Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-89-06325/USCOURTS-ca10-89-06325-0/pdf.json

Parties Involved:
Eastland Mortgage Co.
Appellee
Danny L. Hart
Appellant
Joanne E. Hart
Appellant

Document Text:

PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

In re: DANNY L. HART and 

JOANNE E. HART, 

Debtors, 

EASTLAND MORTGAGE CO., 

Plaintiff-Appellee, 

FIJ"'ED 

United State;-; Cc·.tr: of Arpeals 

're1'\l:'\t (!i,-",,H. 

JAN l 7 1991 

ROBERT L. HOECKFR 

Clerk 

v. 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

No. 89-6325 

DANNY L. HART and JOANNE E. HART, 

Defendants-Appel-lants. 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE WESTERN DISTRICT OF OKLAHOMA 

(D.C. No. CIV-89-797-T) 

James L. Bentley, UAW-GM Legal Services Plan, Oklahoma City, 

Oklahoma, for Debtors-Defendants-Appellants. 

Sandy Schovanec, Phillips McFall Mcvay Sheets & Lovelace (Melvin 

R. Mcvay with her on the briefs), Oklahoma City, Oklahoma, for 

Plaintiff-Appellee. 

Before MOORE, TACHA, and BRORBY, Circuit Judges. 

PER CURIAM. 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 1 
The issue in this bankruptcy case is whether a home mortgage 

protected by 11 u.s.c. § 1322(b)(2) can be bifurcated into secured 

and unsecured portions based on the fair market value of the 

property under a threshold application of the provisions of 

11 u.s.c. § 506(a) to an undersecured mortgage. The district 

court found that the attempt to do so was a modification of the 

mortgage and, as such, was improper. We hold that the bifurcation 

was a recognition of the legal status of the creditor's interest 

in the debtors' property and not a modification of the mortgage. 

We reverse. 

Danny L. Hart and Joanne E. Hart, debtors in the chapter 13 

bankruptcy action from which this appeal arose, took out a loan 

secured by a mortgage held by the Federal National Mortgage 

Association and serviced by appellee Eastland Mortgage Company, a 

creditor in the bankruptcy action. The mortgage described the 

security for the loan to be the real property to which the Harts' 

mobile home is attached, 

TOGETHER WITH all the improvements now or hereafter 

erected on the property, and all easements, rights, 

appurtenances, rents, royalties, mineral, oil and gas 

rights and profits, water rights and stock and all 

fixtures now or hereafter a part of the property. All 

replacements and additions shall also be covered by this 

Security Instrument. All of the foregoing is referred 

to in this Security Instrument as the "Property." 

In re Hart, No. 88-6229-TS, Order Concerning Debtors' Motion to 

Amend Plan at 5 (Bankr. W.D. Okla. Mar. 24, 1988)(hereafter, the 

"bankruptcy court order"). At the time the Harts submitted their 

chapter 13 wage earner plan to the bankruptcy court for approval, 

a $55,000 balance remained on Eastland's note. However, the fair 

2 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 2 
market value of the property described in the mortgage was 

stipulated to be $30,000. One part of the Harts' chapter 13 plan, 

approved by the bankruptcy court without objection, referred to 

the mortgage as a $55,000 secured indebtedness, while other parts 

of the plan referred to the mortgage as a $30,000 secured and 

$25,000 unsecured indebtedness. When the Harts filed a motion to 

amend the plan, correcting what they referred to as a "scrivener's 

error" so that the plan consistently listed $30,000 of the debt as 

secured and $25,000 as unsecured, Eastland objected. 

The bankruptcy court granted the Harts' motion to amend and 

approved the plan over Eastland's objections. Eastland appealed 

to the district court, and that court reversed, holding 

modification of the mortgage to be inappropriate, given the 

protection of residential mortgages granted by 11 u.s.c. 

§ 1322(b) (2). In re Hart, No. CIV-89-797-T, Order (August 28, 

1989)(hereafter, the "district court order"). The Harts appealed 

to this court. 

