Court Opinion

ID: 9695819
Source: CourtListenerOpinion
Date Created: 2023-08-25 18:29:54.977196+00
Date Added: 2024-06-11T18:20:16.800892
License: Public Domain

VOLINN, Bankruptcy Judge,
dissenting:
A. RULING OF THE BANKRUPTCY COURT
The decision of the bankruptcy court was considered in the context of state law. Idaho is a state which follows the lien theory of mortgages. Because the mortgagee under Idaho law does not have legal title to the mortgaged premises and the mortgagor retains full ownership of the property, the mortgagee’s interest in the property is that of a lienholder or holder of a security interest. Birkeland v. Clearwater Concentrating Co., 64 Idaho 122, 127 P.2d 1047, 1051 (1942); Hannah v. Vensel, 19 Idaho 796, 116 P. 115, 117 (1911). Therefore, the mortgagee must institute foreclosure proceedings in the event of a default in order to sell the property.
Idaho Code § 6-101 is known as the “single action rule.” A real property mortgagee in Idaho must foreclose first on its security before having recourse against a debtor. A deficiency exists where the proceeds of the foreclosure sale are insufficient to satisfy the mortgage debt.1 The *242amount of a deficiency judgment under Idaho law is limited to the difference between the property’s fair market value and the amount of the unpaid debt.2
The judgment of foreclosure and sale determines the parties’ legal rights in the underlying obligation, as well as in the mortgaged property. Thus, it determines the amount of the mortgage indebtedness, the default, the right of the mortgagee to realize upon the security, the time and place of sale of the security, the notice required, and the right of the mortgagee to a judgment of deficiency. Idaho Code §§ 6-101 & 6-108 (1979). If the mortgagee bids at the sheriff’s sale, he does not acquire title to the property until judicial confirmation of the sale. Idaho Code § 6-104 (1979). Therefore, the deficiency is determined following confirmation of the sale.
From this premise, Connecticut General contended that when a judgment has been obtained but a sale has not yet taken place, as in this case, a deficiency is not yet in existence, and therefore it remains entitled to the mortgage indebtedness of $1,527,-861.89, regardless of its waiver of a deficiency. Connecticut General also argued that its waiver did not extinguish the debt, and that all it waived was the right to pursue a particular remedy — that of a deficiency judgment. The bankruptcy court agreed with the latter argument of appel-lee, holding that only the remedy, but not the debt, was affected by the waiver. Thus, the court concluded, in effect, that the mortgage debt should be considered as fully enforceable despite a factual context which, beyond sale of the collateral, rendered such debt unenforceable under the Idaho Code, particularly section 6-101 as herein noted.
B. LEGISLATIVE POLICY UNDER THE BANKRUPTCY CODE
The Bankruptcy Code is to be liberally construed in order to give the debtor the full measure of the relief afforded by Congress. Any ambiguities should be resolved in favor of the debtor. See Wright v. Union Central Ins. Co., 311 U.S. 273, 278-79, 61 S.Ct. 196, 199-200, 85 L.Ed. 184 (1940) (construing pre-Code Bankruptcy Act provisions for relief of farmer-debtors). The court in Wright stated;
This Act provided a procedure to effectuate a broad program of rehabilitation of distressed farmers faced with the disaster of forced sales and an oppressive burden of debt. Safeguards were provided to protect the rights of secured creditors, throughout the proceeding, to the extent of the value of the property. There is no constitutional claim of the creditor to more than that. And so long as that right is protected the creditor certainly is in no position to insist that doubts or ambiguities in' the Act be resolved in its favor and against the debt- or. Rather, the Act must be liberally construed to give the debtor the full measure of the relief afforded by Congress, lest its benefits be frittered away by narrow formalistic interpretations which disregard the spirit and the letter of the Act.
Id. at 278-79, 61 S.Ct. at 199-200 (citations omitted).3 For a recent application of this *243principle, see In re Lambert, 43 B.R. 913, 919 (Bankr.D.Utah 1984), which held that the eligibility provisions of Chapter 13 “should be liberally interpreted so as not to unnecessarily obstruct the eligibility of debtors desiring relief....”
Similarly, present Chapter 12 of the Bankruptcy Code, encompassed in legislation entitled the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub.L. No. 99-554, § 255, 100 Stat. 3105-3114, “was enacted by Congress as a tool for family farmers to use in reorganizing their business and financial affairs so as to weather the pending financial crisis in much of rural America.” In re Stedman, 72 B.R. 49, 54 (Bankr.D.N.D.1987); see also 132 Cong. Rec. S15076-77 (daily ed. Oct. 3, 1986) (analysis of farmers’ economic plight). Because Chapter 12 is a recent enactment, there is a consequent dearth of judicial interpretation. There can be little doubt, however, that Congress intended this statute to enlarge and liberalize a farmer’s opportunity to enter into an arrangement with his creditors, particularly those who are secured, whereby he could try to effect a more favorable economic resolution of his problems. Congress found that Chapter 11, the only option for most family farmers, had been “needlessly complicated, unduly time-consuming, inordinately expensive and, in too many cases, unworkable.” H.R.Conf.Rep. No. 958, 99th Cong., 2d Sess. 48 (1986), reprinted in 1986 U.S.Code Cong. & Admin.News 5227, 5249. Present Chapter 12 is
to be used only by family farmers. It is designed to give family farmers facing bankruptcy a fighting chance to reorganize their debts and keep their land. It offers family farmers the important protection from creditors that bankruptcy provides while, at the same time, preventing abuse of the system and ensuring that farm lenders receive a fair repayment.
Under this new chapter, it will be easier for a family farmer to confirm a plan of reorganization.

