USCA1 Opinion
United States Court of Appeals
For the First Circuit
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No. 95-1956
LOMAS MORTGAGE, INC.,
Appellant,
v.
ESPERANDIEU & ANTONINE LOUIS,
Appellees.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Edward F. Harrington, U.S. District Judge]
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Before
Lynch, Circuit Judge,
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Aldrich and Bownes, Senior Circuit Judges.
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John J. Monaghan, with whom Deborah Paige Stone and Sherburne,
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Powers & Needham, P.C. were on brief, for appellant Lomas Mortgage,
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Inc.
Gary Klein, with whom National Consumer Law Center, Joseph G.
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Albiani and Joseph G. Albiani and Associates were on brief, for
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appellees Esperandieu and Antonine Louis.
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April 18, 1996
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LYNCH, Circuit Judge. At issue is the important
LYNCH, Circuit Judge.
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question of whether 1322(b)(2) of the Bankruptcy Code, 11
U.S.C. 1322(b)(2), prevents Chapter 13 debtors from
"stripping down" their primary residence mortgages when the
debtors reside in a multi-family house. "Stripping down"
would advantage such homeowners by permitting them to cap the
dollar amount of the security interest in the home to the
home's actual value rather than the higher amount of the note
itself. The difference would be treated as unsecured debt.
That advantage is denied to resident single-family homeowners
by 1322(b)(2).
This case thus raises the question of whether the
"strip down"1 protections which Congress denied to owners
residing in single-family homes, in order to encourage the
flow of residential mortgage funds, are nonetheless available
to owner occupants of multi-family housing. We hold that
Congress intends exactly such different results and that the
antimodification provision of 1322(b)(2) does not bar
modification of a secured claim on a multi-unit property in
which one unit is the debtor's principal residence and the
security interest extends tothe other income-producing units.
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1. The term "strip down" is a colloquialism used to describe
the process by which a secured creditor's lien is limited to
the market value of its collateral. The term "cram down" is
also commonly used to describe this process. See, e.g., In
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re Wilson, 174 B.R. 215, 218 n.2 (Bankr. S.D. Miss. 1994); In
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re Lutz, 164 B.R. 239, 241 (Bankr. W.D. Pa. 1994), rev'd on
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other grounds, 192 B.R. 107 (W.D. Pa. 1995).
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Esperandieu and Antonine Louis own a three-family
home at 221 Spring Street in Brockton, Massachusetts. Lomas
Mortgage, Inc. holds the mortgage on the property. The
mortgage secures a note executed on February 19, 1987, for
$159,300. The mortgage is in the standard FNMA form for
single-family dwellings, with the standard FNMA one- to four-
family rider, including an assignment of rents. The Louises
hold a one-half interest in the property. The other half is
owned by Mr. Louis's brother, who occupies a second unit.
The third unit is leased to tenants.
Between the time of the 1987 mortgage and the
filing of the bankruptcy petition on January 22, 1995,
Massachusetts suffered a severe recession. The recession
resulted in a general decline in property values, in
unemployment, and other harsh realities. The Louises'
neighborhood in Brockton was not immune and foreclosures in
the neighborhood became common. Eventually, the Louises
themselves could not meet their mortgage payments. They
defaulted on the note held by Lomas, and Lomas started
foreclosure proceedings. The Louises filed a voluntary
petition under Chapter 13, and the foreclosure was stayed.
The Louises then moved to bifurcate or "strip down"
Lomas's claim into a secured claim for the actual value of
the property, agreed to be $80,000, and an unsecured claim
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for the balance, citing 11 U.S.C. 506(a).2 The Louises
could not take advantage of 506(a), however, if Lomas's
security for the note extended only to real property that is
the Louises' principal residence. That is because
1322(b)(2), which governs Chapter 13 plans, provides:
(b) Subject to subsections (a) and (c) of
this section, the plan may --
(2) modify the rights of
holders of secured claims,
other than a claim secured only
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by a security interest in real
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property that is the debtor's
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principal residence, or of
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holders of unsecured claims, or
leave unaffected the rights of
holders of any class of claims.
