder’ of a ‘secured claim,’ because [debtors’] home retains $23,500 of value as collateral.
Those decisions which interpret
Nobel-man
to preclude the voiding of all junior mortgage liens on a debtor’s principal residence are not unreasonable in their focus on
Nobelman’s
“rights” discussion. But they fail to appreciate the
Nobelman
Court’s conclusion that those “rights” flowed first from a lien which had
some
collateral value. Furthermore, it is not quite correct to say that the only consequence of reading § 1322(b)(2) to preclude the modification of liens without collateral value is the preservation of lienholder rights enjoyed outside of bankruptcy. The mortgagee’s rights in
Nobelman
included “the right to repayment of the principal in monthly installments over a fixed term at specified adjustable rates of interest, the right to retain the lien until the debt is paid off, the right to accelerate the loan upon default and to proceed against petitioners’ residence by foreclosure and public sale, and the right to bring an action to recover any deficiency remaining after foreclosure.”
Nobelman,
Outside of bankruptcy, a lien with no collateral value cannot deliver any funds to
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the lienholder upon foreclosure. Such a lien should not deliver better rights in the bankruptcy court.
See In re McCarron,
Other “rights” of wholly unsecured liens are similarly vacuous. True, a junior mortgagee has the right to advance funds to a senior lienholder to preserve the junior mortgagee’s position, and also the right to enjoy the benefit of any increase in the value of the property.
See In re Enriquez,
Three other arguments made by the appellant and/or courts espousing the minority view merit our consideration. First, some express concern that the power of a court to void a wholly unsecured hen will lead to decisions made on the basis on what might very well be a swing of $1.00 in value. With the collateral worth $1.00 to the junior mortgagee, Nobelman teaches that the hen may not be avoided. With the collateral worth $1.00 less, the junior hen would be voided in full. That distinction, they say, would be unfair; and judges, they feel, do not have a level of valuation expertise that would justify distinctions that finely made. In answer, we respond that bankruptcy judges make distinctions of similar import in a variety of other contexts. As the McDonald court aptly noted:
Bright-line rules that use a seemingly arbitrary cut-off point are common in the law. A day beyond the statute of hmitations and the plaintiff must lose, even if the claim was otherwise unquestionably a winning one. If the evidence is just over a preponderance, the plaintiff wins full damages; just under, the plaintiff gets nothing. In bankruptcy law a Chapter 7 trustee cannot contest the validity of a debtor’s claimed exemption when the 30-day period for objecting has expired and the trustee failed to obtain an extension; and this is true *839 even if the debtor has no colorable basis for claiming the exemption. What these examples show is that line drawing is often required in the law and, at the boundary, the appearance of unfairness is unavoidable. Simply pointing out that some arbitrariness occurs is not a compelling objection.
Second, some express concern that the avoidance of junior unsecured mortgages could result in pre-bankruptcy planning abuse. They worry that debtors, in anticipation of filing a Chapter 13 case, could eliminate the collateral of a junior mortgagee by synchronizing the date of bankruptcy filing with defaults on debt to a senior mortgagee.
See In re Neverla,
Third, many courts cite a well-founded concern that proper interpretation of § 1322(b)(2) remain congruent with legislative history reflecting Congress’ “favorable treatment of residential mortgagees [in order] to encourage the flow of capital into the home lending market.”
Nobelman,
IV. CONCLUSION
We agree with the Third and Fifth Circuit Courts of Appeals, the Ninth Circuit Bankruptcy Appellate Panel, and the several bankruptcy and districts courts making up the majority view. Pursuant to § 506(a) and § 1322(b)(2), and notwithstanding the antimodification provision in the latter, Chapter 13 plans may void residential real property liens that are wholly unsecured. We believe that a literal reading of § 1322(b)(2) and § 506(a) mandates this result and that our view is congruent with the Nobelman decision which relegated the role of the antimodification provision of § 1322(b)(2) to claims first made subject to § 506(a) treatment. We decline to read Nobelman as mandating better rights for unsecured creditors holding a document purporting to be a residential real property mortgage than for unsecured creditors without. We find unwarranted the argument that the burden of asset appraisal or the risk of bankruptcy abuse are beyond a court’s ability to carry out its responsibilities. Neither concern justifies elevating one group of unsecured creditors over another or denying to debtors a remedy intended by Congress for Chapter 13 debtors. And we find without foundation the contention that Congress intended to provide to second mortgagees holding wholly unsecured liensparties at the very most peripheral and occasional to the process of home building or buying with rights similar to those of first mortgagees.
