Johnson v. Home State Bank
501 U.S. 78 (1991)

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U.S. Supreme Court

Johnson v. Home State Bank, 501 U.S. 78 (1991)

Johnson v. Home State Bank

No. 90-693

Argued April 16, 1991

Decided June 10, 1991

501 U.S. 78

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

Syllabus

After petitioner Johnson defaulted on promissory notes secured with a mortgage on his farm, respondent Home State Bank (Bank) began foreclosure proceedings in state court. While foreclosure proceedings were pending, Johnson filed for liquidation under Chapter 7 of the Bankruptcy Code, and the Bankruptcy Court discharged him from personal liability on the notes. However, because the Bank's right to proceed against him in rem survived the bankruptcy, see 11 U.S.C. § 522(c)(2); Long v. Bullard,117 U. S. 617, the Bank reinitiated the foreclosure proceedings once the automatic stay protecting his estate was lifted. The state court entered judgment for the Bank, but before the foreclosure sale, Johnson filed for reorganization under Chapter 13, listing the mortgage as a claim against his estate. The Bankruptcy Court confirmed his plan to pay the Bank's judgment in installments, but the District Court reversed, ruling 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 court did not reach the Bank's alternative argument that the Bankruptcy Court erred in finding that Johnson had proposed his plan in good faith and that the plan was feasible. The Court of Appeals affirmed, reasoning that, since Johnson's personal liability had been discharged, the Bank no longer had a "claim" against Johnson subject to rescheduling under Chapter 13.

Held:

1. A mortgage lien securing an obligation for which a debtor's personal liability has been discharged in a Chapter 7 liquidation is a "claim" within the meaning of § 101(5), and is subject to inclusion in an approved Chapter 13 reorganization plan. Congress intended in § 101(5) to incorporate the broadest available definition of "claim," see Pennsylvania Dept. of Public Welfare v. Davenport,495 U. S. 552. As used in § 101(5), "right to payment" and "right to an equitable remedy" mean "nothing more nor less than an enforceable obligation." Id. at 501 U. S. 559. A surviving mortgage interest corresponds to an "enforceable obligation" of the debtor. Even after the debtor's personal obligations have been extinguished, the creditor 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

Page 501 U. S. 79

be viewed as a "right to an equitable remedy" for the debtor's default on the underlying obligation. Thus, a bankruptcy discharge extinguishes only one mode of enforcing a claim -- an in personam action -- while leaving intact another -- an in rem action. Indeed, the need to codify Long v. Bullard, supra, presupposes that a mortgage interest is a "claim," because only "claims" are discharged. This conclusion is consistent with other parts of the Code -- which contemplate circumstances in which a claim may consist of nothing more than a claim against the debtor's property, § 502(b)(1), and establish that the phrase "claim against the debtor' includes claim against" the debtor's property, § 102(2) -- and with the Code's legislative background and history. The Bank's contention that serial filings under Chapters 7 and 13 evade the limits that Congress intended to place on the Chapters' remedies is unpersuasive, since Congress has expressly prohibited various forms of serial filings, see, e.g., § 727(a)(8), yet fashioned no similar prohibition with regard to Chapters 7 and 13 filings. In addition, the full range of Code provisions designed to protect Chapter 13 creditors, see, e.g., § 1325(a), combined with Congress' intent that "claim" be construed broadly, makes it unlikely that Congress intended to use the Code's definition of "claim" to police the Chapter 13 process for abuse. Pp. 501 U. S. 82-88.

2. Because the lower courts never addressed the issues of Johnson's good faith or the plan's feasibility, this Court declines to address those issues and leaves them for consideration on remand. P. 501 U. S. 88.

904 F.2d 563 (CA10 1990), reversed and remanded.

MARSHALL, J., delivered the opinion for a unanimous Court.

Page 501 U. S. 80

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. [Footnote 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. § 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. § 362, the Bank reinitiated the foreclosure proceedings. [Footnote 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

Page 501 U. S. 81

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. 1066 (1991), we now reverse.

Page 501 U. S. 82

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), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6076-6080. So long as a debtor meets the eligibility requirements for relief under Chapter 13, see 11 U.S.C. § 109(e), [Footnote 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," § 1322(b)(2), and that "provide[s] for the payment of all or any part of any [allowed] claim," § 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 11467 (1990). A defaulting debtor can protect himself from personal liability by obtaining a discharge in a Chapter 7 liquidation.

Page 501 U. S. 83

See 11 U.S.C. § 727. However, such a discharge extinguishes only "the personal liability of the debtor." 11 U.S.C. § 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. § 522(c)(2); Owen v. Owen,500 U. S. 305, 500 U. S. 308-309 (1991); Farrey v. Sanderfoot,500 U. S. 291, 500 U. S. 297 (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 500 U. S. . 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. § 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. 552, 495 U. S. 558 (1990); see also Ohio v. Kovacs,469 U. S. 274, 469 U. S. 279 (1985). In Davenport, we concluded that "right to payment' [means] nothing more nor less than an enforceable obligation. . . ." 495 U.S. at 495 U. S. 559. [Footnote 4]

Page 501 U. S. 84

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 § 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, [Footnote 5] the very need to codify Long v.

Page 501 U. S. 85

Bullard presupposes that a mortgage interest is otherwise a "claim."

The conclusion that a surviving mortgage interest is a "claim" under § 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, § 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, § 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 § 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. § 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

Page 501 U. S. 86

established understanding of the lower courts. See generally 6 J. Moore & L. King, Collier on Bankruptcy

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