By Alan Steven Wolf of The Wolf Firm (USFN Network News Winter 1991)
By Alan Steven Wolf of The Wolf Firm
(USFN Network News Winter 1991)
In the Fall, 1990 issue, Alan Steven Wolf addressed the impact of the case In re
Hougland, 886 F.2d 1182 (9th Cir. 1989) upon residential mortgage loans in Chapter 13
bankruptcy proceedings. This article deals with the aftermath of Hougland.
Hougland, a case decided by the Ninth Circuit Court of Appeals, defines what a secured claim is in Chapter 13 bankruptcy proceedings. Ordinarily, outside bankruptcy a claim is considered "secured" where there is a lien against the collateral even if the collateral is insufficient to satisfy the debt upon litigation. This means that the debtor is obligated to pay the entire debt in full, regardless of the value of the property.
In a Chapter 13 bankruptcy, as Hougland says, a claim supported by a mortgage is considered "secured" only to the extent of the value of the collateral. That is, if the amount of the claim exceeds the value of the collateral than the remainder portion is unsecured and will be treated like other unsecured claims.
The effect of Hougland is that a debtor may split or bifurcate a residential mortgage loan into a secured portion and an unsecured portion. By splitting the loan, a debtor need not pay in full the unsecured portion through a Chapter 13 plan: any remainder on the unsecured portion may be discharged by the bankruptcy court.
After Hougland, courts have gone in different directions. Some adopt Hougland, others disagree, and some courts apply Hougland to allow a debtor to avoid a mortgagee's lien.
One of the leading cases adopting Hougland is Wilson v. Commonwealth Mortgage Corporation, 895 F.2d 123 (3rd Cir. 1990). In Wilson, the Third Circuit Court of Appeals reached a similar decision under slightly different factual circumstances.
In Wilson, the mortgagee's claim was secured by the debtor's household goods as well as the debtor's principal residence. The Court held that the language of the Bankruptcy Code Section 1322(b)(2), when read in conjunction with Section 506(a), allows the mortgage claim to be split into a secured portion and an unsecured portion. However, the Court first concluded that Bankruptcy Code Section 1322(b)(2) was not necessarily applicable as the mortgage was secured by personal property, property "other than a claim secured only by a security interest in real property that is debtor's principal residence" (emphasis added). But. the Court said that it would have reached the same decision had the mortgage been secured only by the debtor's principal residence. Nevertheless, the Court adopted the Hougland decision.
Judge Ginsburg, a well-respected jurist, also followed Hougland in his decision in In re Goins. 89 B l5704, 89 A 962. After examining Bankruptcy Code Sections 1322(b)(2) and 506(a), Judge Ginsburg concluded that a mortgage on a debtor's principal residence which is undersecured can be split or bifurcated into a secured claim as determined by the fair market value and an unsecured claim which may be treated as any other unsecured claim.
A few courts interpret Hougland to allow a Chapter 13 debtor to avoid the lien on the unsecured portion of the debtor's principal residence under Bankruptcy Code Section 506(d). See: In re Brouse, 110 B.R. 539 (Bkrtcy. D. Colo. 1990); In re Demoff. 109 B.R. 902 (Bkrtcy. N.D. Ind. 1989).
Specifically, in Brouse, the Bankruptcy Court determined that a debtor is not barred by Bankruptcy Code Section 1322(b)(2) to use Section 506(d) to avoid a mortgagee's lien.
In Brouse, the debtor's residential real property was subject to two liens, a
first deed of trust and a second deed of trust. The first deed of trust was to secure a
debt of approximately $45,000. The second was in the approximate amount of $9,000. The
debtor's real property was valued at $27,100. The Bankruptcy Court concluded that the
debtor could avoid the liens which represented claims
in excess of the value of the collateral pursuant to Bankkruptcy Code Section 506(d).
Accordingly, the Court ordered that the second lien be avoided in its entirety, and the
first lien be avoided to the extent that it exceeded the value of the collateral of
$27,100.
Not all courts, though, agree with Hougland. See: In re Hayes. 111 B.R. 924 (Bkrtcy. D. OR. 1990); In re Chavez, 117 B.R. 733 (Bkrtcy. S.D. Fla. 1990)
In Hayes, the Bankruptcy Court determined that although a Chapter 13 plan may split the mortgage claim into secured and unsecured portions, the plan may not alter the amount of monthly payment so as to reduce the amount of secured debt. It reasoned that Bankruptcy Code Section 1322(b)(5) must also come into play. Section 1322(b)(5) requires all of the provisions of the note to remain in full force, and, in addition, the debtor is given a reasonable time to cure past defaults.
The Banlcruptcy Court in Chavez takes a position opposite to Hougland. The Court determined that the bifurcation of a mortgagee's secured claim violates Bankruptcy Code Section 1322(b)(2). To that end, the Court concluded that the mortgagee was entitled to a secured lien for the entire balance without regard to the collateral.
While Hougland may be followed in some courts and yet be rejected in others, there is a strong, clear message: prompt legislative action is necessary to preserve and define the rights of the mortgage lenders
For further information please contact:
The Wolf Firm, A Law Corporation, is an "AV" rated law firm which concentrates on providing superior legal services to the mortgage banking industry. The firm's national clientele includes many of the largest mortgage bankers in the country, as well as a variety of savings banks, commercial banks, commercial finance companies, credit unions, and the Resolution Trust Corporation. With a staff of approximately forty individuals, including attorneys, certified paralegals, legal secretaries, administrators, clerical personnel, and a full time computer systems analyst, the firm represents its clients on a wide range of matters including all aspects of both residential and commercial/multifamily mortgage loan origination and servicing, securitization, regulatory compliance, bankruptcy, and litigation related to the foregoing in both federal and state courts throughout California. For more routine matters, such as residential bankruptcies, evictions and receiverships, The Wolf Firm has developed extremely cost-effective and efficient programs using specially trained paralegals and computer technology to assist its attorneys in handling these matters at rates that are the most competitive in the State of California and, through its membership in the USFN, the Firm is able to arrange similar services in virtually every state in the nation.
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