# U ni te d S ta te s Co ur t of A pp ea ls

For the Eig hth Circu it

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No. 1 3- 24 47

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In re: Jamey

Alb ert Sch m id t; Keel ey

Arie l Sc hm id t,

ll ll ll ll ll ll ll ll ll ll l Deb to rs ,

----- ----- ----- ----- ----- -----

Mi nn es ot a Hou si ng Fin an ce Ag en cy ,

ll ll ll ll ll ll ll ll ll ll l

App el la nt

,

v.

Ja m ey Alb ert Sch m id t; Keel ey

Arie l Sc hm id t,

ll ll ll ll ll ll ll ll ll ll l

App el le es

.

__ __ __ __ __ __
App eal fro m

Uni te d S ta te s Di st ric t Co ur t fo r th e Dis tri ct of M in ne so ta - Mi nn eap ol is

__ __ __ __ __ __

Su bm it te d: Marc h 1 2, 2 01 4
Fil ed : Au gu st 28 , 20 14

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Befo re COLLOTON, SHEPHERD, and KELLY , Cir cu it Ju dg es

.

__ __ __ __ __ __

COLLOTON, Ci rcu it Ju dg e.J a mey an d Keel ey Sch m id t fil ed fo r ba nk ru pt cy un de r Ch ap te r 13 of th e

ba nk ru pt cy co de

. Ch ap te r 13 al lo ws in di vi du al s wit h reg ul ar in co m e to ad jus t th ei r
de bt s th ro ug h fle xi bl e rep ay m en t pl an s fu nd ed pr im ari ly fro m fu tu re in co m e. Se e 8

Co ll ie r on Ban kr up tc

y ¶ 13 22 .01 (Ala n N. Res ni ck & Hen ry J. So m m er, ed s., 16 th ed

. 20 13 ).

The ba nk ru pt cy co ur t ge ne ral ly ha s au th or it y to ap pr ov e a de bt or ’s Ch ap te r 13
pl an th at m od ifi es th e rig ht s of cred it or s. A pl an m ay m od ify th e rig ht s of ho ld ers of

un se cu red cl ai m s; it al so m ay m od ify th e rig ht s of ho ld ers of se cu red cl ai m s, “ ot he r

th an a cl ai m se cu red on ly by a se cu rit y in te res t in real pr op ert y th at is th e de bt or ’s

pr in ci pa l res id en ce.” 11 U.S.C. § 13 22 (b )(2 ). In th e ba nk ru pt cy co nt ex t, a cred it or ’s

cl ai m is a “ se cu red cl ai m ” on ly to th e ex te nt of th e va lu e of th e cred it or ’s in te res t in

th e co ll at eral th at sec ur es th e cl ai m

. Id

. § 5 06 (a)( 1)

.

Thi s cas e i n v o l ve s a sc en ari o in whi ch a cred it or ho ld s a th ird m or tg ag e th at

is se cu red o n l y b y th e de bt or ’s pr in ci pa l res id en ce, bu t th e va lu e of th e cred it or ’s

in te res t in th e ho m e is zero , be cau se th e va lu e of th e res id en ce is in su ffi ci en t to m ak e
who le th e ho ld ers of th e fir st an d se co nd m or tg ag es

. The qu es ti on pr es en te d on th is

ap pe al is whet he r th e d eb to r m ay en ga ge in a pr act ic e k no wn as “ li en st rip pi ng ,” in

whi ch th e de bt or se ek s t o ( 1 ) ha ve th e cred it or ’s c la im recl as si fie d fro m se cu red to

un se cu red , ( 2) m od ify t he te rm s of th e m or tg ag e fo r th e d u r a t i o n of th e Ch ap te r 13
pl an , an d (3 ) av oi d th e cred it or ’s m or tg ag e en ti rel y up on di sc ha rg e fro m ba nk ru pt cy

. Se e g en er al ly Har mon v. Uni te d S ta te s , 10 1 F .3d 57 4, 5 82 (8t h C ir. 1 99 6)

.

