Opinion
Cause No. NA 02-0120-C-H/H
January 8, 2003
ENTRY ON APPEAL FROM BANKRUPTCY COURT
This appeal from the bankruptcy court presents a legal question important for home equity lines of credit and other obligations secured by second mortgages on homes. The legal question is whether a junior mortgage may be treated as an unsecured claim under Chapter 13 of the Bankruptcy Code if there is no value available to secure any portion of the claim. The question has generated controversy among district and bankruptcy courts, but has received a unanimous resolution by the circuit courts of appeal and bankruptcy appellate panels that have addressed it. This court agrees with those appellate courts that have held that such wholly unsecured second mortgages may be treated as wholly unsecured in a Chapter 13 plan. E.g., In re Lane, 280 F.3d 663, 668 (6th Cir. 2002).
In this case, appellant First Bank, Inc. appeals from the final judgment of the United States Bankruptcy Court for the Southern District of Indiana confirming the modified Chapter 13 plan for appellees John R. Van Wie and Michelle R. Van Wie. As part of the plan, the bankruptcy court "stripped off" First Bank's second mortgage on the Van Wies' home and treated it as a wholly unsecured claim because the home's fair market value was less than the value of another creditor's first mortgage. First Bank contends (a) that the bankruptcy court lacked legal authority to "strip off" and declare the junior mortgage held by First Bank on the Van Wies' residence to be unsecured, and (b) that even if the court had such authority, the case should be remanded for more specific findings of fact and conclusions of law on the issue of the Van Wies' home's value. For reasons explained below, the bankruptcy court's decision is affirmed.
"Strip off" is a term of art commonly used in bankruptcy proceedings to describe the process of changing a secured claim into an unsecured claim when the property securing the claim has no residual value. See, e.g., In re Tanner, 217 F.3d 1357, 1358 (11th Cir. 2000).
Factual Background
On July 12, 1999, the Van Wies obtained a loan from First Bank for $14,050.00, secured by a mortgage on the Van Wies residence at 118 Homestead Avenue in Clarksville, Indiana. First Bank Proof of Claim at 3-4. Since the residence was already mortgaged to Washington Mutual Homes/Fleet Mortgage in the amount of $42,000.00, Obj. to Confirmation of Plan at 9, the mortgage held by First Bank was a second or junior mortgage.
By the time of the bankruptcy proceedings, the debt secured by the first mortgage, including accrued interest and attorneys' fees, had grown to $47,203.14. Obj. to Conf. of Plan at 1.
On December 13, 2001, the Van Wies filed with the United States Bankruptcy Court for the Southern District of Indiana a Chapter 13 plan that provided, among other things, that the claim held by First Bank, "secured only by interests in real property that is the Debtor's principal residence," Chapter 13 Plan at 2, "shall be lien stripped and its mortgage shall be treated as void. This claim shall then be treated as an unsecured claim," id. at 3. First Bank filed an objection to confirmation of the plan, contending that the value of the residence was $68,000, leaving sufficient equity in the home (after satisfaction of the first mortgage holder) to make First Bank a fully secured creditor. An evidentiary hearing was held. An expert witness for the Van Wies testified that the residence was worth only $40,000. Hearing Tr. at 11. An expert witness for First Bank testified that the property had a value of $64,000. Id. at 51, Creditor's Exhibit A. At the close of the hearing, the bankruptcy court ruled the value of the residence to be $40,000. Hearing Tr. at 60. On March 12, 2002, the bankruptcy court issued its final order declaring First Bank's claim to be "totally unsecured" and requiring that First Bank's "mortgage shall be voided upon completion of the plan." Order Conf. Plan at 1. First Bank subsequently appealed to this court.
Jurisdiction and Standard of Review
The court has jurisdiction over this appeal from a final ruling of a United States Bankruptcy Court of this district pursuant to 28 U.S.C. § 158(a). "The district and appellate courts review factual findings of the bankruptcy courts under a clearly erroneous standard, but review conclusions of law de novo." In re Newman, 903 F.2d 1150, 1152 (7th Cir. 1990); see also F.R.Bankr.P. 8013 (bankruptcy judge's findings of fact "shall not be set aside unless clearly erroneous"). "A 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." United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948).
Applying these standards to this case, the court applies the clearly erroneous standard to review the bankruptcy court's factual finding that the Van Wies' residence had a value of $40,000, leaving no equity to secure First Bank's mortgage. The court reviews de novo the bankruptcy court's legal conclusion that First Bank's mortgage could be declared an unsecured claim, despite the exemption from modification in the bankruptcy plan provided in 11 U.S.C. § 1322(b)(2) for liens secured only by the debtor's principal residence. The court also reviews de novo the question of whether the bankruptcy court's factual findings were legally sufficient under Rule 7052 of the Federal Rules of Bankruptcy Procedure.
