Opinion ID: 596191
Heading Depth: 2
Heading Rank: 2

Heading: Mortgage Insurance

Text: 22 Lomas argues that if modification is to be permitted, then its secured claim must be valued according to what FNMA could receive on its mortgage insurance. The relevant portion of section 506(a) provides: 23 An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ... and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest. 24 11 U.S.C. § 506(a). 25 The legislative history of this section is minimal. It states only that [w]hile courts will have to determine value on a case-by-case basis, the subsection makes it clear that valuation is to be determined in light of the purpose of the valuation and the proposed disposition or use of the subject property. S.Rep. No. 989, 95th Cong., 2d Sess. 68 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5854. 26 Lomas argues that this means the value of the creditor's secured claim in bankruptcy is what the creditor could sell its interest in the collateral for outside of bankruptcy. FNMA's claim is based upon mortgage insurance which provides that if default causes foreclosure and a third party does not purchase the property, the property may be conveyed to the insurer by the lender after foreclosure in return for payment of the principal balance and some expenses. Lomas argues, consequently, that the value to FNMA of its collateral is not the market value of the property but consists of that value plus what FNMA could receive under its mortgage insurance. We reject this argument. 27 Instead, we conclude that mortgage insurance should not be included in the valuation. Our conclusion is based in part upon the last sentence in section 506(a) which states [s]uch value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property.... 11 U.S.C. § 506(a) (emphasis added). We adopt the reasoning of In re Fischer, 136 B.R. 819 (D.Alaska 1992), which held that the value of the property in question should not include the mortgage insurance because agreements between the creditor and third parties should not affect the valuation of the subject property. Fischer, 136 B.R. at 828 (following the analysis of In re Lopez, 75 B.R. 961 (Bankr.E.D.Pa.1987), aff'd, 82 B.R. 712 (Bankr.E.D.Pa.1988), holding that because plan did not relinquish property for foreclosure, proper valuation was fair market value without consideration of mortgage insurance). 28 Our holding today does not conflict with our recent decision In re Mitchell, 954 F.2d 557 (9th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 303, 121 L.Ed.2d 226 (1992), a case involving the valuation of the debtor's automobile. Mitchell concluded that the wholesale value rather than replacement cost should determine valuation.  '[W]hat is being valued is the creditor's interest in the collateral, not the debtor's interest.'  Id. at 560 (quoting Queenan, Standards for Valuation of Security Interests in Chapter 11, 92 Com.L.J. 19, 30 (1987)). As Fischer points out, however, Mitchell is consistent with our holding because it did not involve insurance or any type of recourse agreement that would guarantee the creditor more than market value. Fischer, 136 B.R. at 827. 29 We find additional support for our holding in Grubbs v. Nat'l Bank of South Carolina, 114 B.R. 450 (D.S.C.1990), a case which involved automobile valuation but contained the additional factor of a recourse agreement. In Grubbs, the court noted that: 30 The availability to such holder of recourse against third parties with respect to the claim should not affect the value attributed to the property.... The bankruptcy court must protect the holder of a secured claim only to the extent of the value of his interest in the estate's interest in the subject property. The court is not required to afford protection with respect to the creditor's contractual rights against third parties. 31 Grubbs, 114 B.R. at 452 (quoting COLLIER ON BANKRUPTCY p 506.04, at 506-35 to 36) (ellipsis in original). Because we find no practical distinction between a recourse agreement and a mortgage guaranty in this context, we hold that mortgage insurance should not be calculated into the value of the secured claim.C. Automatic Stay 32 Lomas and FNMA argue that the district court erred in affirming the bankruptcy court's denial of their motion for relief from the automatic stay. First, they contend that relief should have been granted because they were not adequately protected. The district court erred by focusing on the mortgage insurance, they argue, because the test does not look to the value of the creditor's secured claim but only whether its interest in the property is protected. They then argue that because FNMA's interest was in the deed of trust which was covered by the insurance, the insurance should have been taken into account. Second, they contend that the Wieses had no equity in the property and had the burden to demonstrate that the property was necessary for them to effectuate the plan. 33 Whether to grant relief from the automatic stay for cause under section 362(d)(1) or (d)(2) is discretionary and reviewed for an abuse of discretion. In re MacDonald, 755 F.2d 715, 716 (9th Cir.1985). 34 Section 362(d) provides that relief from an automatic stay may be granted: 35 (1) for cause, including the lack of adequate protection of an interest in property of such party in interest; or 36 (2) with respect to a stay of an act against property under subsection (a) of this section, if-- 37 (A) the debtor does not have an equity in such property; and 38 (B) such property is not necessary to an effective reorganization. 39 11 U.S.C. § 362(d). 40 Because we affirm the denial of Lomas' motion for relief from the automatic stay pursuant to section 1327(a), we need not apply section 362(d) to this case. Section 1327(a) states that: 41 The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan. 42 11 U.S.C. § 1327(a). 43 The Ninth Circuit BAP has held that the language of section 1327(a) binds the creditor to the provisions of the plan whether or not the creditor has objected to, accepted or rejected the plan. Anaheim Sav. & Loan Ass'n v. Evans (In re Evans), 30 B.R. 530, 531 (Bankr. 