IN RE: Lillie Johns ( 1994 )


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  •                                                                                                                            Opinions of the United
    1994 Decisions                                                                                                             States Court of Appeals
    for the Third Circuit
    10-20-1994
    IN RE: Lillie Johns
    Precedential or Non-Precedential:
    Docket 94-1437
    Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1994
    Recommended Citation
    "IN RE: Lillie Johns" (1994). 1994 Decisions. Paper 162.
    http://digitalcommons.law.villanova.edu/thirdcircuit_1994/162
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    UNITED STATES COURT OF APPEALS
    FOR THE THIRD CIRCUIT
    ------------
    No. 94-1437
    ------------
    IN RE:    LILLIE M. JOHNS
    LILLIE M. JOHNS
    v.
    ROUSSEAU MORTGAGE CORPORATION;
    COMMONWEALTH EASTERN MORTGAGE CORPORATION;
    COMMONWEALTH MORTGAGE CORPORATION OF AMERICA;
    DELAWARE COUNTY REGIONAL WATER CONTROL;
    DELAWARE COUNTY REGIONAL WATER CONTROL AUTHORITY;
    PENNSYLVANIA HOME REMODELING COMPANY;
    REDEVELOPMENT AUTHORITY OF CHESTER;
    DEPARTMENT OF PUBLIC WELFARE
    Rousseau Mortgage Corporation,
    Appellant
    ------------
    On Appeal from the United States District Court
    for the Eastern District of Pennsylvania
    (D.C. Civil No. 93-06624)
    ------------
    Submitted Under Third Circuit LAR 34.1(a)
    Thursday, September 22, 1994
    PANEL:   BECKER, COWEN and GARTH, Circuit Judges
    ------------
    (Opinion filed October 20, 1994)
    ------------
    Lawrence T. Phelan
    Peter C. Cilio
    Federman & Phelan
    Two Penn Center Plaza
    Suite 900
    Philadelphia, Pennsylvania 19102
    Attorney for Appellant
    Lawrence R. Rudderham
    Kirifides & Rudderham
    P.O. Box 723
    Chester, Pennsylvania 19016
    Attorney for Appellee
    OPINION OF THE COURT
    GARTH, Circuit Judge:
    This appeal presents us with two issues.    First,
    whether a debtor in a chapter 13 bankruptcy may modify the rights
    of an undersecured mortgage lender under 11 U.S.C. § 1322(b)(2)
    and 11 U.S.C.§ 506(a) when the mortgage is secured by both real
    and personal property.    Second, whether a pre-petition
    foreclosure judgment precludes modification of the mortgagee's
    secured claim because the terms of the mortgage have "merged"
    into the foreclosure judgment.    The district court held that
    modification was appropriate and was not precluded by merger.    We
    affirm.
    I.
    Appellee Lillie M. Johns ("Ms. Johns") purchased a
    house in Chester, Pennsylvania on April 29, 1986, with the help
    of a loan secured by a mortgage that was later assigned to
    Rousseau Mortgage Corporation ("Rousseau").     The mortgage covered
    Ms. Johns' home as well as "any and all appliances, machinery,
    furniture and equipment (whether fixtures or not) of any nature
    whatsoever now or hereafter installed in or upon said premises."
    Appellee's Appendix 31.
    At some time prior to filing in bankruptcy, and
    following over a year's delinquency on the part of Ms. Johns, the
    Delaware County Court of Common Pleas entered a foreclosure
    judgment against Ms. Johns and in favor of Rousseau in the amount
    of $39,557.15.
    It was stipulated in the bankruptcy court that the fair
    market value of Ms. Johns' residence was $8,000, and that the
    value of her appliances, machinery, furniture and equipment
    ("personalty") was $1,000.
    On April 15, 1993, shortly before the planned
    foreclosure sale, Ms. Johns filed a voluntary petition for relief
    under Chapter 13 of the Bankruptcy Code.   Thereafter, Ms. Johns
    instituted an adversary action in bankruptcy court against
    Rousseau to limit Rousseau's claim to the fair market value of
    the mortgaged premises.   By Order of November 4, 1993, the
    bankruptcy court, pursuant to 11 U.S.C. § 506(a), bifurcated
    Rousseau's interest into a secured claim of $9,000 and an
    unsecured claim of $30,557.15, holding that the anti-modification
    provision of 11 U.S.C. §1322(b)(2) did not prohibit a
    modification of the debtor's indebtedness where the secured claim
    was secured by personalty as well as an interest in the debtor's
    principal residence.   The bankruptcy court also rejected
    Rousseau's argument that the mortgage foreclosure judgment
    precluded reliance on the mortgage's "additional security"
    provisions because the mortgage had merged into the judgment.