11 U.S.C. 1322(b)(2) (emphasis supplied).
The Supreme Court has held that the "other than"
language of 1322(b)(2), called an "antimodification
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2. Section 506(a) provides, in pertinent part:
An allowed claim of a creditor secured by
a lien on property in which the estate
has an interest . . . is a secured claim
to the extent of the value of such
creditor's interest in the estate's
interest in such property . . . and is an
unsecured claim to the extent that the
value of such creditor's interest . . .
is less than the amount of such allowed
claim.
11 U.S.C. 506(a). Section 506(a) allows a debtor to limit
a creditor's secured claim to the value of the underlying
collateral. Any amount of the secured claim exceeding the
value of the collateral becomes unsecured. Section 506(a) is
a general provision under Chapter 5 of the Bankruptcy Code
and thus is applicable to individual bankruptcy cases under
Chapter 13. See 11 U.S.C. 103(a).
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provision," In re Hammond, 27 F.3d 52, 55 (3d Cir. 1994),
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bars bifurcation where the creditor's secured claim "is
secured only by a lien on the debtor's principal residence."
Nobelman v. American Sav. Bank, 508 U.S. 324, 332 (1993). In
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Nobelman, the Supreme Court addressed a Chapter 13 plan to
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modify a home mortgage lender's secured claim on joint
debtors' owner-occupied condominium. The debtors owed
$71,335 in principal, interest, and fees under a note payable
to the lender and secured by a deed of trust on the
condominium. The debtors' Chapter 13 plan proposed to make
monthly payments required by the note up to $23,500, the
value of the residence, and, relying on 506(a), to treat
the remainder of the lender's claim as unsecured. Id. at
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326. The lender objected to the plan, asserting that,
506(a) notwithstanding, 1322(b)(2) prohibited the debtors
from modifying its rights under the note secured by the deed
of trust on the condominium. Although noting that the
debtors were correct to seek valuation pursuant to 506(a)
in order to determine whether the lender in fact held a
secured claim, the Court held that the valuation
determination under 506(a) "does not necessarily mean that
the 'rights' the bank enjoys as a mortgagee, which are
protected by 1322(b)(2), are limited by the valuation of
its secured claim [under 506(a)]." Id. at 329.
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Determining that the term "rights" in 1322(b)(2)
refers to rights reflected in the relevant mortgage
instrument enforceable by state law, the Court held that
1322(b)(2) prohibited the debtor from bifurcating the
lender's claim into secured and unsecured portions. Id. at
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331-32. Because the lender's contractual rights were
contained in a unitary note, it would be impossible for the
debtor to modify the rights of the lender as to the unsecured
portion of its claim without also modifying the terms of the
secured component. Id. Thus, the court held, "to give
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effect to 506(a)'s valuation and bifurcation of secured
claims through a Chapter 13 plan in the manner petitioners
propose would require a modification of the rights of the
holder of the security interest." Id. at 332. Thus Nobelman
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provides that if a lender's claim "is secured only by a lien
on the debtor's principal residence," id., bifurcation under
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506(a) will, in most cases, be prohibited.
Nobelman, however, did not address the question of
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what secured claims would be considered "secured only by a
security interest in real property that is the debtor's
principal residence." 11 U.S.C. 1322(b)(2). Nobelman
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noted that one of the purposes of the provision was to give
special protection to home lenders in order to encourage the
flow of capital into the home lending market. See Nobelman,
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508 U.S. at 332 (Stevens, J., concurring) (citing Grubbs v.
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Houston First Am. Sav. Ass'n, 730 F.2d 236, 245-46 (5th Cir.
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1984)). The precise question of whether home lenders whose
security interest extended beyond the principal residence to
other property or other income-producing components of the
principal residence could be considered to have claims
secured "only by a security interest in real property that is
the debtor's principal residence" was not raised in Nobelman.
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This case raises that question.
In their motion before the bankruptcy court, the
Louises argued that the antimodification provision of
1322(b)(2), as interpreted by Nobelman, did not reach the
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security interest Lomas had on 221 Spring Street because
Lomas's security interest extended to the entire property,
including the income-producing components. Lomas objected,
arguing that 1322(b)(2)'s antimodification provision
applied because its security interest was only on 221 Spring
Street and the property included the Louises' principal
address. The bankruptcy court agreed with the Louises and
allowed the motion to bifurcate. The district court affirmed
the order and Lomas appeals. Review of the bankruptcy
court's conclusion of law is de novo. See In re Winthrop Old
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Farm Nurseries, Inc., 50 F.3d 72, 73 (1st Cir. 1995).
