                                                                                                                           Opinions of the United
2000 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


3-9-2000

In Re: McDonald
Precedential or Non-Precedential:

Docket 99-1381




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Filed March 9, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 99-1381

IN RE: STEPHEN J. MCDONALD;
ROSEMARIE J. MCDONALD,

       Debtors

STEPHEN J. MCDONALD;
ROSEMARIE J. MCDONALD

v.

MASTER FINANCIAL, INC.

FREDERICK L. REIGLE, ESQ.,
STANDING CHAPTER 13 TRUSTEE;
FREDERIC J. BAKER, ESQ.,
ASSISTANT U.S. TRUSTEE,

       Trustees

Stephen J. McDonald;
Rosemarie J. McDonald,

       Appellants

On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil No. 99-cv-00149)
District Judge: Honorable James T. Giles

Argued December 6, 1999

Before: SLOVITER, ROTH and COWEN, Circuit Judges

(Filed: March 9, 2000)




       Dexter K. Case, Esq.
       Alisa R. Hobart, Esq. (Argued)
       541 Court Street
       Reading, PA 19601

        Counsel for Appellants

       Michael A. Tier, Esq. (Argued)
       215 Route 9
       Bayville, NJ 08721

       Joseph A. Diorio, Esq.
       7979 Oxford Avenue, 2nd Floor
       Philadelphia, PA 19111

        Counsel for Appellee

OPINION OF THE COURT

COWEN, Circuit Judge.

In this appeal we must determine whether the so-called
"antimodification provision" in 11 U.S.C.S1322(b)(2) applies
to a second, wholly unsecured mortgage on a Chapter 13
debtor's home. In Nobelman v. American Savings Bank, 508
U.S. 324, 113 S.Ct. 2106 (1993), the Supreme Court held
that a Chapter 13 debtor who had a single mortgage with
an outstanding balance greater than the value of the
debtor's residence could not divide the mortgage, pursuant
to 11 U.S.C. S 506(a), into secured and unsecured parts
and treat only the secured part as subject to the
antimodification clause. According to Nobelman, the full
outstanding balance of the mortgage is governed by the
antimodification clause. Justice Thomas's opinion for the
Court left unresolved, however, whether the
antimodification clause applies to a second or junior
mortgage if that mortgage is wholly unsecured by any
remaining value in the residence.1
_________________________________________________________________

1. Note that the phrase "wholly unsecured" in this context carries a
specific meaning. While the mortgage holder of course initially obtained
a security interest in the debtor's residence and in that sense has a
secured claim, the second mortgage is now deemed wholly unsecured in

                               2


In interpreting Nobelman the Bankruptcy and District
Courts both concluded that the second mortgage on the
McDonalds' residence is subject to the antimodification
clause, even if the value of their home is less than the
outstanding balance of the first mortgage, leaving the
second mortgage wholly unsecured. Because we conclude
that this interpretation fails to take into account several
strands of the Supreme Court's reasoning in Nobelman, we
will reverse.

I

Before reaching when the antimodification clause applies,
we must address a question about our jurisdiction. In the
Bankruptcy Court the parties purportedly entered into a
stipulation of facts specifying that the outstanding balance
of the first mortgage is greater than the value of the
McDonalds' home. At oral argument before this court,
however, Master Financial, the appellee and holder of the
second mortgage on the McDonalds' home, asserted that
their "stipulation" is not binding. On Master Financial's
view if the Bankruptcy Court had held that the
antimodification provision does not apply to wholly
unsecured mortgages, then Master Financial would have
contested whether the value of the home was indeed less
than the outstanding balance of the first mortgage. Master
Financial's interpretation of the "stipulation" apparently
captured the Bankruptcy Court's understanding of the
case, for that Court's opinion simply noted that Master
Financial disputed the value of the home and stated that no
evidentiary hearing had been held on the issue. Thus, as
matters stand, we can only say that the McDonalds have
alleged that the value of their home is $126,400, the
balance of the first mortgage is $127,633.33, and the
balance of the second is $46,846.42.
_________________________________________________________________

the sense that the value of the debtor's residence is less than the
amount due to a first or senior mortgage holder, leaving no remaining
value for the second mortgage. Thus, at a foreclosure sale the holder of
the wholly unsecured second mortgage would receive nothing from the
direct proceeds of the sale.

