Background

        This appeal from an order of the bankruptcy court which confirmed appellee Perrons' Chapter 13 plan, is based upon a common set of circumstances. In 1985, the Perrons obtained a home mortgage loan in the amount of $111,285. The Loan was covered by HUD mortgage insurance so that, in the event of foreclosure, any loss to appellant Goldome upon liquidation would be reduced by the amount of the insurance proceeds. The Perrons eventually found themselves unable to meet their financial obligations and, on January 23, 1991, they filed a voluntary petition for reorganization under Chapter 13. At that time they were in default for all payments due on or after May 1, 1990.

        The Perrons' plan proposed that the mortgage balance be reduced to the purported value of the property, $56,100. The remainder of the mortgage balance was to be treated as an unsecured claim. Goldome objected to the modification of its rights, the failure to cure the arrearage, and to the feasibility of the plan.

        The bankruptcy court confirmed the plan over Goldome's objections. The court reduced the mortgage balance to $74,000--the value as determined by an appraiser. It also deducted hypothetical transaction costs, and ruled that the Perrons did not need to cure the pre-petition arrearage. The Perrons were allowed to retain the property and maintain their scheduled mortgage payments. Goldome appealed.

        This court has jurisdiction pursuant to 28 U.S.C. § 158(a). The facts are not in dispute, and the bankruptcy court's conclusions of law are reviewed by this court de novo. In re American Mariner Industries, Inc., 734 F.2d 426, 429 (9th Cir. 1984).

        This case raises important questions regarding a creditor's rights against a debtor who files a petition in Chapter 13, when the creditor's only security is the debtor's home. Goldome raises the following issues on appeal:

(1)	Did the bankruptcy court err in deducting transaction costs from the amount of Goldome's secured claim;
	2 ABR 416
(2)	Did the court err in not including the amount Goldome would receive as mortgage insurance proceeds in Goldome's secured claim;
(3)	Did the court err when it did not require the Perrons to cure the pre-petition arrearage; and
(4)	Did the court err in ruling that Goldome's rights in the unsecured portion of its claim could be modified.

Transaction Costs

        Under section 506(a) of the Bankruptcy Code, the extent to which a creditor's claim is "secured" is determined by the value of the property.⁽¹⁾ Section (a) provides that a claim is secured only     2 ABR 417  to the extent of the value of the property on which the lien is fixed; the remainder of that claim is considered unsecured. ⁽²⁾ For example, a $100,000 claim, secured by a lien on property having a value of $60,000, is considered to be a secured claim to the extent of $60,000, and to be an unsecured claim for $40,000.⁽³⁾

        In paragraph 3(a) of its order, the bankruptcy court noted that the parties had stipulated that the market value of the Perrons' home was $74,000 and that the transaction costs upon sale would be seven percent. Goldome objected to the deduction of transaction costs in determining its secured claim, but the court deducted the costs and ruled that it had a secured claim for $68,820. The balance of the unpaid mortgage was therefore allowed as an unsecured claim.

        Goldome points out that according to the second sentence of section 506(a), the value of the creditor's interest in the property is to be determined in light of the purpose of the valuation and the proposed use or disposition of the property. Therefore, it contends that transaction costs should not be deducted when the debtor plans to retain the property.⁽⁴⁾

        The Perrons apparently concede this issue in the first paragraph of their brief: "transaction costs are not deductible from the fair market value of the allowed secured claim." GMAC Mortgage Corporation v. Cervantes, A90-l37 Civil. (D. Alaska, July 3, 1991).⁽⁵⁾ Although federal judges within the same district are not bound by each other's rulings,⁽⁶⁾ there is no reason to depart from this conclusion. There is no dispute that the Perrons intend to retain their home. Under section 506(a), transaction costs should not have been deducted in determining the extent of Goldome's secured claim. On remand, the bankruptcy court shall adjust Goldome's secured claim according1y.

