Legislative Intent or Judicial Myth-making No Legislative History Supports Policy Arguments Advanced Against Stripdown

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Dec/Jan 1999

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As the debate over stripdown (and other modifications) of residential mortgages turns
increasingly on technical arguments about the scope of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §322(b)(2)</a> and the Nobelman

case,<a href="#1" name="1a">1</a> judges sometimes allow policy-based arguments to trump the details of the legislative
language. When they do, they often claim support for their position in the supposed legislative
history of §1322(b)(2), which "establishes" that the protections were designed to support
residential mortgage lending activity by encouraging "the flow of capital into the residential
mortgage market."<a href="#2" name="2a">2</a>

The point of origination
of this practice was a concurring opinion by Justice Stevens in the Nobelman case itself. That
concurrence is now frequently cited to support judge-made limits on modification of residential
mortgages. Justice Stevens said:
<blockquote>
At first blush it seems somewhat strange that the Bankruptcy Code should provide less
protection to an individual's interest in retaining possession of his home or her home than of
other assets.<a href="#3" name="3a">3</a> The anomaly is, however, explained by the legislative history indicating that
favorable treatment of residential mortgagees was intended to encourage the flow of capital
into the home-lending market. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Houston First Savings Assn., 730 F.2d 236,
245-246 (5th Cir. 1984)</a> (canvassing legislative history of chapter 13 home mortgage
provisions). It therefore seems quite clear that the court's literal reading of the text of the
statute is faithful to the intent of Congress.

</blockquote>

<h3>Misuses of Justice Stevens's Concurrence</h3>

Over the years since the Nobelman opinion was issued, Justice Stevens's concurrence has passed into the bankruptcy
canon. Rather than research the legislative record directly, courts cite Justice Stevens's
opinion as proof of the existence of relevant legislative history. Courts now often use the
citation to justify a ruling protecting lenders from modification that is not consistent with the
literal language of §1322(b)(2).<a href="#4" name="4a">4</a>

Not only is use of the
citation in these circumstances so inconsistent with the primary rule of statutory construction
that Congress's expresses itself through the statutory language it chooses, but it also misses the
point that Justice Stevens's opinion is a concurrence. He quite clearly states that the
"legislative history" is only additional support for the court's "literal reading" of the plain
language of the statute. His opinion then should not be seen as support for ignoring the literal
reading.

<h3>No History on Intent of §1322(b)(2)</h3>

Most importantly,
however, Justice Stevens's opinion is just plain wrong. Significantly, rather than cite the
legislative record, Justice Stevens cites a Fifth Circuit case to support his description of the
legislative history.<a href="#5" name="5a">5</a> It is important then to reread the Grubbs decision to determine its
underlying basis in the relevant record.

Grubbs is a 1984
decision that concluded that the cure of a default on a residential mortgage loan is allowed
because it is not an impermissible modification under §1322(b)(2). This holding, which is not
controversial now, was a subject of some dispute in the early years of the Code.

In reaching its decision,
the Grubbs court does "canvass" the legislative history of §1322(b)(2) and finds, in fact, that
there is nothing in the record that describes the provision's purpose or scope. Instead, the court
speculates based on the fact that the provision was a legislative compromise. It surmises that
the compromise may have been reached in response to witness testimony (or perhaps may have
been based on unexpressed Congressional perceptions):
<blockquote>
This limited bar was apparently in response to perceptions, or to suggestions advanced in the
legislative hearings...that home-mortgagor lenders [sic] performing a valuable social
service through their loans needed special protection against modification thereof..."
</blockquote>
(Emphasis added.) (Omitted citation is a reference to its own opinion.)

The relevant witness
testimony is described in footnote 13 of the Grubbs opinion and the accompanying text. The bulk
of the testimony described was offered at some point in 1975 before a Senate Committee
(presumably including some members who were no longer in Congress in 1978 when the Code
was passed). The witnesses were testifying on behalf of the American Bankers Association and
the National Consumer Finance Association.