                               3


In light of Master Financial's disavowal of any binding
stipulation, we raised the issue of whether the bankruptcy
court's decision amounted to an advisory opinion and
consequently whether we have jurisdiction to hear this
appeal. Federal courts are not authorized to issue advisory
opinions. See, e.g., United States Nat'l Bank v. Independent
Ins. Agents of America, Inc., 508 U.S. 439, 446, 113 S.Ct.
2173, 2178 (1993); Coffin v. Malvern Federal Savings Bank,
90 F.3d 851 (3d Cir. 1996).

The precise analytical contours of what constitutes an
advisory opinion, however, are less than clear. For example,
Fed.R.Civ.P. 12(b)(6) allows a court to resolve certain legal
disputes in advance of factual disputes. Even though
allowing discovery and conducting a hearing on the facts
could have provided an alternative, and perhaps in some
sense narrower, ground for resolving the suit, a court can
still consider a legal issue that, if decided in the defendant's
favor, would be dispositive on a motion to dismiss. Doing so
conserves both the court's and the parties' resources. In
keeping with this logic we appreciate that in the context of
a Chapter 13 bankruptcy involving comparatively small
sums of money, the parties understandably wanted to avoid
expenses, such as the cost of expert testimony, that would
have been incurred contesting the value of the home if in
the end the evidence produced would be legally irrelevant.

While the record is not entirely clear, we conclude that
this case was decided on a motion to dismiss,
notwithstanding the parties' odd references to a nonbinding
stipulation of facts. The Bankruptcy Court's opinion
accepted as true the McDonalds' allegations that the
second mortgage was wholly unsecured and still held as a
matter of law that the debtors must lose their adversary
proceeding. Under these circumstances, it is clear that the
Bankruptcy Court's interpretation of Nobelman conclusively
resolved the litigation and did so without improperly
issuing an advisory opinion.

Accordingly, we conclude that we are authorized to hear
this appeal. We have jurisdiction pursuant to 28 U.S.C.
S 158(d), and since we are presented with a purely legal
issue, we exercise plenary review over the District Court's
determination, a determination that in turn resulted from a

                                4


plenary review of the Bankruptcy Court's conclusions of
law. See, e.g., In re Anes, 195 F.3d 177, 180 (3d Cir. 1999).

II

Our analysis of the merits of this appeal begins with two
provisions of the bankruptcy code. The first, 11 U.S.C.
S 506(a), applies to bankruptcies under all chapters, see 11
U.S.C. S 103(a), and sorts creditors' allowed claims against
the debtor into secured and unsecured claims. Under
S 506(a) any allowed claim that is 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 deemed an unsecured claim to the
extent it exceeds that value. An undersecured claim is thus
treated as a secured claim only up to the value of the
collateral; the excess debt becomes an unsecured claim.

The second relevant provision, the antimodification
clause, applies only to Chapter 13 bankruptcies. The
antimodification clause states that a Chapter 13 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. . . ." 11 U.S.C.
S 1322(b)(2). Put more directly, the antimodification clause
bars a debtor from modifying the rights of a creditor who
has a claim secured only by the debtor's principal
residence.
Before Nobelman some courts had concluded that in a
Chapter 13 bankruptcy they should look first toS 506(a) to
determine both the value of a debtor's residence and how
much of the mortgage remained secured. The courts would
then treat only the portion deemed secured underS 506(a)
as subject to the antimodification provision inS 1322(b)(2).
See, e.g., In re Bellamy, 962 F.2d 176 (2d Cir. 1992); In re
Hart, 923 F.2d 1410 (10th Cir. 1991); Wilson v.
Commonwealth Mortgage Corp., 895 F.2d 123 (3d Cir.
1990); and In re Hougland, 886 F.2d 1182 (9th Cir. 1989).
Other courts, by contrast, concluded that there was a
conflict between S 506(a) and S 1322(b)(2) and decided that
S 1322(b)(2) should prevail as the more specific provision.
See, e.g., In re Nobleman, 968 F.2d 483 (5th Cir. 1992).