The standard by which this court reviews district court 

decisions arising on appeal from the bankruptcy court was set 

forth in Hall v. Vance, 887 F.2d 1041 (10th Cir. 1989): 

It is well established that neither this court nor 

the district court can disturb a bankruptcy court's 

findings of fact unless they are clearly erroneous. A 

factual finding is clearly erroneous "'when although 

there is evidence to support it, the reviewing court on 

the entire evidence is left with the definite and firm 

conviction that a mistake has been committed.'" This 

court, however, may exercise de novo review over the 

bankruptcy court's conclusions of law. 

Id. at 1043 (citations omitted). See also First Bank v. Mullet 

(In re Mullet), 817 F.2d 677, 679 (10th Cir. 1987)("both the court 

3 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 3 
of appeals and the district court are to review the bankruptcy 

court's legal determinations de novo"); cf. Jarboe v. United Bank 

(In re Golf Course Builders Leasing, Inc.), 768 F.2d 1167, 1169 

(10th Cir. 1985)("the 'clearly erroneous' standard does not apply 

to . . . mixed questions of law and fact") . 

Chapter 13 of the Bankruptcy Code of 1978, 11 u.s.c. 

§§ 1301-30 (1988) 

provides for the adjustments of the debts of an 

individual with regular income, through extensions and 

composition plans, usually extending no more than three 

years, § 1322(c) of the Code, funded out of the Chapter 

13 petitioner's future income (which is submitted to the 

court for the payment of the debts as provided for by 

the plan,§ 1322(a) of the Code). The adjustments and 

extensions so allowed, however, are subject to 

provisions that protect the interests of creditors, 

including, inter alia, their secured interests. 

Grubbs v. Houston First Am. Sav. Ass'n, 730 F.2d 236, 237 

Cir. 19 8 4 ) ( en bane ) . 

Two sections of the Code are particularly important in 

case. The first is 11 u.s.c. § 1322(b) (2). Section 1322 

forth the required contents of a chapter 13 debtor's plan 

(5th 

this 

sets 

for 

rehabilitation. Subsection (b)(2) provides that the plan may: 

"modify the rights of holders of secured claims or of 

holders of unsecured claims, or leave unaffected the rights of 

holders of any class of claims." 

The original draft of the Code, prepared by the Commission on 

the Bankruptcy Laws of the United States, recommended permitting 

modification of secured indebtedness on personal property. 

Grubbs, 730 F.2d at 243-44; In re Neal, 10 Bankr. 535, 538 (Bankr. 

S.D. Ohio 1981); see also H.R. Rep. No. 595, 95th Cong., 1st 

4 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 4 
Sess., reprinted in 1978 U.S. Code Cong. & Ad.min. News 5963; 

s. Rep. No. 989, 95th Cong., 2d Sess., reprinted in 1978 U.S. 

Code Cong. & Ad. News 5787. The House version of the Code, H.R. 

8200, 95th Cong., 1st Sess. (1977), expanded this capability for 

modification of secured interests to include both real and 

personal property. Grubbs, 730 F.2d at 243; In re Neal, 10 Bankr. 

at 538-39. The Senate version, S. 2266, 95th Cong., 2d Sess. 

(1978), restricted the House version's broad right to modification 

by adding the underlined phrase of the following passage, 

"(2) modify the rights of holders of secured claims (other than 

claims wholly secured by mortgages on real property) or of holders 

of unsecured claims." Grubbs, 730 F.2d at 245 & n.14; In re Neal, 

10 Bankr. at 539. The final version of the Code reflected the 

efforts of a compromise committee. "There was no explanation as 

to the rationale for the change of the word 'wholly' to the word 

'only.'" Id. The change in the order of the words in the clause 

also remains unexplained. 

In Grubbs, the Fifth Circuit found that Congress intended to 

protect the home mortgage industry: 

With regard to§ 1322(b)(2), the Senate receded from its 

position that no "modification" was to be permitted of 

any mortgage secured by real estate; it instead agreed 

to a provision that modification was to be barred only 

as to a claim "secured only by a security interest in 

real property that is the debtor's principal residence." 