The ba nk ru pt cy co ur t co nf irmed a Ch ap te r 13 pl an th at recl as si fie d th e th ird

1

m or tg ag e cred it or ’s cl ai m as un se cu red an d pr ov id ed fo r av oi da nc e of th e cred it or ’s

Th e Hon or ab le Nan cy C. Dreh er, la te a Uni te d St at es Ban kr up tc y Ju d g e f o r 1

th e Dis tri ct of M in ne so ta

.

-2

-li en up on di sc h a r g e

. The di st ric t co ur t affi rm ed

, an d th e th ird -m or tg ag e ho ld er 2

ap pe al s. Co ns is te nt wit h th e de ci si on s of al l ot he r ci rcu it s th at ha ve ad dr es se d th e

qu es ti on , we affi rm

.

I.

In Ju ne 20 12

, th e Sch m id ts fil ed fo r rel ie f un de r Ch ap te r 13 of th e Ban kr up tc y

Co de

. The ir ho m e, whi ch ha s an ap pr ai se d v a l ue of $1 40 ,00 0, is en cu m be red by

th ree m or tg ag es

. The se ni or m or tg ag e, in th e am ou nt of $1 54 ,57 8.2 0, is he ld by U.S.

Ban k Hom e Mo rtg ag e. The se co nd -p rio rit y m or tg ag e, al so he ld by U.S. Ban k Hom e

Mo rtg ag e, is fo r $3 9,4 51 .99

. The Mi nn es ot a Hou si ng Fi na n c e A g e nc y ho ld s th e

th ird -p rio rit y m or tg ag e, in th e am ou nt of $2 6,4 69 .31

. The Sch m id ts ’ ho m e is th e on ly

co ll at eral th at sec ur es th e d eb t o wed to th e Age nc y

.

In Nov em

be r 20 12 , th e Sch m id ts fil ed a “ m ot io n to va lu e” in th e b an kr up tc y

co ur t, s eek in g (1 ) a d et erm in at io n t ha t t he re was no eq ui ty in th ei r ho m e to su pp or t

th e Age nc y ’s li en , (2 ) recl a s s i fic at io n of th e Age nc y ’s cl ai m fro m se cu red to no npr io rit y un se cu red

, an d (3 ) av oi da nc e of th e Age nc y ’s li en u p o n t h e Sch m id ts ’

su cces sf ul co m pl et io n of the ir Cha pt er 13 pl an

. The y al so fil ed a m od ifi ed Ch ap te r

13 pl an th at tre at s th e A g e n cy as an un se cu red cred it or an d req ui res th e Age nc y ’s

m or tg ag e li en to be rem ov ed fro m th e ho m e up o n t h e S ch m id ts ’ ba nk ru pt cy
di sc ha rg e.

The ba nk ru pt cy

co ur t, re lying on In re Fis et te , 45 5 B .R. 17 7 (B .A.P. 8t h C ir.

20 11 ), ru le d in fav or of th e Sch m id ts

. The co ur t gr an te d th ei r m ot io n to va lu e an d

co nf irmed th ei r m od ifi ed pl an on th e g ro un d t ha t a b an kr up tc y de bt or m ay

st rip off

The Hon or ab le Ann D. Mo nt go m ery, Uni te d St at es Dis tri ct Ju dg e fo r th e 2

Dis tri ct of M in ne so ta

.

-3

-a l i e n o n t he de bt or ’s pr im ary res id en ce if th ere is no eq ui ty in th e res id en ce t o

su pp or t t he li en . The Ag en cy ap pe al ed bo th rul in gs to th e d is tri ct co ur t.

