In re: Jamey Albert Schmidt and Keeley Ariel Schmidt, Debtors.
Jamey Albert Schmidt and Keeley Ariel Schmidt, Chapter 13, Appellees. Minnesota Housing Finance Agency, Appellant, Civil No. 13-434 ADM.
Mychal A. Bruggeman, Esq., Mackall, Crounse & Moore, PLC, Minneapolis, MN, on behalf of Appellant.
Timothy C. Theisen, Esq., Timothy Casey Theisen PA, Anoka, MN, on behalf of Appellees.
MEMORANDUM OPINION AND ORDER
ANN D. MONTGOMERY, District Judge.
Appellant Minnesota Housing Finance Agency ("MHFA") appeals the United States Bankruptcy Court's Orders: (1) valuing MHFA's claim [Docket No. 1, Attach. 9] and (2) confirming the modified Chapter 13 plan of Appellees Jamey Albert Schmidt and Keeley Ariel Schmidt ("Debtors") [Docket No. 1, Attach. 8]. MHFA is the holder of a third-priority mortgage against the Debtors' principal residence. The value of the first mortgage exceeds the value of the Debtors' home, leaving no equity to support MHFA's mortgage. The Bankruptcy Court Orders permit the Debtors to treat MHFA as an unsecured creditor under the Debtors' modified Chapter 13 plan and to avoid, or "strip off, " MHFA's mortgage upon the Debtors' successful completion of their Chapter 13 plan. MHFA appeals, arguing the Chapter 13 plan violates the Bankruptcy Code because MHFA's claim is secured solely by a lien in the Debtors' residence, and 11 U.S.C. § 1322(b)(2) protects such claims from modification. For the reasons set forth below, the Orders of the Bankruptcy Court are affirmed.
The facts in this case are undisputed by the parties, who agree this appeal presents a question of law only.
On June 29, 2012, Debtors filed for relief under Chapter 13 of the Bankruptcy Code. Bankruptcy Petition [Docket No. 1, Attach. 1]. The Debtors' bankruptcy schedules show their home is encumbered by three mortgages. Id. at 19 (Bankruptcy Schedule D). The senior mortgage is held by U.S. Bank Home Mortgage in the amount of $154, 578.20. Id . This amount exceeds the home's appraised value of $140, 000. See id. The second priority mortgage, also held by U.S. Bank Home Mortgage, is for $39, 451.99. Id . MHFA holds the third priority mortgage in the amount of $26, 469.31. Id .; Aff. of Mary Puertos [Docket No. 1, Attach. 6] at 28-29 ("Puertos Aff.") ¶ 1, Exs. A-C. The Debtors' home is the only collateral securing the indebtedness owed to MHFA. Puertos Aff. ¶ 5.
On November 28, 2012, the Debtors filed a motion (the "Motion to Value") in bankruptcy court seeking: a determination that there was no equity in their home to support MHFA's lien; reclassification of MHFA's claim from a secured claim to a non-priority unsecured claim; and avoidance of MHFA's lien upon the Debtors' successful completion of their Chapter 13 plan. See generally Mot. Value [Docket No. 1, Attach. 5]. The Debtors also filed a modified Chapter 13 plan (the "Modified Plan") that treats MHFA as an unsecured creditor and requires MHFA's mortgage lien be removed from the home upon the Debtors' bankruptcy discharge. Modified Plan [Docket No. 1, Attach. 4] ¶ 13.C. MHFA objected to the Motion to Value and to the Modified Plan. See MHFA Resp. Debtors' Mot. Value [Docket No. 1, Attach. 7]; MHFA Obj. Debtors' Modified Chapter 13 Plan [Docket No. 1, Attach. 6].
On January 10, 2013, the Bankruptcy Court held a hearing on the Motion to Value and the Modified Plan. See Appellant's Br. [Docket No. 5] ADD-7 (Hr'g Tr.). At the hearing, Bankruptcy Judge Dennis D. O'Brien voiced his personal agreement with MHFA's position that its lien should not be stripped. Hr'g Tr. at ADD-8-ADD-11. Nevertheless, Judge O'Brien stated his legal obligation was to follow the Eighth Circuit Bankruptcy Appellate Panel's ("BAP") decision in Fisette v. Keller (In re Fisette) , 455 B.R. 177 (B.A.P. 8th Cir. 2011), which held that a bankruptcy debtor may strip off a lien on the debtor's primary residence if there is no equity in the residence to support the lien. See id. at ADD-10. Accordingly, Judge O'Brien granted the Motion to Value and confirmed the Modified Plan. Id. at ADD-11. MHFA appeals both rulings.
A. Jurisdiction, Standard of Review
A district court has jurisdiction over appeals from final orders of bankruptcy judges. 28 U.S.C. § 158(a)(1). An order confirming a Chapter 13 plan is a final, appealable order. In re Zahn , 526 F.3d 1140, 1143 (8th Cir. 2008). Rulings leading to a confirmation order are also reviewable in conjunction with the appeal of a confirmation order. Id . A district court reviews a bankruptcy court's legal conclusions de novo. In re MBA Poultry, LLC , 291 F.3d 528, 533 (8th Cir. 2002).
The single legal issue presented by MHFA's appeals is whether a Chapter 13 debtor can strip off a lien on the debtor's principal residence if no equity exists to support the lien. The issue "turns on the interplay between 11 U.S.C. § 506(a)(1)... and the anti-modification provision in § 1322(b)(2)." Fisette v. Keller (In re Fisette) , 695 F.3d 803, 804 n.2 (8th Cir. 2012).
1. Section 506(a)(1)
Section 506(a)(1) of the Bankruptcy Code divides creditors' claims against a debtor into "secured" and "unsecured" claims based on the value of the underlying collateral. Harmon v. United States , 101 F.3d 574, 578 (8th Cir. 1996). Under § 506(a)(1), an allowed claim secured by a lien on the debtor's property "is a secured claim to the extent of the value of [the] creditor's interest in the estate's interest in such property... and is an unsecured claim to the extent that the value of [the] creditor's interest... is less than the amount of such allowed claim." 11 U.S.C. § 506(a)(1).
In other words, a claim secured by a lien is a "secured claim" under § 506(a) "only to the extent of the value of the property on which the lien is fixed; the remainder of that claim is considered unsecured." United States v. Ron Pair Enters., Inc. , 489 U.S. 235, 239 (1989). Thus, "secured claim" is a term of art under the Bankruptcy Code, and not every claim that is secured by a lien on collateral is a "secured claim" in bankruptcy. Zimmer v. PSB Lending Corp. (In re Zimmer) , 313 F.3d 1220, 1223 (9th Cir. 2002); see also In re Sanders , 202 B.R. 986, 988 (Bankr. D. Neb. 1996) (distinguishing "secured claim" in the literal sense from "secured claim" in the bankruptcy code sense). Here, the parties do not dispute that MHFA ...