Warren E. Burger: We will hear arguments next in 76-674, Third National Bank against Impact limited. Mr. Kanaday, I think you may proceed, now.
Thomas P. Kanaday, Jr.: Mr. Chief Justice and May it please the court. This case arises out of $700,000 loan that was made by Third National Bank to certain borrowers to finance the construction of a commercial office building. The payment of the loan was secured by deed of trust under the terms of which certain real property was conveyed to a trustee, who was granted the power to sell the property, in the event of default. The loan was originally made in May of 1973 and originally matured in May of 74. However, at the borrowers’ request three different extensions of the maturity date were granted, the last of which expired in July 1975. In August of 1975, the bank determined that the loan was in default and in September 1975, the bank gave the requisite notice of foreclosure. The process of foreclosure in Tennessee is an exercise of private contractual right and is not accomplished through judicial means. After the notice of foreclosure was given, the respondents filed this action in the Tennessee Chancery Court seeking to enjoin the foreclosure. The chancellor granted a temporary injunction restraining the bank from foreclosing. The bank then moved to dissolve the temporary injunction relying on the provisions of 12 United States Code Section 91. The chancellor granted that motion holding that Section 91 of the Banking Act, forbid a Tennessee Court from enjoining the National Bank prior to foreclosure. Respondents filed an interlocutory appeal to the Tennessee Supreme Court, which in its decision, judicially created an exception to the anti-injunction proviso of Section 91. The Tennessee Supreme Court held that the anti-injunction proviso does not apply for a bank’s debtors seeking to restrain the foreclosure. The structure of my argument will be first to examine the grammatical and historical meeting of the anti-injunction proviso in Section 91, then the decisions of this Court and the State Court’s decisions and having done that to explore, whether under the circumstances present in this case, there is any constitutional impediment to its historic and natural construction.
John Paul Stevens: Will you somewhere along the line answer this question and that is, whether respondent Impact instead of being a mortgagee, it simply owned the piece of land and your client sent out of bulldozer and started excavating on the land and the respondent objected and your client said that we are starting our new branch office here and the respondent said well, Gee! I have never sold it to you and it turned out to be simply a mistaken identity on the part of your client. Would the Tennessee Courts be disabled by the Section, you are relying from issuing an injunction in that situation?
Thomas P. Kanaday, Jr.: Well, clearly under the decision of the Supreme Court in this case, they would not be disabled if…
John Paul Stevens: Well, under your theory, would they be?
Thomas P. Kanaday, Jr.: Under our theory, I do not know because in the instance that you pass it to me, the bank is acting on its own initiative without reliance on any contractual rights. In this instance, we are relying on our rights in the contract, in the deed of trust. So I do not know. It might be stretched that far. There is a…
John Paul Stevens: You say then it is simply, literally, no injunction in whatever circumstances conceivable, at least you say it could be prospective.
Thomas P. Kanaday, Jr.: Yes sir, this Court in 1888, when it decided the case of Pacific National Bank versus Mixter said that it was an absolute prohibition and that the remedy and that was an attachment case and not an injunction case, I do not think that is important.
John Paul Stevens: Well, but it could be quite important, could it not because if you read the Section of the statute you are relying on is used in generous type I think, attachment and execution are both remedies prior to judgment, initiated by a plaintiff and certainly you could read this word injunction is being so limited.
Thomas P. Kanaday, Jr.: I do not understand that the limitation that is implied by a reference to the attachment. The bank is relying on the latter part of section 91 which provides “No attachment, injunction or execution shall be issued against such association or its property before final judgment in any suit, action or proceeding in any state, county or municipal court.”
John Paul Stevens: Do you have to go as far as was suggested in the case of the bulldozer and mistakenly on the wrong property? Do you have to say the statute would go that far in order to support you?
Thomas P. Kanaday, Jr.: No, sir, you do not.
John Paul Stevens: You have business relationships and business transactions and documents upon which your proceeding has distinguished from the other which is a trespass, I would take it?
Thomas P. Kanaday, Jr.: Precisely, that is what I have tried to respond that we are relying on private contractual right between the lender and the borrower that were defying the nature of the relationship and the rights on the happening of certain events, rather than a unilateral action on the part of the bank.
John Paul Stevens: Mr. Kanaday, what in the statute draws a distinction between a breach of contract claim and a tort claim? There is nothing in the statute?
Thomas P. Kanaday, Jr.: There is nothing in the plain reading of the statute that draws such a distinction, but I do not think that we have to embrace such an egregious.
John Paul Stevens: No, no, but if you concede that the statute does not apply literally in that situation, are you not saying that in some cases it is read literally and in some cases it is not?
Thomas P. Kanaday, Jr.: Justice Stevens, I am not saying that I concede how the statute would be read under those extreme cases. I am saying that important distinctions can be made. I do not know how to…
John Paul Stevens: Well, if one could distinguish between tort and contract, could one also not distinguish as your opponent does, between cases in which the plaintiff is a creditor and those in which he is a debtor?
Thomas P. Kanaday, Jr.: Yes, but I am not saying that the statute affords us the liberty to make those distinctions either between tort, contract, debtor, creditor. I am relying on to the facts of this case where there is a private contractual right that there is an absolute prohibition on the statute from the interference prior to final judgment. If there is any confusion about the proper construction of anti-injunction proviso, it arises that because in its present form, Section 91 as an amalgam of two unrelated statute. The first portion of the statute, voids preferential transfers of property by Insolvent National Banks, the second portion of Section 91 prohibits a state court from issuing attachments, injunctions and executions against a National Bank prior to final judgment. The issue in this case of course, is rather a State Court can issue an injunction against a National Bank before closing on collateral, prior to final judgment. Now, because of the holding of the Tennessee Supreme Court, I think another way of stating the issue is whether the preceding language relating to preferential transfers in some manner does restrict the otherwise, unqualified meaning and unqualified language of the anti-injunction proviso. Until, 1864, a National Bank could not even be sued in the state court. In that year, a statute was adopted affording jurisdiction and actions against National Banks in the state court. In 1873, the Congress adopted the anti-injunction proviso as a limitation upon the jurisdiction of state courts to grant certain types of remedy at certain stages of the litigation in the state court proceeding. In 1873, there was a revision of the banking and the judiciary code and as a result of this revision, there was an inadvertent deletion of the anti-injunction proviso and it was left out of the code for some two years by mere inadvertence. Then, in 1875, there was another revision of the code and the anti-injunction proviso reappeared without explanation at the end of the Section which rewarded preference of transfers by Insolvent National Banks and it has remained in that position through the present day. It was in that position when this court issued its decisions in Mixter, Van Red and Earle. The Tennessee Supreme Court reached the result that it did by taking the erroneous view that “We look to the purpose of the statute which was to secure the assets of a bank whether solvent or insolvent for ratable distributions among its general creditors.” We say that was not the purpose of the statute. The clear purpose was to limit the jurisdiction of the state court to grant extraordinary remedies at a certain stage in the proceeding. There was a limitation on the Jurisdictional Grant of the 1864 statute. The first case that this court has decided on it was Mixter, Pacific National Bank of Boston versus Mixter which in 1888 held that the anti-injunction proviso nullified an attachment which had been obtained by a creditor of a national bank against funds of that bank on deposit in another bank. The Court clearly rejected the argument that the anti-injunction proviso of Section 91 is somehow limited by its preceding provisions awarding preferential transfer. The court said, “As it stood originally, as part of Section 57, after 1873 and as stands now in the revised statute, it operates as a prohibition upon all attachments against national banks, under the authority of state court. The form of its reenactment in the revised statute does not change its meaning in this particular. All attachment laws of this state must be read as if they contained in expressed terms that they were not able to apply to suit against a national bank, the remedy is taken away all together and cannot be used under any circumstances” and it was further said, that “If the power of issuing attachments has been taken away from the state court, so also is the power of issuing injunctions that is true.” And that was, this Court’s unanimous construction of the statute in 1888. The Mixter case then was followed by the case of Earle versus State of Pennsylvania. In that case, a creditor of a bank customer sought to reach funds on deposit in the bank. The bank claimed no interest in the funds and was a mere stakeholder. This court concluded that this was not an action against a bank or its property rights. It is interesting to note that the Supreme Court in the Earle decision dissolved the attachment against stock which the bank held is collateral for a loan of that customer. But unhappily, we do not have a statement of the reasoning of the court and doing this, presumably because of the applicability of the anti-injunction proviso. The present case is clearly not within the ambit of the exception in the Earle case. For in the present case, the proceeding is brought by the respondents against a national bank as named party defendant and obviously the injunction which they seek would materially affect the bank property rights and its collateral. The final decision was in 1905 in Van Reed versus People's National Bank, which reaffirmed the holding of Mixter again in an attachment case.
John Paul Stevens: What is the procedure for the bank in this case for closing on its security?
Thomas P. Kanaday, Jr.: Under the terms of the Deed of Trust, the trustee who is appointed in the instrument, in this case there was a substitute trustee appointed, the bank gave notice to the customer of the default, called the loan, then published in a newspaper in Davidson County, Tennessee, in Nashville, once each week...
John Paul Stevens: It takes no official participation, it takes no participation, it is not a judicial foreclosure?
Thomas P. Kanaday, Jr.: No sir, the courts are not used at all. The trustee appointed in the instrument does act to enforce the bank’s right under the power of settle grant (Voice Overlap).
John Paul Stevens: But he is not in any kind of public official?
Thomas P. Kanaday, Jr.: No sir, I am the trustee in this sale was a matter of fact.
John Paul Stevens: What about at the sale?
Thomas P. Kanaday, Jr.: The other trustee then reads the notice of foreclosure whereas there has been a default called the note due and it has been advertised in…
John Paul Stevens: But at no time in the whole foreclosure procedure, is there any official participation?