Th e di st ric t co ur t reco gn iz ed th at th e “ si ng le le ga l is su e pr es en te d by [th e Age nc y ’s] ap pe al s is whe th er a Ch ap te r 13 de bt or can st rip of f a li en on th e de bt or ’s

pr in ci pa l res id en ce if no eq ui ty ex is ts t o s u p p o r t th e li en .” The res ol ut io n of th is

is su e, th e co ur t ex pl ai ne d, tu rn ed on th e in te rp la y be twee n § 50 6( a)(1 ) an d th e cl au se

in § 13 22 (b )(2 ) th at fo rb id s a co ur t to m od ify th e rig ht s of cert ai n cred it or s who ha ve

a se cu rit y in te res t i n re al pro pe rty tha t i s t he de bt or ’s pri nc ip al res id en ce.

The di st ric t co ur t fir st no te d th at th e Age nc y ho ld s on l y a n un se cu red cl ai m

un de r § 50 6( a)(1 ), be cau se no eq ui ty exi st s t o s up po rt t he Agen cy ’s li en : the va lu e

of th e Sch m id ts ’ ho m e is le ss th an th e am ou nt owed on th e m or e se ni or m or tg ag es

. Rel y in g on No be lma n v. Ameri ca n Sa vi ng s Ban k

, 50 8 U.S. 32 4 ( 1 9 93 ), th e di st ric t

co ur t co n c l u d e d th at “ a res id en ti al m or tg ag ee m us t ho ld a se cu red cl ai m un de r § 50 6( a)

. . . to qu al ify fo r pr ot ect io n un de r th e an ti -m od ifi cat io n p r o v i s i o n of
§ 13 22 (b )(2 ).” The di st ric t co ur t ru le d th at th e ba nk ru pt cy co ur t di d no t er r by

al lo w i n g t h e Sch m id ts to av oi d th e Age nc y ’s wh ol ly u ns ecu red m or tg ag e up on th e

su cces sf ul co m pl et io n of th ei r m od ifi ed Ch ap te r 13 pl an

. Bec au se th e Age nc y do es

no t h ol d a sec ur ed cla im

un de r § 5 06 (a)( 1) , th e co ur t re as on ed , th e Age nc y ’s rig ht s

m ay be m od ifi ed

.

The Age nc y ap pe al s. The rel ev an t fact s in th is cas e are un di sp ut ed

, an d we

rev ie w th e ba nk ru pt cy co ur t’s co nc lu si on s of la w de no vo

. Rit ch ie Sp eci al Cr ed it

In vs ., Ltd . v. U.S. Tr

. , 62 0 F .3d 84 7, 8 53 (8t h C ir. 2 01 0)

.

II.

The is su e h ere i s wh et he r a b an kr up tc y co ur t m ay st rip of

f a v al ue le ss li en in

a Ch ap te r 13 pr oc eed in g. Each of ou r si st er ci rcu it s th at ha s ad dr es se d th is qu es ti on

-4

-ha s an swe red i n t h e a f f irmativ e. Se e In re Dav is

, 71 6 F.3 d 33 1, 33 4– 39 (4 th Ci r.

20 13 ); In re Zi mmer , 31 3 F.3 d 12 20

, 12 22 –2 7 (9t h Cir. 20 02 ); In re La ne , 28 0 F.3 d

66 3, 66 5– 69 (6 th Ci r. 20 02 ); In re Pon d

, 25 2 F.3 d 12 2, 12 4– 27 (2 d Ci r. 20 01 ); In re

T a n n e r , 2 17 F.3 d 13 57

, 13 58 –6 0 (1 1t h Ci r. 20 00 ); In re Bar te e , 21 2 F.3 d 27 7

, 28 4– 95 (5t h C ir. 2 00 0) ; In re Mc Don al d , 20 5 F .3d 60 6, 6 09 –1 5 (3 d C ir. 2 00 0)

.

