1994 Decisions

Opinions of the United

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Precedential or Non-Precedential: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
 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 reaffirmed 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 antimodification 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 nonconsensual 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.