Thomas P. Kanaday, Jr.: Any public official, no sir, there is not, not at all. We did not get any…
John Paul Stevens: Well, in your capacity you have the same responsibility I suppose on constrictions as a public official, do you not? Are you responsible to a court for…
Thomas P. Kanaday, Jr.: The sale after it is held by the trustee is not reviewed by a court; as I understand some states have a conformation process or something like that. We do not have that actually; it is entirely a private act. There is a fiduciary obligation of course that the trustee has, but there is no public review, there is no public empowerment…
John Paul Stevens: Automatic judicial review.
Thomas P. Kanaday, Jr.: That is correct.
Byron R. White: Was there any constitutional issue presented in the courts below?
Thomas P. Kanaday, Jr.: Mr. Justice White, there was no constitutional issue presented in this case at all, until after I filed my brief after this court had granted Certiorari and it was raised in the respondents reply.
Byron R. White: What is your position on the – whether the respondent is privileged to attempt to sustain the judgment below by making a constitutional argument?
Thomas P. Kanaday, Jr.: I think that you are addressing this to the timeliness issue of…
John Paul Stevens: Assume we agree with you except for the constitutional issue that is presented here, do we have to face that or must we…
Thomas P. Kanaday, Jr.: No, sir I do not think that it is even appropriate that you face this.
John Paul Stevens: Why?
Thomas P. Kanaday, Jr.: Because in the case of Cardinal versus Louisiana, an unanimous decision which you wrote, you wrote this way “The court has consistently refused to decide federal constitutional issues raised here for the first time on review of a State Court decision.
Byron R. White: So, you think that is a jurisdictional matter, the case is properly here, is not it?
Thomas P. Kanaday, Jr.: Yes sir, it is.
John Paul Stevens: Well, the respondent now wants to sustain the judgment on constitutional ground.
Thomas P. Kanaday, Jr.: And your question is what?
Speaker: Well, it may that is the respondent privileged to argue that this statute that you rely on is unconstitutional?
Thomas P. Kanaday, Jr.: No, sir I do not think so. One for the reason that you stated in the Cardinal decision, you noted not only the jurisdictional considerations incident to that rule, but you also noted the policy reasons incident to judicial administration. You said questions not raised below are those on which the record is very likely to be inadequate, since it certainly was not complied with those questions in mind. Now, apart from this court role in the appropriate review of this case, I think there is another result of the failure to raise the question in timely fashion and that is a plain waiver of a constitutional right which any party can do in either civil or criminal litigations, by not having raised it in the trial court, not having raised it in the State Supreme Court and it is obvious that it was not raised in those proceedings, because the State Court’s opinion clearly said and I agreed with it at the time on this one point that there was no jurisdiction in any other forum and they devote a portion of the decision to a holding that the case could not be brought in the Federal District Court, which was true as we understood the case at that time, thinking it was strictly a federal statutory construction case.
Speaker: Mr. Kanaday if the mortgagor wants to challenge the question of default, are they really in default, A) how is it normally done, if there is a State Bank says the mortgagee and in this case how would he do it, once a Federal Bank under your view?
Thomas P. Kanaday, Jr.: There are two procedures to be followed as I am familiar with the law as it is practiced in Tennessee. One would be; a pre-foreclosure proceeding to enjoin the sale or to have the sale held but then subject to further orders of the court pending a hearing. Another approach would be a post-foreclosure proceeding to nullify the sale to set it aside or lacking that, they might be content to file a suit for monetary damages.
Speaker: What is the normal procedure if you have a State Bank as the mortgagee, what is usually done in this a kind of controversy? Is it the pre-foreclosure injunction proceeding?
Thomas P. Kanaday, Jr.: Your Honor, I have seen both types of actions brought during the real estate crunch in 1974 and 1975. There were plenty of both types of actions and the reason that so many of the actions were brought after foreclosures that Tennessee does have a statute barring an application for an injunction unless it is filed within five days preceding foreclosure and many people sort of trip up on that procedure or requirement which and bring the post…
Speaker: And that procedure would be available against a National Bank here, that the post-foreclosure procedure would available?
Thomas P. Kanaday, Jr.: Oh, yes sir.
Warren E. Burger: We resume there at one o’clock Mr. Kanaday. Counsel you may continue.
Thomas P. Kanaday, Jr.: I will reserve the balance of my time Your Honor.
Warren E. Burger: Oh! Very well, Mrs. Pigg.
Gail P. Pigg: Mr. Chief Justice and May it appease the court. Petitioner propounds the theory that courts of our land cannot interfere by injunctive relief to protect the citizens of our land from wrongful foreclosure of their property by a National Bank until a final hearing at which time I submit the damage is done.
Warren E. Burger: What do you think the statute means and what was its purpose?
Gail P. Pigg: You Honor I think that the statute clearly on its face, means that its purpose is to protect creditors from ratable distribution, protect the assets of the bank from ratable distribution among its creditors. The statute defines; it is self defining in that the heading of it regulates transfers by banks and other acts in contemplation of insolvency. It goes further after that heading and it prohibits transfers, assignments, payments of money of committed act or an act of insolvency or in contemplation there off with a view to prevent the application of the banks’ assets in a court with the National Banking Act and with a view to prefer one creditor over another, then Your Honor, it has a semicolon and it says and no attachment or no injunction attachment or garnishment will issue against any bank, against any, in their case it says state bank, pending a final hearing. It says also against the bank or its assets and I submit there is an important clause, but Your Honor, Mr. Chief Justice I submit that it is free and clear of ambiguity, that you cannot pull the last clause of that, that entire statute it is one sentence. I submit that you cannot pull the last clause and apply to wherever it is that you want to apply. I submit that this is good law and I would like to say initially that I do not argue or that responded does not argue with that law, but the petitioner goes further and says that this court has ruled three times, that the courts cannot interfere with national banks to protect the assets of its debtors pending a final hearing, always pending a final hearing. Now, I submit that these cases did not hold that. I would like to take a very quick look at Mixter. Mixter was decided by Chief Justice White or Mixter was an opinion written by Chief Justice White in 1888. In that particular case, the bank owed Mixter $15,000. Mixter began a suit by attachment. Now, the bank was not insolvent on the date apparently that that attachment issued, but just prior day too, it closed its doors. Then it resumed business. During the resumption of business, the attachment issued. Now, I would like to say to the court that in the Mixter case, I have felt that it must be a typographical error because the year was one year preceding the period of time that is involved and I think when the court reads that case, it will see what I mean. Nevertheless, the bank was in severe financial difficulty at that period of time. This would be I think the obvious reason why the court extended or appear to extend the statute to mean that the banks did not have to be insolvent. The Earle case decided by the court in written and the opinion written by Justice Harlan in 1900 did not go that far. This was a case in which one Mr. Long as I recall had a judgment for some $31,000. An attachment issued by garnishment and the court in that instance hailed that this last clause related back to the rest of the Section. Now, it also in that instance went on to say that this was not an asset of the bank, but nevertheless it clearly allowed the attachment by garnishment to stand. There is then another case, this is Van Reed decision written by Mr. Justice Dave (ph) in 1905 and this case was another simple attachment by a creditor, in which event the court related back to the Mixter case and extended the statute to apply beyond insolvency, but I submit to the court that these banks clearly protect or these cases clearly protect the bank against interferences of its asserts by the creditors.
Potter Stewart: In those three cases it was the, they were creditors of the bank, is that it?
Gail P. Pigg: Yes sir, they were creditors of the bank, Mt. Justice Stewart.
Potter Stewart: In all three cases…
Gail P. Pigg: And none of these cases and it’s almost frightening to me that the extension that they have extended this far. None of these cases stands for the proposition. None of theses cases had before it the question as to whether the bank can wrongfully take away the assets of the debtor’s property or the assets of one of its debtors. Not a single one and I submit that neither of these cases stands for that proposition. I have alluded, I think to the fact that property held as security under deem of trust in Tennessee is not owned by Bank and I would like to look to Tennessee law on that point for a moment, and this is our supported course in my brief, but the mortgagee is clearly a creditor. His only interest in the property is as security. He is not deemed to be a property owner. The court has clearly held and this was I think in 1955 Supreme Court case that legal title vests in the trustee, and this has been holding in that state for the last many, many years, certainly since the turn of the century.
Potter Stewart: And who is the trustee in this case?
Gail P. Pigg: The trustee in this case, I believe now is Mr. Kanaday, but the trustee Your Honor in a situation like this is always selected by the mortgagee always. I know of no exception to that rule. The trustee is simply selected by the lender.
Speaker: Doesn’t a mortgagee have inequitable interest in the property?
Gail P. Pigg: Your Honor certainly the mortgagee has an interest from the standpoint of his security interest. He has and we get into a situation here where it becomes shaded. Once the property is sold to a bona fide purchaser, now I will get back to answer to your question in just a moment, but once the property is sold to a bona fide purchaser, contrary to what petitioner say is that that property under the Tennessee law is gone. It is beyond the reach of that mortgagor. Now, that is assuming that he is a bona fide purchaser of course, but the trustee has only such power as he is granted in that day to trust. Now, the serious question becomes the serious question throughout this entire matter becomes who determines default. In the event there is no default the trustee has no power and it is a dry trust. There are cases again throughout state that state just exactly that and I would like to point that the Jones Kennedy said, it is cited in my brief on page 14, states that the property cannot be recovered, in that instance there was a fraudulent sale, an actual sale whereby the mortgagee fraudulently took the property of back and then sold to a bona fide purchaser, and then the court held that the petitioner could only recover or the plaintiff in that case could recover the damages.
Speaker: What did the deed of trust say in this case?