Id.

C. CLAIM VS. DEBT
A “family farmer” is eligible to file a petition for relief with the bankruptcy court under Chapter 12. The Code defines family farmer as an “individual or individual and spouse engaged in farming operations whose aggregate debts do not exceed $1,500,000....” 11 U.S.C. § 101(17)(A) (1982 ed. Supp. IV) (emphasis supplied). The issue before us is whether the foregoing aggregate may include any sum in excess of the present value of the property which is admittedly the sole source for payment of appellee’s claim. Obviously, if the deficiency amount is included, the Quintanas’ aggregate debts exceed the $1,500,-000 eligibility ceiling and they are not entitled to Chapter 12 protection. However, because of its waiver of deficiency, creditor Connecticut General has a right to payment of its secured claim not to the extent of $1,527,861.89 but only to the extent of the value of the property securing the claim, which, as of the filing of the Chapter 12 petition, was admittedly $600,000. Without bankruptcy, since its only recourse is to the property, the amount to which Connecticut General would have been entitled would rise (or fall) with fluctuations in the value of the property, such fluctuations being without relevance to what the debtor would owe. Therefore, characterizing the deficiency amount as contingent or unliqui-dated is not only inaccurate but does not dispose of the issue of whether it is a debt for Chapter 12 purposes, even though these types of liabilities are not statutorily excluded from the debt ceiling calculation in Chapter 12. 11 U.S.C. § 101(17)(A) (1982 ed. Supp. IV); In re Carpenter, 79 B.R. 316, 319-20 (Bankr.S.D.Ohio 1987); see In re Lambert, 43 B.R. 913, 919-23 (Bankr.D. Utah 1984) (defining noncontingent, liqui*244dated, and disputed debts in eligibility context of Chapter 13 proceeding). The issue here is whether a waived deficiency may rise to a level of existence consistent even with the concept of an unliquidated or contingent claim.
The majority cites the legislative history to the definition of “claim” in section 102(2) to the effect that a non-recourse claim against the debtor’s property “would be treated as a claim against the debtor personally for the purposes of the Bankruptcy Code.” However, note should be taken of the italicized sentence which follows the cited material: “However, it would not entitle the holders of the claim to distribution other than from the property in which the holder had an interest. ” H.Rep. No. 595, 95th Cong., 1st Sess. 315, U.S.Code Cong. & Admin.News 1978, p. 6272. This would mean, on the facts before us, that appellee’s claim is worth no more than $600,000 or less than half of the threshold amount for Chapter 12.
Assuming arguendo that it is relevant to discuss the nature of a waived and unenforceable obligation, the nature of any claim thereon should nevertheless be subject to inquiry. “Debt,” as defined in the Bankruptcy code, means “liability on a claim.” 11 U.S.C. § 101(11) (1982). The term “claim” has a broader meaning than debt. 11 U.S.C. § 101(4) (1982);4 In re Carpenter, 79 B.R. at 320; In re Lambert, 43 B.R. at 918-19; In re King, 9 B.R. 376, 377 (Bankr.D.Or.1981); contra, In re Energy Co-Op, 832 F.2d 997, 1001-02 (7th Cir.1987); In re Pulliam, 90 B.R. 241, 245-46 (Bankr.N.D.Tex.1988). The court in Carpenter expressed the consequences of this distinction well:
A claim arising from a creditor’s demand for repayment, encompasses all obligations against a debtor which may be assertible in a bankruptcy case and thereby potentially affected by the discharge. But a claim is subject to disal-lowance if it is not a liability cognizable under law. That liability must be established or unchallenged before a claim becomes a debt. For that reason, the debtor’s good faith indication of its debts generally establishes its eligibility for relief under a specific chapter of the Bankruptcy Code rather than the assertions of creditors by way of claims. See Comprehensive Accounting Corp. v. Pearson (In the Matter of Pearson), 773 F.2d 751 (6th Cir.1985). This Court would add to the finding in Pearson that the omission of a debt by the debtors, even if such omission is not in bad faith, but results from a mistake in law, is properly before the Court for the purpose of establishing eligibility for relief upon an appropriate challenge by a party in interest.
In re Carpenter, 79 B.R. at 320. Therefore, unliquidated, contingent or seriously disputed claims while subject to being counted at face value should nevertheless be subject to review for potentially commensurate enforceability.5 Here, the *245claim, limited as it is to property worth only $600,000, falls far short. As discussed below, while appellee’s claim far exceeds the property’s present value, it is not a presently cognizable debt and would be subject to disallowance by the bankruptcy court to the extent that such claim exceeds the value of the property.
D. ALLOWABILITY OF APPELLEE’S CLAIM
At the outset, 11 U.S.C. § 506(a) should be noted. In pertinent part it states:
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 such property ... and is an unsecured claim to the extent of the value of such creditor’s interest less the amount of such allowed claim....”
The legislative history states:
Subsection (a) of this section separates an undersecured creditor’s claim into two parts. He has a secured claim to the extent of the value of his collateral; and he has an unsecured claim for the balance of his claim.
Section 506(d) provides:
(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void
Based on the foregoing, it is clear that since appellee is undersecured, its claim may be dealt with in its discrete aspects, secured and unsecured, and that its secured claim is viable only to the extent of the value of the collateral.
However, appellee having waived recourse against the debtors, the unsecured portion of its claim cannot be allowed. The claim has no viability as an Idaho judgment, nor under the Bankruptcy Code. And, as indicated, the lien is subject to avoidance in any amount beyond the value of the property. The effect of these provisions on Chapter 12 has been stated as follows:
The essence of Chapter 12 is the ability of the Chapter 12 debtor to “write down” the mortgage securing the farm to the value of the farm and to pay the written-down amount over time. The “write down” is accomplished through use of Code § 506(a) and (d). Code § 506(a) provides that an allowed claim is only a secured claim to the extent of the value of the collateral and is an unsecured claim for the deficiency. Code § 506(d) provides that a lien which secures a claim is void to the extent the claim is not an allowed secured claim ...
3 Norton Bankruptcy Law and Practice § 92.09
Connecticut General’s claim to any amount in excess of the property’s present value could not be allowed by the court, following objection by the debtors, because “such claim is unenforceable against the debtor and property of the debtor [other than the specific collateral in issue], under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.” 11 U.S.C. § 502(b)(1) (1982 ed. Supp. IV). Connecticut General’s claim to any such excess is unenforceable because it waived its right to a deficiency; its only enforceable claim is for the property value. This issue, the basic one here, was dealt with in In re Lands, 85 B.R. 83 (Bankr.E.D.Ark.1988). The court considered whether the debts secured by non-recourse liens should be counted in the aggregate debt limitation. The liens had been granted by the Chapter 12 debtor on his property as an accommodation to secure his son’s debts on which the debtor was not personally obligated. The court pointed out that under these circumstances, the creditor had no claim against the debt- or which could be transformed into a debt, concluding:
*246The claim of the three lienholders is not based on an obligation of the debtors which would be assertible in a bankruptcy case and thereby potentially affected by discharge. Their debts underlying the three claims pursuant to stipulations of the parties, are not debts owing by these debtors. Although the debtors’ real estate may be clouded, they have no ‘liability’ on the claims, hence no debt. Therefore inclusion in the calculation of ‘aggregate debt’ is improper. Lands, p. 85.
There is a factual distinction between Lands and this case in that the debtor here was obligated to the creditor at the outset, whereas in Lands there was no personal debt at all; nevertheless, as matters now stand, this distinction is not pertinent since the debtor has no more personal obligation to the secured creditor than did the debtor in Lands. In both cases, at the relevant time in question, only the collateral was subject to the creditors’ claims.
Debts of a family farmer, for Chapter 12 eligibility purposes, are to be determined as of the date the case is filed. In re Carpenter, 79 B.R. at 320; In re Labig, 74 B.R. 507, 509 (Bankr.S.D.Ohio 1987); In re Orr, 71 B.R. 639, 641 n. 4 (Bankr.E.D.N.C.1987). The date of filing is also determinative for fixing the value of Connecticut General’s claim, 11 U.S.C. § 502(b) (1982 ed. Supp. IV), which in this case is the same as the value of the real property. 11 U.S.C. § 506(a) (1982). In this regard, Connecticut General’s position is analogous to that of a creditor asserting a claim under a nonrecourse loan agreement. The amount of such a claim which exceeded the value of the security would be disallowed. In re Atlanta West VI, 91 B.R. 620, 623 (Bankr. N.D.Ga.1988).
By way of contrast, in a Chapter 11 proceeding, such a nonrecourse deficiency claim would be allowed due to the operation of § 1111(b), which deems that a claim secured by a lien on property of the estate shall be treated the same as if the holder of the claim had recourse against the debtor. 11 U.S.C. § 1111(b)(1)(A) (1982); In re Atlanta West VI, 91 B.R. at 623-24; In re Greenland Vistas, Inc., 33 B.R. 366, 367-69 (Bankr.E.D.Mich.1983); 5 Collier on Bankruptcy ¶ 1111.02 at 14 (L. King 15th ed. 1988). One of the important purposes of Chapter 12 was to eliminate the effects of § 1111(b) in farm bankruptcies so that farmers could scale their secured debts down to the value of their farms.6 132 Cong.Rec. S15092 (daily ed. Oct. 3, 1986) (statement of Sen. DeConcini); see id. at S15084 (discussion of difficulties faced by farmers under § 1111(b)). Despite the clear intent of Congress to provide exemption from section 1111(b) for farmers under Chapter 12, affirmance of dismissal here will engraft on Chapter 12 a stronger variant of section 1111(b) since it will endow the undersecured non-recourse with not simply a choice as to how to react to a debtor’s Chapter 11 plan, but with power to deny the debtor any access to Chapter 12 and the opportunity to file a rehabilitative plan thereafter.
CONCLUSION
Having waived its right to a deficiency judgment, the relief available to the creditor-mortgagee should be limited to its true *247status, that of secured creditor to the extent of the value of the mortgaged property. It would be an unfortunate paradox if that part of a claim which would not be allowable in a Chapter 12 proceeding could nevertheless preclude the debtor from filing thereunder. I therefore respectfully dissent.