This limited bar was apparently in response to 

perceptions, or to suggestions advanced in the 

legislative hearings [by advocates for secured 

creditors], that, home-mortgagor [sic] lenders, 

performing a valuable social service through their 

5 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 5 
loans, needed special 

thereof (i.e., reducing 

valuations, etc.). 

protection against modification 

installment payments, secured 

730 F.2d at 246 (emphasis in original);~ also id. at 245 n.13; 

Federal Land Bank v. Glenn (In re Glenn), 760 F.2d 1428, 1433-34 

(6th Cir.), cert. denied sub nom Miller v. First Fed., 474 U.S. 

849 (1985); In re Seidel, 752 F.2d 1382, 1385-86 (9th Cir. 1985); 

In re Harris, 94 Bankr. 832, 836 (D.N.J. 1989); In re Foster, 61 

Bankr. 492, 495 (Bankr. N.D. Ind. 1986)(special protection of 

§ 1322(b)(2) was created as narrow exception to broad 

restructuring power under chapter 13; exception sought to decrease 

lender's risk in residential real estate loans); In re Neal, 10 

Bankr. at 536-37. At least one court has concluded that the 

benefit of section 1322(b)(2) was intended to apply only to 

lending institutions dealing solely in real estate loans, such as 

banks and savings and loan associations, as opposed to finance 

companies who regularly take other forms of security, such as 

motor vehicles and household furnishings. United Companies Fin. 

Corp. v. Brantley, 6 Bankr. 178, 189 (Bankr. N.D. Fla. 1980); cf. 

In re Glenn, 760 F.2d at 1434 (application of section 1322(b)(2) 

often arises in the context of consumer debts for personal 

property secured by the debtor's home or in the context of 

financing for business ventures secured by the debtor's home). 

The other section of the Code bearing on this case is 

11 u.s.c. § 506(a): 

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 

6 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 6 
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. Such value shall 

be determined in light of the purpose of the valuation 

and of the proposed disposition or use of such property. 

"Section 506 ... governs the definition and treatment of secured 

claims . Subsection (a) of§ 506 provides that a claim is 

secured 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, 238-39 (1989); see also Dewsnup v. Timm (In re Dewsnup), 

908 F.2d 588, 590 (10th Cir. 1990)(citing Ron Pair 

Enters.)(11 u.s.c. §§ 506 (a) and (d) govern the definition and 

treatment of secured claims); H.R. Rep. No. 595, 95th Cong., 1st 

Sess. 356, reprinted in 197·8 u. S. Code Cong. & Admin. News 5963, 

6312-13. 

The dispositive issue in this case is whether Eastland's 

undersecured loan may be bifurcated into two claims by applying 

the general principles of section 506(a) to the mortgage and then 

protecting only the secured claim by the provisions of section 

1322(b)(2). We believe it can. 

Eastland claims that this court does not have jurisdiction to 

examine this issue. Eastland notes that the bankruptcy court did 

not reach this issue because it found that rents, royalties, 

profits and stock were "collateral other than the debtor's 

principal residence, and thus the claim was not protected by 

section 1322(b)(2)," bankruptcy court order at 5-6, and that the 

Harts did not "cross-appeal" the issue in the district court. The 

Harts counter that they noted the issue in their "appellee's 

7 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 7 
statement" to the district court and that such notice is 

sufficient to confer district court jurisdiction over the issue, 

pursuant to Fed. R. Bankr. P. 8010(a)(2). 1 

We hold that we do have jurisdiction to rule on this issue 

for two reasons. First, in this circuit, "[a]n appellee may 

defend the judgment won below on any ground supported by the 

record without filing a cross appeal." Robinson v. Robinson (In 

re Robinson), No. 90-1130, 1990 WL 182317 at 1 (10th Cir. Nov. 28, 

1990)(citing Koch v. City of Hutchinson, 847 F.2d 1436, 1441 n.14 

(10th Cir.)(en bane), cert. denied, 488 U.S. 909 (1988)). 