Gail P. Pigg: Your Honor the deed of trust in this instance was used was a very standard form of deed trust.
Speaker: Whatever the standard it was, what did it say about mortgagee, privileges -- and to decide upon?
Gail P. Pigg: In the event of default he can advertise for twenty or twenty one consecutive days or three consecutive weeks and this is stated, but there is nothing in the deed of trust that tells how one determines default. There is no labor in the deed of trust back that mortgagor.
Warren E. Burger: Well, doesn’t a person declare any default do so at his own peril if he is mistaken?
Gail P. Pigg: Your Honor he does so at his own peril, and forgive me Mr. Chief Justice…
Warren E. Burger: In any situation where the power to declare a default is vested in one person.
Gail P. Pigg: That is not the question before this court. With the permission of the Court, the question is…
Warren E. Burger: Tell me the answer to my question and we will see if it fits in.
Gail P. Pigg: Yes, I would have to agree that he does so at his peril, but then I would have to parry with the question what is his peril? What is the remedy of the property owner? The remedy of the property owner; first of all Tennessee does have the right of equity or redemption, but it is waived in this deed of trust as it is waived and virtually all deeds of trust in state of Tennessee, I know of none that would be different. So what is his remedy? He has waived it in the papers and the terms that are decided or controlled by the lender. He has waived demand notice and protest. He has waived the equity or redemption. What can he do? There is only one thing that he could do if the theory of petitioner were accepted. He could, petitioner says that he can recover the property, this is error. He can recover the property if the mortgagee is the successful bidder and retains the property then he could, I am confident recover the property under Tennessee law. But, if the mortgagee is not the successful bidder he cannot recover the property as previously stated. His next remedy then and petitioner would delegate him to the second best remedy. He has only one other and that is to recover damages. I submit to the court, that to recover damages in this instance is not sufficient. Damages are simply inadequate and I would turn the attention of the Court to the fact that the Chancellor in the first hearing of the matter before this question arose, before the question of jurisdiction, did find that irreparable damages would occur, if foreclosure were permitted to be held prior to a final hearing. Then of course when this question arose, he dissolved the injunction only to be reinstated by the Tennessee Supreme Court. I submit, to the court that beyond the inadequacy of the damages that the legal fees that would be involved in seeking that final redress would be impossible, absolutely impossible for most people. We are not dealing here only with business hardcore commercially oriented people. We are dealing here with literally hundreds of thousands of home loans, home improvement loans, automobile loans, office loans, every kind of loan and in each one of those instances, petitioner stands before the court and say that you cannot interfere if they wrongfully foreclose.
Speaker: But we are only concerned in this case with the Statute involving National Banks as I understand it?
Gail P. Pigg: This is true Your Honor and I am referring always throughout my argument only to National Banks. When I state that we are concerned, they have mortgage loans and we are concerned with these types of loans.
Speaker: I think you made a statement if I understood you correctly that there is nothing in the Deed of Trust that indicated what constituted on the event default?
Gail P. Pigg: No, sir this was not so. I am sorry Your Honor, if I mislead. There are certain things that are obliviously constitute default.
Speaker: It sets forth a long list of things that might constitute the default.
Gail P. Pigg: Yes Sir, one of being nonpayment, one on them being a question of whether the property is being damaged or taxes have been paid or insurance has been kept in enforcement there, those are just some of those, but I am talking about when I responded to the question earlier, I am talking about who will make that determination? Let me, take the example of a case that I have simply followed throughout my briefing, and would prefer to name. Take the situation of a man who pays the account and it gets wrongfully credited to someone else’s account. No demand, no notice, no protest, he does not have to be given these. Advertisement is held for three consecutive weeks, and if he is fortunate enough he finds that in the newspaper which is a legal publication. From that point he immediately tries to stop that sale. Tennessee Law as Mr. Kanaday stated to the Court earlier, has a five-day notice requirement. You must give the mortgagee five-days notice before an injunction can be held or a hearing can be held actually. So the oppressed party and I will call him the oppressed party at this point because I feel that he is, he attempts to stop the sale and applies to the Court for injunctive relief and the court says to that citizen, we cannot help you. The Courts do not have power over the banks to stop your property from being sold. We can help you only, after the act is done and we will try to help you recover damages. I summit to the court that this is at the point of taking. It becomes questionable is to whether there is a violation of due process of the Fifth Amendment of that individual. Now, I want to quickly respond to a question that was asked of the petitioner earlier and that is that I do not attack the statute as unconstitutional because not for one moment do I concede that either Congress or this Honorable Court ever would allow any bank, anywhere to stand in the shoes of the Court and make a determination as to whether a man is in fact in default or is not. So I certainly do not attack it as constitutional. I say only that if the construction were accepted which petitioner propounds that it would render it unconstitutional and that is the only way that I enter that argument.
William H. Rehnquist: Well, in that sense if you are right and we agree with petitioner in his suggested construction of statute, we affirm that we have reversed the judgment of the Supreme Court of Tennessee because they were wrong on the statute and the constitutionality of the statute was never challenged.
Gail P. Pigg: Yeah, there was a -- I would have to say to the Court, to Mr. Justice Rehnquist that there has been no challenge of the constitutionality here and perhaps I misunderstood what you were saying.
William H. Rehnquist: Well, I think you have to fish or cut bait on thing. Either you do assert a constitutional challenge and then you have to demonstrate that you have a right to do so on this state of the record or you say as I understood you to say that you are simply using the constitutional argument as a guidance to statutory construction, which we are free to consider along with all the other statutory guidelines.
Gail P. Pigg: Yeah, this is correct; this is precisely what I am doing.
William H. Rehnquist: Which is precisely what you are doing?
Gail P. Pigg: I am submitting it as the construction as a part of determining the statute. I do not attack the statute as unconstitutional, I never have.
Speaker: So, if we disagree with you on the construction of the statute, you do not expect us then to reach any constitutional argument?
Gail P. Pigg: Well, obviously not. This is an argument from my standpoint and I will proceed from that, but I would submit to the Court that there is an additional situation here. Whereas the man who has the example that I proposed, of the man who has lost his house, goes back into the sign court rounds with the man next door who did not have used loan with a national bank and the Court the says he cannot grant an injunction in so far as a savings in loan or an insurance company, but not as to a national bank. What is the feeling of the individual at that point, as to who makes the determination of default? What is his 39.23 to due process? Has he had a hearing? I submit to the court that he has not had a hearing. He has simply launched the property prior to the time of taking. I would also go about back and sight Mr. Justice Stewart in the 39.40 because the language is far better than I could say it. In that if the right to notice and a hearing is to serve its full purpose, it must be granted at the time when the deprivation can still be prevented, that this court does not embrace the proposition if the wrong can be done if it cannot be undone. I submit first of all that the wrong can not be undone, but if it could, that that does not relay the fact that the oppressed citizen has still lost his property. The wrong was done at that period of time. There are three major points that I state here. First of all, that the statute on its face is free of ambiguity. Second, that the property is not an asset of the bank. It is still an asset of the citizen. Third; that the construction they seek would render in violation of the Fifth Amendment. I submit to the court somewhere in the petitioner’s brief, I have stated that the wheels of business must continue to run. I state that the wheels of business must give way and let the Courts determine if there is default. First of all now, there is nothing here which would interfere with the bank’s rights, ultimately. If there is a hearing under the Foreclosure Injunction Statute which we have, if there is a hearing then it will be determined at that time whether there is possible or are possibly repairable damages. From that point, there will be a hearing. If the Court finds at that time that there are no irreparable damages in the picture and no showing of irreparable damages, then there will not be an injunction granted. There is only and a determination to be made as to whether there are irreparable damages and whether the bank in fact, has a right to foreclose.
Potter Stewart: Mrs. Pigg did you argue in the Supreme Court of Tennessee that to construe this statute against you would be to impinge your constitutional rights of due process of law?
Gail P. Pigg: Mr. Justice Stewart I did not.
Potter Stewart: You did not make that argument?
Gail P. Pigg: No sir, I did not. I would state to the Court that I do follow rule 40 of the Supreme Court rules that in that the statement of a question presented would be deemed to include every subsidiary question fairly presented there in it and I do feel that this is a question fairly presented under the issue. To please the Court, I think the issue is obvious and I think that it really is a quite simple issue. The Tennessee Supreme Court did not accept petitioner’s theory that the Tennessee Courts could not protect citizens’ properties from wrongful foreclosure. I submit that that court gave that decision contrary to petitioner’s statement in his brief, very thorough examination and very thorough consideration and that it is certainly in the interest of public policy alone, if not simply to misconstrue a statute, that the State of Tennessee, the Supreme Court of Tennessee be upheld in its decision. Thank you Your Honors.
Potter Stewart: And you too, you have any further, Mr. Kanaday.
Thomas P. Kanaday, Jr.: Yes sir, I do. If as the Tennessee Supreme Court held and if as the respondent urges on this court the prohibition against the issuing of injunctions is somehow, constricted by the preceding language in Section 91 relating to preferential transfers to condition to Insolvent Banks to the securing of a bank’s assets for ratable distributions among its creditors, then, this court find it necessary to ignore the statutory context in which the anti-injunction proviso was adopted and that was as an amendment to the statute conferring jurisdiction on State Courts to hear actions against National Banks. It will not only be necessary to ignore the context of its enactment. It will be necessary to ignore the decision of this Court in the Van Reed case while in the Mixter case, as Mrs. Pigg stated, there was no insolvency in the bank at the time that the attachment arose. It did become an insolvent, but the Van Reed decision dispelled any notion that the application of anti-injunction proviso is in anyway limited by the state of dissolvency of the bank in question or the securing of assets for ratable distribution to its creditors and then make that quite explicit in the Van Reed opinion, there's no intimation that the bank and Van Reed was insolvent or was having financial difficulties or had committed preferential.
