                                                                                                                           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Precedential or Non-Precedential: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




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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.
