Hurlburt’s Unheralded Takeaways A Renewed Defense of Witt’s § 1322(c)(2) Limitations and a Revealing Clash of Interpretive Methodologies

In the wreck of the Great Recession, numerous borrowers sought to avoid their homestead’s foreclosure despite material payment defaults. Many took advantage of chapter 13, which empowers, inter alia, an individual with a regular income to cure precisely such failures over time under § 1322 (b)(5). With the housing market’s contraction temporarily cratering property values throughout the nation, debtors saw this subsection as the means by which to simultaneously reduce the total mortgage secured by their homes to its newly depressed market values and discharge the reminder of the secured loans. This widely held belief prompted much concluded and ongoing litigation, including the overruling of 22-year-old precedent by a majority of the sitting judges of the U.S. Court of Appeals for the Fourth Circuit in Hurlburt v. Black (In re Hurlburt).[1]

The facts in Hurlburt were not much different than those in the Fourth Circuit’s Witt v. United Cos. Lending Corp. (In re Witt). [2] In the former, the debtor filed a not-atypical chapter 13 plan that, based on a property’s current value, sought to bifurcate his $131,000 secured mortgage to a $40,000 secured claim and $91,000 unsecured claim to be discharged in its entirety. To achieve this result, the debtor proposed to modify not only the payment schedule, but also the amount of underlying principal and a lower interest rate. This proposal, however, flouted the interpretation of § 1322 (c) (2) enshrined as circuit law in Witt. That decision had permitted modification of a payment schedule only.

Conceding the validity of the criticisms long leveled against Witt, Hurlburt jettisoned it in the face of three jurists’ determined objection. In so doing, Hurlburt did ensure the consistent operation of one of chapter 13’s most prominent sections throughout the U.S. At the same time, its dueling opinions not only revealed Witt’s continuing appeal but also articulated two interpretive methodologies equally applicable to the Bankruptcy Code’s every provision.

Simply put, Hurlburt did far more than just patch up a pestering split, harmonizing the interpretation of a central chapter 13 provision across every circuit. It also pioneered stratagems relevant to the proper construction of the Code’s every chapter, particularly as to the utility of that omnipresent interpretive bogeyman: legislative history.

Statutory Text

Section 1322 (b) (2), commonly known as chapter 13’s “anti-modification” provision, prohibits any plan from modifying “a claim secured only by a security interest in real property that is the debtor’s principal residence.” [3] Section 1322 (c) (2) excepts from this prohibition any plan that provides for “the payment of ... [such a] claim as modified pursuant to section 1325 (a) (5)” if the final payment due date specified in the original mortgage contract precedes one set in the relevant plan. [4] On this point, § 1322 (c)’s text is explicit — “Notwithstanding subsection (b) (2)” — and echoes the opening words in § 1322 (b) (5) and (e). [5]

“Main” Story: The Jurisprudential Evolution
Pandora’s Box: Nobelman and Witt

About one year before § 1322 (c) (2)’s passage, the U.S. Supreme Court opined as to the ambit of § 1322 (b) (2) in Nobelman v. American Savings Bank. [6] As Justice Clarence Thomas explained therein, for purposes of § 1322 (b) (2), a creditor’s “rights” are those “reflected in the relevant mortgage instruments” and enforceable under state law. [7] Because the prerogative “to repayment of the principal ... over a fixed term at specified ... rates of interest” falls within this coterie, the Court read § 1322 (b) (2) to prohibit a chapter 13 debtor from relying on § 506 (a) to reduce an undersecured homestead mortgage to the fair market value of the mortgaged residence. [8]

In the wake of Nobelman, § 1322 (c) (2) was enacted. [9] In drafting this exception to a post-Nobelman § 1322 (b) (2), Congress made two key decisions. First, it limited its application to short-term mortgages and the last five (or fewer) years of a home mortgage with a longer original amortization schedule. [10] Second, it mirrored the prefatory prepositional clause in § 1322 (b) (5): “Notwithstanding paragraph (2) of this subsection....” [11] This effective duplication made sense: Nobelman itself had cited § 1322 (b) (5) as one example of a “statutory limitation” on lenders’ rights that would otherwise be immunized from revision by § 1322 (b) (2). [12] Yet no reference to Nobelman appears in this subsection’s legislative history. [13] Instead, it names as targets In re Roach and First National Fidelity Corp. v. Perry, two decisions by the Third Circuit that had construed § 1322 (b) (2) to forbid a mortgage’s modification upon a foreclosure judgment and sale. [14]