Speaker: Mr. Kanaday, in the jurisdiction where I practice for 16 years, the statutes provide there could be no foreclosure of a mortgage without judicial action and in a judicial action such as was provided by the laws of Arizona, a mortgagor or a debtor could raise any of the issues which your opponent has tried to raise here and the court simply would not grant foreclosure until it had a hearing on those issues. Now, I take if there's nothing in that statutory procedure that would violate what you refer to as the anti-injunction provisions.
Thomas P. Kanaday, Jr.: I don’t believe so Your Honor, although, I am not intimately acquainted with that process.
Speaker: Well, then would it not make some sense to construe the injunction language as I suggested earlier as being the same sort of injunction or the kind of injunction that you would think of in connection with attachments and executions, that is what a plaintiff creditor could get against a bank?
Thomas P. Kanaday, Jr.: No sir, I don’t think so, one; because it is an absolute unconditional, unqualified prohibition in its expressed terms. The type of foreclosure that Tennessee has under its deeds of trust is the type that it had since 1796 when it became a state. This was known to the Congress. I think that what you are suggesting is an important policy consideration where we determining point is the appropriate legislative policy, but I don’t think it's of any assistance in the construction of the statute as we find it now.
Speaker: You agreed with Mr. Justice Stevens that the statute couldn’t be read literally out to the very length and breadth of it's literal language, that no repeat, no injunction shall ever be issued by a State Court against a National Banking Association, did you not?
Thomas P. Kanaday, Jr.: I don’t recall unqualifiedly going along with that.
Speaker: Well, but what is your position? Your answer to my bulldozer example was that you really did not have to express an opinion on it, was it not?
Thomas P. Kanaday, Jr.: That is correct. We can always conjure up a parade of probables that it carries a case beyond…
Speaker: Well, but what distinction would you draw in order that my bulldozer example could be governed by and you could get an injunction in that case and you cannot get one in this?
Thomas P. Kanaday, Jr.: The distinction that I would draw would be limited to the facts of this case. I am not prepared to tell this Court what would or would not happen in the bulldozer case because we do not have the bulldozer case. I am prepared to say that there is a basis for a logical distinction where the bank is acting pursuant to a private contract which defines events of default and consequences of those events of defaults as opposed to when the bank acts unilaterally on its own notion.
Speaker: Now, suppose you would to say an injunction was barred if the bank was engaged in some activities not related to its banking business?
Speaker: For example, if it started to drill for oil on the land, technically, you think a court of equity may allow on an injunction then if you could show all the usual requirements.
Thomas P. Kanaday, Jr.: It may well be that when a National Banking Association is acting beyond its powers. It is not entitled as in those activities to the protection of the National Banking Act. In the present situation, it is the most usual type of national banking power that it is exercising and that is to realize upon collateral.
Speaker: Mr. Kanaday, what happens if as a matter of fact the bank violated the contract and the mortgagor did not? What remedy would the mortgagor have under the laws of Tennessee?
Thomas P. Kanaday, Jr.: Well, Mrs. Pigg and I seem to have a difference of opinion as to whether or not the sale could be nullified and set aside. She said that under Tennessee law, this could not happen if it came into the hands of a bona fide purchaser. As I understand the law in the State of Tennessee that no notion of the good faith purchase of a value in real property, the transfer retakes no better title than the transferor conveyed and so I think that it could be set aside as a matter of conveyance involved. In addition, the bank acts at its extreme peril because there could be a remedy of damages, which all be it, leaves some room for dissatisfaction which is the conventional remedy for wrongful taking.
Speaker: As you change a law, I always thought that property could not be compensated adequately for damages. Well with that aside, assuming that the computer made a mistake and the payment had been made twice what it should have been made and it came out that it had been made and the property is sold to bona fide purchaser, what remedy does the mortgagor have?
Thomas P. Kanaday, Jr.: In my opinion, they have the remedy to set the sale aside and should that not be granted…
Speaker: Is that by a statutory law?
Thomas P. Kanaday, Jr.: No sir it is not.
Speaker: Is it by case law and if so what is the case?
Thomas P. Kanaday, Jr.: I do not think that there is any case that I can call to your attention today on that point, but in the conveyancing law in the State of Tennessee, the transferee takes no better title to the transferor and it is actually two parts to it; the transferor would not have the legal power to conduct the sale. It would be an absence of capacity as though it were a minor.
Speaker: But I thought the trust agreement waived their right to do that.
Thomas P. Kanaday, Jr.: It waves to equity of redemption, which is different from the equitable power to void a transaction I think.
Speaker: So you are saying that a part of equity could order a recession to that sale on the showing that is postulated by Justice Marshall.
Thomas P. Kanaday, Jr.: Although I admit the mistake and I differ on at construction of Tennessee Legal principle.
Speaker: Mr. Kanaday, I want to be sure of one thing. I take it your posture here is that you are relying on the strict language of the statute.
Thomas P. Kanaday, Jr.: Yes sir, I am.
Speaker: And I also take it that in effect you have conceded that there might well be a legislative policy that would apply where if the bank is the debtor on the one hand and in a situation of this kind it might be a very different legislative policy.
Thomas P. Kanaday, Jr.: If I made a concession that there is a different legislative policy implemented in the anti-injunction proviso depending on whether the bank is a debtor or a creditor it was in a inadvertent admission. I think that policy that is expressed in this act is a concern incident to the Federal regulation of the national banks for the liquidity of the banks, for the ability to immediately realize on important types of assets that are within the bank’s control. That asset maybe a bank account as it was in Mixter, the asset maybe or the property right which is important to the solvency and the continuing management of the bank, maybe it is collateral, banking up a loan. I think it is the same policy that underlies the statute further, if the bank is debtor or creditor.
Speaker: Then I run right smack into Justice Rehnquist’s enquiry about his bulldozer case. You can say the same thing about that.
Thomas P. Kanaday, Jr.: I do not know whether that is an appropriate exercise of the banking powers to do that type of an act and I admit that that is a real egregious, horrible that has been applied. We can be equally disheartened about the widow, whose life savings is in the her home and she only owes a $1000 and the bank wrongfully forecloses, we can postulate like horrible, but I do not think that we are dealing with anything here, but a foreclosure on a $700,000 commercial office building and I think that we make a mistake…
Speaker: Which I take it is worth more than that.
Thomas P. Kanaday, Jr.: I could not tell you whether you could make a deal on the building or not Your Honor, the bank might be tempted.
Speaker: Banks hope that it is worth more than that, don’t they, to get their money back.
John Paul Stevens: Mr. Kanaday am I correct though that your argument based on the history of the statute that this is in the nature of the condition on the consent of the suit in the State Courts would apply equally to the tort case or the bulldozer?
Thomas P. Kanaday, Jr.: Mr. Justice Stevens, I must admit that because I view the entire injunction proviso as a limitation on the congressional grant of jurisdiction to State Courts that you got me into that corner and if I am going to be faithful to that position, I suppose view it as a jurisdictional limitation that it might well do that. Yes sir. The factors that we have heard mentioned today, adequacy of other remedies, legal fees, fraction on home loans, the possibility of error in bank judgment, these are all important considerations. These are the types of the things that Congress in its wisdom should balance in its mind and in its will in formulating the extent to which it would consent for the national banks to be sued in State Court forum.
Warren E. Burger: Mr. Kanaday your time has expired.
Thomas P. Kanaday, Jr.: Yes sir.
Warren E. Burger: Thank you Mrs. Piggs and Mr. Kanaday, the case is submitted, we will hear arguments…


William H. Rehnquist: We'll hear argument next in No. 92-641, Leonard Nobelman against the American Savings Bank. Mr. Palmer.
Philip Palmer: Mr. Chief Justice and may it please the Court: The basic issue in this case is whether section 506(a) of the Bankruptcy Code and section 1322(b)(2) are compatible and can be harmonized, or whether they are hostile and conflict. It is the position of the petitioner that they are compatible and they can be harmonized. The function of Code section 506(a) is to divide a claim into secured and unsecured parts. A creditor who is undersecured under 506(a) may wind up with two claims, one of which is a secured claim to the extent of the value of the collateral, and the excess, or any amount above that, becomes an unsecured claim. We know that 506(a) does apply in Chapter 13, because the Code tells us it does in section 103(a). But does it apply specifically to Chapter 13, Code section 1322(b)(2)? Everything I've said so far is little in dispute between the parties, but we now reach the point where the ways divide. The respondents argue that it does not apply, in an argument that is based upon the 1322, the clause that reads "other than a claim secured only by security interest in the real property that is the debtor's principal residence. " As you look at the various respondent positions taken, they differ somewhat between themselves as to why the 506(a). American Savings and Freddie Mac specifically focus on the word "rights" to tell us that the "other than" clause modifies only the word "rights". Nationsbanc, Fannie Mae, and the Chapter 13 Trustee look to almost the same thing, "rights of holders". Whereas the Realtor Group, Fannie Mae again, and Freddie Mac look to the word "claims", which they define by going back to the definitional section of the Code to determine that a claim is both a secured and an unsecured claim... indeed, a right to payment. None of the respondents look to the word "secured" or "secured claim" together. Now, the argument for the application of 506(a) can be made first by the rule of last antecedent, which was applied by the Ninth Circuit in the Bellamy case to say you should look to the words that immediately precede the clause in question. Not just claims, but Bellamy looked to the adjective as well, secured claims. Another approach is that when several words are followed by a clause and the clause is just as applicable to the first word or the last word or middle words, that clause should be read as applicable to all, which was an approach espoused by Justice O'Connor and Kennedy in the Ron Pair dissent. Either approach is fatal, because either approach puts the word 1322(b)(2). And it is 506(a), and 506(a) is what the respondents must avoid. Now if, as those opposed to the application of 506(a) would argue, that it was not meant to apply, one thought which occurs is that the clause could have been put at the very first of 1322(b)(2), or at the very end. In effect, to start off by saying "other than" what I'll call a homestead mortgage, the debtor may modify secured or unsecured claims, and you could reach the same reasoning at the end. Or as another alternative, Congress intended that both the secured and the unsecured homestead lands were untouchable, and put in something equivalent to the 1111(b) option that is found in Chapter 11 and with which all respondents seem to be happy. But none of those things happened. And if you simply take the statute as it reads, 506(a), for the determination of what is a secured claim, and 1322 by either of the techniques of the "other than" clause, you come out with a statute that is consistent. It harmonizes, there is no conflict. We do not need to search further for the intention of Congress because it is expressed clearly.
