In Re Danny L. Hart and Joanne E. Hart, Debtors. Eastland Mortgage Co. v. Danny L. Hart and Joanne E. HartIn Re Danny L. Hart and Joanne E. Hart, Debtors. Eastland Mortgage Co. v. Danny L. Hart and Joanne E. Hart
Lead Opinion
The issue in this bankruptcy case is whether a home mortgage protected by
Danny L. Hart and Joanne E. Hart, debtors in the chapter 13 bankruptcy action from which this appeal arose, took out a loan secured by a mortgage held by the Federal National Mortgage Association and serviced by appellee Eastland Mortgage Company, a creditor in the bankruptcy action. The mortgage described the security for the loan to be the real property to which the Harts’ mobile home is attached,
TOGETHER WITH all the improvements now or hereafter erected on the property, and all easements, rights, appurtenances, rents, royalties, mineral, oil and gas rights and profits, water rights and stock and all fixtures now or hereafter a part of the property. All replacements and additions shall also be covered by this Security Instrument. All of the foregoing is referred to in this Security Instrument as the “Property.”
In re Hart, No. 88-6229-TS, Order Concerning Debtors’ Motion to Amend Plan at 5 (Bankr.W.D.Okla. Mar. 24, 1988) (hereafter, the “bankruptcy court order”). At the time the Harts submitted their chapter 13 wage earner plan to the bankruptcy court for approval, a $55,000 balance remained on Eastland’s note. However, the fair market value of the property described in the mortgage was stipulated to be $30,000. One part of the Harts’ chapter 13 plan, approved by the bankruptcy court without objection, referred to the mortgage as a $55,000 secured indebtedness, while other parts of the plan referred to the mortgage as a $30,000 secured and $25,000 unsecured indebtedness. When the Harts filed a motion to amend the plan, correcting what they referred to as a “scrivener’s error” so that the plan consistently listed $30,000 of the debt as secured and $25,000 as unsecured, Eastland objected.
The bankruptcy court granted the Harts’ motion to amend and approved the plan over Eastland’s objections. Eastland appealed to the district court, and that court reversed, holding modification of the mortgage to be inappropriate, given the protection of residential mortgages granted by
The standard by which this court reviews district court decisions arising on appeal from the bankruptcy court was set forth in Hall v. Vance,
It is well established that neither this court nor the district court can disturb a bankruptcy court’s findings of fact unless they are clearly erroneous. A factual finding is clearly erroneous “ ‘when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.’ ” This court, however, may exercise de novo review over the bankruptcy court’s conclusions of law.
Id. at 1043 (citations omitted). See also First Bank v. Mullet (In re Mullet),
Chapter 13 of the Bankruptcy Code of 1978,
provides for the adjustments of the debts of an individual with regular income, through extensions • and composition plans, usually extending no more than three years,§ 1322(c) of the Code, funded out of the Chapter 13 petitioner’s future income (which is submitted to the court for the payment of the debts as provided for by the plan,§ 1322(a) of the Code). The adjustments and extensions so allowed, however, are subject to provisions that protect the interests of creditors, including, inter alia, their secured interests.
Grubbs v. Houston First Am. Sav. Ass’n,
Two sections of the Code are particularly important in this case. The first is
The original draft of the Code, prepared by the Commission on the Bankruptcy Laws of the United States, recommended permitting modification of secured indebtedness on personal property. Grubbs,
In Grubbs, the Fifth Circuit found that Congress intended to protect the home mortgage industry:
With regard to§ 1322(b)(2) , the Senate receded from its position that no “modification” was to be permitted of any mortgage secured by real estate; it instead agreed to a provision that modification was to be barred only as to a claim “secured only by a security interest in real property that is the debtor’s principal residence.” This limited bar was apparently in response to perceptions, or to suggestions advanced in the legislative hearings [by advocates for secured creditors], that, home-mortgagor [sic] lenders, performing a valuable social service through their loans, needed special protection against modification thereof (i.e., reducing installment payments, secured valuations, etc.).
The other section of the Code bearing on this case is
An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property ... and is an unsecured claim to the extent that the value of such creditor’s interest ... 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.
“
The dispositive issue in this case is whether Eastland’s undersecured loan may be bifurcated into two claims by applying the general principles of
Eastland claims that this court does not have jurisdiction to examine this issue. Eastland notes that the bankruptcy court did not reach this issue because it found that rents, royalties, profits and stock were “collateral other than the debtor’s principal residence, and thus the claim was not protected by
We hold that we do have jurisdiction to rule on this issue for two reasons. First, in this circuit, “[a]n appellee may defend the judgment won below on any ground supported by the record without filing a cross appeal.” Robinson v. Robinson (In re Robinson),
And second, although the record on appeal does not include the Harts’ appellee’s statement, they evidently did bring the issue to the district court’s attention because the district court order states: “Debtors contend that even if Eastland’s claim is within the scope of 1322(b)(2), debtors can still bifurcate the claim into secured and unsecured claims and modify the unsecured portion pursuant to
The district court did not consider this issue, on the grounds that “the issue is not before this Court on appeal.” Id. at 4. However, the district court could have ad
Threshold bifurcation of undersecured mortgages has been recognized recently by both the Third and the Ninth Circuits. In Hougland v. Lomas & Nettleton Co. (In re Hougland),
[I]t is clear thatsection 506(a) applies to Chapter 13 proceedings. See § 103(a). There is, therefore, no reason to believe that the phrases “secured claim” and “unsecured claim” insection 1322(b)(2) have any meaning other than those given to them bysection 506(a) .