While numerous courts viewed § 1322 (c) (2) as rendering § 1322 (b) (2) and Nobelman inapplicable to short-term home mortgages, Witt instead understood § 1322 (c) (2) to proscribe the cramdown of undersecured homestead mortgages. [15] As a threshold matter, Witt posited an intrinsic ambiguity in § 1322 (c) (2) due to the lack of clarity on whether the words “as modified” in the phrase “payment of the claim as modified” applied to “payment” or “claim.” [16] Based on the rule of the last antecedent, “as modified” should apply to “claim”; based on common sense, however, the term “claim” could be part of the phrase “of the claim,” which modifies “payment.” [17] This structural ambiguity freed the Witt panel to consult extrinsic interpretive sources. From one such fount — this subsection’s scanty legislative history — the Witt panel determined that only the claim’s payment schedule may be modified under § 1322 (c) (2). [18]

Witt’s Aftermath

For decades, Witt incurred reproach for “trump [ing] the plain language of the statute with the ambiguous silence of legislative history.” [19] To a judicial and scholarly majority, it propounded “a grammatically strained reading” absolutely precluded by “the rule of the last antecedent.” [20] Witt was blamed for simultaneously manufacturing “nonsense” of § 1322 (c) (2)’s “cross reference to § 1325 (a) (5),” as the latter has always authorized modification of “allowed secured claims.” [21] The result of these questionable gymnastics was that a creditor that surrenders its collateral receives “an unsecured debt that must be paid in full with interest to confirm a plan,” “the most exalted status ever achieved by a nonpriority, unsecured claim” under the Bankruptcy Code’s plain prose and a result incompatible with its broader design. [22]

Fourth Circuit Reconsiders: Hurlburt

Receptive to these critiques, the Hurlburt majority rejected Witt. It first noted, quoting Witt, that the phrase “payment of the claim as modified” plainly permits the modification of claims in accordance with the rule of the last antecedent. [23] By its reckoning, the introductory phrase in § 1322 (c) (2) (“Notwithstanding subsection (b) (2)”) and the limiting phrase in § 1322 (b) ( “subject to subsections (a) and (c)”) further evidences an unmistakable congressional intent to create “an exception to or limitation on” chapter 13’s anti-modification provision. [24]

Finally, it detected significance in § 1322 (c) (2)’s final words — “as modified pursuant to section 1325 (a) (5) of this title ...” — that Witt had never noticed: Section 1325 (a) (5) had always dealt with the modification of claims, “not just payments.” [25] Reasonably understood, § 1322 (c) (2)’s plain language demanded Witt’s repudiation, a clear-cut deduction that could not be disregarded based on bits of legislative history, especially history as equivocal as § 1322 (c) (2)’s own. [26]

Unwilling to dispense with Witt, the dissent espied textual error and judicial overreach in the majority’s opinion. As written, § 1322 (c) (2) “is all about payment timing,” mentioning “payments” four times and extensively discussing timing. [27] Assuming that this unambiguous focus was deliberate rather than accidental, as all courts must, the reference in § 1322 (c) (2) to § 1325 (a) (5) is properly understood as a textual incorporation of the latter’s methodology for the alteration of a claim’s payment schedule. [28] In the hands of Hurlburt and the judicial majority that it now joined, the dissent added, § 1322 (c) (2) had been transformed into an exception for an entire subset of short-term mortgages that, but for their interpretive sleight-of-hand, would be encompassed by Nobelman’s expansive § 1322 (b) (2). [29] Consequently, the majority’s reasoning effectively cabined the reach of the Court’s definitive pronouncement without the kind of decisive extrinsic evidence controlling precedent minimally demands. [30] Considering the legislative record’s silence as to Nobelman’s connection to § 1322 (b) (2) or (c) (2), the majority had brazenly arrogated to itself the authority to overturn binding precedent that only this nation’s highest court possesses. [31]