Res ol ut io n of th is ap pe al req ui res co ns id erat io n of two st at ut es , 11 U.S.C.
§ 50 6( a)(1 ) an d 11 U.S.C. § 13 22 (b )(2 ). Sect io n 50 6( a)(1 ) d i v id es a cred it or ’s

al lo wed cl ai m s ag ai ns t a de bt or in to se cu red an d un se cu red cl ai m s, ba se d on th e va lu e

of th e un de rlyin g co ll at eral

. A cred it or ’s cl ai m is se cu red “ to th e ex te nt of th e va lu e

of [th e] cred it or ’s in te res t i n . . . [th e] pro pe rty” and is un se cu red “ to th e ex te nt th at

th e va lu e of [th e] cred i t o r ’s i n t e r e s t

. . . is le ss th an th e am ou nt of [th e cred it or ’s]

cl ai m .” 11 U.S.C. § 50 6( a)(1 ). Tha t is

, a cred it or ’s un de rs ecu red cl ai m is tre at ed as

a se cu red cl ai m up to th e v al ue of th e cred it or ’s in te res t in th e co ll at eral ; th e ex ces s
de bt is tre at ed as an un se cu red cl ai m co m po ne nt

. Uni te d St at es v. Ron Pai r Ent er s.,

In c. , 48 9 U.S. 2 35 , 23 9 & n.3 (19 89 ).

Sect io n 13 22 (b )(2 ) go ve rn s pe rm is si bl e mo d i fic at io ns of a cred it or ’s rig ht s.

As rel ev an t he re, it go ve rn s th e “ st rip of f” of a li en , whi ch oc cu rs whe n “ th ere be in g

no co ll at eral va lu e fo r a m or tg ag e, th e en ti re li en is pr op os ed to be av oi de d.” In re

Fis et te

, 45 5 B.R. at 17 9 n.1

. Sect io n 13 22 (b )(2 ) pr ov id es th at a de bt or ’s Ch ap te r 13
pl an m ay “ m od ify th e rig ht s of ho ld ers of se cu red cl ai m s, ot he r th an a cl ai m se cu red

on ly by a se cu rit y in te res t in real pr op ert y th at is th e de bt or ’s pr in ci pa l res id en ce, or

of ho ld ers of u ns ecu red cla im s.” We a re co nc ern ed wit h th e “ ot he r th an ” cl au se of
§ 13 22 (b )(2 )—t he “ an ti m od ifi cat io n pr ov is io n” —wh ic h protec ts cert ai n cl ai m s fro m

li en st rip pi ng

.

The Su pr em e Co ur t ad dr es se d th e in te rp la y of th es e two st at ut es in No be lma n

. The de bt or s th ere so ug h t t o st rip of f th e un se cu red po rti on of a cred it or ’s

un de rs ecu red li en —t he de bt or s owe d th e cred it or $7 1,3 35 on th ei r ho m e, whi ch was

-5

-va lu ed at $2 3,5 00

. 50 8 U.S. a t 3 2 6

. The Co ur t ex pl ai ne d th at th e de bt or s “ were

co rrec t in lo ok in g to § 50 6( a) fo r a jud ic ia l va lu at io n of th e co ll at eral to de te rm in e th e

st at us of th e ba nk ’s s ecu red cl ai m .” I d

. a t 3 2 8

. Nex t, th e Co ur t ob se rv ed th at “ th e
ba nk is in di sp ut ab ly th e ho ld er of a cl ai m se cu red by a li en on [th e de bt or s’] ho m e,”

id

., “ be cau se [th e de bt or s’] ho m e ret ai ns $2 3,5 00 of va lu e as co ll at eral

. The po rti on

of th e ba nk ’s cl ai m th at ex ceed s $2 3,5 00 is an ‘uns ecu red cl ai m co m po ne n[ t]’ un de r § 50 6( a).” Id . a t 32 9 (s eco nd alt erat io n i n o rig in al ) (q uo ti ng Ron Pai r Ent er s. , 4 89

U.S. at 2 39 n.3 ).

The Co ur t u l ti m at el y co nc lu de d th at th e de bt or s co ul d no t st rip of f th e

un se cu red po rti on of t he ba nk ’s un de rs ecu red li en :

[T]o gi ve effe ct to § 50 6( a)’s va lu at io n an d bi fu rcat io n of se cu red cl ai m s th ro ug h a Ch ap te r 13 pl an in th e m an ne r [th e de bt o r s ] pr op os e wou ld

req ui re a m od ifi cat io n of th e rig ht s of th e ho ld er of th e se cu rit y in te res t.
Sect io n 13 22 (b )(2 ) pr oh ib it s su ch a m od ifi cat io n whe re, as he re, th e le nd er’s cl ai m is se cu red on ly by a li en on th e de bt or ’s pr in ci pa l

res id en ce.