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The Louises' "principal residence" is 221 Spring
Street. Were the property a single-family house,
1322(b)(2)'s antimodification provision surely would apply
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and bar bifurcation, assuming Lomas's security interest did
not extend to any other property. See, e.g., In re Hammond,
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27 F.3d 52 (3d Cir. 1994) (note secured by home and by
personal property within the home is outside scope of
antimodification provision); see also 5 Collier on Bankruptcy
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1322.06[1][a], at 1322-21 to 1322-23 (Lawrence P. King ed.,
15th ed. 1995) (a claim secured by any other real property or
by personal property of the estate or debtor, or by personal
property of another may be modified by the Chapter 13 plan).
Starting, as they should, with the language of
1322(b)(2), see Consumer Prod. Safety Comm'n v. GTE
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Sylvania, Inc., 447 U.S. 102, 108 (1980) ("the starting point
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for interpreting a statute is the language of the statute
itself"), Lomas and the Louises present competing
constructions of the statutory language. Lomas argues that
the term "only" modifies "by a security interest in real
property" and the term "that is the debtor's principal
residence" further modifies "real property." Lomas's reading
results in 1322(b)(2) applying when (1) the security
interest is only in real property (as opposed to personal,
intangible or other non-real property) and (2) the real
property is the "debtor's principal residence." Under this
reading, there is no need that the real property be "only"
the debtor's principal residence.
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The Louises, in contrast, argue (1) that "only"
modifies the entire phrase "by a security interest in real
property that is the debtor's principal residence"; and (2)
that the word "is" requires complete and exclusive identity
between "real property" and "principal residence."3
Lomas criticizes the Louises' reading on the ground
that the statutory language does not explicitly state that
the real property must be "exclusively" the debtor's
principal residence. The Louises criticize Lomas's reading
on the ground that the statutory language does not explicitly
state that the real property must merely "contain" or
"include" the principal residence.
The "plain meaning" approach to 1322(b)(2)
appears to us to be, in the end, inconclusive. The disputed
terms could (as Lomas claims) serve the limited purpose of
distinguishing security interests in real property from
security interests in personal or other property. But they
could also (as the Louises claim) serve the more general
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3. The Louises' reading is the approach preferred in the
case law. See In re Adebanjo, 165 B.R. 98, 104 (Bankr. D.
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Conn. 1994) (collecting cases); accord In re McGregor, 172
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B.R. 718, 720 (Bankr. D. Mass. 1994) ("If [Congress intended
to extend 1322(b)(2) to multi-unit buildings,] the statute
should refer to real property that 'includes' the residence.
Instead, the word 'is' appears, which more aptly describes an
equivalence between the real estate and the residence."); In
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re Legowski, 167 B.R. 711, 714-15 (Bankr. D. Mass. 1994)
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(employing same plain meaning argument); but see In re
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Guilbert, 165 B.R. 88, 90 (Bankr. D.R.I. 1994) (rejecting
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that plain meaning approach), rev'd on other grounds, 176
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B.R. 302 (D.R.I. 1995).
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purpose of distinguishing lenders secured only by a principal
residence from lenders who may have additional security. Cf.
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In re Legowski, 167 B.R. 711, 714 n.9 (Bankr. D. Mass. 1994)
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("Meaning is always plain to the proponent of an
interpretation."). "When ambiguity is identified, a dispute
about a statute's or regulation's proper construction cannot
be resolved simply by placing the gloss of 'plain meaning' on
one competing interpretation." Massachusetts v. Blackstone
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Valley Elec. Co., 67 F.3d 981, 986 (1st Cir. 1995).
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Given the lack of plain meaning, we turn to
legislative history for guidance. See United States v.
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O'Neil, 11 F.3d 292, 297-98 (1st Cir. 1993) (resort to
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legislative history is proper where "there is room for
disagreement" over the meaning of statutory language). The
legislative history of 1322(b)(2) does not clearly resolve
the issue.