9th Cir.1983). An order confirming a Chapter 13 plan is res judicata as to all justiciable issues which were or could have been decided at the confirmation hearing. Id. Evans further stated that issues of adequate protection, lack of equity, and necessity for a successful rehabilitation of the Chapter 13 debtor [are] all res judicata as of the confirmation of the plan. Id. Similarly, we have held that [o]nce a Chapter 13 plan is confirmed, all of the property of the estate vests in the debtor and creditors are precluded from asserting any other interest than that provided for them in the confirmed plan. Fietz v. Great W. Sav. (In re Fietz), 852 F.2d 455, 458 (9th Cir.1988) (citing 11 U.S.C. § 1327 (1982) and In re Evans, 30 B.R. at 531). 44 Therefore, because the issues involved in determining whether relief from the automatic stay were determined in the confirmation of the plan, and thus are res judicata, we hold that the bankruptcy court did not abuse its discretion by denying relief from the automatic stay and the district court correctly affirmed that decision. D. Constitutional Issue 45 Finally, Lomas argues that the unsecured portion of a mortgage lien constitutes a valuable property right that is protected by the Takings Clause of the Fifth Amendment. It argues that allowing modification of the unsecured portion of a creditor's claim constitutes lien avoidance and consequently violates the Takings Clause. 46 However, we need not reach the merits of this constitutional issue because Lomas failed to raise it both in the bankruptcy court and in the district court. Therefore, it has waived that issue and is precluded from asserting it before this court. See United States v. Wanless, 882 F.2d 1459, 1462 (9th Cir.1989) (failure of Government to raise Fourth Amendment standing issue either in the district court or on appeal results in waiver). E. Wieses' Cross-Appeal 47 The Wieses' cross-appeal arguing that the district court erred by reversing the bankruptcy court and denying a deduction in the value of the secured claim for transaction costs and anticipated expenses for septic tank repairs. The district court held that because the property would be retained by the debtor it would be inappropriate to deduct transaction costs from the value. We agree. 48 As the Bankruptcy Appellate Panel stated in Case, when the debtor plans to retain the property, selling costs should not be deducted from the fair market value of the property when valuing the creditor's interest in the property. In re Case, 115 B.R. 666, 670 (9th Cir.BAP 1990). 49 Intuitively, this makes sense and, as Lomas points out, is really only the flipside of its effort to figure mortgage insurance into valuation. Both arguments are attempting to base valuation upon a contingency that never took place. Consequently, the discussion of each issue complements the other. 50 As with the mortgage insurance issue, this question involves the interpretation of section 506(a). The contention put forth by the Wieses highlights what at first appears to be a conflict within the statute itself. The first sentence provides that [a]n allowed claim ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property.... 11 U.S.C. § 506(a). The second sentence provides that [s]uch value shall be determined in the light of the purpose of the valuation and of the proposed disposition or use of such property.... Id. 51 While this circuit has not addressed the question, the Fourth Circuit has discussed it under somewhat different facts in Brown and Co. Sec. Corp. v. Balbus (In re Balbus), 933 F.2d 246 (4th Cir.1991). 2 Balbus determined that the only way to read the statute without effectively erasing the second sentence was to deduct sales costs only if there were an actual sale. Id. at 252. Acknowledging that there is a split in authority among lower courts, the Balbus court concluded that [c]ourts which have focused on the intended use of the property have generally held that when a debtor retains the property, hypothetical costs should not be deducted. 933 F.2d at 251. 52 Balbus noted that initially courts had dwelled upon the first sentence and allowed deduction of such costs, 3 but that  'a growing number of courts have rejected this line of reasoning, and have refused to deduct the sale costs in rendering a § 506 calculation unless the debtor's plan contemplates selling the property on the open market.'  Id. at 249-50 (quoting In re 222 Liberty Assoc., 105 B.R. 798, 803 (Bankr.E.D.Pa.1989)). 53 The reasoning of the courts that focused on the first sentence was that section 506(a) mandates that the creditor's interest in the property controls the valuation. In re Ward, 13 B.R. 710, 712 (Bankr.S.D.Ohio 1981). This view has been roundly criticized: 54 Such an interpretation would mean that the value should always be fixed at the amount which the creditor would receive upon foreclosure regardless of the purpose of the valuation and of the proposed disposition or use of the property. 55 In re Courtright, 57 B.R. 495, 497 (Bankr.D.Or.1986). Balbus agreed with this interpretation. 933 F.2d at 250-52. 56 Balbus adopted this second view also because of its reading of dicta found in United Sav. Ass'n v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). Balbus, 933 F.2d at 252. There, the Supreme Court stated: 57 In subsection (a) of [§ 506] the creditor's interest in property obviously means his security interest without taking account of his right to immediate possession of the collateral on default.... The phrase value of such creditor's interest in § 506(a) means the value of the collateral. 58 Timbers, 484 U.S. at 372, 108 S.Ct. at 631 (emphasis added). The Balbus court concluded that the better view is that the secured creditor's interest may be valued for § 506(a) purposes without superimposing a foreclosure or other sale of the collateral where a disposition of the property is not reasonably in the offing. 933 F.2d at 251 (internal quotations omitted). 59 We adopt the view of the Fourth Circuit in Balbus and affirm the district court's denial of transaction costs. First, as the Balbus court stated, to do otherwise would be to completely erase the second sentence of the statute. Second, it is contradictory to allow the debtor to keep the home but value the secured portion based upon a hypothetical sale of the residence. As one court put it, the debtors cannot eat with the hounds and run with the hares. Matter of Crockett, 3 B.R. 365, 367 (Bankr.N.D.Ill.1980). Third, this is consistent with the legislative history of section 506(a) which reflects Congress's intent that the issues would be resolved on a case-by-case basis. Finally, it would be inconsistent not to calculate mortgage insurance into the value but to allow hypothetical transaction costs.