And second, although the record on appeal does not include 

the Harts' appellee's statement, they evidently did bring the 

issue to the district court's attention because the district court 

order states: "Debtors contend that even if Eastland's claim is 

within the scope of 1322(b)(2), debtors can still bifurcate the 

claim into secured and unsecured claims and modify the unsecured 

portion pursuant to 11 u.s.c. § 506(a)." District court order 

at 3. 

1 Fed. R. Bankr. P. 8010(a)(2) provides: 

Brief of the Appellee. The brief of the appellee shall 

conform to the requirements of paragraph (l)(A)-(E) of this 

subdivision [contents of the appellant's brief: table of 

contents, basis of appellate jurisdiction, issues presented 

and standard of review, statement of the case (includes 

nature of the case, course of proceedings, disposition in the 

court below, facts relevant to the issues on review with 

record references), and argument], except that a statement of 

the basis of appellate jurisdiction, of the issues, or of the 

case need not be made unless the appellee is dissatisfied 

with the statement of the appellant. 

8 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 8 
The district court did not consider this. issue, on the 

grounds that "the issue is not before this Court on appeal." Id. 

at 4. However, the district court could have addressed the issue 

had it concluded that it was dispositive. See Pizza of Haw., Inc. 

v. Shakey's, Inc. (In re Pizza of Haw., Inc.), 761 F.2d 1374, 1377 

(9th Cir. 1985)(district court has the discretion to consider any 

issue presented by the lower court record, even if not addressed 

in the bankruptcy court). As also noted above, this court has the 

same scope of review over bankruptcy court decisions as does the 

district court. Thus, the issue of threshold bifurcation of the 

Harts' mortgage prior to application of section 

protection from modification is properly before us. 

1322(b)(2) 

Threshold bifurcation of undersecured mortgages has been 

recognized recently by both the Third and the Ninth Circuits. In 

Hougland v. Lomas & Nettleton Co. (In re Hougland), 886 F.2d 1182 

(9th Cir. 1989), the Ninth Circuit held that: 

[I]t is clear that section 506(a) applies to Chapter 13 

proceedings. See § 103(a). There is, therefore, no 

reason to believe that the phrases "secured claim" and 

"unsecured claim" in section 1322(b)(2) have any meaning 

other than those given to them by section 506 (a). 

quite plainly has provided for the 

of undersecured claims into two 

Congress 

separation 

components 

component. 

Chapter 13 

protection 

involved. 

- a secured component and an unsecured 

It has then provided for their treatment in 

proceedings. The secured portion has special 

when residential real estate lending is 

The unsecured portion does not. 

9 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 9 
Id. at 1183, 1185. 2 Accord Wilson v. Commonwealth Mortgage Corp., 

895 F.2d 123, 127, 128 (3d Cir. 1990)("[W]e hold today that 

section 1322(b)(2) does not preclude the modification of any 

'unsecured' portion of an undersecured [mortgage debt]."); Gaglia 

v. First Fed. Savs. & Loan Ass'n, 889 F.2d 1304, 1311 (3d Cir. 

1989)("Whether the plan complies with§ 1322(b)(2) depends on the 

extent to which the claim is secured, an issue that is determined 

by reference to § 506."); In re Lewis, 875 F.2d 53, 56 (3d Cir. 

1989)(in a chapter 13 proceeding, a claim secured only by a 

security interest in the debtor's residence may be voided to the 

extent it is not an allowed secured claim as defined by 

section 506). See also 5 Collier on Bankruptcy ~r 1322.06[l][a] 

at 1322-15 (L. King, 15th ed. 1979 & Supp. Dec. 1989). 

While no other circuit courts have ruled on this issue, 

district courts and bankruptcy courts from other circuits reflect 

a split of authority. Courts within the Fourth, Sixth, and 

Seventh Circuits have favored protection of only the secured 

portion of a home mortgage under section 1322(b)(2), applying 

section 506(a) and then submitting only the secured portion of the 

claim to the protection of section 1322(b)(2). See McNair v. 

Chrysler First Fin. Servs. Corp. (In re McNair), 115 Bankr. 520, 

523 (Bankr. E.D. Va. 1990); In re Demoff, 109 Bankr. 902, 915 

2 In re Hougland cites 11 u.s.c. 103(a) as authority for the 

proposition that section 506(a) applies to section 1322(b)(2). 