                               5


In reviewing the Fifth Circuit opinion, the Supreme Court
agreed that S 1322(b)(2) applies to both the part of a
mortgage that is currently secured by value in the
residence and the part that is unsecured, but significantly
the Court nevertheless rejected the Fifth Circuit's position
that S 506(a) does not apply. Justice Thomas began his
analysis by pointing out that it is "correct to look to S 506(a)
for a judicial valuation of the collateral to determine the
status of the bank's secured claim," and doing so in
Nobelman, he continued, showed that the mortgage holder,
American Savings Bank, was "still the `holder' of a `secured
claim,' because petitioner's home retains $23,500 of value
as collateral." 508 U.S. at 329, 113 S.Ct. at 2110.

Once it was clear that American Savings was a holder of
a claim secured by the debtor's principal residence, Justice
Thomas reasoned that S 1322(b)(2) dictates that none of the
bank's "rights" could be "modified" for its claim, even
though part of the bank's claim was deemed unsecured
under S 506(a). Finding that the term "rights" was not
defined by the Bankruptcy Code, Justice Thomas invoked
state law to determine the word's meaning and therefore
concluded that, when the antimodification clause applies, it
prevents the debtor's Chapter 13 plan from modifying the
mortgage holder's state-law rights to repayment. What
counts as impermissibly "modifying" a creditor's rights,
however, should not be understood too broadly. Justice
Thomas hastened to add that the mortgage holder's rights
are still "affected" by the bankruptcy. The automatic stay,
for example, still blocks the creditor's right to foreclose, and
debtors can cure prepetition defaults on a home mortgage
under S 1322(b)(5). See Nobelman, 508 U.S. at 330, 113
S.Ct. at 2110.

The McDonalds argue that because Nobelman stated that
S 506(a) still applies and determines the"status" of a
creditor's claim, it follows that a wholly unsecured
mortgage is no longer a secured claim under the
Bankruptcy Code and hence is not subject to the
antimodification clause. Nobelman specifically said that the
bank was a holder of a secured claim "because the
petitioner's home retains $23,500 of value as collateral."
508 U.S. at 329, 113 S.Ct. at 2110. In the McDonalds' case

                               6


they allege that there is no value left in their home as
collateral for Master Financial's mortgage.

So far the only appellate panel to apply Nobelman to a
wholly unsecured mortgage has agreed with the McDonalds
that such a mortgage is not subject to the antimodification
clause. In re Lam, 211 B.R. 36 (9th Cir. BAP), appeal
dismissed, 192 F.3d 1309 (9th Cir. 1999). The many
bankruptcy courts to consider the issue have split, with a
majority favoring the McDonalds' view2 but some adopting
the opposing view.3 Bankruptcy treatises are also divided
on the issue. Compare 5 Collier on Bankruptcy,
S 1322.06[1][a]at 1322-16 ("If the creditor had held a lien
on property that had no value (perhaps because the
property was fully encumbered by prior liens), then under
this analysis it would not have been a "holder of a secured
_________________________________________________________________