Section 1322(b)(2) was enacted as part of the
Bankruptcy Code of 1978. The Bankruptcy Code of 1978 was the
culmination of a legislative process that began in 1970, the
year the Congress created the Commission on the Bankruptcy
Laws of the United States. In 1973 the Commission issued a
report containing its findings and recommendations and a
draft bill. Section 6-201(2) of the Commission's draft bill
was the predecessor of what eventually became 1322(b)(2).
It provided that a plan under Chapter 13 "may include
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provisions dealing with claims secured by personal property
severally, on any terms, and may provide for the curing of
defaults within a reasonable time and otherwise alter or
modify the rights of the holders of such claims." Report of
the Commission on the Bankruptcy Laws of the United States,
H.R. Doc. No. 137, 93d Cong., 1st Sess., pt. II, at 204
(1973). The focus of this provision was on modification of
claims secured by personal property. It apparently would
have left largely untouched then existing law in which
security interests in real property were excluded from the
provisions of Chapter XIII. See id. pt. I, at 165 (stating
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that claims that may be dealt with under Chapter XIII include
secured and unsecured claims, but that claims secured by
estates in real property or "chattels real" were excluded
from Chapter XIII).4
But the bill as reported out of the House, H.R.
8200, had quite different language in 1322(b)(2) than that
proposed by the Commission Report. H.R. 8200 provided in
1322(b)(2) that a debtor's plan might "modify the rights of
holders of secured claims or of holders of unsecured claims."
See H.R. 8200, 95th Cong., 1st Sess. 1322(b)(2) (1977).
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4. The Commission did provide in section 6-201(4) that a
plan may include provisions for curing defaults within a
reasonable time on claims secured by a lien on the debtor's
residence. See Report on the Commission on the Bankruptcy
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Laws of the United States, H.R. Doc. No. 137, 93d Cong., 1st
Sess., pt. II, at 204.
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Although the accompanying House Report did not specifically
state that this language would allow for modification of
secured claims in real as well as personal property, see H.R.
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Rep. No. 595, 95th Cong., 1st Sess. 124 (1977), the report
does not suggest that the term "claim" which otherwise has
quite broad application, should somehow be limited to claims
in personal property in this context.
H.R. 8200 was passed by the House and sent to the
Senate, but the Senate chose to consider simultaneously
S. 2266, which had been reported out of the Senate Judiciary
Committee on July 14, 1978. The version of 1322(b)(2) in
S. 2266 provided that a debtor's plan may "modify the rights
of holders of secured claims (other than claims wholly
secured by mortgages on real property) or of holders of
unsecured claims." S. 2266, 95th Cong., 2d Sess.
1322(b)(2) (1978).
This language, which would preclude modification of
any claim wholly secured by a real estate mortgage, appears
to have been the product of testimony given during hearings
before a Senate Judiciary Committee subcommittee to the
effect that H.R. 8200 would cause "residential mortgage
lenders to be extraordinarily conservative in making loans in
cases where the general financial resources of the individual
borrower are not particularly strong." See Hearings Before
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the Subcomm. on Improvements of the Judicial Machinery of the
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Senate Comm. on the Judiciary, 95th Cong., 1st Sess. 707
(1977) (statement of Edward J. Kulik, Senior Vice President,
Real Estate Div., Mass. Mut. Life Ins. Co.). Mr. Kulik
recommended that H.R. 8200 should be changed so that, at the
least, "a mortgage on real property other than investment
property may not be modified." Id. at 714. When Mr. Kulik
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was specifically asked about the effect of the bill on
individual home mortgages (as opposed to its effect on
limited partnerships), Mr. Kulik's attorney, Robert O'Malley,
asked to speak and said, "savings and loans will continue to
make loans to individual homeowners, but they will tend to
be, I believe, extraordinarily conservative and more
conservative than they are now in the flow of credit." Id.
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at 715.
The final version of 1322(b)(2) came after H.R.
