by The en banc fourth circuit panel overturned a twenty-two-year-old precedent to join the majority of courts finding that section 1322(c)(2) “authorizes modification of covered homestead mortgage claims, not just payments, including bifurcation of undersecured homestead mortgages into secured and unsecured components.” Hurlburt v. Black, No. 17-2449 (4th Cir. May 24, 2019) (en banc). NACBA and NCBRC participated as amici in support of the debtor.
In Witt v. United Cos. Lending Corp. (In re Witt), 113 F.3d 508 (4th Cir. 1997), the Fourth Circuit held that section 1322(c)(2)’s exception to the anti-modification provision in section 1322(b)(2) was limited to permitting a chapter 13 debtor to extend the final payments on his mortgage over the course of the plan even though the terms of the lending agreement would have those payments due earlier. Thus, the Witt court found that section 1322(c)(2) does not permit a chapter 13 debtor to modify the amount owed on the claim by bifurcating the claim into secured and unsecured portions, but could alter only the timing of payments on that claim.
Here, Larry Hurlburt bought his home from Juliet Black and entered into a purchase agreement under which he would be responsible for regular payments until May, 2014, at which time the remaining principal and interest would come due. Hurlburt defaulted on the final balloon payment of $136,000, and Black initiated foreclosure proceedings. Hurlburt filed for chapter 13 bankruptcy and proposed a plan under which the loan would be bifurcated into secured and unsecured portions with the unsecured portion receiving no payments. The bankruptcy court found that the plan offended the anti-modification provision of section 1322(b) and denied confirmation. Hurlburt v. Black (In re Hurlburt), 572 B.R. 160, 169 (Bankr. E.D.N.C. 2017). The district court affirmed. Hurlburt v. Black (In re Hurlburt), No. 7:17-CV-169-FL (E.D.N.C. Dec. 19, 2017). The Fourth Circuit likewise affirmed. Hurlburt v. Black (In re Hurlburt), 733 Fed. App’x 721 (4th Cir. 2018) (unpublished) (per curiam). That decision was vacated, however, when the circuit court granted Hurlburt’s petition for rehearing en banc in January, 2019.
On rehearing, the circuit court panel took a stroll through relevant statutory provisions. It began with section 1325(a)(5)(B) which allows the debtor to confirm a plan that “provide[s] the creditor with payments, over the life of the plan, that will total the present value of the allowed secured claim. . . ” and which permits the plan to treat any remaining portion of the claim as unsecured. Valuation of the claim into secured and unsecured components is governed by section 506(a)(1). The panel then turned to the effect of the anti-modification provision, section 1322(b)(2), which prohibits modification of a debt secured by the debtor’s residence. Nobelman v. American Savings Bank, 508 U.S. 324 (1993), interpreted the anti-modification provision as preventing cramdown of a partially-secured homestead debt in chapter 13.
But this case differed from Nobelman in one important respect: the remaining principal and interest on the loan were due in their entirety before the end of the plan period. Therefore, the panel turned to section 1322(c)(2), enacted in the 1994 Bankruptcy Code amendments, which provides in pertinent part: “Notwithstanding subsection (b)(2). . . 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 section 1325(a)(5) of this title.”
In Witt, the court found the language of section 1322(c)(2) to be ambiguous and, relying on legislative history, interpreted it to permit modification only with respect to “payment of the claim” and not with respect to the claim itself. Therefore, Witt and its progeny found that the anti-modification provision in paragraph (b)(2) applied to claims otherwise covered by section 1322(c)(2). On rehearing, the court rejected that reasoning and, instead, agreed with those courts finding that the natural reading of “payment of the claim as modified” was not limited to modification of the payment schedule, but included modification of the claim itself.
Congress’s introductory phrase, “notwithstanding subsection (b)(2)” suggested to the panel that Congress intended to create an exception to the entire anti-modification provision (which, by beginning with limiting phrase, “subject to subsections (a) and (c),” likewise singles out paragraph (c) for separate treatment), not just one aspect of that provision.
The panel found most persuasive the language in section 1322(c)(2) to the effect that “the plan may provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title.” Where the latter section provides for cramdown, the panel took section 1322(c)(2)’s reference to mean that cramdown likewise is available under that section. The majority concluded that all significant statutory evidence pointed to permitting cramdown of debts that mature prior to the end of the plan period.
Turning to the Witt court’s reliance on the absence of any indication that Congress intended to abrogate Nobelman when it enacted section 1322(c)(2), the panel found that because Nobelman dealt with section 1322(b)(2), the Witt court erred in its reasoning. The panel found that, in enacting 1322(c)(2), Congress carved out an exception to the strictures of section 1322(b) which otherwise remained unaffected. Therefore, this case would not run afoul of Nobelman and Congress had no reason to address any abrogation of Nobelman when it enacted 1322(c). Nor did Congress’s positive reference to First National Fidelity Corp. v. Perry, 945 F.2d 61 (3d Cir. 1991), which applied 1322(c) to alterations to payments on an otherwise unmodified claim, indicate that Congress intended to limit application of section 1322(c) to that narrow situation.
The court thus overturned Witt. It reversed and remanded.
Judges Wilkinson, Keenan and Thacker dissented.
The dissent argued that the court got it right when it decided Witt and interpreted section 1322(c)(2) to permit modification of the payment schedule but not of the claim itself. The dissent was persuaded that Congress would not have completely overridden the anti-modification provision as applied in Nobelman without specific reference to Nobelman and an explicit indication that the new statutory text was that broad in its scope. The dissent argued that the text of section 1322(c)(2) supports the narrower view in that the phrase, “payment of the claim as modified,” must be read as a phrase rather than individual terms. Thus, “payment of the claim” is what is modified, not the “claim” itself. The dissent maintained that, contrary to the majority’s holding, the power to strip down a claim derives from sections 506(a) and 1322(b), not from section 1325(a)(5), therefore Congress’s reference to the latter section could not be seen as an indication that Congress intended to bootstrap cramdown into section 1322(c).
The dissent was particularly troubled by the fact that the panel’s decision would have the practical effect of treating debtors whose mortgage would mature during the course of the plan—even if it was in month fifty-nine of a sixty-month plan—significantly more favorably than the debtor whose mortgage would come due any time after month sixty. In addition, less affluent debtors, whose plans were more likely to be only thirty-six months, would derive even less benefit from the court’s interpretation of section 1322(c). The dissenting judges thought it more likely that Congress intended to help debtors climb out from under balloon payments and acceleration clauses and they expressed concern about the effect of the majority decision on future lenders.