Mortgage Insurance

        The bankruptcy court did not include Goldome's mortgage insurance in its secured claim. Goldome argues that the mortgage insurance should be included. This issue was thoroughly briefed and analyzed in a case recently decided in this court. ⁽⁷⁾ This court concurs in Judge Singleton's reasoning in Fischer. Accordingly, the     2 ABR 419  bankruptcy court's exclusion of mortgage insurance from Goldome's secured claim is affirmed.

Cure of Arrearages

        The debtor's plan proposes to pay Goldome's secured claim over a period longer than the three-year plan, by maintaining the regular monthly mortgage payments until the claim is paid off. Ordinarily, a secured claim must be paid in full within the life of the plan.⁽⁸⁾ In most cases this would be difficult on a large claim like a home mortgage. To avoid this problem, section 1322(b)(5) provides a mechanism whereby debtors may pay off a debt over a period that is longer than the maximum length of the plan. The section reads in part:

[T]he plan may--

        . . .

        (5) [P]rovide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due....

        Goldome has cited a number of cases which hold that cure is mandatory once the debtor elects to take advantage of section 1322(b)(5).⁽¹⁰⁾ Generally, the reasoning of these cases is that if a debtor is allowed to amass substantial arrearages, schedule the mortgage lien as though it were a debt at the alleged present value of the property, and then ignore the arrearages, the result would be a substantial windfall for the debtor.⁽¹¹⁾

        The Perrons devote most of their brief to an attempt to distinguish each of the cases cited by Goldome. However, the holdings of the cases are clear, and the Perrons' attempts to distinguish the cases are ineffectual.

        The Perrons argue that they have no obligation to cure the arrearages unless the creditor has lodged a valid objection that the     2 ABR 421  failure to cure constitutes bad faith.⁽¹²⁾ The Perrons cite In re Warren, 89 B.R. 87 (Bankr. 9th Cir. 1988), which sets out the circumstances a court should consider in determining whether a plan was proposed in good faith. One of the factors is "the extent to which the secured claims are modified". Id. at 93. This, they say, is proof that the court may consider whether it is good faith for the debtor to accumulate pre-petition arrears and then fail to propose to cure them in Chapter 13.

        However, the Perrons have not cited any case which suggests that cure of arrearages is voluntary, nor does Warren mention the arrearage issue. The court concludes that "[i]f a debtor desires to extend a creditor's payment beyond the term of the Plan, the only avenue available is to cure any default due under the Plan and resume the payments under the original mortgage". In re Scott, 121 B.R. 605, 608 (Bankr. E.D. Okta. 1990). See also In re Cole, 122 B.R. 943, 950 (Bankr. E.D. Pa. 1991); In re Honnett, 116 B.R.495 (Bankr. E.D. Tex. 1990); In re Hyden, 112 B.R. 431 (Bankr. W.D. Okla. 1990); In re Hayes, 111 B.R. 924 (Bankr. Or. 1990); and In re Bradley, 109 B.R. 182 (Bankr. E.D. Va. 1990). On the facts of this case, this court concludes that cure of arrearages during the term of the plan is mandatory. The bankruptcy court is reversed on this issue.

Modification of Goldome's Unsecured Claim

        The most important question in this case is whether a debtor can modify the unsecured portion of a secured creditor's claim. This issue involves the interplay between section 506 and section 1322(b)(2). The latter section provides that:

[The debtor's plan may] modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims....

        In In re Houghland, 886 F.2d 1182, (9th Cir. 1989), the Ninth Circuit clearly sided with the former line of authority. Houghland held that section 506(a)⁽¹³⁾ allows a debtor to bifurcate     2 ABR 423  a creditor's claim into secured and unsecured portions, and that under section 1322(b) (2) the secured portion is protected from modification, while the unsecured portion is not.⁽¹⁴⁾

        Houghland would end this inquiry but for the United States Supreme Court's recent opinion in Dewsnup v. Timm, ___ U.S. ___, 112 S. Ct. 773 (Jan. 15, 1992). The issue in this case is whether Dewsnup overruled or so undermined Houghland that Houghland is no longer valid law.