Id

. at 33 2. The Co ur t ex pl ai ne d th at th e de bt or s “ can no t m od ify th e pa ym en t an d

in te res t te rm s fo r th e un se cu red co m po ne nt

, as th ey pr op os e t o d o , w it ho ut al so

m od ifyin g t he ter m s o f th e se cu red co m po ne nt .” Id . at 3 31

.

No be lm a n h e l d t h a t as lo ng as a cred it or ’s li en is at le as t pa rti al ly se cu red

, § 13 22 (b )(2 ) pr ecl ud es st rip pi ng an y pa rt of th at li en

. The Co ur t ha d no oc cas io n to

ad dr es s th e qu es ti on pr es en te d in th is cas e: W ha t res ul t if th e cred it or ’s li en is who ll y

un se cu red un d e r § 50 6( a)(1 ) be cau se th e cred it or ’s in te res t in th e co ll at eral th at

se cu res th e li en ha s n o v al ue ?

The Agen cy

arg ue s t ha t b ecau se it s l ie n i s s ecu red on ly by a se cu rit y

in te res t

in th e Sch m id ts ’ pr in ci pa l res id e n c e , § 13 22 (b )(2 )’s an ti m od ifi cat io n pr ov is io n

-6

-pr ot ect s it

. Sect io n 13 22 (b )( 2 ) g o v ern s whe n a ba nk ru pt cy co ur t can “ m od ify th e

rig ht s of ho ld ers of se cu red cl ai m s” an d th e rig ht s of “ ho ld ers of un se cu red cl ai m s.”

“ Secu red cl ai m ” an d “ un se cu red cl ai m ” are term s of art in th e Ban kr up tc y Co de

, so

it is ne ces sa ry fir st to co ns ul t § 50 6( a)(1 ) to de te rm in e whi ch t ype of cl ai m is

in vo lv ed

. No be lma n “ co nf irm[ed] t ha t § 50 6( a) is th e st art in g po in t in th e an al y si s

an d i s n ot ren de red a nu ll it y in th e Ch ap te r 13 co nt ex t.” Bar te e , 21 2 F .3d at 2 86

.

W e ag ree wit h ot he r ci rcu it s th at whe n co ns id eri ng th e rig ht s of cred it or s who

ho ld ho m es te ad li en s, “ th e di vi di ng li ne dr awn by § 13 22 (b )(2 ) ru ns be twee n th e

li en ho ld er who se se cu rit y in te res t in th e ho m es te ad pr op ert y h a s so m e ‘val ue ,’ se e § 50 6( a), an d th e li en ho ld er who se se cu rit y in te res t is va lu el es s.” La ne , 28 0 F.3 d at

66 8. “ Sect io n 1 32 2( b) (2 ) pr ot ect s a cred it or ’s r ig ht s in a m or tg ag e li en on ly w he re
the de bt or ’s res id en ce ret ai ns en ou gh va lue— af te r ac co unt ing fo r oth er en cu m br an ce s

th at ha ve pr io rit y ov er th e li en —s o th at th e li e n i s a t l e as t pa rti al ly se cu red un de r

Sect io n 5 06 (a).” Pon d , 25 2 F .3d at 1 26

.

