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Sapos v. Provident Institution of Savings

argued: May 11, 1992.


Appeal from the United States District Court for the Western District of Pennsylvania. (D.C. No. 91-00258)

Before: Stapleton, Alito and Aldisert, Circuit Judges.

Author: Aldisert


ALDISERT, Circuit Judge.

The debtor in this chapter 13 bankruptcy has received confirmation of his reorganization plan. The plan disposes of the home mortgage note held by Provident Institution of Savings (now known as Shawmut Mortgage Company) by bifurcating the amount due into an allowed secured claim equal to $17,000, the agreed value of the property at the time the bankruptcy petition was filed, and an allowed unsecured portion equal to the remaining balance, and by including pre-petition and post-petition arrearages in the allowed secured claim.

Shawmut appeals and asks that we reverse the judgment of the district court affirming the reorganization plan's approval. Shawmut argues that the bankruptcy court improperly dealt with the arrearages and a schedule to pay off the secured claim. The primary issues for decision are whether the district court erred in affirming the approval of a plan that (1) included the arrearages of $11,188.12 in the allowed secured claim of $17,000.00, and (2) approved a payment schedule under which the debtor will not pay off the arrearages and the allowed secured claim before the plan expires.


While this appeal was pending, the Supreme Court in Dewsnup v. Timm, 116 L. Ed. 2d 903, 112 S. Ct. 773, 60 U.S.L.W. 4111 (1992), held that a chapter 7 debtor may not apply 11 U.S.C. §§ 506(a) and 506(d) to strip down a mortgage lien, thus effectively overruling Gaglia v. First Fed. Sav. & Loan Ass'n, 889 F.2d 1304, 1306-11 (3d Cir. 1989). Accordingly, before we meet the issues presented to us, we must decide whether the holding of Dewsnup reaches chapter 13 reorganization plans as well. We will follow the lead of the Court of the Appeals for the Second Circuit in In re Bellamy, No. 91-5045, 1992 WL 78690 (2d Cir. Apr. 21, 1992), and decide that the holding of Dewsnup is limited to chapter 7 liquidations only and does not reach reorganizations under chapter 13.

We previously have held in Wilson v. Commonwealth Mortgage Corp., 895 F.2d 123 (3d. Cir. 1990), that bifurcation of a mortgage secured only by real property that is the debtor's principal residence does not modify a creditor's rights under 11 U.S.C. § 1322(b)(2). For the reasons that follow, we reaffirm the continuing vitality of Wilson. We also agree with Shawmut that the debtor's reorganization plan does not accord with statutory authority. Accordingly, we will reverse the district court judgment and remand the cause to the district court with a direction to vacate the bankruptcy court order confirming the plan and to remand to the bankruptcy court for further proceedings in accordance with this opinion.

The parties were properly before the bankruptcy court as provided in 28 U.S.C. §§ 157 and 1334. The bankruptcy court's confirmation order was appealable to the district court. 28 U.S.C. § 158. This court has jurisdiction under 28 U.S.C. § 1291. The appeal was timely filed under Rule 4(a) of the Federal Rules of Appellate Procedure.


We will discuss the facts and proceedings in detail, but a short preliminary statement will help establish the perimeters of the legal questions before us. The debtor filed his chapter 13 petition in January 1990, and Shawmut filed a proof of claim for $44,989.53. Included in this amount were pre-petition arrearages of $11,188.12. The debtor filed an adversary proceeding under 11 U.S.C. § 506(a) to cram down Shawmut's claim. Pursuant to this proceeding, the debtor and Shawmut stipulated that the present value of the property was $17,000.00. Shawmut was recognized as having an allowed secured claim in this amount.

Under the debtor's approved plan, the debtor will pay the $17,000.00 allowed secured claim over approximately 63 months, at an interest rate of 13.5 percent. The total paid under this plan would be $28,728.00. The remaining amount due under the mortgage is relegated to Class Four unsecured debt, to be paid at $46 per month for 28 months and shared pro rata by all Class Four creditors. This is the total amount the debtor will pay to Shawmut; the debtor will not have to pay the arrearages separately.

Implicated here is the application and interrelationship of certain provisions of the bankruptcy code. We will consider 11 U.S.C. § 506(a):

An allowed secured 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.

This provision permits the debtor to "cram down" an undersecured claim to reflect the present value of the collateral. The creditor's claim is converted to secured debt up to the present value of the property and unsecured debt as to the remainder. See In re Bender, 86 Bankr. 809, 811 (Bankr. E.D. Pa. 1988) (discussing section 506(a)).

We also will consider the effect of 11 U.S.C. § 1322(b)(2):

The 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, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.

The anti-modification provision applies to claims secured only by an interest in real property that is the debtor's principal residence. Where a claim is secured by other collateral in addition to the realty, the creditor's rights may be modified. Wilson v. Commonwealth Mortgage Corp., 895 F.2d 123, 128-29 (3d Cir. 1990).

The debtor sought to avail himself of 11 U.S.C. § 1322(b)(5):

Notwithstanding [section 1322(b)(2), the plan may] provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.

This cure-and-maintain option gives the debtor an alternative to cramming down the creditor's claim and paying it off within the chapter 13 plan. In re Cole, 122 Bankr. 943, 950 (Bankr. E.D. Pa. 1991); 5 Collier on Bankruptcy P 1322.09, at 1322-22 (King ed., 15th ed. 1990).

Finally, we will consider the requirements of 11 U.S.C. § 1322(c):

The plan may not provide for payments over a period that is longer than three years, unless the court, for cause, approves a longer period, but the court may not approve a period that is longer than five years.

We emphasize that the reorganization plan at issue here is being measured against only these statutes. The defense of the plan and the objections levelled against it were based on these statutory provisions. Both the bankruptcy court and the district court decided this case on the basis of these provisions. Accordingly, our approach will be similarly limited. We will give particular emphasis to the requirements of section 1322(b)(5).


We are required to construe the preceding statutory provisions, and our review is plenary.

Because in bankruptcy cases the district court sits as an appellate court, our review of the district court's decision is plenary. This court exercises the same review over the district court's decision that the district court may exercise. The findings of fact by the bankruptcy court are reviewable ...

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