Bankruptcy – 1997 decision on homestead bifurcation overruled

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The 4th Circuit, sitting en banc, holds that a Chapter 13 plan may bifurcate a claim based on an undersecured homestead mortgage into secured and unsecured components and cram down the unsecured component, overruling a 1997 decision that had been widely criticized.

Background

In this bankruptcy case, we are asked to overrule a 22-year-old decision of this court holding that Chapter 13 debtors may not bifurcate a narrow subset of undersecured home mortgage loans into separate secured and unsecured claims and “cram down” the unsecured portion of such loans. See Witt v. United Cos. Lending Corp., 113 F.3d 508 (4th Cir. 1997).

Analysis

The Bankruptcy Code does not permit bifurcation and cram down of all undersecured claims. In particular, § 1322(b)(2) generally prohibits Chapter 13 discharge plans from “[modifying] the rights of holders of secured claims … secured only by a security interest in real property that is the debtor’s principal residence.”

The bankruptcy court and the district court held—and we agree—that Hurlburt’s proposed Chapter 13 “modified” Black’s “rights” under the promissory note and deed of trust. Because the proposed plan modified Black’s rights under the loan documents, the sole issue before this court is whether Black’s claim falls into the narrow exception set forth in Section 1322(c)(2). Witt looked to § 1322(c)(2)’s legislative history and determined that Congress intended “that only payment may be modified.”

Emphasizing that other aspects of §1322(c)(2)—not highlighted in Witt— indicate that Congress intended for the exception to permit modification of “claims,” not just “[payments],” other courts universally have criticized Witt’s finding of ambiguity and attendant reliance on the statute’s legislative history. Commentators have reached the same conclusion—the plain language of § 1322(c)(2) authorizes Chapter 13 plans to modify claims, not just payment schedules.

Although we do not lightly overrule our precedent, we agree with these courts and commentators that “the specific context in which the language is used, and the broader context of the statute as a whole” establishes that § 1322(c)(2) is best read to authorize modification of “[claims],” not just “[payments],” and therefore that a Chapter 13 plan may bifurcate a claim based on an undersecured homestead mortgage, the last payment for which is due prior to a debtor’s final payment under a repayment plan, into secured and unsecured components and cram down the unsecured component.

Because the plain language of § 1322(c)(2) authorizes modification of homestead mortgage loans subject to that provision, we do not believe that it is proper to rely on legislative history to “muddy [the] clear statutory language.” For the sake of argument, even if it was proper to look to the statute’s legislative history, we do not believe that the legislative history carries much interpretive weight.

Reversed and remanded.

Dissenting opinion
(Wilkinson, J., dissenting): Congress obviously has the last word on matters of statutory interpretation. It can overturn a Supreme Court decision interpreting an Act of Congress if it wants. The Supreme Court held in Nobelman v. American Savings Bank that 11 U.S.C. § 1322(b)(2) gives lenders broad protections from modifications of their homestead mortgage loans in bankruptcy. It is clear that, by enacting 11 U.S.C. § 1322(c)(2) after Nobelman, Congress limited the scope of that decision. My disagreement with the majority simply turns on how much.

Whereas the majority reads § 1322(c)(2) as completely overriding Nobelman with respect to an entire class of mortgages, I do not. When Congress exercises its power to override a major decision of the Supreme Court, it is appropriate to expect a modicum of clarity. Because I find that clarity lacking here, I am compelled to conclude that § 1322(c)(2) effected a more limited change to Nobelman, allowing debtors to repay their mortgages over the full duration of their plan. I thus respectfully dissent.

Hurlburt v. Black (Lawyers Weekly No. 001-100-19, 43 pp. (James Wynn, J.) (J. Harvie Wilkinson, J., dissenting) Case No. 17-2449. May 24, 2019. From E.D.N.C. (Louise Flanagan, J.) Richard Preston Cook for Appellant, James O. Carter for Appellee.