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Hurlburt v. Black

United States Court of Appeals, Fourth Circuit

May 24, 2019

LARRY ALBERT HURLBURT, Plaintiff - Appellant,
v.
JULIET J. BLACK, Defendant-Appellee, and JOSEPH A. BLEDSOE, III, Trustee. NATIONAL ASSOCIATION OF CONSUMER BANKRUPTCY ATTORNEYS; NATIONAL CONSUMER BANKRUPTCY RIGHTS CENTER, Amici Supporting Appellant.

          Argued: March 20, 2019

          Appeal from the United States District Court for the Eastern District of North Carolina, at Wilmington. Louise Flanagan, District Judge. (7:17-cv-00169-FL)

          Richard Preston Cook, RICHARD P. COOK, PLLC, Wilmington, North Carolina, for Appellant.

          James O. Carter, CARTER & CARTER, P.A., Wilmington, North Carolina, for Appellee.

          Before GREGORY, Chief Judge, and WILKINSON, NIEMEYER, MOTZ, KING, AGEE, KEENAN, WYNN, DIAZ, FLOYD, THACKER, HARRIS, RICHARDSON, and QUATTLEBAUM, Circuit Judges.

          WYNN, CIRCUIT JUDGE:

         In this bankruptcy case, we are asked to overrule a twenty-two-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. (In re Witt), 113 F.3d 508 (4th Cir. 1997). As explained further below, we now align our circuit with every other court that has considered this issue to hold that the plain text of 11 U.S.C. § 1322(c)(2) authorizes modification of such claims, not just the payment schedule for such claims, including through bifurcation and cram down. See, e.g., Am. Gen. Fin., Inc. v. Paschen (In re Paschen), 296 F.3d 1203, 1209 (11th Cir. 2002); First Union Mortg. Corp. v. Eubanks (In re Eubanks), 219 B.R. 468, 471-73 (B.A.P. 6th Cir. 1998). Accordingly, we overrule our decision in Witt.

         I.

         The facts material to this appeal are not in dispute. In May 2004, debtor Larry Albert Hurlburt purchased real property located at 130 South Navassa Road, Leland, North Carolina (the "Property"), from Juliet J. Black for $136, 000. Hurlburt paid Black $5, 000 in cash at closing. Black financed the remaining $131, 000 of the purchase price through a promissory note executed by Hurlburt in Black's favor, which note was secured by a purchase-money deed of trust naming Black as beneficiary. Under the mortgage agreement between Hurlburt and Black, the $131, 000 principal accrued interest at 6% per annum, payable over 119 months in installments of $785.41, with a balloon payment of all remaining principal and accrued interest due on May 26, 2014. In the event of default, interest on the balance would begin to accrue at a rate of 8% per annum. Hurlburt used the property as his primary residence from the purchase date until the present day.

         Hurlburt failed to pay the balance owed upon maturation of the loan. On January 29, 2016, Black initiated a foreclosure action in Brunswick County, North Carolina, claiming Hurlburt owed her approximately $136, 000 under the mortgage. On April 13, 2016, Hurlburt filed a petition for relief under Chapter 13 of the Bankruptcy Code in the Bankruptcy Court for the Eastern District of North Carolina, which petition stayed Black's foreclosure action. In his petition, Hurlburt valued the Property at $40, 000. That same day, Hurlburt brought an adversary proceeding against Black seeking to quiet title in the Property. On June 13, 2016, Black filed a proof of claim totaling $131, 000, comprising a $40, 000 secured claim and a $91, 000 unsecured claim. The next day, Black filed an amended proof of claim totaling $180, 971.72[1] but declined to identify the amount of the claim that was secured or unsecured as she "[did] not know the value of the collateral." J.A. 88. Hurlburt filed an objection to Black's proof of claim.

         On June 24, 2016, Hurlburt filed an amended complaint in the adversary proceeding seeking to acquire quiet title or avoid the deed of trust, while maintaining his statutory objection to Black's claim. Approximately six months later, the bankruptcy court granted partial summary judgment in favor of Black, finding the deed of trust was valid. See Hurlburt v. Black (In re Hurlburt), No. 16-00031-5-SWH-AP, 2016 WL 7076980, at *3 (Bankr. E.D. N.C. Dec. 5, 2016).

