The Supreme Court/The Supreme Court.iso/pc/ascii/1990/90_693/90_693.o

Text File | 1991-06-09 | 18.8 KB | 323 lines

Subject: 90-693 -- OPINION, JOHNSON v. HOME STATE BANK




NOTICE: This opinion is subject to formal revision before publication in
the preliminary print of the United States Reports.  Readers are requested
to notify the Reporter of Decisions, Supreme Court of the United States,
Washington, D. C. 20543, of any typographical or other formal errors, in
order that corrections may be made before the preliminary print goes to
press.
SUPREME COURT OF THE UNITED STATES


No. 90-693



CURTIS REED JOHNSON, PETITIONER v.
HOME STATE BANK


on writ of certiorari to the united states court of appeals for the tenth
circuit

[June 10, 1991]



    Justice Marshall delivered the opinion of the Court.

    The issue in this case is whether a debtor can include a mortgage lien
in a Chapter 13 bankruptcy reorganization plan once the personal obligation
secured by the mortgaged property has been discharged in a Chapter 7
proceeding.  We hold that the mortgage lien in such a circumstance remains
a "claim" against the debtor that can be rescheduled under Chapter 13.
I
    This case arises from the efforts of respondent Home State Bank (Bank)
to foreclose a mortgage on the farm property of petitioner.  Petitioner
gave the mortgage to secure promissory notes to the Bank totaling
approximately $470,000. {1}  When petitioner defaulted on these notes, the
Bank initiated foreclosure proceedings in state court.  During the pendency
of these proceedings, petitioner filed for a liquidation under Chapter 7 of
the Bankruptcy Code.  Pursuant to 11 U. S. C. MDRV 727, the Bankruptcy
Court discharged petitioner from personal liability on his promissory notes
to the Bank.  Notwithstanding the discharge, the Bank's right to proceed
against petitioner in rem survived the Chapter 7 liquidation.  After the
Bankruptcy Court lifted the automatic stay protecting petitioner's estate,
see 11 U. S. C. MDRV 362, the Bank reinitiated the foreclosure proceedings.
{2}  Ultimately, the state court entered an in rem judgment of
approximately $200,000 for the Bank.
    Before the foreclosure sale was scheduled to take place, petitioner
filed the Chapter 13 petition at issue here.  In his Chapter 13 plan,
petitioner listed the Bank's mortgage in the farm property as a claim
against his estate and proposed to pay the Bank four annual installments
and a final "balloon payment" equal in total value to the Bank's in rem
judgment.  Over the Bank's objection, the Bankruptcy Court confirmed the
Chapter 13 plan.  The Bank appealed to the District Court, arguing that the
Code does not allow a debtor to include in a Chapter 13 plan a mortgage
used to secure an obligation for which personal liability has been
discharged in Chapter 7 proceedings; the Bank argued in the alternative
that the Bankruptcy Court had erred in finding that petitioner had proposed
the plan in good faith and that the plan was feasible.  The District Court
accepted the first of these arguments and disposed of the case on that
ground.  See In re Johnson, 96 B. R. 326, 328-330 (Kan. 1989).
    The Court of Appeals affirmed.  See 904 F. 2d 563 (CA10 1990).
Emphasizing that petitioner's personal liability on the promissory notes
secured by the mortgage had been discharged in the Chapter 7 proceedings,
the court reasoned that the Bank no longer had a "claim" against petitioner
subject to rescheduling under Chapter 13.  See id., at 565, 566.  Like the
District Court, the Court of Appeals disposed of the case without
considering the Bank's contentions that Johnson's plan was not in good
faith and was not feasible.  See id., at 566.
    In contrast to the decision of the Tenth Circuit in this case, two
other Circuit Courts of Appeals have concluded that a debtor can include a
mortgage lien in a Chapter 13 plan even after the debtor's personal
liability on the debt secured by the property has been discharged in a
Chapter 7 liquidation.  See In re Saylors, 869 F. 2d 1434, 1436 (CA11
1989); In re Metz, 820 F. 2d 1495, 1498 (CA9 1987).  Having granted
certiorari to resolve this conflict, see 498 U. S. --- (1991), we now
reverse.
II
    Chapter 13 of the Bankruptcy Code provides a reorganization remedy for
consumer debtors and proprietors with relatively small debts.  See
generally H. R. Rep. No. 95-595, pp. 116-119 (1977).  So long as a debtor
meets the eligibility requirements for relief under Chapter 13, see 11 U.
S. C. MDRV 109(e), {3} he may submit for the bankruptcy court's
confirmation a plan that "modif[ies] the rights of holders of secured
claims . . . or . . . unsecured claims," MDRV 1322(b)(2), and that
"provide[s] for the payment of all or any part of any [allowed] claim,"
MDRV 1322(b)(6).  The issue in this case is whether a mortgage lien that
secures an obligation for which a debtor's personal liability has been
discharged in a Chapter 7 liquidation is a "claim" subject to inclusion in
an approved Chapter 13 reorganization plan.
    To put this question in context, we must first say more about the
nature of the mortgage interest that survives a Chapter 7 liquidation.  A
mortgage is an interest in real property that secures a creditor's right to
repayment.  But unless the debtor and creditor have provided otherwise, the
creditor ordinarily is not limited to foreclosure on the mortgaged property
should the debtor default on his obligation; rather, the creditor may in
addition sue to establish the debtor's in personam liability for any
deficiency on the debt and may enforce any judgment against the debtor's
assets generally.  See 3 R. Powell, The Law of Real Property MDRV 467
(1990).  A defaulting debtor can protect himself from personal liability by
obtaining a discharge in a Chapter 7 liquidation.  See 7 U. S. C. MDRV 727.
However, such a discharge extinguishes only "the personal liability of the
debtor."  11 U. S. C. MDRV 524(a)(1).  Codifying the rule of Long v.
Bullard, 117 U. S. 617 (1886), the Code provides that a creditor's right to
foreclose on the mortgage survives or passes through the bankruptcy.  See
11 U. S. C. MDRV 522(c)(2); Owen v. Owen, 500 U. S. ---, --- (1991); Farrey
v. Sanderfoot, 500 U. S. ---, --- (1991); H. R. Rep. No. 95-595, supra, at
361.
    Whether this surviving mortgage interest is a "claim" subject to
inclusion in a Chapter 13 reorganization plan is a straightforward issue of
statutory construction to be resolved by reference to "the text, history,
and purpose" of the Bankruptcy Code.  Farrey v. Sanderfoot, supra, at ---.
Under the Code,

