When a home mortgage matures before the final payment under a chapter 13 plan, the debtor may bifurcate the mortgage into a secured and an unsecured claim, only paying the secured claim in full, the Ninth Circuit Bankruptcy Appellate Panel tells us.
The BAP’s November 13 opinion has another interesting holding: When the schedules show that the debtor was ineligible for chapter 13 by having too much unsecured debt, the court’s later valuation of the collateral could make the debtor eligible if the valuation decreases the amount of unsecured debt.
The First and Second Mortgages
The debtors filed a chapter 11 plan, scheduling their home as being worth about $1 million. They scheduled a first mortgage for approximately $950,000 and a second mortgage for some $465,000.
The second mortgage would mature before the end of the term of the plan. The debtors intended to bifurcate the second mortgage into an unsecured claim of about $375,000 and a secured claim of more than $90,000.
In his opinion for the BAP, Bankruptcy Judge Robert J. Faris said that the junior lender didn’t realize until the debtors were into their fourth amended plan that the debtors were ineligible for chapter 13 because they had more unsecured debt than Section 109(e) allowed at the time. By then, however, the bankruptcy judge had held a valuation hearing and determined that the home was actually worth more than $1.2 million.
Consequently, the debtors amended the plan to bifurcate the second mortgage into a secured claim of $265,500 and an unsecured claim of something over $200,000. The lower unsecured claim on the mortgage would put the debtors below the Section 109(e) cap for unsecured claims.
Primarily, though, the junior lender objected to confirmation by contending that the debtors were obligated to pay the second mortgage in full, given the antimodification provision in Section 1322(b)(2).
The bankruptcy court overruled the objection and confirmed the plan. The junior lender appealed to the BAP.
The Exception in Section 1322(c)(2)
Section 1322(b)(2) allows a chapter 13 plan to “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.” [Emphasis added.] But there is an exception. When the last payment on a home mortgage is due before the last payment on the plan, Section 1322(c)(2) allows the plan to “provide for the payment of the claim as modified.”
Judge Faris described the junior lender as arguing that “the statute allows for modification of only the payment term, not the claim itself.”
The lender relied on Nobelman v. American Savings Bank, 508 U.S. 324 (1993), where the Supreme Court held that Section 1322(b)(2) would not permit bifurcation. Judge Faris said that reliance on Nobelman “fails” because Congress amended the Code a year later by adding Section 1322(c)(2).
Although the Ninth Circuit has not ruled on the permissibility of bifurcation under Section 1322(c)(2), Judge Faris cited the Fourth and Eleventh Circuits, along with other courts that permit bifurcation of a mortgage that matures before the plan’s end.
In league with the “overwhelming weight of authority,” Judge Faris said that Section 1322(c)(2) was not ambiguous and that it “allows modification” of the junior lender’s claim. The “only reasonable way to read the statute,” he said, is to say that the antimodification language in subsection (b)(2) “does not have any application” to claims that fall under subsection (c)(2).
Furthermore, Judge Faris observed that Congress “would have said so” if it “intended to require full payment in Section 1322(c)(2).” He found no error in the bankruptcy court’s ruling that the plan could modify the junior mortgage.
Chapter 13 Eligibility
Judge Faris addressed the lender’s belated objection to eligibility for chapter 13. He recognized that the Ninth Circuit had held that “eligibility should normally be determined by the debtor’s originally filed schedules, checking only to see if the schedules were made in good faith.” Scovis v. Henrichsen (In re Scovis), 249 F.3d 975, 982 (9th Cir. 2001). [Emphasis added.]
If the debtor’s original schedules were the end of the story, Judge Faris would have set aside confirmation and dismissed the case, because the original schedules were filed in good faith and showed that the debtors had too much unsecured debt, as Section 109 was written at the time. However, he latched on to the word “normally” in Scovis to conclude that the debtors were eligible once the bankruptcy court valued the home.
Judge Faris said it was not a “normal” case. “In most cases,” he said, “eligibility is raised early in the case.” In the case on appeal, the lender did not raise eligibility until after the bankruptcy court had valued the property. After valuation, he said “it would be absurd to require the court to consider only the earlier-filed schedules and disregard its own finding of value.”
Judge Faris upheld confirmation of the plan, finding no error in the bankruptcy court’s conclusion that the debtors were eligible for chapter 13.
When a home mortgage matures before the final payment under a chapter 13 plan, the debtor may bifurcate the mortgage into a secured and an unsecured claim, only paying the secured claim in full, the Ninth Circuit Bankruptcy Appellate Panel tells us.
The BAP’s November 13 opinion has another interesting holding: When the schedules show that the debtor was ineligible for chapter 13 by having too much unsecured debt, the court’s later valuation of the collateral could make the debtor eligible if the valuation decreases the amount of unsecured debt.