2. See, e.g., In re McCarron, 242 B.R. 479 (Bankr.W.D.Mo. 2000); In re
Johnson, 226 B.R. 364 (D.Md. 1998); In re Cerminaro, 220 B.R. 518
(Bankr.N.D.N.Y. 1998); In re Phillips, 224 B.R. 871 (Bankr.W.D.Mich.
1998); In re Reeves, 221 B.R.756 (Bankr.C.D.Ill. 1998); In re Smith, 215
B.R. 716 (Bankr.W.D.Tenn. 1998); In re Bivvins , 216 B.R. 622
(Bankr.E.D.Tenn. 1997); In re Scheuer, 213 B.R. 415 (Bankr.N.D.N.Y.
1997); In re Cervelli, 213 B.R. 900 (Bankr.D.N.J. 1997); In re Geyer, 203
B.R. 726 (Bankr.S.D.Cal. 1996); In re Sanders , 202 B.R. 986
(Bankr.D.Neb. 1996); In re Purdue, 187 B.R. 188 (S.D.Ohio 1995); Wright
v. Commercial Credit Corp., 178 B.R. 703 (E.D.Va. 1995); In re Thomas,
177 B.R. 750 (Bankr.S.D.Ga. 1995); In re Lee, 177 B.R. 715
(Bankr.N.D.Ala. 1995); In re Woodhouse, 172 B.R. 1 (Bankr.D.R.I. 1994);
In re Sette, 164 B.R. 453 (Bankr.E.D.N.Y. 1994); In re Castellanos, 178
B.R. 393 (Bankr.M.D.Pa. 1994); In re Mitchell , 177 B.R. 900
(Bankr.E.D.Mo. 1994); In re Hornes, 160 B.R. 709 (Bankr.D.Conn. 1993);
In re Plouffe, 157 B.R. 198 (Bankr.D.Conn. 1993); In re Lee, 161 B.R.
271 (Bankr.W.D.Okla. 1993); In re Moncrief, 163 B.R. 492
(Bankr.E.D.Ky. 1993); In re Kidd, 161 B.R. 769 (Bankr.E.D.N.C. 1993);
In re Williams, 161 B.R. 27 (Bankr. E.D.Ky. 1993).

3. See, e.g., In re Boehmer, 240 B.R. 837 (Bankr.E.D.Pa. 1999); In re
Tanner, 223 B.R. 379 (Bankr.M.D.Fla. 1998); In re Lewandowski, 219
B.R. 99 (Bankr.W.D.Pa. 1998); In re Bauler, 215 B.R. 628 (Bankr.D.N.M.
1997); In re Mattson, 210 B.R. 157 (Bankr.D.Minn. 1997); In re
Shandrew, 210 B.R. 829 (Bankr.E.D.Cal. 1997); In re Fraize, 208 B.R.
311 (Bankr.D.N.H. 1997); In re Barnes, 207 B.R. 588 (Bankr.N.D.Ill.
1997); In re Neverla, 194 B.R. 547 (Bankr.W.N.Y. 1996); In re Barnes,
199 B.R. 256 (Bankr.S.D.N.Y. 1996); In re Jones , 201 B.R. 371
(Bankr.D.N.J. 1996); In re Witt, 199 B.R. 890 (W.D.Va. 1996).

                               7


claim" entitled to protection by section 1322(b)(2).") with
Keith M. Lundin, Chapter 13 Bankruptcy 2d ed., S 4.46 at
4-56 ("Although the concept of an "unsecured secured
claim" is impossible under S 506(a), Justice Thomas's focus
on the "rights" of the "holders" of a"claim secured only by
. . ." in S 1322(b)(2) extends the protection from
modification . . . without regard to the allowance or
disallowance of secured claims under S 506(a).").