        Three courts of appeal have interpreted section 1322(b)(2). All three⁽¹⁵⁾ held that section 1322(b)(2) allows a debtor to strip the lien of an undersecured creditor who held a mortgage on the principal residence of the debtor. The court in Houahland noted that the clause which begins "other than a claim secured by" (the "other than" clause) was intended to protect the rights of creditors whose only security is the debtor's principal residence. It reasoned that the "other than" clause refers exclusively to the secured claim language which immediately precedes it.⁽¹⁶⁾ It concluded that only the secured claim portion is protected from modification, and that a creditor's rights in the unsecured portion may be altered. Thus, under this reasoning, the protection     2 ABR 424  of a creditor's claims provided by section 1322(b) (2) is limited by the bifurcation provision in section 506(a).⁽¹⁷⁾

        However, a number of bankruptcy and district courts have reached the opposite conclusion. The reasoning of those courts is that although section 506 is a statute of general applicability,⁽¹⁸⁾ section 1322(b) (2) supersedes section 506 to the extent that they are contradictory or inconsistent. A representative holding is as follows:

Accordingly, in a Chapter 13 case, the allowed amount of a claim secured only by a security interest in the principal residence of a debtor is, at filing, the balance owing on the debt without regard to the value of the collateral--- § 506(a) notwithstanding. Application of § 506(a), where the value of the collateral is less than the debt, would modify the rights of the holder of a claim secured only by a security interest in the principal residence of a debtor beyond the permissible impairment provided in § l322(b)(2) ....

        This split of authority has been at least partially resolved by the Supreme Court's decision in Dewsnup. The debtors there, who had filed a petition under Chapter 7, took the position that section 506(a) and 506(d)⁽²⁰⁾ must be read together, that section 506(a) bifurcates classes of claims into secured and unsecured claims, and that any portion of an allowed claim deemed to be unsecured under section 506(a) was not "an allowed secured claim" and thus fell within the lien voiding scope of section 506(d).⁽²¹⁾ The Court held, notwithstanding section 506(a), that the debtors could not use section 506(d) to strip down the creditor's lien to the market value of collateral because the creditor's "claim is secured by a lien and has been fully allowed pursuant to § 502."⁽²²⁾

        Since this court must follow Dewsnup, the question is whether the Court's reasoning and policy objectives eviscerate the Ninth Circuit's holding in Houghland.⁽²³⁾

        The recent decision by the Second Circuit Court of Appeals in In re Bellamy, ___ F.2d ___, No. 91-5045, slip. op. at 3143, 1992 WL 78690 (2d Cir. Apr. 21, 1992), squarely addresses the impact of Dewsnup in Chapter 13 cases. Bellamy agrees with Houghland that a debtor can bifurcate an undersecured creditor's claim and modify the unsecured portion under sections 506(a) and l322(b)(2). It also holds that the Houghland-Wilson-Hart line of authority is still valid law after Dewsnup, because the ruling in Dewsnup is confined to Chapter 7 cases. A synopsis of the case follows.

        At the time the Bellamys filed for reorganization under Chapter 13, the total due on their home mortgage was $151,340.85, and they were approximately $13,000 in arrears on their monthly payments. The parties stipulated that the market value of the property at that time was $127,500. In their plan for reorganization, the Bellamys proposed to bifurcate the creditor's claim into a secured portion equal to the market value of the property, with the balance of the mortgage ($23,840.85) remaining as an unsecured claim. They sought to void the unsecured portion under section 506(d), and then cure the arrearages and reinstate the mortgage in its reduced amount under section l322(b)(5). The Bankruptcy Court for the District of Connecticut confirmed the plan (122 B.R. 856 (Bankr. D. Conn. 1991)), and the district court affirmed (132 B.R. 810 (D. Conn. 1991)). The creditor appealed to the Second Circuit, which issued its opinion on April 21, 1992.

        The Second Circuit began its analysis with section 1322(b) (2), which provides that a Chapter 13 plan of reorganization may:

[M]odify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims....

The real question is whether the "rights" to which § 1322(b)(2) refers include the mortgagee's rights concerning its claim or it rights with respect to its secured claim.

