Nobelman v. American Savings Bank

Background

In 1984 a bank lent a Dallas couple $68,250 for their condominium, secured by an adjustable-rate deed of trust. After falling behind, the couple filed Chapter 13 in 1990. The bank filed a claim for $71,335. The debtors’ plan valued the home at $23,500 and proposed to pay only that amount as secured, treating the remainder as unsecured under §506(a). The bankruptcy court, district court, and the Fifth Circuit all refused to confirm the plan.

Reasoning

The Court addressed whether §1322(b)(2) bars using §506(a) in Chapter 13 to reduce an undersecured home mortgage to market value. The Court held the statute protects the “rights of holders” of home mortgages, and those rights are defined by state law. The bank’s bargained-for rights include scheduled repayment, adjustable interest, retention of the lien, acceleration on default, foreclosure sale, and deficiency actions. Reducing principal to collateral value while preserving other contract terms would alter those rights. Thus §1322(b)(2) prohibits such modification of a mortgage secured only by the debtor’s principal residence.

Real world impact

The decision prevents Chapter 13 debtors from cutting an undersecured home mortgage down to the home’s market value while leaving other loan terms intact. It protects lenders’ contractual mortgage remedies and limits debtors’ ability to treat large portions of a home loan as unsecured. The ruling resolves conflicting appeals court decisions and governs how similar bankruptcy plans are handled.

Dissents or concurrances

Justice Stevens agreed and added that the statute’s favorable treatment of residential mortgagees reflects congressional intent to encourage home lending, so he joined the judgment.