Discussion
I. Nobelman and the Treatment of Unsecured Claims under § 1322(b)(2)
Whether the bankruptcy court had authority to "strip off" the unsecured junior mortgage held by First Bank is governed by 11 U.S.C. § 506(a) and 11 U.S.C. § 1322(b)(2), as interpreted by the Supreme Court in Nobelman v. American Savings Bank, 508 U.S. 324 (1993). Section 506(a) provides: "An allowed claim of a creditor secured by a lien on property . . . 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." 11 U.S.C. § 506(a). Splitting a single secured claim into two claims — one secured and one unsecured — is often called bifurcation of the claim. See, e.g., Nobelman, 508 U.S. at 326. Section 506(a) applies to all bankruptcy proceedings including Chapter 13. Nobelman, 508 U.S. at 328, n. 3.
Section 1322(b)(2), which applies only to Chapter 13 bankruptcy proceedings, creates special protection for claims based on home mortgages by providing that the Chapter 13 plan may not "modify the rights" of "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). The Supreme Court held in Nobelman that under Chapter 13, a home mortgage may not be first bifurcated under § 506(a) into secured and unsecured claims, with only the secured portion protected by § 1322(b)(2). Instead, the Court held that § 1322(b)(2) protected the entire claim. Nobelman, 508 U.S. at 327-32.
Nobelman addressed a first mortgage that was secured by property that had at least some value, though its value was less than the amount of the claim. The Nobelman Court did not directly rule on whether § 1322(b)(2) provided similar protection to a junior mortgage claim that has not been bifurcated but has been found instead to be wholly unsecured by a § 506(a) valuation. Courts and commentators have divided on the application of Nobelman to wholly unsecured mortgages, but the clear weight of appellate authority favors the bankruptcy court's authority to strip off a wholly unsecured junior mortgage. See In re Bartee, 212 F.3d 277, 288-89 nn. 15-18 (5th Cir. 2000) (collecting cases and citing treatises on both sides of the issue). The majority hold "that the antimodification exception is triggered only where there is sufficient value in the underlying collateral to cover some portion of the creditor's claim." In re Pond, 252 F.3d 122 (2d Cir. 2001). The seven federal circuits or circuit bankruptcy appellate panels to rule on the question have adopted the majority position. The Seventh Circuit has yet to decide the question. Among the three published decisions within this circuit, one bankruptcy court, In re Waters, 276 B.R. 879 (Bankr.N.D.Ill. 2002), and one district court, In re Holloway, 2001 WL 1249053 (N.D.Ill. 2001), adopted the majority view, and one bankruptcy court, In re Barnes, 207 B.R. 588 (Bankr.N.D.Ill. 1997), adopted the minority view that even wholly unsecured junior mortgages are protected by § 1322(b)(2).
In re Zimmer, ___ F.3d ___, 2002 WL 31866219 (9th Cir. Dec. 24, 2002); In re Lane, 280 F.3d 663 (6th Cir. 2002); In re Pond, 252 F.3d 122 (2d Cir. 2001); In re Tanner, 217 F.3d 1357 (11th Cir. 2000); In re Mann, 249 B.R. 831 (B.A.P. 1st Cir. 2000); In re Bartee, 212 F.3d 277 (5th Cir. 2000); In re McDonald, 205 F.3d 606 (3d Cir. 2000).
The majority view cites the Nobelman Court's holding that it is "correct" to look first to § 506(a) "to determine the status of the bank's secured claim," Nobelman, 508 U.S. at 328, as a clear indication that the Court did not intend for § 1322(b)(2) to protect wholly unsecured claims. If § 1322(b)(2) were to protect wholly unsecured claims, as well as fully and partially secured claims, then there would be no reason for a court to apply the § 506(a) valuation process to mortgages, since all mortgage claims would be fully protected, regardless of the value of the property. See, e.g., In re McDonald, 205 F.3d at 611. Where there is no value available to secure the debt, then, in the language of the statute, there simply is no "claim secured only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)(2). The wholly unsecured claim falls outside the language of the statute.