         In February 2017, following the bankruptcy court's decision, Hurlburt filed a proposed Chapter 13 repayment plan, seeking to bifurcate Black's claim into secured and unsecured components. Under the proposed plan, Black would hold a fully secured claim for $41, 132.19, which amount Hurlburt calculated by subtracting a senior Brunswick County tax lien totaling $5, 867.81 from the Property's recently appraised value of $47, 000.[2] The plan proposed treating the remainder of Black's claim as unsecured, with Black receiving no payment for that portion of her claim. On February 23, 2017, Black filed an objection to the amended plan contending that Witt barred the plan's proposed modification and bifurcation of her claim and asserting that she was entitled to a secured claim in the full amount due under the mortgage agreement, plus interest.

         The parties filed cross motions for summary judgment. In an opinion filed June 7, 2017, the bankruptcy court first held that Hurlburt's plan would "modify" Black's rights under the note and deed of trust. In reaching that conclusion, the bankruptcy court first noted that "whereas the note itself requires repayment of $131, 000 at 6 percent, the proposed plan would require only repayment of $41, 132.19 at 4.5 percent." Hurlburt v. Black (In re Hurlburt), 572 B.R. 160, 169 (Bankr. E.D. N.C. 2017). The plan's proposed changes to the loan principal and interest rate also had the effect of modifying "what constitutes a default under the note," the court explained. Id. Having found that Hurlburt's proposed plan modified Black's rights under the note and deed of trust, the bankruptcy court further held that the plan violated 11 U.S.C. § 1322 because, under Witt, that provision barred modifying claims secured by a security interest on a debtor's principal residence, like Black's, into secured and unsecured components. See id. at 170- 71.

         The district court affirmed the reasoning and judgment of the bankruptcy court in an opinion and order entered December 19, 2017. Hurlburt v. Black (In re Hurlburt), No. 7:17-CV-169-FL (E.D. N.C. Dec. 19, 2017). Two days later, Hurlburt filed a timely Notice of Appeal. A Fourth Circuit panel affirmed the district court's order in an unpublished, per curiam opinion issued on August 8, 2018. Hurlburt v. Black (In re Hurlburt), 733 Fed.Appx. 721 (4th Cir. 2018) (unpublished) (per curiam). On January 8, 2019, this Court granted Hurlburt's request for a rehearing en banc, thereby vacating the panel opinion. Hurlburt v. Black (In re Hurlburt), 747 Fed.Appx. 168 (4th Cir. 2019) (mem.).

         II.

         Hurlburt's appeal requires that we construe several provisions in the Bankruptcy Code. When construing a statute, we "first and foremost strive to implement congressional intent by examining the plain language." Minor v. Bostwick Labs., Inc., 669 F.3d 428, 434 (4th Cir. 2012) (citation omitted). "[U]nless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning." Kennedy v. St. Joseph's Ministries, Inc., 657 F.3d 189, 192 (4th Cir. 2011) (citation omitted). In interpreting the plain language of the statute, we also look to "the specific context in which the language is used, and the broader context of the statute as a whole." Minor, 669 F.3d at 434-35. We review de novo questions of statutory construction. In re Sunterra Corp., 361 F.3d 257, 263 (4th Cir. 2004).

         A.

         Congress enacted the 1978 Bankruptcy Reform Act with the overarching goal of providing debtors with a "fresh start." H.R. Rep. No. 95-595, at 118 (1978). Among other changes, Congress significantly revamped Chapter 13 to better "facilitate adjustments of the debts of individuals with regular income through flexible repayment plans funded primarily from future income." 8 Collier on Bankr. (MB) ¶ 1322.01 (2018). To that end, a debtor seeking relief under Chapter 13 may file with the bankruptcy court a proposed plan for repaying claims, like Black's, asserted against the debtor. See Assocs. Comm. Corp. v. Rash, 520 U.S. 953, 956 (1997). Subject to confirmation by the court, that plan may "modif[y] the rights of secured and unsecured creditors." Tidewater Fin. Co. v. Kenney, 531 F.3d 312, 316 (4th Cir. 2008).

         Section 1325 of the Bankruptcy Code sets forth the criteria a debtor's proposed repayment plan must meet for a bankruptcy court to confirm the plan. Of particular relevance, Section 1325(a)(5) provides that a court can confirm a plan's proposed treatment of a secured claim if one of three conditions is satisfied: (1) "[t]he secured creditor accepts the plan," (2) "the debtor surrenders the property securing the claim to the creditor," or, as Hurlburt seeks to do here, (3) "the debtor invokes the so-called 'cram down' power." Rash, 520 U.S. at 956-57. Under the cram down option, which is set forth in Section 1325(a)(5)(B), "the debtor is permitted to keep the property over the objection of the creditor; the creditor retains the lien securing the claim, . . . and the debtor is required to provide the creditor with payments, over the life of the plan, that will total the present value of the allowed secured claim. . . ." Id. at 957 (emphasis added); see also 11 U.S.C. § 1325(a)(5)(B).