Alt ho ug h th e Age nc y ack no wled ge s th at it s cl ai m is no t a se cu red cl ai m un de r § 50 6 ( a)(1 ), th e Age nc y rel ie s on No be lma n ’s co nc lu si on th at th e an ti m od ifi cat io n

pr ov is io n of § 13 22 (b )(2 ) pr ot ect s ag ai ns t m od ifi cat io n an y “ cl ai m se cu red

. . . b y ”

a d e b t o r ’s pr in ci pa l res id en ce, no t m erel y a “ se cu red cl ai m .” 50 8 U.S. at 32 8

. O n

tha t ba sis

, the A ge nc y co nte nd s th at § 13 22 (b )(2 )’s an ti m od ifi cat io n pr ov is io n ap pl ie s

to al l cl ai m s “ se cu red on ly by a se cu red i n t e r e s t in

. . . th e de bt or ’s pr in ci pa l

res id en ce,” wh et he r or no t t he cla im is a se cu red cla im

un de r § 5 06 (a)( 1)

.

In ou r vi ew, t h e A ge nc y read s to o m uc h in to No be lma n ’s di sc us si on on th is

po in t. Bec au se th e cred it or ’s cl ai m in No be lma n was pa rti al ly se cu red

, th e Co ur t was

no t co nc ern ed wit h whe th er § 13 22 (b )(2 )’s an ti m od ifi cat i o n p ro vi si on ap pl ie s

re g ard le ss of a cl ai m ’s st at us un de r § 50 6( a)(1 ). The qu es ti on in No be lma n was
whe th er § 13 22 (b )(2 ) pe rm it s bi fu rcat in g a pa rti al ly se cu red cl ai m an d st rip pi ng th e

li en fro m th e un se cu red po rti on of th at cl ai m

. No be lma n th us m ad e cl ear th at if a

-7

-cred it or ’s cl ai m is at le as t pa rti al ly se cu red

, no ne of th e cred it or ’s rig ht s m ay be

m od ifi ed

.

I f

, h o w e ve r, th e cred it or ’s cl ai m is who ll y un se cu red

, th en th e reas on in g o f

No be lma n do es no t pr ecl ud e m od ifyin g th e cred it or ’s rig ht s un de r § 13 22 (b )(2 ). As

th e Thi rd Cir cu it ex pl ai ne d:

If a m or tg ag e h ol de r’s cl ai m is who ll y un se cu red

, th en aft er th e

va lu at io n th at [th e Co ur t] sa id th at d e b t or s co ul d se ek un de r § 50 6( a),
th e ba nk is no t in an y res pe ct a ho ld er of a cl ai m se cu red by th e de bt or ’s

res id en ce. The ba nk si m pl y ha s an un se cu red cl ai m an d th e

an ti m od ifi cat io n cl au s e do es no t ap pl y

. On th e ot he r ha nd , i f an y pa rt of th e ba nk ’s cl ai m is se cu red

, th en , u nd er [th e Co ur t’s] in te rp ret at io n of th e te rm “ cl ai m ,” th e en ti re cl ai m , bo th se cu red an d un se cu red pa rts

,
can no t be m od ifi ed

. W e th in k th is read in g reco nc il es th e va rio us pa rts of th e Co ur t’s o pi ni on

.

McDo na ld

, 20 5 F.3 d at 61 2; se e La ne , 28 0 F.3 d at 66 8– 69 (“ The im pl ic at io ns of th is

po rti on of th e No be lma n op in io n

. . . do no t ex te nd be y on d th e si tu at io n

. . . in whi ch

th e li en ho ld er’s cl ai m fo r th e am ou nt du e ha s bo th a se c u r e d co m po ne nt an d an

un se cu red co m

po ne nt .”); Bar te e , 21 2 F .3d at 2 88 -8 9.

The Agen cy

als o reli es on leg is la ti ve hi st or y to su pp or t i ts co nt en ti on , bu t as

is of te n th e cas e, th e co m

m it te e rep or ts an d flo or st at em en ts arg ua bl y le nd su pp or t to

ei th er si de of th e co nt ro ve rs y . Th e Age nc y hi gh li gh ts a flo or st at em en t of a Hou se

m an ag er in 19 78 to arg ue th at a cred it or ’s cl ai m se cu red on ly by a de bt or ’s pr in ci pa l

res id en ce m ay no t be av oi de d al to ge th er. The Hou se m an ag er’s st at em en t ex pr es se d

an in te nt th at “ a cl ai m se cu red by th e de bt or ’s pr in ci pa l res id en ce m ay be tre at ed

. . .

un de r se ct io n 13 22 (b )(5 ),” whi ch pr ov id es fo r a de bt or to cu re a pr e-p et it io n
de li nq ue nc y ov er ti m e. 12 4 Co ng

. Rec

. 32 ,40 9 (1 97 8) (s ta te m en t of Rep

. Edwar ds ).