Byron R. White: You mean your clients weren't trying to alter a secured claim.
Philip Palmer: They were not and, in fact, have not. But in answering that, of course, the key, the operable words are secured claim. If you accept, as we do, 506(a), that secured claim is only the $23,500 the condominium was worth, we're not altering.
Sandra Day O'Connor: Mr. Palmer, I'm not sure that 1332(b)(2) refers to secured claim. It... the language is "a claim secured only by a security interest. " I'm not sure that necessarily means the same thing.
Philip Palmer: And that argument--
Sandra Day O'Connor: It's an identification of the instance in which the... where there is a security interest in real property that is the principal residence, it says no modification of the rights of holders could be made. And I think you also have to deal with the language, modify the rights of holders. I suppose a holder can hold both rights to secured and unsecured claims.
Philip Palmer: --Let me answer or state to the first one first, and then we'll come to the rights of holders. The secured claims that I was referring to is the language that is before the comma in 1322(b)(2): the "secured only by a security interest. " The argument has been made that to really say clearly what I am arguing, you would have to say secured claim secured. And that is rejected by Bellamy upon the proposition that that would be a wooden and awkward way to force Congress to express its intent; that there is really no significant difference between a secured claim and a claim secured. And, of course, our position would be the same as Bellamy. On the rights of holders, if I may borrow your own language from the Ron Pair dissent.
Sandra Day O'Connor: Well, that's dangerous business, I suppose. [Laughter]
Philip Palmer: It's been cited several times for the grammatical analysis which, frankly, does appeal to me at this moment. [Laughter] If you take... or if you accept that there is some uncertainty as to what the "other than" clause applies, if you do not accept the Bellamy rule of last antecedent, then we seem to fall right into the analysis that you made... with considerable and respectable authority, I might add... that it must apply to the whole thing, rights of holders of secured claims. But what are the rights of the holders of the secured claims? And that brings us back, I think, to the operative word, "secured claim". We're not now speaking about the rights of holders of secured, or partially secured, or secured and unsecured claims, but only secured claims. There are some other points that lead to somewhat the same analysis.
William H. Rehnquist: Mr. Palmer, I hope you will discuss either now or after we return from the noon recess, the bearing you think the Dewsnup... our opinion in Dewsnup against Timm has on this. It seems to me that that... although it may not be controlling, it certainly cuts against some of your arguments.
Philip Palmer: Dewsnup and lien pass through, we can certainly start it now and may not finish. There is a question of whether or not Dewsnup forecloses the argument that was made here. And, of course, all are aware that that was a Chapter 7 case. All are aware that that was dealing to 506(d). And I think all are aware that that was... the issue there was whether or not an abandonment would revive the lien that appeared by its terms to be cut off under 506(d). And what I think the Court held, and properly, was that 506(d) applies only when it is not an allowed secured claim claim. Because otherwise, Code liens would not pass through the act the way that Act liens did. Now, when I say pass to... through, I think this Court was speaking in terms of unadministered. They come into the estate at the beginning, but they are abandoned out of the estate and they should go out as they came in, with the same lien encumbered. That was the old Bankruptcy Act rule and it was... the Court found nothing in the Code or the legislative history to indicate any intent to change that. And the results of implying such a change would be a rather unfair windfall to the debtor, because it would be a permanent reduction even though it no longer served a bankruptcy purpose. But none of those considerations apply here. Chapter 13, as indeed do Chapter 11 and 12, have a built in protection against the windfall problem. Chapters 11 and 12 keep... and 13 keep the property in the estate; abandonment is not a problem. I see nothing in the Dewsnup case that indicates that it would move beyond the Chapter 7 abandonment factual situation the Court applied it to. There is a reference in Dewsnup... and the Chapter 13 trustee here speaks to it in her brief... that 506(a) does not, by itself, avoid liens; it simply classifies claims into secured and unsecured. But that something further... as I recall, she used the word catalyst... some catalyst is required. And this Court determined that 506(d) did not apply in Chapter 7. Even if you were to assume that the Dewsnup opinion should be expanded to say 506(d) does not apply in Chapter 13 either, that's not the catalyst that avoids the excess lien in Chapter 13. Instead, it's section 1327(c), which is the effect of confirmation rule, that reduces the property to the value... by... well, mechanically it revests the property in the debtor free and clear of whatever amount has been determined to be an excessive value. So a 1327(c) trigger, and a discharge under 1328, except as to long-term debts assumed by the plan, which would include the mortgage, as reduced in-- Obviously, Dewsnup spoke to none of those issues. I don't think they were before the Court. And I see Dewsnup as a case somewhat limited in its scope to arrive at a proper result.
William H. Rehnquist: We'll resume there at 1:00.
William H. Rehnquist: Mr. Palmer, you may resume.
Philip Palmer: When we took our noon break, we were discussing Dewsnup, and I'd like to pick up again at that point. Dewsnup, of course, was a Chapter 7 case. Dewsnup did not involve homestead or residence; it involved farmland in Utah. And the argument was made in Dewsnup that because there had been a valuation of the property at a value well below the total amount, the total amount of the debt, that that was something akin to albatross branded to that property, even after that property was abandoned from the bankruptcy estate so that no distribution purpose in the bankruptcy remained. The Court felt, and I think with justification, that that was an unfair result. Should the property appreciate in value, it would create a windfall to the debtor. The Court found 506(d) ambiguous, and having made that initial determination then determined that the Court was uncomfortable in changing pre-Code law on ambiguous language when there was no legislative history whatever to support it. But we turn then to Chapter 13 and its differences. Chapter 13, of course, is one of the rehabilitation sections. The property is not abandoned from the estate but remains in the estate, and that is true even if there is no objection to the exemption status as homestead. Exempt property does not pass from the Chapter 13 estate until after the plan has been confirmed, and only then under 1327 does it pass from the estate. The purpose of determining exemptions in Chapter 13 is not, as in Chapter 7, to have it pass from the estate, but to determine whether or not the debtor must include in its payments to creditors an amount equal to all of its nonexempt property. Now, that's all a Chapter 7 debtor does, is surrender his nonexempt property. But a Chapter 13 debtor is required to do more than that. The Chapter 13 debtor must not only pay the value of all of his nonexempt property, but must also pay his nondisposable income... that is to the excess under his monthly budget, his nondisposable income for 3 years to get the benefits of a Chapter 13. Chapter 13 is a favored chapter in bankruptcy, and that has been a consistent purpose of Congress and that's well reflected in legislative history throughout.
William H. Rehnquist: Favored over Chapter 7, Mr. Palmer?
Philip Palmer: Favored over Chapter 7. Because Chapter 13 presents a man who is doing more than the legal minimum that he would have to do to receive a discharge of his debts.
Byron R. White: Under Chapter 7.
Philip Palmer: Than he would have to do under Chapter 7, yes.
William H. Rehnquist: But he also gets some benefits from Chapter 13 that a Chapter 7 debtor doesn't.
Philip Palmer: That is true. Otherwise, I assume it would be very hard to sell. But those benefits are these. First, he will consider Chapter 7 when he needs to take an Internal Revenue Service, a tax debt otherwise nondischargeable, and wants to pay it out over a period of time. Or he wishes to save a homestead, because Dewsnup now makes it clear Chapter 7 will not help him save a homestead. Or in those States where exemptions are parsimonious and he would rather value and pay for his furniture, car, et cetera than give them up. Those are the benefits of Chapter 13. Saving a homestead, I will not deny, is a major benefit in Chapter 13, and one reason why many people select Chapter 13. But if the respondents prevail today, that incentive will be taken away and there will be more people filing Chapter 7 than 13. Well, there is another I should mention, and that is that the grounds for objection to discharge in Chapter 13 are more restrictive than they are in 7. That's really not a major consideration for the average couple, but it's also a benefit of 13 over 7.
Antonin Scalia: Mr. Palmer, would you explain... explain how your system works? How can it be that where you have a single instrument of indebtedness that covers both the secured and the unsecured claim, you can comply with what you contend the provision says, and that is allow the instrument to be modified as to the unsecured claim, but not allow it to be modified as to the secured claim. How does one go about doing that?
Philip Palmer: Let me begin by explaining it in an area where there is absolutely no controversy between the parties, the $50,000 lien on the $100,000 automobile. All the same... instruments are the same. Security agreement instead of the deed of trust, but other than that exactly the same. 506(a) and 1322(b)(2) clearly permit the valuation of the lien, the secured claim, to $1,000, on the proposition that that's all the car is worth. If the car were abandoned, the lienholder could get no more than the $1,000 fair market value and have an unsecured claim for $49,000. If we move it to a homestead, the result is exactly the same unless, of course, the "other than" clause gives more protection than we say it does. The debtor... the creditor will have a $23,500 secured claim in this case.