The minority courts have relied on the Nobelman Court's declaration that the phrase "claim secured only by . . . the debtor's principal residence" includes both secured and unsecured portions of a claim to assert that § 1322(b)(2) protects all home mortgages — fully secured, partially secured, and unsecured. See, e.g., In re Barnes at 592. The minority courts have rejected the Court's references to valuation under § 506(a) as dicta. Id. at 593.
II. Determination of First Bank's Claim as Wholly Unsecured
Under Nobelman, First Bank's claim would be protected by § 1322(b)(2) if the security for the debt had any value at all under a § 506(a) evaluation, so the court considers first whether the bankruptcy court erred in finding that First Bank's claim was wholly unsecured. The court will uphold the bankruptcy court's finding on this question of fact unless it was clearly erroneous. F.R.Bankr.P. 8013.
First Bank agreed that the total due on the first mortgage held by Washington Mutual/Fleet Mortgage at the date of filing of the bankruptcy was $47,203.14. Objection to Confirmation of the Plan at 1. Unless the value of the residence is greater than that amount, First Bank's lien is wholly unsecured under § 506(a). At the evidentiary hearing, the bankruptcy court heard the expert witness for the Van Wies testify that the residence was worth $40,000, Hearing Tr. at 11, and the expert witness for First Bank testify that the property had a value of $64,000, id. at 51, Creditor's Exhibit A. At the close of the hearing, the bankruptcy court, acknowledging that the house was "in poor condition and in a bad location," Hearing Tr. at 59, ruled the value of the residence to be $40,000, id. at 60. There is no basis for this court to find that the bankruptcy court erred in weighing the conflicting evidence presented and arriving at its decision. Certainly the finding was not clearly erroneous. See Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985) ("Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous."). First Bank has not shown any reason why the bankruptcy court could not reasonably have credited the VanWies' expert's testimony. First Bank's claim is wholly unsecured.
First Bank also suggests that this court remand this case, contending that the bankruptcy court "failed to make sufficient findings of fact, and separate conclusions of law, as required under B.R. 7052, to support it's [sic] conclusion that the real property was worth only $40,000." App. Br. at 6. The record, however, so clearly reports the bankruptcy court's findings of fact as to make this claim border on the frivolous. The finding that the Van Wies' property was worth $40,000 was a finding of fact, not a conclusion of law. The finding was supported by evidence from the Van Wies' expert's testimony. Judge Lorch explained why he chose to credit that expert's opinion over First Bank's expert's opinion. The court noted that the house was in poor condition and in a bad location, and observed that the supposedly comparable house used by First Bank's expert was not truly comparable. Hearing Tr. 59-60. Nothing more was needed. A bankruptcy judge need only "make findings and explain his reasoning sufficiently to show that he examined the proper factors and made an informed and independent judgment." In re American Reserve Corp., 841 F.2d 159, 162 (7th Cir. 1987). Compliance with the rule "does not require the trial court to make findings on all the facts presented or to make detailed evidentiary findings; if the findings are sufficient to support the ultimate conclusion of the court they are sufficient." Norwich Union Indem. Co. v. Haas, 179 F.2d 827, 832 (7th Cir. 1950); see also Matter of Holtkamp, 669 F.2d 505, 510 (7th Cir. 1982) (holding that "it is not error to fail to make formal findings of fact or conclusions of law when the basis of the bankruptcy judge's decision is clear, and, thus, reviewable").
III. The Treatment of First Bank's Wholly Unsecured Claim
The bankruptcy court did not provide explicit reasoning for its decision that First Bank's wholly unsecured "mortgage shall be voided upon completion of the plan." Order Confirming Plan at 1. Much ink has already been spilled by other courts on the question, and it is clear that the bankruptcy court adopted the majority view that mortgage claims determined wholly unsecured under a § 506(a) valuation are not protected by § 1322(b)(2). This court agrees that the majority view is the sounder view. In light of the Nobelman Court's ruling against bifurcation of mortgage liens, the Court's direction that courts first apply a § 506(a) valuation "to determine the status of the bank's secured claim," 508 U.S. at 328, makes sense only if the Court meant not to give similar protection to wholly unsecured claims.
This court agrees with the view of the seven federal circuits or circuit bankruptcy appellate panels who have ruled on the question that § 1322(b)(2), as interpreted by the Nobelman Court, does not provide protection to mortgage claims found wholly unsecured in the § 506(a) valuation process. Consequently, the court finds no error in the bankruptcy court's application of the law.
Conclusion For the foregoing reasons, the court affirms the bankruptcy court's judgment that First Bank's claim is "totally unsecured" and that First Bank's "mortgage shall be voided upon completion of the plan." Final judgment shall be entered accordingly.