The negative consequences of Hurlburt’s construction on low-income debtors constituted the dissenter’s final rejoinder. Once the majority’s logic was applied, the typically poorer debtors allowed to submit only three-year plans would be forced to pay the full value of a four-year mortgage, while wealthier debtors entitled to file five-year plans would not. [32] Such a harsh result struck the dissent as antithetical to bankruptcy law’s traditional, albeit conditional, solicitude for the interests of the most financially precarious debtors. [33]

Conclusion

Overall, the text, purpose and history of § 1322 (c) (2) can be marshaled to support the dissent in Hurlburt (and thus Witt), as well as its majority without much difficulty, an unfortunate problem common to today’s chapter 13. The grammatically sound rule of the last antecedent favors Hurlburt, as so many have noted. [34] Nonetheless, this formalistic canon has often been discarded, and it has been accorded decisive weight only when there is no contraindication from legislative history or another source. [35] Furthermore, grammatically speaking, an antecedent can be an entire phrase, meaning that the “last antecedent” of “as modified” could be “claim,” the noun, as much as “payment of a claim,” the noun phrase. [36] Such a gloss undercuts the central pillar of the attack on Witt within and without the Fourth Circuit.

Finally, to the extent that § 1322 (c) (2) really is “all about payment timing,” [37] the more-prized rule against superfluity arguably overrides this more technical axiom. [38] Two facts — that the legislative history set its sights on Perry’s “result ... with respect to” the payment of certain “mortgages” and ignores Nobelman — can sustain a narrow interpretation of § 1322 (b) (2), one issued prior to § 1322 (c) (2)’s passage and of whose existence Congress was cognizant. [38] On the other hand, § 1322 (c) (2) can also be characterized as a standalone exception to § 1322 (b) (2) that is independent of the latter’s prevailing construction. If so, then Nobelman was irrelevant to its operations, and its absence from the legislative history is eminently understandable.

In turn, § 1322 (c) (2)’s shout-out to § 1325 (a) (5) cuts both ways: It either incorporates just its scheme for altering a claim’s “payment” in light of § 1322 (c) (2)’s payment-centric tone, or it authorizes the modification of a “claim” in light of § 1322 (a) (5)’s claim-riveted design. Although the majority’s approach holds the stronger hand, all these options can be depicted as anchored in § 1322 (c) (2)’s copy and context, and therefore remain plausible, if not equally, after as before Hurlburt.

Outside of this highly technical debate, Hurlburt’s more lasting influence might come from the dueling approaches to statutory interpretation, both of which find forceful expression in its pages, whenever the law in question represents a congressional response to a particular Supreme Court opinion. In general, as the Court has often said, Congress is presumed to enact legislation with the knowledge of the interpretation that courts have given to an existing statute. [39] According to the dissenters, this presumption compels courts “to respect Congress’s decision to override or endorse a particular holding” and to “not lightly toss aside Supreme Court precedents that Congress has not squarely addressed,” particularly as to the Bankruptcy Code. [40]

In thusly observing, the Hurlburt dissenters flagged an oft-overlooked aspect of the Supreme Court’s bankruptcy jurisprudence: with noticeable regularity, this nation’s highest tribunal has employed this supposition to select between two or more plausible meanings, thereby dispelling the ambiguity frequently engendered by the elasticity of the English language. [41] In contrast, the majority relied on a separate line of precedent establishing that “silence in the legislative history, no matter how clanging, cannot defeat the better reading of the text and statutory context.” [42] In battling over § 1322 (c) (2), a cadre of jurists hence sketched dissimilar techniques for the resolution of an oft-confronted interpretive problem: One construed a venerable presumption as a limit on a statutory text’s range of plausible meanings, and the other began — and ended — its analysis with the statute’s apparently singular plain meaning. Despite these contradictory holdings, both modes are rooted in bankruptcy law’s past and present, which can be justifiably utilized in the construction of other sections besides § 1322 (c) (2).

Hurlburt ultimately brings clarity to one debate even as it sets up yet another. As of its release, the Fourth Circuit has joined every other appellate court to have considered this issue in holding that the plain text of § 1322 (c) (2) authorizes modification of such claims, not just the payment schedule for such claims, including through bifurcation and cramdown. But Hurlburt contains something more: persuasive articulations of alternative interpretive routes for other courts and counsel to weigh and wander in parsing yet other Code sections.