    Rousseau appealed to the district court, which, by
    Memorandum and Order dated March 17, 1994, affirmed the order of
    the bankruptcy court.    This appeal followed.
    Because this case was submitted on a stipulated record
    and presents issues of statutory interpretation and conclusions
    of law only, our standard of review is plenary.    Brown v.
    Pennsylvania State Employees Credit Union, 
    851 F.2d 81
    , 84 (3d
    Cir. 1988).
    II.
    Chapter 13 of the Bankruptcy Code permits debtors to
    structure repayment of their indebtedness through a plan approved
    by the bankruptcy court.    Section 1322(b) lists ten provisions
    which Chapter 13 debtors may, at their option, include in their
    bankruptcy plans.   Section 1322(b)(2) in particular provides that
    a debtor's 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.
    (emphasis added).   This provision thus allows modification of the
    rights of both secured and unsecured creditors, with the
    exception that the rights of creditors whose claims are secured
    only by a mortgage on the debtor's principal residence may not be
    modified.
    Section 506(a) defines allowed1 secured and allowed
    unsecured claims as follows:
    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.
    Section   506(a) thus "provides that a claim is secured only to
    the extent of the value of the property on which the lien is
    fixed."   United States v. Ron Pair Enterprises, Inc., 
    489 U.S. 235
    , 239, 
    109 S. Ct. 1026
    , 1029 (1989).   Any surplus is, by
    definition, unsecured.
    We have recently held in In re Hammond, 
    27 F.3d 52
    (3d
    Cir. 1994) that the Bankruptcy Code did not preclude bifurcation
    of a secured interest in a personal residence when personalty
    also secured the debtor's loan.   In so holding we have re-
    affirmed the continuing vitality of a prior holding of this Court
    reached in Wilson v. Commonwealth Mortg. Corp., 
    895 F.2d 123
    (3d
    Cir. 1990).
    In Wilson we held that the anti-modification provision
    of § 1322(b)(2) does not prohibit modification of the unsecured
    portion of an undersecured mortgage on the debtor's principal
    residence.    This holding was overturned by the Supreme Court in
    Nobelman v. American Sav. Bank, __ U.S. __, 
    113 S. Ct. 2106
    1
    .        An "allowed" claim is one that will serve as the basis
    for distribution. 11 U.S.C. § 502(a).
    (1993).   However, our decision in Wilson in favor of the
    mortgagor-debtor was also based on a second and alternative
    ground.   Having noted that the mortgage agreement in question
    covered not only real estate but personalty as well, we concluded
    that:
    [T]he anti-modification provision of section 1322 does
    not bar the bankruptcy court's order [limiting the
    creditor's allowed secured claim to the fair market
    value of the principal residence] because the
    creditor's interest was not secured only by real
    property as required by the statute. By its express
    terms, § 1322 prohibits modification of a creditor's
    rights only when the creditor's claim is "secured only
    by a security interest in real property that is the
    creditor's principal residence."
    
    Wilson, 895 F.2d at 128
    ; see also Sapos v. Provident Inst. of
    Sav. in Town of Boston, 
    967 F.2d 918
    (3d Cir. 1992).   Nobelman
    did not address, and hence did not disturb, this alternative
    ground of decision.
    Thus, in Hammond we reasserted and upheld the principle
    that bifurcation is available when a mortgage secures both the
    residence and personal property of the debtor.   The Hammonds had
    given Commonwealth a purchase money mortgage on their home and on
    "any and all appliances, machinery" etc. installed in their home.
    The security interest given in Hammond cannot be distinguished
    from the security interest given by Ms. Johns to Rousseau.
    Hence, the present case is in all relevant respects
    indistinguishable from, and therefore controlled by, Hammond.
    See Internal Operating Procedure 9.1.2   Indeed, Rousseau's
    2
    .         I.O.P. 9.1 states that:
    supplemental brief, filed shortly after our decision in Hammond
    was handed down, at least implicitly acknowledged that Hammond
    governs our decision here by focusing almost exclusively on
    reasons why Hammond should be overruled as inconsistent with
    Nobelman.
    III.
    Rousseau also contends that because the mortgage has
    been foreclosed, the terms of the mortgage "merge" into the
    foreclosure judgment of the Delaware County Court of Common Pleas
    and thereby cease to exist, leaving Rousseau with a security
    interest which does not include Ms. Johns' personalty.