Any interpretation of the Bankruptcy Code which relies on a suspension of reality deserves to be subjected to a significant level of skepticism. Here, the bankruptcy judge was unable to find any collateral value for the Bank’s mortgage lien. Accordingly, he ruled that the Bank enjoyed only the rights of a holder of an unsecured claim. Our reading of the Bankruptcy Code supports the bankruptcy judge’s ruling. And we do not believe that Congress intended otherwise.
The bankruptcy court’s order confirming the Debtors’ Chapter 13 plan is AFFIRMED.
Notes
. The term "strip off” is colloquially used when, there being no collateral value for a mortgage, the entire lien is proposed to be avoided. The term "strip down” is used when, there being insufficient collateral value for a mortgage, the lien is proposed to be reduced to the value of the collateral.
Lam
v.
Investors Thrift (In re Lam),
. 11 U.S.C. § 506(a) provides:
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. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on-such disposition or use or on a plan affecting such creditor’s interest.
. 11 U.S.C. § 1322(b)(2) 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[.]
.The Supreme Court has also examined the strip down issue in the context of Chapter 7.
See Dewsnup v. Timm,
Dewsnup’s
holding has little applicability here as § 1322(b)(2) provides the necessary evidence of congressional intention (to permit modifications) in Chapter 13 cases, which the Supreme Court found missing in Chapter 7. Although the pertinence of
Dewsnup
to wholly unsecured liens in Chapter 7 cases is not today before us, we note that it is also a subject of growing debate.
Compare Farha v. First Am. Title Ins. (In re Farha),
. Prior to
Nobelman,
there had been a division among the Circuits. A strong majority of courts, including the United States Courts of Appeals for the Second, Third, Ninth, and Tenth Circuits, construed § 1322(b)(2) to permit a Chapter 13 debtor to strip down an undersecured claim on his or her principal residence.
See, e.g., Bellamy v. Federal Home Loan Mortgage Corp. (In re Bellamy),
The minority view, which the Supreme Court adopted in
Nobelman,
was embraced only by the Fifth Circuit.
See Nobleman v. American Sav. Bank (In re Nobleman),
. Leading bankruptcy treatises also take opposing views. Compare 8 Lawrence P. King, ' Collier On Bankruptcy, ¶ 1322.06[1][a][i] at 1322-21 (15th ed. rev. 1998) (arguing that the Nobelman opinion suggests that if a lien is completely unsecured, there would be a different result) with 1 Keith M. Lundin, Chapter 13 Bankruptcy § 4.46 at 4-56 (2nd ed.1994) (explaining that the implication of the analysis in Nobelman is that a completely unsecured claim holder with a lien on real property that is the debtor’s principal residence would be protected from modification by § 1322(b)(2) even though such unsecured lienholder does not have an allowable secured claim under § 506(a)).
. The issue before us has not been directly addressed in any published opinion of the United States Court of Appeals for the First Circuit. Like in many other circuits, there is a split of opinion among our bankruptcy courts. As noted above, Chief Judge Votolato of the United States Bankruptcy Court for the District of Rhode Island has ruled that wholly unsecured mortgages are not entitled to the § 1322(b)(2) protection.
In re Woodhouse,
.
See, e.g., Bartee v. Tara Colony Homeowners Ass’n (In re Bartee),
.
See, e.g., In re Lane,
. 11 U.S.C. § 1325(a)(5) provides:
(a) Except as provided in subsection (b), the court shall confirm a plan if—
(5) with respect to each allowed secured claim provided for by the plan—
(A)the holder of such claim has accepted the plan;
(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or
(C) the debtor surrenders the property securing such claim to such holderf.]
. 11 U.S.C. § 1325(a)(3) provides;
(a) Except as provided in subsection(b), the court shall confirm a plan if—
(3) the plan has been proposed in good faith and not by any means forbidden by law[.]