" `[C]laim' means --
    "(A) right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
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. A.
MDRV 101(5) (Supp. 1991).


We have previously explained that Congress intended by this language to
adopt the broadest available definition of "claim."  See Pennsylvania Dept.
of Public Welfare v. Davenport, 495 U. S. ---, ---, --- (1990); see also
Ohio v. Kovacs, 469 U. S. 274, 279 (1985).  In Davenport, we concluded that
"`right to payment' [means] nothing more nor less than an enforceable
obligation . . . ."  495 U. S., at ---. {4}
    Applying the teachings of Davenport, we have no trouble concluding that
a mortgage interest that survives the discharge of a debtor's personal
liability is a "claim" within the terms of MDRV 101(5).  Even after the
debtor's personal obligations have been extinguished, the mortgage holder
still retains a "right to payment" in the form of its right to the proceeds
from the sale of the debtor's property.  Alternatively, the creditor's
surviving right to foreclose on the mortgage can be viewed as a "right to
an equitable remedy" for the debtor's default on the underlying obligation.
Either way, there can be no doubt that the surviving mortgage interest
corresponds to an "enforceable obligation" of the debtor.
    The Court of Appeals thus erred in concluding that the discharge of
petitioner's personal liability on his promissory notes constituted the
complete termination of the Bank's claim against petitioner.  Rather, a
bankruptcy discharge extinguishes only one mode of enforcing a claim --
namely, an action against the debtor in personam -- while leaving intact
another -- namely, an action against the debtor in rem.  Indeed, but for
the codification of the rule of Long v. Bullard, supra, there can be little
question that a "discharge" under Chapter 7 would have the effect of
extinguishing the in rem component as well as the in personam component of
any claim against the debtor. And because only "claims" are discharged
under the Code, {5} the very need to codify Long v. Bullard presupposes
that a mortgage interest is otherwise a "claim."
    The conclusion that a surviving mortgage interest is a "claim" under
MDRV 101(5) is consistent with other parts of the Code.  Section 502(b)(1),
for example, states that the bankruptcy court "shall determine the amount
of [a disputed] claim . . . and shall allow such claim in such amount,
except to the extent that . . . such claim is unenforceable against the
debtor and property of the debtor" (emphasis added).  In other words, the
court must allow the claim if it is enforceable against either the debtor
or his property.  Thus, MDRV 502(b)(1) contemplates circumstances in which
a "claim," like the mortgage lien that passes through a Chapter 7
proceeding, may consist of nothing more than an obligation enforceable
against the debtor's property.  Similarly, MDRV 102(2) establishes, as a
"[r]ul[e] of construction," that the phrase "`claim against the debtor'
includes claim against property of the debtor."  A fair reading of MDRV
102(2) is that a creditor who, like the Bank in this case, has a claim
enforceable only against the debtor's property nonetheless has a "claim
against the debtor" for purposes of the Code.
    The legislative background and history of the Code confirm this
construction of "claim."  Although the pre-1978 Bankruptcy Act contained no
single definition of "claim," the Act did define "claim" as "includ[ing]
all claims of whatever character against a debtor or its property" for
purposes of Chapter X corporate reorganizations.  See 11 U. S. C. MDRV
506(1) (1976 ed.) (emphasis added).  It is clear that Congress so defined
"claim" in order to confirm that creditors with interests enforceable only
against the property of the debtor had "claims" for purposes of Chapter X,
see S. Rep. No. 1916, 75th Cong., 3d Sess., 25 (1938); H. R. Rep. No. 1409,
75th Cong., 1st Sess., 39 (1937), and such was the established
understanding of the lower courts.  See generally 6 J. Moore & L. King,
Collier on Bankruptcy MDRV 2.05, pp. 307-308 (14th ed. 1978) ("[I]t is to
be noted that a claim against the debtor's property alone is sufficient"
for Chapter X).  In fashioning a single definition of "claim" for the 1978
Bankruptcy Code, Congress intended to "adop[t] an even broader definition
of claim than [was] found in the [pre-1978 Act's] debtor rehabilitation
chapters."  H. R. Rep. No. 95595, at 309 (emphasis added); accord, S. Rep.
No. 95-989, pp. 21-22 (1978); see also Pennsylvania Dept. of Public Welfare
v. Davenport, supra, at ---, --- (recognizing that Congress intended
broadest available definition of claim).  Presuming, as we must, that
Congress was familiar with the prevailing understanding of "claim" under
Chapter X of the Act, see Cottage Savings Assn. v. Commissioner, 499 U. S.