Antonin Scalia: No, I understand that. I mean, I'm not asking for the difference between the secured and the unsecured; I understand that. But for the car or for the homestead, I have the same problem about how you can... how you can allow a unitary instrument which covers a claim... part of which is secured and part of which is unsecured, but it's just one instrument. How can you allow it to be modified as to the secured portion of the claim but not as to the unsecured portion of the claim, or vice versa, which is what 1322(b)(2) requires? How can you do that? It's a single instrument that covers both.
Philip Palmer: Well, the single instrument is defined as between the parties and in a nonbankruptcy context. But when you go into a bankruptcy, 506(a) applies whether it... the debt's in one instrument or two instruments.
Antonin Scalia: Well, I understand that. But the other side says we don't have to worry about this problem. Given our interpretation, you simply... you simply can't modify it, if it's a homestead. You say, yes, you can, but you can only modify it... you can only modify it as to the unsecured. How does one go about modifying it just as to the unsecured?
Philip Palmer: Well, at the inception we apply 506 and 1322(b)(2), and we've talked about that. Then we have confirmation. The confirmation section, which is 1327, provides in section (c) that all of the property of the estate not otherwise dealt with revests in the debtor free and clear of any amount other than the secured claim. So that's how we get our one instrument down to a twenty three thousand five--
Antonin Scalia: Well, but we're not talking about the revesting provision. What we're talking about is whether the rights can be modified in the plan. That's the provision we're discussing here. Now, give me an example of how one can modify the rights pertaining to this unitary instrument only as to the unsecured portion, but not as to the secured portion. How does one go about doing that?
Philip Palmer: --Well, we're not going to modify the unsecured rights. We're going to treat them as unsecured rights under the plan. The remaining portion of the claim was unsecured; the plan will treat of unsecured claims.
Antonin Scalia: No, but the provision we're talking about is a provision that allows rights to be modified, right? I mean that's the provision before us.
Philip Palmer: That's 506(a).
Antonin Scalia: And... right. And as at issue is whether the exception to that which says you can't modify rights as to homestead... whether that covers all rights in the homestead agreement or only those rights that are secured. And you say the latter, right?
Philip Palmer: I say the latter.
Antonin Scalia: And just give me an example of a real life mortgage agreement in which you modify the unsecured portion but not the secured portion. How... I really don't understand what it means to say that.
Philip Palmer: That approaches it backwards, I have to admit, from the way I've always looked at it.
Antonin Scalia: Well, I do things that way, I guess. [Laughter]
Philip Palmer: I've always looked at it that we're modifying the secured portion and thereby automatically making the rest unsecured. I don't know of any case that ever dealt with modifying the unsecured portion of the claim. Once it's become an unsecured portion, the debtor can deal with it in his claim.
Antonin Scalia: Well, I don't care if there's a case or not. But if it's impossible to do, if you can't give me an example of how it might be done, I will be inclined to think that your reading of the provision is wrong since it makes no sense. Just tell me how? You know, how one would do it if one wanted to do it?
Philip Palmer: All right. I would think that you could propose a plan that says we will value down all secured claims, homestead, car, et cetera, to fair market value, and we will pay 25 cents on the dollar for all unsecured claims. There I've modified unsecured claims, which I have a right to do. That's not in dispute. I have a right to modify unsecured claims.
Byron R. White: Does the... in 13 does... if the secured creditor wants to participate, does he have to file a claim?
Philip Palmer: All claims are supposed to be filed in a 13.
Byron R. White: Yeah. Did--
Philip Palmer: There's nothing equivalent to 111(a) where--
Byron R. White: --Under 506... under 506 does a secured creditor... with 506 in mind, does he just file a claim for the full amount of his security?
Philip Palmer: --Traditionally, yes.
Byron R. White: And he never then files a claim for the unsecured portion.
Philip Palmer: No. The debtor draws the issue by filing the plan.
Byron R. White: Yes.
Philip Palmer: Which says we value... as they did here... we value your equity at $23,500. That will be the amount of your secured claim.
Byron R. White: But the secured creditor has filed a claim for the full amount.
Philip Palmer: Has filed a claim for the full amount.
Byron R. White: As a secured creditor... as a secured claim.
Philip Palmer: It... as a secured claim.
Byron R. White: And so he has an... so the secured creditor, whether it's a... whether it's a homestead or not, he has a... he has a chance to litigate the value that they assign.
Philip Palmer: That is so. And that was, in effect, done here at the confirmation hearing. But of all the court of appeals cases, the four that conflict with the Fifth Circuit decision, every one of those, the values were agreed or stipulated. Apparently, it's not a big batch.
Byron R. White: Yeah.
Philip Palmer: But the opportunity is always there. There's one thing that--
Antonin Scalia: Mr.... is this another point or are you still responding to the same one?
Philip Palmer: --No, it was another point.
Antonin Scalia: Before you do that, let's take a... I'm not satisfied or I don't understand your answer to my previous question. Suppose you have a mortgage that provides for payments of $500 a month, all right. And that's for the whole thing, for the secured and the unsecured. How do you modify the unsecured portion of that mortgage without modifying the secured portion? Don't the payments still have to be $500 a month?
Philip Palmer: They do. That's what we contend is the meaning of the "other than" clause. We must continue to pay the same mortgage amount.
David H. Souter: But even if that is so, you're still modifying it because you're not going to pay the same mortgage amount for... or the same periodic payment amount for the same period of time.
Philip Palmer: No.
David H. Souter: No matter how you cut it, you've got to modify something with respect to what's left of the secured portion.
Philip Palmer: Well, the... if you reduce the balance that's due... the unpaid principal, if you will, to the $23,500, when the payments, after interest service, have reached $23,500, that lien will be paid off.
David H. Souter: Yeah. And the lien would also be paid off if you make the same number of payments you had agreed to make before, but they were smaller payments, sure. So no matter... no matter which way you go, you've modified something with respect to the secured claim beyond the amount of the lien.
Philip Palmer: I have reduced the amount of the debt by what we have determined to be unsecured.
William H. Rehnquist: Thank you, Mr. Palmer. Mr. Schroeder, we'll hear from you.
Michael J. Schroeder: Mr. Chief Justice, and may it please the Court: Mr. Palmer was correct when he said that this case involves an interpretation of one or more statutes. I would like to reread section 1322 for the Court, the pertinent portions of that statute, and if the Court wants to follow along, that statute is reprinted in page 3 of American Savings' brief. The pertinent provisions of 1322(b)(2) state that "the plan may modify the rights of holders of secured claims, other than a claim secured only by security interest in real property that is the debtor's principal resident. " Taking a plain and clear look at the language of this statute, it appears that the word "rights" is the grammatical object of the word "modify". Modify. What are modifying? We're modifying the rights. In addition, the term "secured claim", again in that first phrase, is preceded by the preposition "of". It's our contention that those three words together, "of secured claim" is merely definitional and defines the type of holder that the Congress was talking about when they passed the statute. They're talking about a holder of a secured claim. Now, applying Mr. Palmer's rule--
Byron R. White: "Other than the holder of a claim secured only by a security interest. "
Michael J. Schroeder: --That's correct, Your Honor.
Byron R. White: Yes, uh-huh, all right.
Michael J. Schroeder: And applying Mr. Palmer's rule of last antecedent, several courts which have allowed lien strip-down have simply gone back and applied the "other than" words simply to the phrase "secured claim". It's our position that the better application, according to that particular rule, is to apply the "other than" phrase to the rights of holders of secured claims.
Anthony M. Kennedy: Under your view, what is the result if there is a second mortgage as to which there is no adequate security at all? Say that in this case there were a second mortgage, even the first is not satisfied. Is the second mortgagee a holder of a secured claim?
Michael J. Schroeder: So long as he had a perfected security interest in the property at the time of the filing of bankruptcy, he would be a secured creditor, that's correct. The debtor--
Anthony M. Kennedy: Even though the value of the property does not support any portion of his secured... any portion of his claim as a secured claim.
Michael J. Schroeder: --That's correct. He would be a secured creditor. However, his security interests would be undersecured. In your example, there would be no value in the property to support his security interest. Nonetheless, because he has, for example, a second lien mortgage or deed of trust, he would ostensibly be classified as a secured creditor because he has a security interest claim against property of the debtor in the bankruptcy proceeding.
Anthony M. Kennedy: It's difficult for me to square that with 506(a). I know we're not talking about a second here, but I want to see how the statute works.
Michael J. Schroeder: I understand that, Your Honor. And until the legislature clarifies your concern, it's our interpretation that the same treatment must be accorded to a first, second, or third lienholder against residential real property, without regard to the value of the property. And let me, if I can, explain how I arrive at that conclusion. Mr. Palmer's client would have this Court believe that 506(a) automatically kicks in to affect the claim or secured claim rights of a holder as defined in section 1322. It's our position that 506(a) doesn't necessarily automatically kick in to define the term "secured claim" in that instance. The term "secured claim" is merely definitional, again, of the type of holder that the statute's talking about.
Byron R. White: Well, I suppose your colleague on the other side would... the meaning he would ascribe to 1322(b)(2) would be the same if it just read "the plan may modify secured claims other than a claim secured by. " Which the meaning for him, the meaning wouldn't change if you left out the words "the rights of holders of". Is that right?
Michael J. Schroeder: I think for Mr. Palmer's position that would be correct. But what the... the way... the statute's not written that way. The statute is written that it's the rights that are protected by the "other than" clause, in a clause that fits after the comma.
Byron R. White: And but you... but rights you figure are those rights defined by State law.
Michael J. Schroeder: That's... I'll get into that argument--
Byron R. White: Well, I know, but you have to get to it because otherwise you can say... you could argue that well the rights are those that are... that are described in 506. Namely, you've got a secured claim only to the extent of the value of the property.