Putting aside the
question of whether witness testimony alone is ever significant as Congressional history, what
lender ever stated that it was not "performing a valuable social service" or that it was not
entitled to special protection? (Perhaps this "valuable social service" test should be read into
§1322(b)(2)—thus eviscerating the anti-modification protection for high-rate and predatory
mortgage lenders). Still worse, the language that describes the "suggestion advanced" in the
legislative history is that of the Grubbs court and not even that of the witnesses themselves.

In short, despite
Justice Stevens's concurrence, there is no valid legislative history that supports policy-based
limits on the plain language of §1322(b)(2). It is obvious from the legislative language itself
that Congress intended to give some protection to residential mortgage lenders. However, nothing
in the legislative history amplifies the meaning of that statutory language.<a href="#6" name="6a">6</a>

Judges are thus left to
follow the Supreme Court's admonitions to interpret the plain language of the statute. That
language indisputably supports modification in limited situations that are outside the ambit of
§1322(b)(2).

<h3>No Evidence on Undermining Residential Mortgage Market</h3>

As a supplement to the
mythical legislative history, lenders often argue against stripdown on the basis that dire
consequences for the residential mortgage market will follow. However, no actual evidence
supports this bald policy argument.

It is unclear, as a
matter of evidence, that the stripdown of residential mortgages, in the limited factual context in
which it is allowed, has a significant financial impact on residential lenders. In the years before
Nobelman came down, many jurisdictions allowed stripdown of all residential mortgages,<a href="#7" name="7a">7</a> and
even then, no evidence of a broad economic impact was produced.

Stripdown is unlikely
to be the cause of substantial lender losses. The reality is that when stripdown is unavailable,
nothing changes the fact that the collateral is worth less than the debt owed. If a chapter 13 plan
cannot be confirmed and foreclosure results (as is likely), the creditor can only recover the
actual economic value of the property.<a href="#8" name="8a">8</a>

There are only three
situations in which stripdown is ever the cause of the lender's loss—all of which are unlikely
scenarios. In the first, stripdown is unavailable and the debtor somehow nevertheless finds a
way to pay both the secured and unsecured portion of the claim either during or after
bankruptcy. In the second, the debtor has resources available to be collected in a deficiency
action that are unavailable under a chapter 13 plan (and the debtor never obtains a bankruptcy
discharge in chapter 7 or 13). And third, although the debtor cannot afford to pay the full
amount of the debt, the property would have been misvalued in bankruptcy or would have
appreciated quickly between the date of valuation and a foreclosure sale. (Since foreclosures are
expensive and since stripdown valuations don't take account of foreclosure costs after Rash,
mortgage-holders have a substantial cushion against the third type of loss.<a href="#9" name="9a">9</a>)

<h3>Conclusion</h3>

While this article does
not address underlying arguments on the meaning of the language of §1322(b)(2), the positions
expressed here would nevertheless confine the terms of the debate to that language. Where
debtors have the better of the plain language arguments, as they may in the context of strip-off,
multi-use residential properties, mortgages maturing before or during a chapter 13 plan, and
additional security interests in personal property, the legislative history should be no bar to a
favorable outcome.<a href="#10" name="10a">10</a>

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. American Savings Bank, 113 S.Ct. 2106, 124 L.Ed. 2d 228 (1993)</a>. See, generally, National Consumer Law Center, Consumer Bankruptcy Law
and Practice ch. 11 (5th ed. 1996 and Supp.) for a discussion of the implications of the Nobelman decision. <a href="#1a">Return to article</a>

<a name="2">2</a> See, e.g., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Witt, 113 F.3d 508, 514 (4th Cir. 1997)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Eason, 207 B.R. 238, 239 (N.D. Ala. 1996)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Rodriguez, 218 B.R. 764, 775 (Bankr. E.D.
Pa. 1998)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Bauler, 215 B.R. 628, 633 (Bankr. D. N.M. 1997)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Smart, 214 B.R. 63, 68 (Bankr. D. Conn. 1997)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Anderson, 209 B.R. 639
(Bankr. M.D. Pa. 1997)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Fraize, 208 B.R. 311, 313 (Bankr. D. N.H. 1997)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Neverla, 194 B.R. 547, 550-552 (Bankr. W.D.N.Y.)</a>. <a href="#2a">Return to article</a>