Section 103(a) provides: "Except as provided in section 1161 of 

this title [Railroad Reorganization], chapters 1, 3, and 5 [which 

includes section 506(a)] of this title apply in a case under 

chapter 7, 11, 12, or 13 of this title." 

10 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 10 
(Bankr. N.D. Ind. 1989); In re Hill, 96 Bankr. 809, 813-14 

(Bankr. S.D. Ohio 1989); In re Frost, 96 Bankr. 804, 807 (Bankr. 

S. D. Ohio 19 8 9) . 

To the contrary, bankruptcy courts in the Fifth, Eighth, and 

Eleventh Circuits have held that such bifurcation is 

inappropriate. The bankruptcy courts in these circuits rely on 

some or all of four rationales: (1) the legislative history 

mandates protection of the home mortgage lender, and bifurcation 

impermissibly dilutes that protection; (2) as a matter of 

statutory construction, the requirements of a specific section, 

in this case section 1322(b)(2), control those of a general 

section, in this case section 506(a); (3) as a matter of statutory 

construction, the courts should look to the definition of . "claim" 

from section 101(4), which includes both secured and unsecured 

claims, rather than the definition of "secured claim" from section 

506(a); and (4) analysis of the legislative history should look 

back to Chapter XIII of the now-repealed Bankruptcy Act, 

predecessor to the Code, for guidance in the definition of secured 

claims. See In re Chavez, 117 Bankr. 733, 736-37 (Bankr. S.D. 

Fla. 1990); In re Sauber, 115 Bankr. 197, 199 (Bankr. D. Minn. 

1990); In re Schum, 112 Bankr. 159, 162 & n.3 (Bankr. N.D. Tex. 

1990); In re Kaczmarczyk, 107 Bankr. 200, 202-03 (Bankr. D. Neb. 

1989); In re Russell, 93 Bankr. 703, 705 (D.N.D. 1988); In re 

Catlin, 81 Bankr. 522, 524 (Bankr. D. Minn. 1987). 3 We are not 

3 The courts in our own circuit are split on the issue. 

Compare Brouse v. CSB Mortgage Corp. (In re Brouse), 110 Bankr. 

539, 543-44 (Bankr. D. Colo. 1990); In re Ross, 107 Bankr. 759, 

762 (Bankr. W.D. Okla. 1989); In re Simmons, 78 Bankr. 300, 303 

(continued on next page) 

11 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 11 
persuaded that application of any of these four rationales, taken 

individually or cumulatively, results in a correct reading of the 

Code as currently enacted. 

The position of the Third and Ninth Circuits and the other 

courts which have adopted threshold bifurcation under section 

506(a) prior to submission of the secured claim portion of a 

mortgage to the protection of section 1322(b)(2) reflects the 

plain meaning of section 1322(b)(2), which states: 

Subject to subsections (a) and (c) of this section, 

the 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. 

In interpreting any statute, we "'begin with the language employed 

by Congress and the assumption that the ordinary meaning of that 

language accurately expresses the legislative purpose.'" Justice 

v. Valley Nat'l Bank, 849 F.2d 1078, 1084 (8th Cir. 1988)(quoting 

Park 'N Fly, Inc. v. Dollar Park & Fly, Inc., 469 U.S. 189, 194 

(1985)). "The plain meaning of legislation should be conclusive, 

except in the 'rare cases [in which] the literal application of a 

statute will produce a result demonstrably at odds with the 

intention of its drafters.'" Ron Pair Enters., 489 U.S. at 242 

(quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 

(continued from previous page) 

(Bankr. D. Kan. 1987) with First Interstate Bank v. Woodall (In re 

Woodall), No. CIV-90-1019-A (W.D. Okla. Oct. 11, 1990); In re 

Christiansen, 121 Bankr. 63 (Bankr. D. Colo. 1990). 

12 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 12 
(1982)). In addition, using a literal reading of 11 u.s.c. 

