Cheered by the U.S. Supreme Court's acceptance last week of a case that could ultimately end cramdowns in cases brought under Chapter 13 of the Bankruptcy Code, a coalition of lenders is mulling options for intervening in that case as well as seeking early congressional approval for a legislative solution.
We expect early action in the Senate next year," said Philip Corwin, director of o rations and retail banking for the American Bankers Association.
The ABA, the American Financial Services Association and the Credit Union National Association comprise the steering committee of the National Consumer Bankruptcy Coalition, which suffered a frustrating defeat this year when the 102nd Congress, in its last hours, failed to pass a bankruptcy bill though both houses had approved a ban on Chapter 13 cramdowns. The group is considering joining on an amicus brief. The Federal Home Loan Mortgage Corporation, loser in an earlier appellate court case, will also seek partners for an amicus brief it will file.
Lenders will pursue an end to cramdowns both in Congress and before the high court in the hope of foreclosing any opportunity for debtors to achieve a cramdown. Moreover, legislation will only deal with future cases, whereas a Supreme Court decision in favor of the lenders would reverse the four appellate court decisions that went against the lenders.
In decisions rendered by the 2nd, 3rd. 9th and 10th Appeals Court circuits, the lenders lost at both the trial and appellate levels. In the case accepted last week by the Supreme Court, both the district court and the 5th Circuit Court of Appeals in New Orleans found in favor of the lenders.
The Supreme Court in January had ruled against cramdowns in a case brought under Chapter 7 of the Bankruptcy Code.
"Cramdowns" and "lien-stripping" are colloquialisms for what the Bankruptcy Code refers to as "bifurcation"--loan splitting. Some courts have concluded that if the market value of a secured property is below the amount of the lien, they can divide the lien into secured and unsecured portions. The courts then require the borrower to pay back only the secured portion--usually an amount equal to market value--so the value of the loan to the lender is crammed down' to that level.
In Nobleman vs. American Savings Bank, 5th Circuit Judge Emilio Garza noted that the argument over cramdowns turns on the inter place between sections 506(a) and 1322(b)(2) of the code. Section 506(a) defines a secured claim as the value of the collateral while any balance of the debt above that value is an unsecured claim. Section 1322(b)(2) says the rights of holders of secured claims can be modified except for a claim secured only by a security interest in real property that is the debtor's principal residence. ... '
The Noblemans, as did the prevailing debtors in the four other Appellate Circuits, argued that the only portion of the claim that cannot be modified is the part supported by the collateral, the secured claim.
Judge Garza said section 506(a) 'is a ion of
general applicability" whereas section 1322(b)(2) only applies in Chapter 13 cases. "Section 1322(b)(2) clearly prohibits the modification of rights of holders of secured claims if the claim is secured only by a security interest in the debtor's principal residence," wrote Judge Garza. "However, this prohibition ... appears to conflict with section 506(a), which would allow the modification.
"If two statutes conflict, a generally accepted tent of statutory construction is that the general language of a statute does not ~prevail over matters specifically dealt with in another part of the same enactment.'" (In Re: Russell 93 B.R. 703, 705 (D.N.D. 1988))
Judge Garza said the court holds that the specific language of section 1322(b)(2) "prevails over the general language of section 506(a). "Moreover, section 1322(b)(2) describes its subject matter as the modification of 'the rights of holders of claims, not as the modification of claim as such; thus the section can properly be read as excepting from its reach modification of 'the rights of holders of... a claim secured only by a security interest in real property that is the debtor's principal residence. ..'Therefore, even if the entirety of such a claim is not a secured claim (as per section 506(a)), the rights of a holder of such a claim may not be modified under section 1322(b)(2)."