8200 and S. 2266 (passed by the Senate as an amendment to
H.R. 8200) were shaped into a compromise bill through a
series of agreed-upon floor amendments. As part of that
process, the Senate backed off its position that no
modifications would be permitted of any mortgage secured by
real estate and agreed to more limited antimodification
language for 1322(b)(2). Modification would not be allowed
on claims "secured only by a security interest in real
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property that is the debtor's principal residence." 11
U.S.C. 1322(b)(2).5
This legislative history does tend to show that
with 1322(b)(2) Congress wanted to benefit the residential
mortgage market as opposed to the entire real estate mortgage
market. It also might suggest that a distinction should be
drawn between the residential mortgage market and the market
for investment property. Nevertheless, the legislative
history does not state with clarity how a mortgage on a mixed
property, one with both residential and investment
characteristics, should be treated. While Congress debated
over whether to protect all real estate lenders or no real
estate lenders and eventually compromised on protecting
residential mortgages, Congress did not focus on what to do
in the multi-family context.
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5. The explanatory statement of the provision, while
noting the Senate's compromise on the mortgage issue, does
not state the extent of the compromise:
Section 1322(b)(2) of the House amendment
represents a compromise agreement between
similar provisions in the House bill and
Senate amendment. Under the House
amendment, the plan may modify the rights
of holders of secured claims other than a
claim secured by a security interest in
real property that is the debtor's
principal residence. It is intended that
a claim secured by the debtor's principal
residence may be treated with under
section 1322(b)(5) of the House
amendment.
124 Cong. Rec. H11106 (daily ed. Sept. 28, 1978).
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Lomas suggests that there is no need for such
specific evidence in the legislative history. According to
Lomas, it is enough that Congress intended to protect home
mortgage lenders. Lomas argues that a mortgage on a three-
family house is just as much a "home" mortgage as a mortgage
on a single-family house, and that any distinction between a
three-family and one-family for these purposes is arbitrary.
If one accepts this premise,6 Lomas's point has some force.
If the antimodification provision is meant to encourage home
lending, then excluding multi-family houses would tend to
harm (in relative terms) those purchasing property in urban
neighborhoods, where owner-occupied multi-unit housing would
tend to be more common, and to favor those purchasing single-
family homes, more common in suburbia. The theory is that
lenders would face relatively more risk of modification in
the case of default in urban areas, and interest rates on
loans in those areas would rise accordingly. The legislative
history certainly does not show Congress intended the
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antimodification provision of 1322(b)(2) to benefit
suburbanites to a greater degree than city dwellers.
Still, the legislative history is silent on the
scope of the incentive Congress wished to give home lenders.
Congress certainly could have viewed single-family homes as
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6. The Louises dispute this assertion. They claim that the
underwriting practices for two- to four-family houses are
different from those for single-family houses.
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less likely to be secured by other collateral, such as rents,
than multi-family properties. Further, condominiums are
common in cities and a condominium in which the debtor
resides is covered by the antimodification provision. See
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Nobelman, 508 U.S. at 332. This blunts some of the force of
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Lomas's claim that the Louises' interpretation would create a
disparate and perhaps unfair application of the
antimodification provision.
Additionally, extending the antimodification
provision to multi-family houses would also create a
difficult line-drawing problem. It is unlikely Congress
intended the antimodification provision to reach a 100-unit
apartment complex simply because the debtor lives in one of
the units. Limiting the antimodification provision to
single-family dwellings creates a more easily administered
test.
We are left then without clear guidance on the
question here from either the language or contemporaneous
legislative history of 1322(b)(2). But there is guidance
from another source: the amendments to Chapter 11 contained
in the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394,
108 Stat. 4106 (1994) (codified in scattered sections of 11
U.S.C.). In those amendments Congress referred favorably to
case law under Chapter 13 holding that the antimodification
provision did not apply to multi-family housing, and
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established that it wished petitions under Chapter 11 and
Chapter 13 to treat the matter in the same way.
As part of the 1994 Act and post-Nobelman, Congress
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added for the first time a home mortgagee antimodification
provision to Chapter 11. See Pub. L. No. 103-394, Title II,
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206, Oct. 22 1994, 108 Stat. 4123 (codified at 11 U.S.C.
