In Re George E. Lane and Sherry A. Lane, Debtors. George E. Lane and Sherry A. Lane v. Western Interstate Bancorp, as Successor Servicer to Firstplus Financial, Inc.In Re George E. Lane and Sherry A. Lane, Debtors. George E. Lane and Sherry A. Lane v. Western Interstate Bancorp, as Successor Servicer to Firstplus Financial, Inc.
Anthony R. Steele (briefed), Winchester, Sellers, Foster & Steele, Knoxville, Tennessee, for Appellee.
OPINION
DAVID A. NELSON, Circuit Judge.
The bankruptcy code expressly provides that a Chapter 13 bankruptcy plan may modify the rights of holders of “unsecured claims.”
Whether a lienholder has a “secured claim” or an “unsecured claim,” in the sense in which those terms are used in the bankruptcy code, depends on whether the lienholder‘s interest in the collateral has economic value. See
The appellee in the case at bar is such an unsecured creditor — a second mortgagee whose lien on the Chapter 13 debtor‘s homestead is totally under water. If the lien were only partially under water (i.e. if the second mortgagee‘s claim had a secured component, being unsecured only in part), the Supreme Court‘s decision in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), teaches that the rights of the lienholder would not be subject to modification. The question before us now is whether the implications of Nobelman would bar modification of the rights of a creditor who, although the holder of a lien on the Chapter 13 debtor‘s homestead, has solely an “unsecured claim” under
We shall reverse. It does not appear to us that Nobelman forecloses what we take to be the better reading of the code. Under that reading, which is consistent with the result reached by all of the four other courts of appeals and both of the bankruptcy appellate panels that have addressed the question, modification of the rights of a totally unsecured homestead mortgagee is permitted by
I
The facts of the instant case were largely placed before the bankruptcy court by stipulation. Here is a brief summary.
In 1996 the debtors, George and Sherry Lane, obtained a loan secured by a first mortgage on what we take to have been their sole residence. This mortgage was assigned to CIT Group, along with the Lanes’ promissory note.
The Lanes took out a second mortgage loan on their residence a year later. The second mortgage and mortgage note were assigned to FirstPlus Financial, Inc.1 Neither FirstPlus nor CIT had any relevant security interest outside its mortgage, as far as the record discloses.
In November of 1999 the Lanes sought protection under Chapter 13 of the bankruptcy code. Soon thereafter CIT filed a proof of claim showing a balance of $40,223.79 due and owing on the senior mortgage obligation. There is no dispute as to the validity or amount of this claim.
FirstPlus filed a proof of claim showing $22,146.69 due and owing on the junior mortgage obligation. FirstPlus has stipulated that the value of the Lanes’ residence was less than the $40,223.79 balance due on the first mortgage. (The stipulation does not give a dollar value for the residence, but a brief filed by FirstPlus in the bankruptcy court put the value of the property at no more than $38,000.00.)
The debtors filed a repayment plan proposing that CIT would receive its regular monthly mortgage payment and that FirstPlus would be paid only as an unsecured claimant. The dividend for holders of unsecured claims would be in the range of 20 cents to 70 cents on the dollar, according to the plan.
FirstPlus objected to confirmation of the plan. In a brief supporting its objection, FirstPlus argued that
II
Lawyers often think of any claim for repayment of a mortgage loan as a “secured claim” whether or not the mortgagee could actually realize anything at a foreclosure sale. Under the bankruptcy code, however, “[a]n 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 [and only to the extent] of the value of such creditor‘s interest in the estate‘s interest in such property....”
In reaching this conclusion, the Nobelman Court decided that the phrase used in the antimodification clause — “a claim secured only by a security interest in real property that is the debtor‘s principal residence” — should be read as encompassing the unsecured component of the bank‘s overall claim as well as the secured component. Nobelman, 508 U.S. at 331, 113 S.Ct. 2106. Otherwise, the Court pointed out, it would be impossible to protect the bank‘s rights in the manner intended by Congress:
“The bank‘s contractual rights are contained in a unitary note that applies at once to the bank‘s overall claim, including both the secured and unsecured components. [The debtors] cannot modify the payment and interest terms for the unsecured component, as they propose to do, without also modifying the terms of the secured component.” Id.