         Section 506(a)(1), which governs the value of the allowed secured claim, provides, in relevant part:

An allowed 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.

Id. § 506(a)(1).

         In other words, Section 506(a)(1) "provides that a claim is secured only to the extent of the value of the property on which the lien is fixed," whereas "the remainder of that claim is considered unsecured." United States v. Ron Pair Enters., Inc., 489 U.S. 235, 239 (1989). Accordingly, when an allowed claim is undersecured-when the claimed amount exceeds the value of the property securing the claim-"Section 506(a)(1) requires the bifurcation of the claim into two components: a secured claim for the value of the collateral, and an unsecured claim for the balance." In re Price, 562 F.3d 618, 623 (4th Cir. 2009); see also In re Young, 199 B.R. 643, 649 (Bankr.E.D.Tenn. 1996) ("Section 506(a) simply governs the allowance process for the secured status of a claim by supplying the method or formula for valuation, the result of which is bifurcation or separation of the secured claim into its secured and unsecured components."). Once Section 506(a)(1) bifurcates an allowed claim into secured and unsecured components, Section 1325(a)(5)(B) may then be used to cram down the bifurcated claim to its secured amount, effectively "stripping the lien from the portion of the claim that exceeds that value." In re Young, 199 B.R. at 648.

         The Bankruptcy Code, however, does not permit bifurcation and cram down of all undersecured claims. In particular, Section 1322(b)(2) generally prohibits Chapter 13 discharge plans from "modify[ing] the rights of holders of secured claims . . . secured only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)(2) (emphasis added). In Nobelman v. American Savings Bank, 508 U.S. 324 (1993), the Supreme Court held that that, for purposes of Section 1322(b)(2), a creditor's "rights" are those "reflected in the relevant mortgage instruments" and enforceable under state law, id. at 329-30. Because the rights reflected in mortgage instruments include the right "to repayment of the principal . . . over a fixed term at specified . . . rates of interest," Section 1322(b)(2) "prohibits a Chapter 13 debtor from relying on § 506(a) to reduce an undersecured homestead mortgage to the fair market value of the mortgaged residence." Id. at 325-26, 329.

         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. Among other modifications, the proposed plan reduced the principal due on the loan and reduced the interest rate at which Hurlburt must repay that principal, and thereby constrained the circumstances in which Black can exercise her right to foreclose on the property. See In re Hurlburt, 572 B.R. at 169-70; see also Nobelman, 508 U.S. at 329 (recognizing that a creditor's rights under mortgage instruments may include, without limitation: the right to repayment of the principal at a specified interest rate, the right to retain the lien until the debt is paid off, and the right to proceed against the debtor's property via foreclosure and public sale); Anderson v. Hancock, 820 F.3d 670, 675 (4th Cir. 2016) (holding that a debtor's Chapter 13 proposal to reinstate a 5% pre-default interest rate in lieu of a 7% interest rate that was triggered by default ran afoul of § 1322(b)(2)'s anti-modification provision); Litton v. Wachovia Bank (In re Litton), 330 F.3d 636, 643-44 (4th Cir. 2003) (holding that Section "1322(b)(2) prohibits modifications that would alter at least one fundamental aspect of a claim," including "lowering monthly payments, converting a variable interest rate to a fixed interest rate, . . . extending the repayment term of a note, . . . [altering] the nature and rate of interest, and [changing] the maturity features of the loan").[3]

         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 to Section 1322(b)(2) set forth in Section 1322(c)(2), which provides:

Notwithstanding subsection (b)(2) and applicable nonbankruptcy law . . . 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.

11 U.S.C. § 1322(c)(2). The exception set forth in Section 1322(c)(2), which Congress enacted in 1994, potentially applies to Black's claim because it (a) is secured only by a lien on real property that is Hurlburt's principal residence, and (b) derives from a loan that matured prior to the final payment due under the Chapter 13 plan. Because Hurlburt seeks to modify Black's claim into secured and unsecured components and cram down the unsecured portion, the key question we must resolve is whether the phrase "payment of the claim as modified" authorizes modification of "claim[s]"-including modification of the loan principal through bifurcation and cram down-or only modification of "payment of . . . claim[s]"-by, for example, permitting debtors to repay the outstanding part of a debt over the life of a repayment plan, rather than in accordance with the payment schedule set forth in the mortgage instruments.