§ 1322(b)(2) is less speculative and less quasi-legislative than 

attempting to ferret its meaning from its legislative history, 

which, as we have seen, is not clear enough with respect to this 

issue to show a "demonstrably" different congressional intent than 

that indicated by the plain meaning of the statute itself. 

We join the Third and Ninth Circuits in holding that an 

undersecured mortgage is, for the purposes of the bankruptcy code, 

two claims, and only the secured claim is protected by section 

1322(b)(2). 4 More importantly, we recognize that while 

bifurcation, in the literal sense, may be a modification of the 

mortgage represented in the secured and unsecured claims, 

bifurcation is not, of itself, a "modification" of the secured 

claim made impermissible by section 1322(b)(2). Indeed, the act 

of bifurcation recognizes, but does not affect, the secured claim. 

We find nothing in the plain language of section 1322(b)(2) 

which instructs us to go beyond the Code's statutory definition of 

the term "secured claims" to protect the unsecured portion of an 

undersecured home mortgage. We note that the Harts' plan provided 

for the secured claim to be paid in full without adjustment in the 

interest rate or repayment schedule stated in the loan documents. 

Under this plan, payment of only the secured portion of the debt 

is not a modification of the creditor's rights under the mortgage, 

and thus is allowed under 11 u.s.c. § 1322(b)(2). 

4 The term "secured claims" as used in that section is defined 

by section 506(a), which requires bifurcation. 

13 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 13 
Tangentially, the Harts argue that their mortgage is secured 

by more than "only an interest in real property that is [their] 

principal residence," thereby removing the mortgage from the 

protection of section 1322(b)(2) and freeing them to subject it to 

section 506(a) bifurcation. Both the bankruptcy court and the 

district court confined their analysis to this approach in 

analyzing the bifurcation issue. The bankruptcy court concluded 

that: 

While such items as "rents, royalties ... profits . and stock" may be related to realty, clearly they 

are not realty and certainly are not considered a part 

of a mortgagor's principal residence. Although Eastland 

argues none of those items are present in this case at 

this time, the drafters of the mortgage form certainly 

placed the mortgagee in a position to claim such items 

as its collateral if they arise in the future. Thus, 

Eastland cannot now be heard to say its claim is limited 

to only Debtors' principal residence. 

Bankruptcy court order at 5. Through this analysis, the 

bankruptcy court removed the mortgage from the protection of 

section 1322(b)(2) and allowed application of the bifurcation 

provisions of section 506(a). 

The district court reversed. It stated that, "Eastland does 

not seriously contend that rents and profits are real property. 

Therefore ... the language of the clause covers items other than 

real property." District court order at 2. However, the district 

court concluded that Eastland's mortgage was totally protected by 

section 1322(b)(2) because the non-realty items did not presently 

exist and therefore could not be construed as security for the 

mortgage, citing the definition of a secured claim found in 

11 U.S.C. § 506 and In re Foster, 61 Bankr. at 495 (additional 

14 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 14 
security must have actual independent value; land bank stock's 

value is illusory). District court order at 2-3. The district 

court concluded that because a mortgage does not exist on items 

which do not exist, nothing other than the Harts' real property 

secured the loan, and Eastland's mortgage was totally protected by 

section 1322(b)(2). 

The Harts argue that, in finding that the additional items of 

collateral had no value, the district court made a finding of fact 

unsupported by the record. 

the 

They 

district 

argue, 

court 

citing 

5 Fed. R. Bankr. P. 8013, that had no 

jurisdiction to make such findings of fact. We agree. 

The Third Circuit clarified the federal appeals court's role 

in reviewing district court decisions in bankruptcy cases: 

5 

As an appellate court twice removed from the primary 

tribunal, we review both the factual and the legal 

determinations of the district court for error. The 

district court does not sit as a finder of facts in 

evaluating them as a court of review, and therefore its 

evaluation of the evidence is not shielded by the 

"clearly erroneous" standard of Fed. R. Civ. P. 52(a), 

which applies only to a trial court sitting as a fact 

finder. We are in as good a position as the district 

court to review the findings of the bankruptcy court, so 

we review the bankruptcy court's findings by the 

standards the district court should employ, to determine 

whether the district court erred in its review. To the 

extent the parties challenge the choice, interpretation, 

Fed. R. Bankr. P. 8013 provides: 

On an appeal the district court ... may affirm, 

modify, or reverse a bankruptcy judge's judgment, order, 

or decree or remand with instructions for further 

proceedings. Findings of fact, whether based on oral or 

documentary evidence,. shall not be set aside unless 

clearly erroneous, and due regard shall be given to the 

opportunity of the bankruptcy court to judge the 

credibility of the witnesses. 

