Daily Development for Wednesday, November 8, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

Note that two cases are reported here:

DIRT's regular Bankruptcy Reporter is Jim Stillman of the California Bar.

BANKRUPTCY; LOANS SECURED SOLELY BY DEBTOR'S RESIDENCE; STRIPOFF OF WHOLLY UNSECURED CLAIM: While a Homeowners Association's junior lien on the debtor's residence would be a "claim secured only by a security interest in a debtor's principal residence" and therefore protected from modification in a Chapter 13 case by force of section 1322(b), the fact that there was no value in the residence to secure the claim takes the claim outside the purview of the section, so that debtor's Chapter 13 plan could treat the claim as wholly unsecured.

In re Bartee, 212 F. 3d 277 (5th Cir. 2000).

The Court of Appeals wrote that Nobelman v. American Savings Bank, 508 U.S. 324 (1993), resolved an earlier split in authority in holding that section 1322(b) protects the partially unsecured home mortgage from modification including by bifurcation of the claim into a secured and unsecured portion (i.e., a "stripdown" of the lien); but a new split in authority has arisen over the question whether section 1322(b) should protect a home mortgage having no security value at all. The Fifth Circuit appellate court finds that a wholly unsecured home mortgagee has no "rights" in the collateral that warrant protection, and that the claim can be stripped off the property in Chapter 13.

Reporter's Comment: Every court that deals with this question has to consider that, in Nobelman, Justice Thomas in writing for the Supreme Court stated that section 1322(b) was intended to protect the "rights" of the undersecured creditor rather than only on the "claim" of such a creditor, (claim being a welldelimited term in the Code). Here, the Fifth Circuit (at n. 20, p. 291) opines that Justice Thomas could not have intended "a tectonic shift in the focus of the Bankruptcy Code" from "claim" to "rights." And anyway, the Court of Appeals writes, the "rights" of a wholly unsecured mortgagee are "illusory, hypertechnical and relevant only in law review articles." (p. 290.)

That last point is one with which experienced mortgage lawyers will continue to disagree. A subordinate lien holder has enjoys a mix of rights and bargaining powers, even when the security has been rendered valueless from an appraisal point of view, which in many cases results in at least some dollar recovery for the "unsecured" lienholder.

Editor's Comment: For a more thorough discussion of this issue combined with some speculation as to tactics concerning it, see the DD for April 13, 2000, discussing McDonald v. Master Financial, Inc. (In re McDonald), No. 991381, ___ F.3d ___, 2000 WL 261061 (3d Cir.) (3/9/00) (Cowen, J.). All old DD's are posted on the DIRT website: http://www.umkc.edu/dirt/

Editor's Comment 2: Don't neglect the holding on association liens falling under the protection of Section 1322. This may come in handy some day. Undoubtedly many bankruptcy courts and lawyers neglect to take this consideration into account in structuring plans.

BANKRUPTCY; LIENS SECURED SOLELY BY DEBTOR'S RESIDENCE; MODIFICATION RESTRICTIONS; STRIPOFF OF WHOLLY UNSECURED CLAIM: Bankruptcy Appellate Panel for the First Circuit holds that a wholly unsecured residential mortgagee can be "stripped off" the property, notwithstanding the antimodification provision of Section 1322(b)(2).

In re Mann, 249 B.R. 831 (Bankr. 1st Cir. 2000).

The opinion is separately reported for its vigorous confrontation of the "swing of $1.00" argument. According to this argument, if a partially secured home mortgage cannot be modified at all, pursuant to Nobelman, even if the security value is only a dollar, then it is unfair and irrational to allow a debtor to strip off the home mortgage altogether when the collateral is worth merely a dollar less. The Appellate Panel replies, "[L]ine drawing is often required in the law and, at the boundary, the appearance of unfairness is unavoidable" (pp. 838839), quoting from In re McDonald, 205 F.3d 606 (3rd Cir. 2000). Leaving such decisions up to judges is "consistent with both the common law and sound public policy." (id.)

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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