    Accordingly, Rousseau argues that Nobelman precludes bifurcation
    of the remaining security interest - that is the residence - into
    secured and unsecured interests.3
    Rousseau notes that in In re Stendardo, 
    991 F.2d 1089
    (3d Cir. 1993) we held that where a foreclosure judgment had been
    entered on a mortgage containing no specific language preserving
    a debtor's obligation to pay taxes and insurance premiums beyond
    the date of the judgment, the mortgagee could not rely on the
    terms of the mortgage for recoupment of advances made for taxes
    (..continued)
    It is the tradition of this court that the holding of a
    panel in a reported opinion is binding on subsequent
    panels. No subsequent panel overrules a holding in a
    published opinion of a previous panel. Court in banc
    consideration is required to do so.
    3
    . The same issue raised here was also raised in In re Hammond,
    
    27 F.3d 52
    (3d Cir. 1994). We did not address it at that time,
    however, because the appellant had not argued the merger issue to
    the district court.
    and insurance.   From this, Rousseau argues that all specific
    terms of the mortgage were merged into the judgment, leaving
    Rousseau with a security interest in Ms. Johns' residence alone
    because § 1322(b)(2) evinces Congress' intention to protect home
    mortgage lenders from cram-downs.
    We are not attracted by this argument.   If Rousseau's
    rights under § 1322(b)(2) were to be determined solely because it
    was the holder of a judicial lien rather than the holder of a
    mortgage then it could not claim protection under the anti-
    modification provision because that provision "applies only to
    claims secured by a 'security interest' in the debtor's
    house. . .." First Nat. Fidelity Corp. v. Perry, 
    945 F.2d 61
    , 64
    (3d Cir. 1991), and Perry, referring to the Code, defines a
    security interest "as a lien created by an agreement" 11 U.S.C. §
    101(51).   It is clear that a judgment lien is not "created by
    agreement."
    In Perry, however, we also held that a "security
    interest" within the meaning of § 1322(b)(2) continues to exist
    after a foreclosure judgment.   Thus in determining whether the
    protections of § 1322(b)(2) attach, we require that the security
    interest created by the parties be analyzed as we discussed
    above.   The security interest created by Ms. Johns' original
    mortgagee and then assigned to Rousseau included Ms. Johns'
    personal property as well as her principal residence.     In that
    circumstance, we have held in 
    Hammond, supra
    , that modification
    of the security interest is not barred by the operation of §
    1322(b)(2).
    Moreover, Rousseau has not demonstrated why it should
    be favored over other secured creditors just by virtue of having
    reduced its claim to a foreclosure judgment.    Rousseau has
    furnished us with no authority which would justify a holding that
    Rousseau was entitled to be placed in a superior position
    compared to other secured creditors simply because it has
    relinquished a security interest that was taken in the original
    transaction with Ms. Johns.    The original contract with Ms.
    Johns, which specified that the mortgagee would be secured not
    only by a mortgage on her principal residence but also by a
    security interest in her personalty, fell within the exception
    found in § 1322(b)(2).    Rousseau cannot now escape from that
    exception by relying on its status as the holder of a non-
    consensual judgment and thereby gain the protection that had
    originally been given up when a security interest in both real
    and personal property had been sought and taken.    Nor can it
    obtain that protection by now foregoing part of the security,
    i.e. the personalty, which it originally required.
    Our holding in Perry that a security interest continued
    to exist after a foreclosure judgment was based in large part on
    our concern that to hold otherwise would frustrate the clear
    intentions of Congress:    "If modification of the lender's rights
    were permissible after it secured a foreclosed judgment, the
    [antimodification] assurance afforded by § 1322(b)(2) would be
    rendered largely illusory."    Perry at 65.   The same holds true of
    the exception to that section's antimodification protections.
    Thus, although the foreclosure judgment terminated the
    mortgage, i.e. the contractual relationship between Ms. Johns and
    now Rousseau, see Matter of Roach, 
    824 F.2d 1370
    (3d Cir. 1987),
    the security interest taken by Rousseau survives in toto and that
    interest must, as we have previously explained, include
    Rousseau's security interest in Ms. Johns' personalty.    This
    being so, § 1322(b)(2) operates to permit modification into
    secured and unsecured interests, as the bankruptcy and district
    court held.
    IV.
    Having held that § 1322(b)(2) does not bar modification
    of a mortgage which is secured by both real and personal property
    and having held that a pre-petition foreclosure judgment cannot
    bar modification of the mortgagee's secured claim by reason of
    "merger," we will affirm the March 17, 1994 judgment of the
    district court.