While we acknowledge that there is some ambiguity in
the language in Nobelman, we believe that the better
interpretation is that reached by Collier's, the Ninth Circuit
bankruptcy panel in Lam, and the majority of bankruptcy
courts to consider the issue. The Supreme Court did not
adopt the Fifth Circuit's view that S 506(a) is inapplicable,
and S 103(a) provides that S 506(a) does apply to a Chapter
13 bankruptcy. Once we accept that courts must apply
S 506(a), then it follows, even under Nobelman, that a
wholly unsecured mortgage holder does not have a secured
claim. Justice Thomas specifically said that the bank in
Nobelman had a secured claim "because" the bank's lien
still attached to some existing value in the debtor's house.
We do not think there is any meaningful sense in which a
court could be said to apply S 506(a) if the sole function of
the section was simply to adopt the state-law label of the
claim as secured. Moreover, if the value of the collateral
were irrelevant, then it is hard to see why Justice Thomas
would instruct that the debtors "were correct in looking to
S 506(a) for a judicial valuation of the collateral to
determine the status of the bank's secured claim."
Nobelman, 508 U.S. at 328, 113 S.Ct. at 2110. Courts
hardly need to perform a valuation of the collateral to adopt
the original state-law label of the claim as secured.

The only reason there is any doubt about the result is
Justice Thomas's discussion of the term "claim" occurring
in the antimodification clause. When he rejected the
approach of the courts holding that the antimodification
clause applies only to the still secured part of a mortgage
under S 506(a), Justice Thomas said that those courts had
incorrectly relied on the rule of the last antecedent. To see
how that rule applies, recall that S 1322(b)(2) states that a
debtor's Chapter 13 plan can "modify the rights of holders

                               8
of secured claims, other than a claim secured only by a
security interest in . . . the debtor's principal residence.
. . ." Under the rule of the last antecedent, the clause "other
than a claim secured only by a security interest in . . . the
debtor's principal residence," modifies its immediate
antecedent, "secured claims." With "secured claims" as the
term modified, courts had reasoned before Nobelman that
the antimodification clause must apply only to the part of
a mortgage that remained a "secured claim." Justice
Thomas agreed that this reading "is quite sensible as a
matter of grammar," but concluded that the reading "is not
compelled." Nobelman, 508 U.S. at 330, 113 S.Ct. at 2111.

He explained that the statute deliberately used the
unmodified term "claim" in the antimodification clause,
rather than the term "secured claim." Since"claim" receives
a broad interpretation under the Bankruptcy Code, the
term encompasses both the secured and unsecured
portions of the mortgage, a conclusion showing that the
antimodification clause applies to both parts of the
mortgage.

This discussion of the term "claim" has created some
confusion because earlier Justice Thomas emphasized that
applying S 506(a) in the case before the Court showed that,
since value remained in the collateral, the bank was"still
the `holder' of a `secured claim.' " Id. at 329, 113 S.Ct. at
2110. If his subsequent discussion concluded that the
antimodification clause, by using the unmodified term
"claim," applied to both the unsecured and secured part of
the mortgage, then why did he bother to establish earlier
that the bank was still a holder of a secured claim? Doesn't
the expansive reading of the term "claim" make it irrelevant
whether the bank remains a holder of a secured claim?

We think the Supreme Court's discussion of #8E8E # 506(a)
and 1322(b)(2) is consistent. Perhaps the clearest
explanation of how the Court's discussion of the two
sections can be reconciled is to point out that while the
antimodification clause uses the term "claim" rather than
"secured claim" and therefore applies to both the secured
and unsecured part of a mortgage, the antimodification
clause still states that the claim must be "secured only by
a security interest in . . . the debtor's principal residence."

                               9


11 U.S.C. S 1322(b)(2) (emphasis added). If a mortgage
holder's claim is wholly unsecured, then after the valuation
that Justice Thomas said that debtors could seek under
S 506(a), the bank is not in any respect a holder of a claim
secured by the debtor's residence. The bank simply has an
unsecured claim and the antimodification clause does not
apply. On the other hand, if any part of the bank's claim is
secured, then, under Justice Thomas's interpretation of the
term "claim," the entire claim, both secured and unsecured
parts, cannot be modified. We think this reading reconciles
the various parts of the Court's opinion.4