Michael J. Schroeder: --Well, we would take the position, Your Honor, that the term "rights", as opposed to the words "claim", and "security interest" and "lien" and other words of art in the Bankruptcy Code... the word "rights" is not defined anywhere in the Bankruptcy Code itself.
Byron R. White: So it's State law rights, I guess.
Michael J. Schroeder: Well, this... this Court, in Dewsnup, gave us some direction as to some of the rights that a holder of a mortgage has, with respect to its note and deed of trust, a mortgage. And it comes into the bankruptcy court as a creditor of the bankruptcy estate. This Court, for example, in Dewsnup has said that it is the creditor, not the debtor, who has the benefit of increase in value, so as to avoid a windfall to the debtor in that case. I believe that's one right. Another right that the Dewsnup Court set forth was the right to have the lien pass through bankruptcy unaffected. In addition, this Court in the Barnhill case, in interpreting the words property and interest in property, said that in the absence of a controlling Federal law, we may look to State laws. So by analogy, I think... to answer your question... yes, we may look to State law in determining what rights are.
Antonin Scalia: Well I... I'm surprised this is even an issue. I mean the provision doesn't mean very much if it means the only rights you may modify are the lien rights in particular. I mean surely it means you can... you can modify the rights that are the substantive rights to which the lien attaches. The right to payment by a certain date, the right to a certain amount of payments every month, and so forth and so forth.
Michael J. Schroeder: And that's exactly--
Antonin Scalia: Certainly everybody understands that's what it means.
Michael J. Schroeder: --And that's exactly--
Antonin Scalia: And those are State rights, aren't they?
Michael J. Schroeder: --That's correct.
Antonin Scalia: So why isn't your answer to Justice White simply yes, it includes State rights?
Michael J. Schroeder: Yes, it does include State rights. [Laughter] But what--
Byron R. White: How about not... but limited to. Under 1322, you're talking... the word "rights" refers only to the rights of the holder that he acquired prior to bankruptcy under State law.
Michael J. Schroeder: --Yes. Because I think the rights that any creditor would have in bankruptcy are those defined by the Bankruptcy Code.
Byron R. White: Yes, all right.
Michael J. Schroeder: So, yes. And Justice Scalia, your analysis is exactly our point. The "other than" clause must affect all those rights, those bundle of rights that a secured creditor such as my client would take with him in the bankruptcy. In addition--
David H. Souter: Mr. Schroeder, could I just interrupt you for a second--
Michael J. Schroeder: --Yes.
David H. Souter: --With what I assume is an easier question. But I take it on your theory, if the one lien holder had a second mortgage on a separate piece of property, he wouldn't have any protection.
Michael J. Schroeder: That's correct.
David H. Souter: Okay.
Michael J. Schroeder: If it's not homestead, for example.
David H. Souter: The second one is not homestead, that's right.
Michael J. Schroeder: If that's--
David H. Souter: One, he's got a lien on the homestead and then he's got a second mortgage. He doesn't get protected.
Michael J. Schroeder: --That would be our interpretation, yes. Because--
Antonin Scalia: Rights means the rights to which the lien that's a lien on a homestead relates.
Michael J. Schroeder: --Correct.
Antonin Scalia: Okay. No, but you're... but you're also identifying the person who can claim anything as the person whose sole lien is... whose lien is solely on the homestead property.
Michael J. Schroeder: And that's... yes, sir. And that's because that's... in our view, that's the way the statute is written. The "other than" clause refers to those creditors having a claim on real property that is the debtor's principal residence. So it's under that--
Antonin Scalia: And that alone.
Michael J. Schroeder: --And that... under that statute alone, that seems where that protection is directed, that's correct. In addition, under that second clause, the 1322(b)(2) refers to a claim in the singular. It does not refer a second time to secured claim or to secured portion of a claim, or something else; it refers to a claim. And under section 101(5)(a) of the Bankruptcy Code, "claim" is defined as any right to payment, whether or not such right is secured or unsecured.
Antonin Scalia: To be fair, it refers... it refers not just to a claim, but to a claim secured, which is poetic for secured claim. [Laughter]
Michael J. Schroeder: Some courts have interpreted it that way, yes, Your Honor. Other commentators have found that there is a difference between the term 506(a) and "claim secured by", where the word "secured" is definitional.
William H. Rehnquist: Only lawyers could come up with that sort of a distinction. [Laughter] And so you are.
Michael J. Schroeder: That's what I was told when I got my certificate from this Court. [Laughter]
Sandra Day O'Connor: Counsel, what can the debtor in a Chapter 13 proceeding do, then, in a situation such as the Nobelmans have? Just leave the residence out of the proceeding altogether and let it be taken by the mortgage holders.
Michael J. Schroeder: They have several elections or alternatives, and some of the alternatives are not very realistic. One alternative would be to cure any existing arrearage immediately so there is no problem with the mortgage company. Most debtors wouldn't be in bankruptcy in the first place if they had that ability to do that. Another alternative would be... and this is what I believe the legislature intended and Senator DeConcini's comments went to, is that a claim such as the one claimed by American Savings Bank, the debtor would elect to cure and maintain payments under section 1322(b)(5). Under 1322(b)(5), a homestead debtor typically takes a prepetition arrearage, that arrearage that existed on the mortgage loan prior to bankruptcy, puts it into his plan, and, depending on what district you're in, either makes direct regular monthly postpetition payments to the creditor or through the trustee to the creditor. That's an election that a creditor in the Nobelmans' position could take.
Byron R. White: Yeah, but he's got to keep... he's not only got to make up arrearages; he's got to pay his current amounts due.
Michael J. Schroeder: That's correct. And that's the way the Code's read.
Sandra Day O'Connor: Well, and in your position, pay off the whole principal balance even though the property isn't worth it at all.
Michael J. Schroeder: Well--
Sandra Day O'Connor: So does he have another alternative, just walk away from it?
Michael J. Schroeder: --He can walk away from it. He can go into a Chapter 7 and get his personal liability discharged, which is going to get him potentially better off than if he were to go through a Chapter 13.
Sandra Day O'Connor: Well, if he wants to walk away from it, would he have to do it in a Chapter 7 proceeding, very likely?
Michael J. Schroeder: If he wants to avoid personal liability, that's correct, Your Honor. And Chapter 13, the discharge provision, section 1328, has an exception. There are certain debts which are excepted to discharge in Chapter 13 which are not excepted to in Chapter 7. For... and one of those is long-term debt, where the last payment on the debt is on a date further into the future than the last payment date on the Chapter 13 case. So potentially in the situation we're talking about, a debtor may be better off going into a 7 because he would have the receipt of a Chapter 7 discharge, would receive that personal liability relief. But obviously he would lose his home. The creditor, more than likely, would ask the court to lift the stay or modify the stay to allow foreclosure to proceed.
Sandra Day O'Connor: Now, a majority of the circuits have gone the other way.
Michael J. Schroeder: That's correct.
Sandra Day O'Connor: How do you... how do you explain that? They just take your... the petitioners' view of this thing, I guess, in terms of how to read the statute.
Michael J. Schroeder: Well, if I might answer your question, Your Honor, by addressing the four specific cases individually. In the Hougland case which came out of the Ninth Circuit, which was the first of the pro lien-stripping cases, it appears from a reading of the text that that court was predisposed as to its decision. There was some verbiage in that decision which says we can't believe that a mortgage creditor wouldn't have an equity cushion in the first place. They also do, as my opponent is suggesting, automatically take 506(a) and force it into 1322(b)(2), just because 506... the Chapter 5 provisions of the Bankruptcy Code are ones of general applicability to all other substantive provisions. The Wilson case is somewhat distinguishable. The same result was reached there, but in that case the creditor had additional collateral beyond the homestead. And so the court, in part... almost in passing, but it did recognize that additional collateral beyond the homestead was claimed by the mortgage company in that case, so that case is somewhat distinguishable. In the Hart case we have the same situation where we had a mobile home on real property and other collateral. Again, that is somewhat distinguishable. That's not what the court necessarily... the facts that that court necessarily relied on in reaching its decision, but those were considered by that court in the result that took place. In the most recent case, the Bellamy case, the court there takes a somewhat circular analysis of the statutes in effect. The court, by that time, had heard several arguments. And as a matter of fact, the creditor involved in that case, the Federal Home Mortgage Corporation, made the argument that it was rights and not the secured claim that was subject to modification at 1322(b)(2). The Bellamy court on one page of its decision said yeah, that might be the case. You may be correct in saying that it is the rights that are the subject of the adjective modified. However, the real question is whether it means unsecured rights or secured rights. And then it goes on to make a statement about the Code being a substantial change from the Act, which it was. And therefore... without really looking at the terms of the statute, therefore we must only be talking about secured claims. A couple of pages later in that same decision that court goes and automatically, as the Hougland, Wilson, and Hart courts did, take the "other than" phrase and apply it to the words "secured claim", just as if it had forgotten that it already used the rule of last antecedent to apply to the entire phrase of that preceding phrase.
Byron R. White: So your submission is that a plan may not be confirmed unless it provides for the payment of the entire principal amount.
Michael J. Schroeder: To a home mortgage lender.
Byron R. White: Yes.
Michael J. Schroeder: That's correct.
Byron R. White: And no part of it can be treated as an unsecured claim. What may--
Michael J. Schroeder: Not necessarily.
Byron R. White: --How may the rights of unsecured creditors be modified in a Chapter 13 proceeding?
Michael J. Schroeder: How may the unsecured rights--
Byron R. White: Uh-hum.
Michael J. Schroeder: --Be modified?
Byron R. White: Do they have to pay them at all?
Michael J. Schroeder: In a Chapter 13 proceeding, a debtor is required to submit to the court, as required by the Code, his disposable income.