. Section 6-101 provides for judicial foreclosure proceedings as follows:
There can be but one action for the recovery of any debt, or the enforcement of any right secured by mortgage upon real estate which action must be in accordance with the provisions of this chapter. In such action the court may, by its judgment, direct a sale of the encumbered property (or so much thereof as may be necessary) and the application of the proceeds of the sale to the payment of the costs of the court and the expenses of the sale, and the amount due to the plaintiff; and sales *242of real estate under judgments of foreclosure of mortgages and liens are subject to redemption as in the case of sales under execution; (and if it appears from the sheriff’s return that the proceeds are insufficient, and a balance still remains due, judgment can then be docketed for such balance against the defendant or defendants personally liable for the debt), and it becomes a lien on the real estate of such judgment debtor, as in other cases on which execution may be issued.
Idaho Code § 6-101 (1979) (emphasis added).

. Statute governing deficiency judgments provides:
No court in the state of Idaho shall have jurisdiction to enter a deficiency judgment ... in any amount greater than the difference between the mortgage indebtedness, as determined by the decree, plus costs of foreclosure and sale, and the reasonable value of the mortgaged property, to be determined by the court in the decree upon the taking of evidence of such value.
Idaho Code § 6-108 (1979).

. Several cases have held that the eligibility provisions of Chapter 12 are to be strictly construed. Such cases, however, invoked this principle only after determining the true debt amount to be in excess of $1,500,000. In re *243Labig, 74 B.R. 507, 108-09 (Bankr.S.D. Ohio 1987) (husband and wife filed separate petitions, each listing one-half of their joint debts); In re Stedman, 72 B.R. 49, 54 (Bankr.D.N.D.1957) (discrepancies between debtors’ schedules and creditors’ claims to be resolved most favorably to permit eligibility.)

. A claim is defined as a
(A) right to payment, whether or not such right is reduced to judgment, liquidated, un-liquidated, fixed, contingent, matured, unma-tured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured;
11 U.S.C. § 101(4) (1982). The legislative history merely states that "[t]he terms are coextensive: a creditor has a ‘claim’ against the debtor, the debtor owes a ‘debt’ to the creditor.” S.Rep. No. 989, 95th Cong., 2d Sess. 23 (1978), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5809; H.R.Rep. No. 595, 95th Cong., 2d Sess. 310 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 5963, 6267. The Sixth Circuit in Comprehensive Accounting Corp. v. Pearson (In re Pearson), 773 F.2d 751, 755 (6th Cir.1985) characterized this language as "imprecise.”

. There are two Ninth Circuit Bankruptcy Appellate Panel opinions addressing issues related to eligibility determinations under Chapter 13 which may be discussed and distinguished. In re Wenberg, 94 B.R. 631, 633-35 (9th Cir. BAP 1988), involved whether an attorneys' fee award in an adversary proceeding was a liquidated debt and thus affected the debtors' eligibility under the Chapter 13 debt ceiling, 11 U.S.C. § 109(e) (1982). The court held that the fees were liquidated and debtors thus ineligible. The fee reasonableness issue, however, is more in the nature of a dispute over the liquidated character and amount of the debt, rather than over its existence, and so is fundamentally dif*245ferent than the waived deficiency against the Quintanas.
The second Bankruptcy Appellate Panel case, In re Sylvester, 19 B.R. 671, 673 (9th Cir. BAP 1982), also concerned eligibility for Chapter 13 and whether a disputed debt was liquidated. Debtors argued that their counterclaim rendered the debt unliquidated until after trial. The court disagreed. Again, a dispute over a set-off is a dispute over the amount of a debt, rather than its existence.

. This aspect of Chapter 12 has been attended by some controversy and apprehension as noted by the following:
... it is clear that Chapter 12 has rekindled the ability of a debtor with a substantially undercollateralized mortgage debt to write down the debt to the current depressed value of his land. The debtor, under chapter 12, is allowed to keep his land, pay the former secured debtor only "liquidation value” on the newly created unsecured debt, and receive a bankruptcy discharge on the rest of the debt, while the creditor is precluded from sharing in any future reappreciation of the land. As Senator DeConcini duly noted:
“Why won’t every farmer with a substantially undercollateralized loan against his farm declare bankruptcy.... I fear that we have created a legal atmosphere that may well encourage farm bankruptcies and that farmers who can now manage to work things out with their creditors in some satisfactory manner to both will no longer have that incentive to reach mutual agreement.”
Note, An Analysis of the Family Farmer Bankruptcy Act of 1986, (quoting 132 Cong.Rec. § 15092 (daily ed. Oct. 3, 1986) 15 Hofstra L.Rev. 353, 376 (1987)).