Master Financial insists that the Supreme Court's
statement that S 506(a) still applies is dictum and should
be ignored. We disagree. Chief Judge Posner has aptly
defined dictum as "a statement in a judicial opinion that
could have been deleted without seriously impairing the
analytical foundations of the holding--that, being
peripheral, may not have received the full and careful
consideration of the court that uttered it." Sarnoff v.
American Home Prods. Corp., 798 F.2d 1075, 1084 (7th Cir.
1986). Justice Thomas's statement that it is correct to
apply S 506(a) is critical to Nobelman's holding, for if the
petitioner's home had not retained some value as collateral,
the Supreme Court's discussion of S 506(a) implies that the
result would have been different. The Supreme Court's
discussion is only dictum, in other words, if you assume
Master Financial's reading of the case is correct at the
outset.

The bare fact that the Supreme Court was not
considering a wholly unsecured mortgage does not convert
into dicta every piece of reasoning in Nobelman bearing on
_________________________________________________________________

4. Master Financial asserts in its brief that wholly unsecured mortgages
are regularly bought and sold, and therefore a wholly unsecured
mortgage has value and is still subject to the antimodification clause.
Whatever value a wholly unsecured mortgage might have in the market
Master Financial has in mind, that value has no bearing on the inquiry
under S 506(a). Section 506(a) compares the value of the collateral
against the "creditor's interest in the estate's interest in [the
collateral]."
Master Financial's position would only make sense if the creditor was
entitled to collect from the debtor not only the money owed on the debt
but also the price that the mortgage might be sold to someone else.

                               10


that issue. A holding, as Sarnoff's definition makes clear,
extends beyond a statement of who won or lost a case. A
court can choose among different holdings that offer
broader or narrower ways of resolving a dispute. It is also
worth emphasizing that the Supreme Court's discussion of
S 506(a) was not likely to have been an ill-considered
remark since the Fifth Circuit opinion that the Supreme
Court reviewed expressly rejected that S 506(a) applies. See
In re Nobelman, 968 F.2d 489, 488 (5th Cir. 1992).
Furthermore, on Master Financial's interpretation the
Supreme Court's discussion of S 506(a) is not dictum in the
sense that it resolved a real legal issue, but one that could
be readily deleted from the court's rationale for deciding the
case; rather, Master Financial's view makes the Court's
discussion of S 506(a) a useless aside that could not be
relevant to any case involving the antimodification clause.

But even if the discussion of S 506(a) could be accurately
characterized as dictum--and we think it cannot be--we
should not idly ignore considered statements the Supreme
Court makes in dicta. The Supreme Court uses dicta to
help control and influence the many issues it cannot decide
because of its limited docket. "Appellate courts that dismiss
these expressions [in dicta] and strike off on their own
increase the disparity among tribunals (for other judges are
likely to follow the Supreme Court's marching orders) and
frustrate the evenhanded administration of justice by giving
litigants an outcome other than the one the Supreme Court
would be likely to reach were the case heard there." United
States v. Bloom, 149 F.3d 649, 653 (7th Cir. 1998).

We think the textual arguments about Nobelman by
themselves require the result we reach today, but we also
are unpersuaded by Master Financial's policy arguments
that the Supreme Court reached the wrong result. Thefirst
point to stress is that, as Justice Stevens noted in his
concurrence, the antimodification clause's legislative
history shows that the provision's "favorable treatment of
residential mortgagees was intended to encourage theflow
of capital into the home lending market." 508 U.S. at 332,
113 S.Ct. 2112. Because second mortgages are rarely used
to purchase a home, making wholly unsecured second
mortgages subject to the antimodification clause would

                                11


have at best a minimal impact in encouraging home
building and buying. The holder of a second mortgage is
apt to be very much like other general creditors, and
therefore it seems reasonable that a wholly unsecured
second mortgage will be subject to the same rules that
apply to other secured claims--i.e., a claim not secured by
any current value in the specified collateral is deemed an
unsecured claim.