Byron R. White: Right.
Michael J. Schroeder: That income that is over and above his living expenses, simply.
Byron R. White: Right.
Michael J. Schroeder: That disposable income goes in part to pay certain claims in the bankruptcy case. Priority claims.
Byron R. White: Sure.
Michael J. Schroeder: Potentially, attorney fees.
Byron R. White: Yes.
Michael J. Schroeder: Unsecured creditors.
Byron R. White: How about secured creditors?
Michael J. Schroeder: Secured creditors are dealt with... and potentially secured creditors. For example, the prepetition arrearage on a home-mortgage loan.
Byron R. White: Well, how about the... how about the principal amount, the unpaid principal amount?
Michael J. Schroeder: The unpaid principal amount in a typical residential mortgage situation--
Byron R. White: Yes.
Michael J. Schroeder: --Is going to be included, in part, in the prepetition arrearage.
Byron R. White: Yes.
Michael J. Schroeder: Because the prepetition arrearage--
Byron R. White: Right. But now the rest of the unpaid amount.
Michael J. Schroeder: --But now... the unpaid amount?
Byron R. White: The rest of it, yeah.
Michael J. Schroeder: It's our position that there cannot be any modification on that, whether it is secured or not. Because the reading of the statute says that the... it is the rights, whether secured or not.
Byron R. White: Yeah.
Michael J. Schroeder: Those rights cannot be modified as against a residential--
Byron R. White: But when... when the... suppose the disposal income is not enough to pay anything more than, say... it just obviously isn't enough ever to pay off unsecured claims, all of them.
Michael J. Schroeder: --Usually that's the case, yes.
Byron R. White: Yes. And so the balance is... when he pays what he can, he's discharged from--
Michael J. Schroeder: Debt. That is correct. Except as to, again, either... the 1328 discharge, certain debts. There are certain sections including long-term debts.
Byron R. White: --But in any event, the principal amount, the unpaid principal amount of the contract or on the mortgage on the principal residence just lingers. He's never discharged from that, in your position.
Michael J. Schroeder: That is our position, yes, sir.
John Paul Stevens: May I just ask to get one thing clear in my mind. You do... or what is your position on whether the interference with your right, otherwise existing right to foreclose, would be a modification of your rights?
Michael J. Schroeder: That is... my position on that, Your Honor, is that is dealt with by another section of the Bankruptcy Code, specifically section 362 of the Bankruptcy Code and, in certain cases, section 1301 of the Bankruptcy Code which imposes upon the filing of a bankruptcy petition an automatic stay.
John Paul Stevens: So this is done by statute rather than by a plan.
Michael J. Schroeder: That's correct. And what 1322 speaks to, Your Honor, is "a plan may modify"--
John Paul Stevens: I see.
Michael J. Schroeder: --"Other than".
John Paul Stevens: That is not a modification caused by the plan.
Michael J. Schroeder: That's correct. That's a statutory modification, and that is something that we were... we live with.
John Paul Stevens: Yeah.
Michael J. Schroeder: In addition--
Antonin Scalia: Mr. Schroeder, what... what if you have two mortgages on a property, okay?
Michael J. Schroeder: --Yes.
Antonin Scalia: And even the first one is undersecured. Under your reading, is the second mortgage also protected?
Michael J. Schroeder: Under our reading of the statute, the way it is currently written, yes.
Antonin Scalia: Even though that second mortgage doesn't even qualify as a secured claim at all. It's not even a... under 506.
Michael J. Schroeder: Under 506 it may not be secured, that's correct. But--
Antonin Scalia: It is not secured. Now, don't say "may not" now. In the hypothetical I gave you, it is not.
Michael J. Schroeder: --That--
Antonin Scalia: It is not a secured claim under 506(a).
Michael J. Schroeder: --That's correct, Your Honor.
Antonin Scalia: But under your reading it would have full protection under... as a second mortgage even though the first mortgage gobbles up the entire value of the security, right?
Michael J. Schroeder: That's correct, Your Honor.
Antonin Scalia: Wow.
Michael J. Schroeder: And so our position would be that the debtors need to make some elections and some choices about whether that home is worth keeping or not. In addition, Your Honor, in our case American Savings Bank is, according to the findings of the bankruptcy court below, undersecured. They have a first lien on the property, but the value of the property, as found by the bankruptcy court, is less than the total of that.
Antonin Scalia: Well, they--
Michael J. Schroeder: The--
Byron R. White: --I would think under your position in this case, it would be better for the... for the homeowner just to say go ahead and foreclose, just abandon the property to you.
Michael J. Schroeder: --Yes. That would be an election that I think would make sense for a homeowner.
Byron R. White: And then... and what rights would you have, then, by the way? Would... say you foreclose. Would you have any security claim that you might have to... that you could get paid off or possibly get paid off under the plan?
Michael J. Schroeder: No secured claim after liquidation of the collateral through foreclosure.
Byron R. White: Yeah, yeah.
Michael J. Schroeder: That's correct.
Byron R. White: But you'll still have a deficiency.
Michael J. Schroeder: That's correct.
Byron R. White: And that is still... except for the bankruptcy, he would still owe it.
Michael J. Schroeder: That's correct.
Byron R. White: Well he still owe it to you if he abandons the property to you?
Michael J. Schroeder: Yes. If he... well, it--
Byron R. White: Wouldn't it be--
Michael J. Schroeder: --Let me answer that question this way. It may depend on how he abandons the property to the creditor. There is a practice in the Northern District Bankruptcy Court of Texas whereby certain debtors attempt to abandon property in full satisfaction of the debt to the creditor.
Byron R. White: --But I would have thought that your deficiency would be discharged in the... in the proceeding.
Michael J. Schroeder: It may be discharged, and that's a question that I don't think is before this Court today, but--
Byron R. White: Well, it may not be, but it's kind of an interesting question, isn't it? [Laughter]
Michael J. Schroeder: --That... you're right. And the answer I would give to your question is that I don't... I do not believe... the way that Chapter 13 is set up is that that deficiency would be discharged because of section 1328.
Byron R. White: 1328.
Michael J. Schroeder: Which has the certain exceptions to discharge for Chapter 13. And one of the exceptions is long-term debt, and that note is still due and payable 25 years in the future, or whatever the maturity date is, which may be outside the 3 or 5 year plan that the Chapter 13 debtor is in. So potentially, yes, even a deficiency after foreclosure in a bankruptcy may not be nondischargeable. Now--
Byron R. White: Well say it was... it didn't exceed the length of time that... say it would... it didn't exceed that length of time, would it be discharged?
Michael J. Schroeder: --Yes, it would.
Byron R. White: Because why?
Michael J. Schroeder: Because it does not fall within the exception of section 1322.
Byron R. White: Well, I know. But why in the first place would be... would it be discharged? Did you... would you have filed a deficiency? Filed--
Michael J. Schroeder: We... my client would--
Byron R. White: --Your client... your client would have... would have scheduled it.
Michael J. Schroeder: --Would have filed and mended.
Byron R. White: Exactly.
Michael J. Schroeder: Proof of claim for the deficiency after foreclosure.
Byron R. White: And that would be discharged.
Michael J. Schroeder: If the last payment fell within the 3 or 5 year period--
Byron R. White: Yeah.
Michael J. Schroeder: --Of the Code... of the plan.
John Paul Stevens: May I just be sure I understood one of your answers to Justice Scalia. Assume the hypothetical, the second mortgage in this case in which the first mortgage is undersecured, is the person who holds the second mortgage... does he have a secured or an unsecured claim?
Michael J. Schroeder: When he comes into the bankruptcy proceeding before there's any claim determination or any action by the debtor, that creditor holds a security agreement or mortgage on property that is the debtor's that becomes property of the estate when the debtor files bankruptcy. At that point in time, he's a secured creditor. He is a creditor who has security. His security may be nothing. His security may be 0, or--
Anthony M. Kennedy: All right, but then go to 506. Under 506(a), is he a secured creditor?
Michael J. Schroeder: --Under 506(a), I believe he's a secured creditor only where he falls within the protection of the 1322(b)(2). Now, a debtor in bankruptcy has the opportunity in an adversary proceeding under bankruptcy rule 7001 to bring an action to determine the extent, validity of a... of a lien or of a claim.
Anthony M. Kennedy: Well, but it seems to me your argument is circular, because of... (b)(2) does not apply except to the holders of secured claims. And under 506(a), he's not secured in any degree. So it seems to me perfectly plausible--
Michael J. Schroeder: He--
Anthony M. Kennedy: --To read (b)(2) as applying to someone who has a... a holder who has some portion of his claim secured.
Michael J. Schroeder: --That--
Anthony M. Kennedy: But in the situations... the cases supposed and put to you by Justice Stevens and Justice Scalia and earlier by me, that is not the case with the second mortgagee.
Michael J. Schroeder: --Yes, Your Honor, that is a plausible reading of the two statutes together.
Antonin Scalia: Mr. Schroeder, I'm sure it's in the interests of your clients to protect the second mortgage as well as the first mortgage. But, in fact, I can agree with you on the first mortgage here without agreeing with you on the second.
Michael J. Schroeder: I understand that, Your Honor.
Antonin Scalia: I can read the word... as Justice Kennedy said, the word, the phrase 506(a).
Michael J. Schroeder: Your Honor, that may be a plausible reading.
Antonin Scalia: You would rather... you would want us to go further, but we really don't have to to agree with you on the first mortgage.
Michael J. Schroeder: That's correct.
Antonin Scalia: Yes.
William H. Rehnquist: Thank you, Mr. Schroeder. The case is submitted.
Speaker: The honorable court is now adjourned until tomorrow at ten o'clock.