Section 1322(c)(2) A Limited Exception to the Exception
The Fourth Circuit was right on target last year when it held that C1322(c)(2) does not permit the bifurcation of an undersecured claim into separate secured and unsecured claims, as several bankruptcy courts had held. Witt v. United Companies Lending Corp. (In re Witt), 113 F.d 508 (4th Cir. 1997). The court recognized that C1322(c)(2) is only a limited exception to the antimodification language of C1322(b)(2) regarding home-stead mortgages and rejected the "anything goes" approach that some courts had taken.
The debtors in Witt, a husband and wife, filed a joint chapter 13 case in 1995 and sought confirmation of a five-year repayment plan. Their assets included a home that served as their principal residence. Their home was encumbered by a 10-year balloon mortgage that would mature, under the original payment schedule, during the fourth year of their plan in 1999. The approximate unpaid balance of the mortgage as of the petition date in 1995 was $22,500. The Witts claimed that the present value of the home was $13,100 and therefore proposed to separate the bank’s claim into a secured claim of $13,100 based on the value, and an unsecured claim of the balance due of approximately $9,400. The Witts’ plan would pay the secured portion in full over five years, while paying only 30 percent of the unsecured portion as a general unsecured claim.
The mortgage lender, United, opposed the Witts’ treatment of its claim and asserted that such bifurcation of its claim modified its rights under the secured note in violation of C1322(b)(2) and applicable case law. The debtors argued that C1322(c)(2), which Congress enacted in 1994, was an exception to C1322(b)(2)’s prohibition against bifurcation of home mortgage debt and had, in fact, superseded the Supreme Court’s 1993 decision Nobelman v. American Savings Bank, 508 U.S. 324 (1993), which held that C1322(b)(2) protected from modification a home mortgage lender’s entire right to payment, both secured and unsecured, so that its secured claim could not be bifurcated through cramdown.
The language that the Witts believed had overruled Nobelman, provides:
[n]otwithstanding subsection (b)(2) and applicable non-bankruptcy law...in a case in which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor’s principal residence is due before the date on which the final payment under the plan is due, the plan may provide for the payment of the claim as modified pursuant to C1325(a)(5) of this title. [Emphasis added.]
had Congress intended such a revolutionary change in the law,
Although United agreed that C1322(c)(2) was applicable because the last payment on the original payment schedule of the note would come due before the final payment due under the plan, it argued that C1322(c)(2) still did not permit the Witts to modify its claim through bifurcation. United disagreed with the Witts’ interpretation of the phrase in C1322(c)(2), "provide for the payment of the claim as modified pursuant to C1325(a)(5)." The Witts maintained that the language referred to modification of the claim; United countered that "as modified" should be read as applying to the word "payment."
Combining its reading of the statute with the legislative history, the Fourth Circuit in Witt agreed with United’s position and found that the words "as modified" applied to "payment" not "claim," so that C1322(c)(2) provides only for a modified payment, not a modified claim. The court noted that the House Committee Report, which became the legislative history, specifically provides that the Bankruptcy Code amendments were designed to address a number of problematic court opinions construing the Code. The section of the report concerning C1322(c) is captioned, "Period for curing default relating to principal residence." Under this caption, the House Report discusses the impact of CC1322(c)(1) and 1322(c)(2), which were designed to overrule the effects of two Third Circuit cases. The first one, Matter of Roach, 824 F.2d 1370 (3rd Cir. 1987), held that a debtor no longer had a right to cure a mortgage after the issuance of a foreclosure judgment. The second Third Circuit case was First National Fidelity Corp. v. Perry, 945 F.2d 61 (3rd Cir. 1991), which held that subsequent to a foreclosure judgment, a chapter 13 debtor could no longer provide for a mortgage debt by paying the full amount of the allowed secured claim under C1325(a)(5) because doing so would constitute an impermissible modification of the mortgage holder’s right to immediate payment under C1322(b)(2). Because Congress enacted C1322(c)(1) and (2) to overrule two specific Third Circuit cases, C1322(c)(1) should be read as allowing for the cure of a mortgage up until the property is actually sold at foreclosure, while C1322(c)(2) should be read as providing for those payments to be stretched out over time, but as still requiring the debtor to pay the full amount of the allowed secured claim.
Having completed its analysis of the legislative history, the statute and case law, the court in Witt found that under C1322(c)(2) the Witts could only modify the mortgage by stretching out the regular payments over time, but were still required to pay the full amount of United’s claim. The Fourth Circuit’s decision further harmonized the language of the statute with the long-standing special protection that Congress affords to home mortgage lenders to preserve wider access to affordable home purchase financing. As the court observed, although Congress did intend for the Bankruptcy Reform Act of 1994 to overrule judicial precedent in a number of different areas, there is no clear manifestation that Congress intended to overrule Nobelman; had Congress intended such a revolutionary change in the law, it would have made clear its intention to do so. There is further support for this position in academic literature. See, e.g., McCaffrey, Cramdown Under the New 1322(c)(2) from Dewsnup to Nobelman to the Bankruptcy Reform Act of 1994: Did Congress Intend to Change Pre-Amendment Law When It Enacted 1322(c)(2)? 30 Loy. L.A.L. Rev. 841 (1997).
At least one published bankruptcy court decision criticizes the Fourth Circuit’s decision in Witt. The court in In re Mattson, 210 B.R. 157 (Bankr. Minn. 1997), described "cramdown as the centerpiece of the reorganization chapters," disagreed with the Witt interpretation and held that the words "as modified" in C1322(c)(2) referred to "claim" not "payment," so that instead of limiting debtors to a modified payment amount, C1322(c)(2) permits modification of the actual claim amount based on the value of the underlying asset. While this position has support among other bankruptcy court decisions (see, e.g., In re Young, 199 B.R. 643 (Bankr. E.D. Tenn. 1996)), the Fourth Circuit decision appears to have succeeded best in reconciling C1322(c)(2) with existing law concerning the correct treatment of home mortgages.
In its October 1997 report to Congress, the National Bankruptcy Review Commission proposed a change to the antimodification language of C1322(b)(2), but made a point of mentioning that this revision would have no impact on the existing law concerning the payment and cure provisions of C1322(c)(2). Unfortunately, because not all courts adopt presently the Fourth Circuit’s view, Congress may eventually need to revise C1322(c)(2) to clarify this situation.