This being so, and given the focus of
The Nobelman Court had no occasion to say what the result would have been if the bank‘s claim had involved no secured component at all. In a passage consistent with the position adopted by a number of lower courts, however, the author of one leading bankruptcy treatise has said that “[t]he clear implication of [Nobelman‘s] analysis is that even a completely unsecured claim holder with a lien on real property that is the debtor‘s principal residence would be protected from modification by
Strictly as a matter of syntactics, perhaps, there is something to be said for this conclusion. But the majority of courts that have been called upon to adjudicate the rights of lienholders asserting purely “unsecured claims” have declined to read Nobelman as placing such lienholders in the class of claimants whose rights are entitled to special protection under the antimodification clause of
Collier‘s explanation of the implications of Nobelman finds strong support, we believe, in the Supreme Court‘s declaration that the debtors in Nobelman “were correct in looking to
The Supreme Court‘s recognition of
To interpret
It is important, in this connection, to remember that just as “secured claims” is a term of art in the bankruptcy code (see Nobelman, 508 U.S. at 331, 113 S.Ct. 2106, where the Supreme Court so described the term), “unsecured claims” is a term of art too. Courts subscribing to the minority position often ignore this; they proceed as if the phrase “holders of unsecured claims” meant nothing more than claimants without any liens. But when Congress divided the universe of claimants into those with “secured claims” and those with “unsecured claims,” it was not merely distinguishing between claimants possessed of security interests and claimants not possessed of such interests. Insofar as claimants with homestead liens are concerned, rather, the dividing line drawn by
In the case at bar, as we have seen, the security interest that FirstPlus holds in the debtors’ homestead property is totally valueless. FirstPlus is thus the holder of an “unsecured claim,” pure and simple — and if the words of
It is true, as several of the courts adopting the minority position have pointed out, that the Nobelman Court was unmoved by “the so-called `rule of the last antecedent.‘” Nobelman, 508 U.S. at 330, 113 S.Ct. 2106. Under that rule, as a grammatical matter, the antimodification clause of
The implications of this portion of the Nobelman opinion, it seems to us, do not extend beyond the situation to which the language just quoted alludes — the situation in which the lienholder‘s claim for the amount due has both a secured component and an unsecured component. Any broader implication, as we see it, would run counter to the logic of Nobelman‘s reliance on the fact that the bank in that case was “still the `holder’ of a `secured claim,’ because [the debtors‘] home retains $23,500 of value as collateral.” Id. at 329, 113 S.Ct. 2106. And although some have read conflicting messages into Nobelman, the message conveyed by the language of the statute itself, read in the light of the Nobelman holding, strikes us as perfectly clear.
The message, to recapitulate, is this:
- Section 1322(b)(2) prohibits modification of the rights of a holder of a secured claim if the security consists of a lien on the debtor‘s principal residence;
- Section 1322(b)(2) permits modification of the rights of an unsecured claimholder;
- Whether a lien claimant is the holder of a “secured claim” or an “unsecured claim” depends, thanks to
§ 506(a) , on whether the claimant‘s security interest has any actual “value;” - If a claimant‘s lien on the debtor‘s homestead has a positive value, no matter how small in relation to the total claim, the claimant holds a “secured claim” and the claimant‘s contractual rights under the loan documents are not subject to modification by the Chapter 13 plan;
- If a claimant‘s lien on the debtor‘s homestead has no value at all, on the other hand, the claimant holds an “unsecured claim” and the claimant‘s contractual rights are subject to modification by the plan.
A “secured claim/unsecured claim” touchstone may seem arbitrary, to be sure, especially where the assignment of value vel non presents a close question of fact. As can be attested by anyone who has ever struggled with the Internal Revenue Code or similar artifacts of the modern administrative state, however, we live in a world that abounds with arbitrary distinctions. Absent a challenge on constitutional grounds — and none has been asserted here — this court holds no warrant to cleanse the United States Code of arbitrary distinctions.
Our job, obviously, is to see that congressional enactments are applied in accordance with the presumed intent of Congress, as manifested in the language Congress has chosen to use. In the case at bar, for reasons we have explained, it seems to us that the bankruptcy court misapplied the relevant language of the bankruptcy code. The judgment in which the district court affirmed the bankruptcy court‘s decision is therefore REVERSED, and the case is REMANDED for further proceedings not inconsistent with this opinion.
Notes
“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....”
11 U.S.C. § 1322(b)(2) (emphasis supplied).