<a name="3">3</a> Author's Note: Indeed, it does seem peculiar that modification of a mortgage to save a vacation home should be possible in chapter 13, when similar
protections are unavailable with respect to a debtor's shelter. <a href="#3a">Return to article</a>

<a name="4">4</a> For example, as many courts have held, a completely undersecured secured creditor is not the "holder" of a "secured claim" entitled to the protection of
§1322(b)(2). This conclusion is consistent with the plain language of both §§506 and 1322(b)(2) and with the Nobelman opinion itself. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Plouffe,

157 B.R. 198, 200 (Bankr. D. Conn. 1993)</a>; 8 King, Collier on Bankruptcy, ¶1322.06[1][a], at 1322-21 (15th ed. rev. 1999). Courts that have held to the
contrary have frequently cited Congressional intent. See, e.g., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Neverla, 194 B.R. 547 (Bankr. W.D.N.Y. 1996)</a> (minority position "better reflects
Congressional intent"). Similarly, most courts have concluded that the plain language of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §1322(c)(2)</a> permits modification of mortgages that have
matured during or after a chapter 13 case "notwithstanding subsection (b)(2)." See, e.g., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Mattson, 210 B.R. 157 (Bankr. D. Minn. 1997)</a>

(§1322(b)(2) protections did not apply to loans maturing before end of plan); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Young, 199 B.R. 643 (Bankr. E.D. Tenn. 1996)</a> (debtors could strip
down mortgage if last payment was due before final scheduled plan payment); 8 King, Collier on Bankruptcy, ¶1322.16 at 132252 (15th ed. rev. 1999). In
1997, the Fourth Circuit in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Witt, 133 F.3d 508 (4th Cir. 1997)</a>, concluded that stripdown is not permitted under §1322(c)(2) because it provides for
modification of "payments" rather than "claims." The Witt court misreads §1322(c)(2) because the statute plainly refers to "claims as modified." In reaching a
tortured interpretation of the language to deny modification, the court relies, in part, on "legislative history." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 133 B.R. at 514</a>. <a href="#4a">Return to article</a>

<a name="5">5</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Houston First Savings Assn., 730 F.2d 236, 245-246 (5th Cir. 1984)</a>. <a href="#5a">Return to article</a>

<a name="6">6</a> Indeed, I may speculate that Congress was intending to placate the naked political power of large institutional lenders, but that doesn't help me read the
statute. <a href="#6a">Return to article</a>

<a name="7">7</a> See, e.g., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Hougland, 886 F.2d 1182 (9th Cir. 1989)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Commonwealth Mortgage Corp., 895 F.2d 123 (3d Cir. 1990)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Bellamy, 962 F.2d
176 (2d Cir. 1992)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Hart, 923 F.2d 1410 (10th Cir. 1991)</a>. <a href="#7a">Return to article</a>

<a name="8">8</a> For a host of reasons, including state anti-deficiency statutes, conversions and discharge under chapter 7, judgment-proof mortgagors and the expense of
collection, actual recovery on deficiency judgments after foreclosure is extremely rare. <a href="#8a">Return to article</a>

<a name="9">9</a> Note that the high cost of foreclosure also means that if the choice is between stripdown with successful payment of the stripped-down balance and foreclosure with attendant costs, a rational lender should choose the stripdown. <a href="#9a">Return to article</a>

<a name="10">10</a> See, generally, National Consumer Law Center, Consumer Bankruptcy Law and Practice, 11.6.1 (5th ed. 1996 and Supp.) for a discussion of the underlying arguments. <a href="#10a">Return to article</a>

Journal Authors

Gary Klein

Journal Date

Wednesday, December 1, 1999 - 12:00