---, --- (1991); Cannon v. University of Chicago, 441 U. S. 677, 698-699
(1979), we must infer that Congress fully expected that an obligation
enforceable only against a debtor's property would be a "claim" under MDRV
101(5) of the Code.
    The legislative history surrounding MDRV 102(2) directly corroborates
this inference.  The Committee Reports accompanying MDRV 102(2) explain
that this rule of construction contemplates, inter alia, "nonrecourse loan
agreements where the creditor's only rights are against property of the
debtor, and not against the debtor personally."  H. R. Rep. No. 95-595,
supra, at 315; accord, S. Rep. No. 95-989, supra, at 28.  Insofar as the
mortgage interest that passes through a Chapter 7 liquidation is
enforceable only against the debtor's property, this interest has the same
properties as a nonrecourse loan.  It is true, as the Court of Appeals
noted, that the debtor and creditor in such a case did not conceive of
their credit agreement as a nonrecourse loan when they entered it.  See 904
F. 2d, at 566.  However, insofar as Congress did not expressly limit MDRV
102(2) to nonrecourse loans but rather chose general language broad enough
to encompass such obligations, we understand Congress' intent to be that
MDRV 102(2) extend to all interests having the relevant attributes of
nonrecourse obligations regardless of how these interests come into
existence.
    The Bank resists this analysis.  It contends that even if an obligation
enforceable only against the debtor's property might normally be treated as
a "claim" subject to inclusion in a Chapter 13 plan, such an obligation
should not be deemed a claim against the debtor when it is merely the
remainder of an obligation for which the debtor's personal liability has
been discharged in a Chapter 7 liquidation.  Serial filings under Chapter 7
and Chapter 13, respondent maintains, evade the limits that Congress
intended to place on these remedies.
    We disagree.  Congress has expressly prohibited various forms of serial
filings.  See, e. g., 11 U. S. C. MDRV 109(g) (no filings within 180 days
of dismissal); MDRV 727(a)(8) (no Chapter 7 filing within six years of a
Chapter 7 or Chapter 11 filing); MDRV 727(a)(9) (limitation on Chapter 7
filing within six years of Chapter 12 or Chapter 13 filing).  The absence
of a like prohibition on serial filings of Chapter 7 and Chapter 13
petitions, combined with the evident care with which Congress fashioned
these express prohibitions, convinces us that Congress did not intend
categorically to foreclose the benefit of Chapter 13 reorganization to a
debtor who previously has filed for Chapter 7 relief.  Cf. United States v.
Smith, 499 U. S. ---, --- (1991) (expressly enumerated exceptions presumed
to be exclusive).
    The Bank's contention also fails to apprehend the significance of the
full range of Code provisions designed to protect Chapter 13 creditors.  A
bankruptcy court is authorized to confirm a plan only if the court finds,
inter alia, that "the plan has been proposed in good faith," MDRV
1325(a)(3); that the plan assures unsecured creditors a recovery as
adequate as "if the estate of the debtor were liquidated under chapter 7,"
MDRV 1325(a)(4); that secured creditors either have "accepted the plan,"
obtained the property securing their claims, or "retain[ed] the[ir]
lien[s]" where the "the value . . . of property to be distributed under the
plan . . . is not less than the allowed amount of such claim[s]," MDRV
1325(a)(5); and that the "the debtor will be able to make all payments
under the plan and to comply with the plan," MDRV 1325(a)(6).  In addition,
the bankruptcy court retains its broad equitable power to "issue any order,
process, or judgment that is necessary or appropriate to carry out the
provisions of [the Code.]"  MDRV 105(a).  Any or all of these provisions
may be implicated when a debtor files serially under Chapter 7 and Chapter
13.  But given the availability of these provisions, and given Congress'
intent that "claim" be construed broadly, we do not believe that Congress
intended the bankruptcy courts to use the Code's definition of "claim" to
police the Chapter 13 process for abuse.
III
    The Bank renews here its claim that the Bankruptcy Court erred in
finding petitioner's plan to be in good faith for purposes of MDRV
1325(a)(3) and feasible for purposes of MDRV 1325(a)(6) of the Code.
Because the District Court and Court of Appeals disposed of this case on
the ground that the Bank's mortgage interest was not a "claim" subject to
inclusion in a Chapter 13 plan, neither court addressed the issues of good
faith or feasibility.  We also decline to address these issues and instead
leave them for consideration on remand.
    The judgment of the Court of Appeals is reversed, and the case is
remanded for further proceedings consistent with this opinion.
It is so ordered.