        Next, the court agreed with the Ninth Circuit's reasoning in Houghland that the "other than" clause in section 1322(b) (2) refers exclusively to the secured claim language which immediately precedes it. Id. at 3152-4. The court in Bellamy agreed that only     2 ABR 428  the secured portion is protected from modification, and that the creditor's rights in the unsecured portion may be altered.

        Furthermore, it concluded that although the legislative history of section 1322(b)(2) indicates that the section was designed to provide greater protection to home mortgage lenders than other secured creditors in the Chapter 13 context, it gave no guidance as to the extent to which such creditors are to be accorded greater protection. Id. at 3154-6. Thus the legislative history did not preclude the interpretation made by the court.

        The court then discussed the import of Dewsnup on the foregoing analysis. The court in Dewsnup held that the term "secured claim" did not have the same meaning in section 506(d) as it did in section 506(a). Similarly, the creditor in Bellamy argued that "secured claim" in section 506(a) does not have the same meaning in section 1322(b)(2), but the Second Circuit said that the second proposition does not necessarily follow the first. It noted that Dewsnup did not hold that the term "secured claim" in section 506(a) could never have the same meaning in any other part of the Code. Id. at 3156-7, citing Dewsnup, 112 S. Ct. at 778 n.3. The court stated that it would assume that the meaning of "secured claim" in section 506(a), i.e., the secured portion of a bifurcated claim, would prevail in other parts of the code unless to read it in that fashion "would be contrary to basic bankruptcy principles." Id. at 3157, quoting Dewsnup, 112 S. Ct. at 779.

        Next, the court reasoned that if the term "secured claim" in section 1322(b)(2) refers to the secured status of a claimant (not to the secured portion of the creditor's claim), section 1322(b) (2) would make little sense and would be in conflict with the rest of the code for the following reasons.

        First, section 1322(b)(2) refers to both secured and unsecured claims, while section 506(d) does not. Since the term "unsecured claims" in section 1322(b) (2) has the same meaning as it does in section 506(a), the term "secured claim" should also have the same meaning in both.

        Second, section 506(d) is concerned with a creditor's entire lien, while sections 1322(b)(2) and 506(a) focus on the subsets of secured and unsecured claims. The court stated that to read section 1322(b)(2) as referring to a creditor's lien would be contrary to express legislative history.

        Third, and most significantly, under the predecessor Bankruptcy Act, liens on real estate passed through bankruptcy unaffected, and in order to find that Congress intended to change this practice, there must either be express language in the code or an indication in the legislative history that such a change was intended. The Supreme Court in Dewsnup found neither with respect to Chapter 7, and so concluded that allowing a debtor to void a portion of his debt under section 506(d) was impermissible. By contrast, the court in Bellamy pointed out that the Code expressly provides that a Chapter 13 debtor may, contrary to pre-Code prac-     2 ABR 430  tice, modify or void the unsecured portion of a creditor's claim that is secured by real property. Id. at 3159-61. Thus, Dewsnup is limited to cases brought under Chapter 7. The court concluded with reference to other issues that do not need discussing here.

        This court is not obliged to follow Second Circuit precedents; however, the reasoning in Bellamy is persuasive and, in the court's opinion, Bellamy contains the clearest evaluation of these issues of any case to date. Accordingly, the bankruptcy court's conclusion, that the Perrons may bifurcate Goldome's lien and modify the unsecured portion, is affirmed.

        This case is remanded to the bankruptcy court for further proceedings consistent herewith.

        DATED at Anchorage, Alaska, this 8_ day of June 1992.

M. Russell Holland
United States District Judge

N O T E S:

    2 ABR 416  1. 11 U.S.C. § 506(a) reads:

(a)An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such propertv, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.

    2 ABR 417  2. United States v. Ron Pair Enternrprises, Inc., 489 U.S. 235,239 (1988)

    2 ABR 417  3. Id. at n.3. See also 3 Collier on Bankruptcy, ¶ 506.04, at 506-15 (15th ed. 1988).

    2 ABR 417  4. See also In re Case, 115 B.R. 666 (Bankr. 9th Cir. 1990) (no deduction for transaction costs should be made when the debtor's plan proposed that he retain the property securing the creditor's claim).