Bu t ev en gi vi ng weig ht to th is st at em en t o f a s i n g l e le gi sl at or , t he rem ark do es no t

-8

-ad dr es s th e ke y q u e st io n: whe th er a cred it or ’s cl ai m is a “ cl ai m se cu red ” by th e

de bt or ’s pe rs on al res id en ce wit hi n th e m ean in g of § 13 22 (b )(2 ) whe n th e va lu e of th e
cred it or ’s in te res t in th e pr op ert y i s z e r o a nd th e cred it or do es no t ho ld a “ se cu red

cl ai m ” un de r § 5 06 (a)( 1) . The Ag en cy ’s app eal to “ su bs eq ue nt le gi sl at iv e hi st or y ”

fro m 19 94 is ev en “ le ss il lu m in at in g th an th e co nt em po ran eo us ev id en ce,” Hag en v.

Uta h

, 51 0 U.S. 39 9, 42 0 (1 99 4)

, an d it pr ov id es at be st eq u i v o c a l s u p p or t fo r th e Age nc y ’s po si ti on

. Co mpa re In re Fra me , No. 09 -4 10 10

, 20 09 W L 87 25 11 1, at *2 –3
(Ban kr

. D. Mi nn

. Sep t. 23

, 20 09 ), wi th Bar te e , 21 2 F.3 d at 29 2– 94

. W e th in k th e te xt

of th e st at ut es an d th e te xt ua l an al y si s of No be lma n are su ffi ci en t to res ol ve th is cas e

in fav or of t he de bt or s, an d t he leg is la ti ve hi st or y do es no t ch an ge th at co nc lu si on

.

The Age nc y co m

pl ai ns th at th e ba

nkru pt cy co ur t’s in te rp ret at io n of th e st at ut es
wil l ha ve de le te rio us po li cy co ns eq ue nc es

. It sa y s th at a ru le al lo win g m od ifi cat io n

of cred it or rig ht s in th is si tu at io n pl aces un du e weig ht on th e jud ic ia l va lu at io n

pr oc es s an d le ad s to arb it rary res ul ts

. Fo r ex am pl e , a c r e d i t o r wit h on e do ll ar of

eq ui ty in th e de bt or ’s ho me is acco rd ed th e fu ll pr ot ect io n of § 13 22 (b )(2 )’s

an ti m od ifi cat io n pr ov is io n un de r No be lma n , bu t th e li en of a cred it or wit h no eq ui ty (li ke th e Age nc y he re) m ay be av oi d e d i n fu ll

. Se e In re Dick er so n , 22 2 F.3 d 92 4,

92 6 (1 1t h Ci r. 20 00 ). As ot he r co ur ts ha ve ob se rv ed , h owe ve r, “ [b ]righ t

- l i n e r ul es

th at us e a se em in gl y arb it rary cu t-o ff po in t are c om m on in th e la w,” an d “ [s ]im pl y

po in t i n g ou t th at so m e arb it rari ne ss oc cu rs is no t a co m pe ll in g ob

jecti on .”

McDo na ld , 20 5 F .3d at 6 13 ; se e a ls o La ne , 28 0 F .3d at 6 69

.