------------------------------------------------------------------------------
1
    At the time at which the mortgage was executed, petitioner co-owned the
property in question.  However, by the time petitioner filed the Chapter 13
petition at issue in this case, he had acquired his wife's interest in the
property.  In addition, although petitioner's wife was a party in various
of the proceedings surrounding disposition of the property, for simplicity
we refer only to petitioner's role in these proceedings.

2
    During the course of the proceedings, the Bank acquired from another
creditor a superior mortgage interest in petitioner's property.

3
    Section 109(e) states:
    "Only an individual with regular income that owes, on the date of the
filing of the petition, noncontingent, liquidated, unsecured debts of less
than $100,000 and noncontingent, liquidated, secured debts of less than
$350,000, or an individual with regular income and such individual's
spouse, except a stockbroker or a commodity broker, that owe, on the date
of the filing of the petition, noncontingent, liquidated, unsecured debts
that aggregate less than $100,000 and noncontingent, liquidated, secured
debts of less than $350,000 may be a debtor under chapter 13 of this
title."

4
    Using this definition, we held in Davenport that restitution orders
imposed as a condition of probation in state criminal proceedings were
"claims" dischargeable in a Chapter 13 reorganization.  See 495 U. S., at
---.  Congress subsequently overruled the result in Davenport.  See
Criminal Victims Protection Act of 1990, Pub. L. 101-581, MDRV 3, 104 Stat.
2865.  It did so, however, by expressly withdrawing the Bankruptcy Court's
power to discharge restitution orders under 11 U. S. C. MDRV 1328(a), not
by restricting the scope of, or otherwise amending, the definition of
"claim" under MDRV 101(5).  Consequently, we do not view the Criminal
Victims Protection Act as disturbing our general conclusions on the breadth
of the definition of "claim" under the Code.

5
    A bankruptcy discharge extinguishes "the personal liability of the
debtor with respect to any debt."  11 U. S. C. MDRV 524(a)(1) (emphasis
added).  As we explained in Davenport, "debt," which is defined under the
Code as "liability on a claim," 11 U. S. C. A. MDRV 101(12) (Supp. 1991),
has a meaning coextensive with that of "claim" as defined in MDRV 101(5).
Pennsylvania Dept. of Public Welfare v. Davenport, supra, at ---.  Hence, a
discharge under the Code extinguishes the debtor's personal liability on
his creditor's claims.