One often-cited concern that Master Financial invokes is
that it would be unjust and arbitrary to allow a mortgage
holder to have an unmodifiable claim when there is merely
one dollar of value left in the residence, but leave a
mortgage holder with a modifiable (and hence potentially
valueless) claim if there is no remaining value in the
residence. We will begin with the complaint that the result
is arbitrary and then turn to the objection that it is unjust.

Bright-line rules that use a seemingly arbitrary cut-off
point are common in the law. A day beyond the statute of
limitations and the plaintiff must lose, even if the claim was
otherwise unquestionably a winning one. If the evidence is
just over a preponderance, the plaintiff wins full damages;
just under, the plaintiff gets nothing. In bankruptcy law a
Chapter 7 trustee cannot contest the validity of a debtor's
claimed exemption when the 30-day period for objecting
has expired and the trustee failed to obtain an extension;
and this is true even if the debtor has no colorable basis for
claiming the exemption. Taylor v. Freeland & Kronz, 503
U.S. 638, 112 S.Ct. 1644 (1992). To take an example closer
to our case, we have read the word "only" in the
antimodification clause's phrase, "secured only by a
security interest in . . . the debtor's principal residence," to
mean that the clause's protection is unavailable when the
loan is secured not just by the debtor's residence but by
other property as well. See, e.g., Hammond v.
Commonwealth Mortgage Co., 27 F.3d 52 (3d Cir. 1994);
Wilson v. Commonwealth Mortgage Corp., 895 F.2d 123,
126-29 (3d Cir. 1990). What these examples show is that
line drawing is often required in the law and, at the
boundary, the appearance of unfairness is unavoidable.
Simply pointing out that some arbitrariness occurs is not a
compelling objection.

                               12


Master Financial believes that the law should always
prevent the modification of a mortgage in a Chapter 13
bankruptcy and hence the law should not require a
distinction between a wholly unsecured and a partially
secured mortgage. This is essentially the argument that the
result is unjust. As we have explained, there is no way to
reconcile Master Financial's position with the reasoning in
Justice Thomas's opinion. Even if we agreed with Master
Financial's argument that the result is unjust, we would be
bound. But in any event, holders of second mortgages are
in a sense unintended beneficiaries of congressional intent
to boost the home-buying and home-building markets. And
to the extent there is any unfairness in the distinction
between wholly unsecured mortgage holders and those
secured only by a nominal value, the creditor with only a
dollar's worth of security in the property cannot be heard to
complain--such a creditor can invoke the antimodification
clause. Any unfairness in that circumstance falls on the
debtor. The only class of creditors who can complain are
those who are wholly unsecured, but as we set forth above,
these creditors are not worse off than other secured
creditors who operate outside of mortgage lending.
We also note that our holding frequently will not make
holders of wholly unsecured residential mortgages worse off
than they would be under Master Financial's own rule
making a wholly unsecured residential mortgage
unmodifiable. This is true because a debtor who has
outstanding balances on multiple mortgages exceeding the
current value of the debtor's home often will not try to keep
a home encumbered with so much debt, and instead will
turn to a Chapter 7 bankruptcy and allow the home to be
sold in liquidation. For example, consider that in our case
Master Financial's reading of Nobelman would have the
McDonalds pay, according to the McDonalds' statement of
the facts, $174,479.75 to keep a home worth $126,400. A
rational debtor might well decide to switch to Chapter 7,
lose the home, and start over. Once the debtor proceeds
under Chapter 7, a holder of a wholly unsecured mortgage
will again, under S 506(a), be deemed unsecured and
receive no more (and possibly less) money than that
creditor would have under our interpretation of the
antimodification clause. See 11 U.S.C.S 1325 (providing

                               13


requirements for a Chapter 13 plan's payment of unsecured
creditors).