Congress quite plainly has provided for the separation of undersecured claims into two components — a secured component and an unsecured component. It has then provided for their treatment in Chapter 13 proceedings. The secured portion has special protection when residential real estate lending is involved. The unsecured portion does not.
Id. at 1183, 1185.
While no other circuit courts have ruled on this issue, district courts and bankruptcy courts from other circuits reflect a split of authority. Courts within the Fourth, Sixth, and Seventh Circuits have favored protection of only the secured portion of a home mortgage under
To the contrary, bankruptcy courts in the Fifth, Eighth, and Eleventh Circuits have held that such bifurcation is inappropriate. The bankruptcy courts in these circuits rely on some or all of four rationales: (1) the legislative history mandates protection of the home mortgage lender, and bifurcation impermissibly dilutes that protection; (2) as a matter of statutory construction, the requirements of a specific section, in this case
The position of the Third and Ninth Circuits and the other courts which have adopted threshold bifurcation under
Subject to subsections (a) and (c) of this section, the plan may—
modify the rights of holders of secured claims,1 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.
In interpreting any statute, we “ ‘begin with the language employed by Congress and the assumption that the ordinary meaning of that language accurately expresses the legislative purpose.’ ” Justice v. Valley Nat’l Bank,
We join the Third and Ninth Circuits in holding that an undersecured mortgage is, for the purposes of the bankruptcy code, two claims, and only the secured claim is protected by
We find nothing in the plain language of
Tangentially, the Harts argue that their mortgage is secured by more than “only an interest in real property that is [their] principal residence,” thereby removing the mortgage from the protection of
While such items as “rents, royalties ... profits ... and stock” may be related to realty, clearly they are not realty and certainly are not considered a part of a mortgagor’s principal residence. Although Eastland argues none of those items are present in this case at this time, the drafters of the mortgage form certainly placed the mortgagee in a position to claim such items as its collateral if they arise in the future. Thus, East-land cannot now be heard to say its claim is limited to only Debtors’ principal residence.
Bankruptcy court order at 5. Through this analysis, the bankruptcy court removed the mortgage from the protection of
The district court reversed. It stated that, “Eastland does not seriously contend that rents and profits are real property. Therefore ... the language of the clause covers items other than real property.” District court order at 2. However, the district court concluded that Eastland’s mortgage was totally protected by
The Harts argue that, in finding that the additional items of collateral had no value, the district court made a finding of fact unsupported by the record. They argue, citing
The Third Circuit clarified the federal appeals court’s role in reviewing district court decisions in bankruptcy cases:
As an appellate court twice removed from the primary tribunal, we review both the factual and the legal determinations of the district court for error. The district court does not sit as a finder of facts in evaluating them ás a court of review, and therefore its evaluation of the evidence is not shielded by the “clearly erroneous” standard ofFed.R.Civ.P. 52(a) , which applies only to a trial court sitting as a fact finder. We are in as good a position as the district court to review the findings of the bankruptcy court, so we review the bankruptcy court’s findings by the standards the district court should employ, to determine whether the district court erred in its review. To the extent the parties challenge the choice, interpretation, or application of legal precepts, we always employ the fullest scope of review: we examine the decision of the court from which the appeal is taken for error, and the legal determinations of the district court as a reviewing tribunal are not shielded by any presumption of correctness.
Universal Minerals, Inc. v. C.A. Hughes & Co.,
While the district court “is free to draw inferences from undisputed facts,” Adams v. United States (In re Breit),
In this case, the district court went beyond the factual findings of the bankruptcy court to find that the rents and profits listed as security on the Harts’ mortgage are illusory,
The order of the District Court for the Western District of Oklahoma is REVERSED and this matter is REMANDED to the Bankruptcy Court for the Western District of Oklahoma for further proceedings consistent with this opinion.
Notes
.
Brief of the Appellee. The brief of the ap-pellee shall conform to the requirements of paragraph (1)(A)-(E) of this subdivision [contents of the appellant’s brief: table of contents, basis of appellate jurisdiction, issues presented and standard of review, statement of the case (includes nature of the case, course of proceedings, disposition in the court below, facts relevant to the issues on review with record references), and argument], except that a statement of the basis of appellate jurisdiction, of the issues, or of the case need not be made unless the appellee is dissatisfied with the statement of the appellant.
. In re Hougland, cites 11 U.S.C. 103(a) as authority for the proposition that
. The courts in our own circuit are split on the issue. Compare Brouse v. CSB Mortgage Corp. (In re Brouse),
. The term "secured claims” as used in that section is defined by
.
On an appeal the district court ... may affirm, modify, or reverse a bankruptcy judge’s judgment, order, or decree or remand with instructions for further proceedings. Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.
. It is undisputed that illusory items may not serve as security for a mortgage, as that term is used in
Dissenting Opinion
dissenting.
As I would affirm the decision of the district court, I must dissent.
The principal issue we must decide is the apparent tension between two separate provisions of.the Bankruptcy Code.
The majority’s conclusion is that
The majority accurately describes the split in authority on this issue and cites numerous bankruptcy court decisions in the Fifth, Eighth and Eleventh Circuits that have disagreed with the majority’s approach. I am persuaded by these decisions. I believe these cases correctly analyze the problem and reach the better solution.