Johnson v. Home State Bank
501 U.S. 78 (1991)
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Rule of Law:
A mortgage lien that survives a Chapter 7 bankruptcy discharge of the debtor's personal liability is a "claim" as defined by the Bankruptcy Code, and is therefore subject to inclusion and modification in a subsequent Chapter 13 reorganization plan.
Facts:
- Petitioner Johnson gave Home State Bank (Bank) a mortgage on his farm property to secure several promissory notes.
- Johnson defaulted on the notes, and the Bank initiated foreclosure proceedings in state court.
- During the foreclosure, Johnson filed for Chapter 7 bankruptcy.
- The Bankruptcy Court granted Johnson a discharge, extinguishing his personal liability on the promissory notes owed to the Bank.
- The Bank's mortgage lien on the farm property survived the Chapter 7 discharge as an 'in rem' right.
- The Bank reinitiated foreclosure proceedings, and the state court entered an 'in rem' judgment in its favor.
- Before the foreclosure sale of the farm could take place, Johnson filed for Chapter 13 bankruptcy, proposing a plan to repay the Bank's 'in rem' judgment over time.
Procedural Posture:
- Johnson filed a Chapter 13 plan in the U.S. Bankruptcy Court.
- Over the Bank's objection, the Bankruptcy Court confirmed Johnson's plan.
- The Bank appealed to the U.S. District Court for the District of Kansas.
- The District Court reversed the Bankruptcy Court, holding that the Bank's mortgage interest was not a 'claim' that could be included in the Chapter 13 plan.
- Johnson appealed to the U.S. Court of Appeals for the Tenth Circuit, which affirmed the District Court's decision.
- The U.S. Supreme Court granted Johnson's petition for a writ of certiorari to resolve a conflict among the circuit courts.
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Issue:
Does a mortgage lien that survives a Chapter 7 discharge of a debtor's personal liability constitute a "claim" subject to modification in a subsequent Chapter 13 bankruptcy plan under the Bankruptcy Code?
Opinions:
Majority - Justice Marshall
Yes, a mortgage lien that survives a Chapter 7 discharge is a 'claim' that can be modified in a subsequent Chapter 13 plan. The Bankruptcy Code defines 'claim' in the broadest possible terms, encompassing a 'right to payment' or a 'right to an equitable remedy.' Although the debtor's personal liability (in personam) was discharged, the creditor's right to foreclose on the property (in rem) survives and constitutes a 'right to payment' from the proceeds of the property's sale, or a 'right to an equitable remedy' for the default. This interpretation is supported by other Code provisions, such as §102(2), which states that a 'claim against the debtor' includes a 'claim against property of the debtor,' effectively treating the surviving lien like a nonrecourse loan. The legislative history confirms Congress intended this broad definition. Concerns about abuse through serial filings are best addressed through Chapter 13's specific requirements, such as good faith, rather than by narrowly interpreting the definition of a 'claim'.
Analysis:
This decision validates the practice of 'serial filing,' often called a 'Chapter 20' bankruptcy (Chapter 7 plus Chapter 13). It allows debtors to first discharge their personal liabilities on debts in Chapter 7 and then use Chapter 13 to cure defaults and restructure the remaining secured debt on property they wish to keep, such as a home. The ruling solidifies the extremely broad definition of 'claim' within the Bankruptcy Code, clarifying that a claim can exist solely against property (in rem) without any personal liability from the debtor. This provides a powerful tool for debtors facing foreclosure while directing lower courts to police potential abuses through Chapter 13's good faith and feasibility requirements, not through definitional limitations.
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