         Witt concluded that the meaning of that phrase is ambiguous because "[i]t cannot be determined, merely from the statute's text, whether the words 'as modified' should apply to 'payment' or to 'claim.'" 113 F.3d at 511. In finding ambiguity, Witt first recognized that "under the 'rule of the last antecedent,' a phrase"-in this case "as modified"-generally "should be read to modify its immediate antecedent"-in this case "claim"-and therefore that interpreting Section 1322(c)(2) as permitting modification of claims was "'quite sensible as a matter of grammar.'" Id. (quoting Nobelman, 508 U.S. at 330). Nevertheless, Witt held that that reading "is not compelled" because "the term 'claim' is part of the phrase 'of the claim,' which modifies 'payment.' It is quite plausible as a matter of common sense, we believe, that the phrase 'as modified' also modifies 'payment' and not 'claim.'" Id. In light of this purported ambiguity, Witt looked to Section 1322(c)(2)'s legislative history and determined that Congress intended "that only payment may be modified." Id. at 512.

         Emphasizing that other aspects of Section 1322(c)(2)-not highlighted in Witt- indicate that Congress intended for the exception to permit modification of "claims," not just "payment[s]," other courts universally have criticized Witt's finding of ambiguity and attendant reliance on the statute's legislative history. See, e.g., In re Paschen, 296 F.3d at 1209; In re Eubanks, 219 B.R. at 471-73; In re Tekavec, 476 B.R. 555, 556, n. 2 (Bankr. E.D. Wis. 2012); Geller v. Grijalva (In re Grijalva), No. 4:11-bk-25386-EWH, 2012 WL 1110291, at *3-4 (Bankr. D. Ariz. Apr. 2, 2012); In re Reeves, 221 B.R. 756, 760 (Bankr. C.D. Ill. 1998); In re Mattson, 210 B.R. 157, 158-59 (Bankr. D. Minn. 1997). Commentators have reached the same conclusion-the plain language of Section 1322(c)(2) authorizes Chapter 13 plans to modify claims, not just payment schedules. See Nat'l Bankr. Rev. Comm'n, Report of the National Bankruptcy Review Commission 237 (1997) ("[S]ection 1322(c)(2) authorizes a stripdown of an undersecured residential mortgage if final payment would become due during the course of the Chapter 13 plan."); 8 Collier on Bankr. (MB) ¶ 1322.17 (2018) (opining that "the plain language of [§ 1322(c)(2)] permits the modification of a claim on [a qualifying] home mortgage through the bifurcation of that claim into secured and unsecured components, with the unsecured component crammed down pursuant to section 1325(a)(5)," and characterizing Witt as a "strained reading of the language" that runs "contrary to accepted canons of statutory construction, as well as the great weight of authority, and inconsistent with other language in the subsection that specifically referred to section 1325(a)(5)").

         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," Minor, 669 F.3d at 434-35, establishes that Section 1322(c)(2) is best read to authorize modification of "claim[s]," not just "payment[s]," 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.

         In reaching this conclusion, we first emphasize-as Witt acknowledged, 113 F.3d at 511-that the phrase "payment of the claim as modified" is most naturally read as permitting the modification of claims, not payments, cf. In re Paschen, 296 F.3d at 1208 (characterizing "[t]he Witt court's view that the phrase 'as modified' modifies 'payment,' rather than 'claim'" as "grammatically strained"). To be sure, courts are not bound to adopt the most natural reading of statutory language. Nonetheless, when, as here, the most natural reading of statutory language supports a particular construction of that language, courts should be wary of adopting an alternative construction.

         The dissenting opinion maintains that Section 1322(c)(2) is most naturally read as allowing modification of only payments, not claims, because the provision uses the term "payment" "four times," whereas it uses the term "claim" just once. Post at 30. But we do not interpret a statute's meaning simply by tallying up the number of uses of one term and then comparing that figure to the number of times Congress uses other terms. And all but one of Congress's four references to "payment" in Section 1322(c)(2) are used to define the class of homestead mortgage claims excluded from Section 1322(b)(2)'s reach-those that mature before the final payment ...


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