15 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 15 
or application of legal precepts, we always· employ the 

fullest scope of review: we examine the decision of the 

court from which the appeal is taken for error, and the 

legal determinations of the district court as a 

reviewing tribunal are not shielded by any presumption 

of correctness. 

Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 

(3d Cir. 1981)(emphasis in original). 

While the district court "is free to draw inferences from 

undisputed facts," Adams v. United States (In re Breit), 

460 F. Supp. 873, 875 (E.D. Va. 1978), it "may not accept the 

findings of the bankruptcy court and then go on to make additional 

findings having the effect of contradicting the conclusions of the 

bankruptcy court." In re Neis, 723 F.2d at 589. "Merely because 

a reviewing Court on the same evidence may have reached a 

different result will not justify setting a finding aside." 

Machinery Rental, Inc. v. Herpel (In re Multiponics, Inc.), 

622 F.2d 709, 723 (5th Cir. 1980)(citing United States v. National 

Ass'n of Real Estate [Bds.J, 339 U.S. 485, 495-96 (1950)). 

In this case, the district court went beyond the factual 

findings of the bankruptcy court to find that the rents and 

profits listed as security on the Harts' mortgage are illusory, 6 

apparently based on undocumented, albeit uncontested, statements 

in Eastland's brief to the district court. The district court 

6 It is undisputed that illusory items may not serve as 

security for a mortgage, as that term is used in section 

1322(b)(2). See,~, Wilson v. Commonwealth Mortgage Corp., 

895 F.2d 123, 129 (3d Cir. 1990)(items must have independent value 

to serve as collateral for a mortgage); In re Foster, 61 Bankr. at 

495 (security interest must have "actual independent value"); cf. 

In re Stiles, 74 Bankr. 708, 710 (Bankr. N.D. Ala. 1987)(worthless 

collateral does not defeat section 1322(b)(2) protection). 

16 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 16 
then went on to use this finding of fact to reverse the legal 

conclusion of the bankruptcy court. This use of a finding of fact 

by the district court in a bankruptcy appeal, unsupported by the 

record~ is reversible error. 

The order of the District Court for the Western District of 

Oklahoma is REVERSED and this matter is REMANDED to the Bankruptcy 

Court for the Western District of Oklahoma for further proceedings 

consistent with this opinion. 

17 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 17 
( 

No. 89-6325, In re Hart 

BRORBY, Circuit Judge, dissenting. 

As I would affirm the decision of the district court, I must 

dissent. 

The principal issue we must decide is the apparent tension 

between two separate provisions of the Bankruptcy Code. 11 u.s.c. 

§ 506(a) provides that a claim is secured only to the extent of 

the value of the property on which the lien is fixed. The balance 

of the debt is unsecured. On the other hand, 11 u.s.c. 

§ 1322(b)(2) provides that ·a 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 

ti 

The majority's conclusion is that§ 1322(b)(2) applies only 

after the secured debt has been reduced to the fair market value 

of the property. In other words,§ 1322(b)(2) "kicks in" only to 

prevent any further modification of this secured claim. The 

problem with this approach is that it renders § 1322(b)(2) 

essentially meaningless. 

The majority accurately describes the split in authority on 

this issue and cites numerous bankruptcy court decisions in the 

18 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 18 
Fifth, Eighth and Eleventh Circuits that have disagreed with the 

majority's approach. I am persuaded by these decisions. I 

believe these cases correctly analyze the problem and reach the 

better solution. 

19 

Appellate Case: 89-6325 Document: 010110016257 Date Filed: 01/17/1991 Page: 19