We also think it is significant that courts have repeatedly
emphasized Congress's preference that individual debtors
use Chapter 13 instead of Chapter 7. Part of the reason for
this preference is that unsecured creditors often receive
more money under successful Chapter 13 plans than they
would under a Chapter 7 liquidation bankruptcy. To the
extent Master Financial's rule would stampede more
debtors into Chapter 7, Master Financial's strong
interpretation of the antimodification clause would pursue
the tenuous gains for holders of wholly unsecured
mortgages by imposing losses on other unsecured creditors
who will be worse off in Chapter 7 than they would have
been in Chapter 13.

Master Financial responds that Chapter 7 will not offer a
viable alternative for debtors because the Supreme Court
has rejected lien-stripping in Chapter 7. See Dewsnup v.
Timm, 502 U.S. 410, 112 S.Ct. 773 (1992). It is true that in
Dewsnup the Supreme Court concluded that a debtor in
Chapter 7 could not use S 506(d) to " `strip down' a
creditor's lien on real property to the value of the collateral,
as judicially determined, when that value is less than the
amount of the claim secured by the lien." Id. at 412, 112
S.Ct. at 775. The Court reached this conclusion to prevent
debtors from benefitting from any increase in the value of
their home between the time its value was judicially
determined (and hence the time part of the debt was
deemed unsecured) to the time of the later foreclosure sale.
For example, before Dewsnup if the outstanding balance on
the mortgage was $120,000, the house was judicially
valued at $100,000, and the house's value later rose to
$130,000 by the foreclosure sale, the debtor could strip
down the lien to $100,000 and later take the $30,000
increase free of the creditor's claim to the $20,000. Because
Dewsnup allowed the creditor in Chapter 7 to maintain a
claim against the property for the unsecured balance, the
decision prevented a Chapter 7 debtor from benefitting from
an increase in the value of the home. But what matters for
our purposes is that even under Dewsnup the debtor is still
discharged of personal liability, so Dewsnup does not

                               14


eliminate the incentive to switch from Chapter 13 to 7 in
order to escape debt on a home that far exceeds the home's
value. A debtor in the McDonalds' position would still view
Chapter 7 as a better alternative than Chapter 13.

It is also worth noting that courts are split on whether
Dewsnup's rejection of lien-stripping in Chapter 7 applies to
a wholly unsecured lien, although of course we express no
view on that dispute. Compare In re Yi, 219 B.R. 394
(E.D.Va. 1998), and Howard v. National Westminister Bank,
184 B.R. 644 (Bankr.E.D.N.Y. 1995), with In re Laskin, 222
B.R. 872 (9th Cir. BAP 1998).

One last point should be mentioned. This appeal does not
require us to decide what date a court should use to
determine whether a mortgage is wholly unsecured. The
parties appear to have assumed that the date the adversary
proceeding was initiated should be used. There is no clear
consensus in the caselaw. Compare In re McCarron , 242
B.R. 479, 482 (Bankr.W.D.Mo. 2000)(using the date the
bankruptcy petition was filed) with In re Crain, 243 B.R. 75
(Bankr.C.D.Calif. 1999)(using the effective date of the
Chapter 13 debtor's plan or ten days after the order
confirming the plan if no timely appeal has been made).
Section 506(a) states, "Such value shall be determined in
light of the purpose of the valuation and of the proposed
disposition or use of such property, and in conjunction with
any hearing on such disposition or use or on a plan
affecting such creditor's interest." Although we need not
resolve the issue, we point out that whatever rule is
adopted, it is desirable to avoid allowing an appeal to delay
the date used for evaluation. Such a rule could encourage
the losing party to bring an appeal in the hope of obtaining
a more favorable evaluation.

For the foregoing reasons, we hold that a wholly
unsecured mortgage is not subject to the antimodification
clause in S 1322(b)(2). The judgment of the District Court
will be reversed. The case will be remanded to the District
Court for it to remand the matter to the Bankruptcy Court
for further proceedings consistent with this opinion. Costs
taxed against appellee.

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A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

                               16