The Age nc y al so co nt en ds th at al lo win g m od ifi cat io n of it s rig ht s fai ls to gi ve
ad eq ua te co ns id erat io n to pr e-Co de pr act ic es th at pr ot ect ed th e st at e-l aw rig ht s of

cred it or s, in cl ud in g a pr es um pt io n th at li en s pa ss th ro ug h ba nk ru pt cy un affe ct ed

. Se e

Dews nu p v. Ti mm , 50 2 U.S. 41 0, 41 7 (1 99 2)

. The Co ur t in No be lma n , fo r ex am pl e,

fo cu se d o n b a r g ai ne d- fo r rig ht s of a cred it or th at are refl ect ed in th e rel ev an t

m or tg ag e in st ru men t s a n d p r ot ect ed un de r st at e la w. 50 8 U.S. at 32 9. As th e
Elev en th Cir cu it ex pl ai ne d, h owe ve r, ou r ho ld in g

-9

-do es no t de ro ga te th e pr ot ect ed rig ht s al lu de d to by th e No be lma n Co ur t,

bu t rat he r reco gn iz es th at on ly th e rig ht s se cu r e d b y so m e rem ai ni ng
eq ui ty wil l be pr ot ect ed fro m m od ifi ca t i o n

. . . . A fo rced sa le of th e
pr op ert y wou ld no t res ul t in an y fin an ci al ret ur n to th e li en ho ld er, ev en if a fo rced s a l e co ul d be acco m pl is he d whe re th e li en at ta ch es to

no th in g.

Ta nn er , 21 7 F .3d at 1 36 0 (i nt ern al qu ot at io n o m it te d)

.

The Age nc y al so ur ge s th at al lo win g m od ifi cat io n of it s rig ht s wou ld pr ov id e

an un warra nt ed win df

al l to th e de bt or s. If th e de bt or were al l o w e d to st rip li en s

at tri bu ta bl e to jun io r m or tg ag es an d ret ai n th e pr op ert y , th e Age nc y sa y s, th e pr op ert y

m ig ht la te r in crea se in va lu e, pe rh ap s be y on d th e am ou nt owe d on th e m or e s e ni or

m or tg ag es th at th e de bt or was no t al lo wed to av o i d. It is th eo ret ic al ly po ss ib le

, of

co ur se , th at a de bt or m ig ht be ne fit fro m li en st r i p p i n g in so m e ci rcu m st an ces

. Bu t

“ [t]he re is al way s so m e t h e o r e t i c a l po te nt ia l fo r th e va lu e of th e co ll at eral to

in crea se ,” an d “ if th e po ss ib il it y of pr op ert y ap pr eci at io n were to p recl ud e li en

av oi da nc e, no fin al de te rm in a t i o n c o u l d ev er be m ad e in a ba nk ru pt cy cas e.” In re

Man n , 24 9 B .R. 83 1, 8 38 (B.A.P. 1s t Ci r. 20 00 ) (i nt ern al qu ot at io n o m it te d)

.

The de bt or s h a v e p ol ic y arg um en ts to o. Req ui rin g a cred it or to ha ve a

“ se cu red cl ai m ” un de r § 50 6( a)(1 ) be fo re it can av a i l it se lf of § 13 22 (b )(2 )’s

an ti m od ifi cat io n pr ov is io n “ be tt er se rv es th e po li cy im pe rat iv es o f th e Ban kr up tc y

Co de by en co ur ag in g de bt or s to fi r s t c on su lt Ch ap te r 13 be fo re se ek in g ei th er to

reo rg an iz e pu rs ua nt to th e m or e ex pe ns iv e an d cu m be rs om e Ch ap te r 11 or li qu id at e

pu rs ua nt to Ch ap te r 7.” Bar te e , 21 2 F.3 d at 29 4– 95 ; se e al so Ta nn er , 21 7 F.3 d at

13 60 ; McDo na ld

, 20 5 F.3 d at 61 4. The wis do m of a ru le in th is co nt ex t is de ba ta bl e
ei th er way , bu t th e di st ric t co ur t’s de ci si on is m or e fai th fu l to th e te xt of th e st at ut es

an d a vo id s re nd eri ng § 5 06 (a)( 1) a nu ll it y

.

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-1 0-The jud gm en t o f th e d is tri ct co ur t i s af fir m ed

.

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