    2 ABR 418  5. The issue of whether transaction costs should be deducted in determining the extent of a secured creditor's claim was not before Judge Singleton in Cervantes. The bankruptcy court in that case deducted the costs, but the creditor did not raise the issue on appeal. Judge Singleton summarily affirmed the bankruptcy court's ruling with one exception that is not relevant here.

    2 ABR 418  6. Starbuck v.City and County of San Francisco, 556 F.2d 450 (9th Cir. 1977).

    2 ABR 418  7. Lomas Mortgage USA and Union Planters National Bank v. Joseph P. Fischer, No. A90-440 Civil (D. Alaska, Feb. 4, 1992).

    2 ABR 419  8. 11 U.S.C. § 1325(a)(5)(B).

    2 ABR 419  9. The bankruptcy court did not give any reason for its decision.

    2 ABR 420  10. In re Cole, 122 B.R. 943, 950 (Bankr. E.D. Pa. 1991) ("once a debtor has chosen to cure arrearages in a Chapter 13 plan, § 1322(b)(5) requires that it be done in a certain way, i.e. by curing all defaults in a reasonable time while maintaining current payments"); In re Scott, 121 B.R. 605, 608 (Bankr. E.D. Okla. 1990) ("If a debtor desires to extend a creditor's payment beyond the term of the Plan, the only avenue available is to cure any default due under the Plan and resume the payments under the original mortgage"); In re Honnett, 116 B.R. 495 (Bankr. E.D. Tex. 1990) ; In re Hyden, 112 B.R. 431 (Bankr. W.D. Okla. 1990); In re Hayes, 111 B.R. 924 (Bankr. Or. 1990); In re Bradley, 109 B.R. 182 (Bankr. E.D. Va.1990).

    2 ABR 420  11. See, e.g., In re Hyden, 112 B.R. 431, 432 (Bankr. E.D. Okla. 1990).

    2 ABR 421  12. Subsection 1325 (a) (3) states that the plan must be "proposed in good faith and not by any means forbidden by the law."

    2 ABR 422  13. Section 506(a) reads in part:

An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim.

    2 ABR 423  14. Houghland, 886 F.2d at 1185.

    2 ABR 423  15. Houghland; In re Wilson, 895 F.2d 123 (3d Cir. 1990); and In re Hart, 923 F.2d 1410 (10th Cir. 1991).

    2 ABR 423  16. Houghland, 886 F.2d at 1184.

    2 ABR 424  17. Accord, Hart, at 1413; Wilson, at 126-7.

    2 ABR 424  18. Section 506 is applicable in proceedings under Chapters 7, 11, and 13. 11 U.S.C. § 103(a).

    2 ABR 424  19. Accord, In re Chaves, 117 B.R. 733, 736-7 (Bankr. S.D. Fla. 1990); In re Sauber, 115 B.R. 197, 199 (Bankr. D. Minn. 1990); In re Schaum, 112 B.R. 159, 162 n.3 (Bankr. N.D. Tex. 1990); In re Kaczmarczvk, 107 B.R. 200, 202-3 (Bankr. N.D. Neb. 1989); In re Russell, 93 B.R. 703, 705 (D.N.D. 1988). See also Collier on Bankruptcy, ¶ 1322.09[4], at 1322-22: "Indeed, when a long term mortgage on the debtor's principal residence is the creditor's only security, a chapter 13 plan may not modify the creditor's rights."

    2 ABR 425  20. Section 506(d) reads in part:

To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void ....

    2 ABR 425  22. Id. at 778.

    2 ABR 425  23. Very recently, several bankruptcy and district courts have discussed the impact of Dewsnup on the Houghland-Wilson-Hart line of cases. See In re Davidoff, 136 B.R. 567 (M.D. Fla. Feb. 12, 1992); In re Strober, 136 B.R. 614 (E.D.N.Y. March 10, 1992); In re Ireland, ___ B.R., 1992 WL 36422 (Bankr. M.D. Fla. Feb. 14, 1992).