1123(b)(5)) (a Chapter 11 plan may "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"). The antimodification language of
1123(b)(5) is identical to that of 1322(b)(2). The
legislative history of 1123(b)(5) reveals that Congress
deliberately tracked the antimodification language of
1322(b)(2) and intended conformity of treatment between
Chapter 13 and Chapter 11:
This amendment conforms the treatment of
residential mortgages in chapter 11 to
that in chapter 13, preventing the
modification of the rights of a holder of
a claim secured only by a security
interest in the debtor's principal
residence.
H.R. Rep. No. 835, 103d Cong., 2d Sess. 46 (1994), reprinted
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in 1994 U.S.C.C.A.N. 3340, 3354.
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More importantly, the legislative history of
1123(b)(5) specifies the limits of its antimodification
provision. That history specifies that the antimodification
provision of 1123(b)(5)
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does not apply to a commercial property,
or to any transaction in which the
creditor acquired a lien on property
other than real property used as the
debtor's residence.
Id. (footnote omitted). This passage from the Judiciary
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Committee Report refers to In re Ramirez, 62 B.R. 668 (Bankr.
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S.D. Cal. 1986), as an example of a case in which the
antimodification provision of Chapter 11 would not apply.
See H.R. Report No. 835 at 46 n.13. Ramirez, a case
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construing the antimodification provision of 1322(b)(2),
squarely holds that the antimodification provision of
1322(b)(2) does not apply to multi-unit houses where the
security interest extends to the rental units.7 Given this
clear expression of congressional intent, the inference
becomes quite strong that Congress believes the
antimodification provision in Chapter 13 does not reach such
multi-unit properties. Cf. 5 Collier on Bankruptcy, supra,
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1322.06[1][a], 1322-23 n.13 (stating that Ramirez was cited
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by Congress in the Bankruptcy Reform Act of 1994 as a correct
statement of the current law of 1322(b)(2)).
That this evidence from the 1994 Act is a species
of subsequent, not contemporaneous, legislative history gives
us little pause. "Although subsequent legislative history is
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7. In Ramirez the lender held a security interest in
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property that consisted of the debtor's principal residence
and two rental units. See 62 B.R. at 668-69. The facts of
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Ramirez do not appear to be distinguishable in any relevant
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way from the facts here.
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less authoritative than contemporaneous explanation,
subsequent Congressional declaration of an act's intent is
entitled to great weight in statutory construction."
Roosevelt Campobello Int'l Park Comm'n v. E.P.A., 711 F.2d
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431, 436-37 (1st Cir. 1983) (citing Seatrain Shipbuilding
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Corp. v. Shell Oil Co., 444 U.S. 572, 596 (1980)). The 1994
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Act evidences a deliberate choice on the part of Congress
under Chapter 11 to exclude security interests in multi-unit
properties like that here from the reach of the
antimodification provision based on its understanding that
Chapter 13's antimodification provision did not reach such
security interests. To disregard such evidence would
frustrate the uniform treatment under Chapters 11 and 13 of
secured interests in debtors' principal residences that was
so clearly Congress's aim in amending 1123(b)(5).
We hold that the antimodification provision of
1322(b)(2) does not bar modification of a secured claim on
a multi-unit property in which one of the units is the
debtor's principal residence and the security interest
extends to the other income-producing units. Because Lomas's
security interest extends to the additional rental units of
221 Spring Street, the antimodification provision of
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1322(b)(2) does not apply to that interest, and bifurcation
pursuant to 506(a) is appropriate.8
If we are wrong as to what Congress intended,
legislation can provide a correction. Affirmed. Parties to
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bear their own costs.
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8. The Louises have presented an alternative theory for
holding the antimodification provision of 1322(b)(2)
inapplicable to Lomas's security interest in 221 Spring
Street. The Louises point out that Lomas is entitled to the
rents from 221 Spring Street under an assignment of rents
provision. The Louises argue that under Massachusetts law
the assignment of rents provision is additional security in
other, non-real property, and that, consequently, the
antimodification provision would not apply. See Hammond, 27
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F.3d at 57. Lomas disputes the Louises' interpretation of
Massachusetts law, however, arguing that in Massachusetts an
assignment of rents is not separate from a mortgagee's
interest in the real property. In light of our disposition
of the case, we need not resolve this question.
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