in Re: Michael E. Denofa Tommye Denofa v. National Loan Investors, L.p

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 04-1686
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IN RE:
MICHAEL E. DENOFA
TOMMYE DENOFA,
Debtors
MICHAEL E. DENOFA;
TOMMYE DENOFA
v.
NATIONAL LOAN INVESTORS, L.P.,
Appellant
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On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 02-cv-05524)
District Judge: Honorable John W. Bissell
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Submitted Under Third Circuit LAR 34.1(a)
January 28, 2005
Before: SCIRICA, Chief Judge, RENDELL and FISHER, Circuit Judges.
(Filed: February 17, 2005)
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OPINION OF THE COURT
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FISHER, Circuit Judge.
Appellant National Loan Investors, L.P. (“NLI”) appeals from the District Court’s
ruling that it was not entitled to post-bankruptcy petition interest on a loan extended to the
Appellee-Debtors, Michael E. and Tommye DeNofa. Post-petition interest is available
under § 506(b) of the Bankruptcy Code where a debt is oversecured, i.e., where the value
of the property securing the debt exceeds the amount of the debt itself. The District Court
found that only property securing the loan which belonged to the bankruptcy estate – and
not third-party property securing the loan – could be included in a calculation of the value
of secured property for purposes of assessing a claim for post-petition interest under §
506(b). We agree with the District Court’s conclusion and will therefore affirm.
As we write solely for the parties, and the facts are known to them, we will discuss
only those facts pertinent to this appeal. NLI became the holder of a loan debt incurred in
part by the DeNofas. The loan had originally been made to DAK M anufacturing
Corporation (“DAK”), an entity wholly owned by Michael DeNofa and Steven Katz, and
was secured not only by an interest in property owned by DAK, but also by guaranties
executed by DeNofa and Katz, which were respectively secured by a mortgage on their
private residences.
The DeNofas filed a Chapter 11 bankruptcy petition. NLI’s predecessor filed a
proof of claim in the DeNofa bankruptcy proceeding, as well as a motion seeking relief
from the automatic stay so as to continue with its foreclosure action against the DeNofas,

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1Section 506 provides, in pertinent part:
(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
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or, in the alternative, dismissal of the DeNofa reorganization proceeding. The DeNofas
filed an adversary proceeding against NLI seeking an accounting as to NLI’s claim and a
reduction in the amount the DeNofas owed on that claim due to an alleged oral agreement
which purportedly froze the accrual of interest on the loan debt. NLI disputed the oral
agreement claim and argued that it was entitled to post-petition interest on its claim under
11 U.S.C. § 506(b). After several proceedings before the Bankruptcy and District Courts,
the District Court ultimately ruled that NLI was not entitled to post-petition interest under
§ 506(b). The District Court also found that a $250,000 payment made to NLI by the
Katzes in order to settle a foreclosure action filed against them by NLI was to be applied
to the principal amount of the loan debt. NLI filed a timely notice of appeal.
We have appellate jurisdiction pursuant to 28 U.S.C. § 158(d). We exercise
plenary review over grants and denials of summary judgment, and review a district
court’s interpretation of a statute de novo. See Circle Schools v. Pappert, 381 F.3d 172,
177 (3d Cir. 2004); Mitchell v. Cellone, 389 F.3d 86, 89 (3d Cir. 2004) (citation omitted).
Our resolution of the primary substantive question in this appeal – whether non-
debtor property may be included in determining whether a debt is oversecured – requires
us to interpret § 506 of the Bankruptcy Code.1 NLI contends that the plain meaning of

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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 property, and in conjunction with any hearing on
such disposition or use or on a plan affecting such creditor's
interest.
(b) To the extent that an allowed secured claim is secured by
property the value of which, after any recovery under
subsection (c) of this section, is greater than the amount of
such claim, there shall be allowed to the holder of such claim,
interest on such claim, and any reasonable fees, costs, or
charges provided for under the agreement under which such
claim arose.
11 U.S.C. § 506.
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“property,” standing alone and unmodified in § 506(b), encompasses more than just
property belonging to the bankrupt estate. It reasons that such a reading is reinforced by
the fact that § 506 more specifically defines “property” in subsection (a) as belonging to
the estate, and that the omission of such specific descriptive terms surrounding “property”
in § 506(b) precludes giving it the same meaning as the “property” defined in subsection
(a). The DeNofas counter that one must read the entirety of § 506 and how its
subsections work together, and that such a reading leads to the conclusion that § 506(b)
“property” can only be property belonging to the bankruptcy estate.
Focusing only on § 506(a) and (b)’s reference to “property,” and not on the entire
text of the two subsections, leads one to side, at least initially, with NLI. Section 506(a)
refers to “property in which the estate has an interest,” while § 506(b) refers only to

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“property” generally, unmodified by any surrounding terms. As such, one is tempted to
follow the interpretive principle that “‘where Congress includes particular language in
one section of a statute but omits it in another section of the same Act, it is generally
presumed that Congress acts intentionally and purposely in the disparate inclusion or
exclusion.’” KP Permanent Make-Up, Inc. v. Lasting Impression I, Inc., 125 S.Ct. 542,
548 (2004) (quoting Russello v. United States, 464 U.S. 16, 23 (1983)). This principle
“applies ‘particularly when the two [provisions] are interrelated and closely positioned,
both in fact being parts of the same statutory scheme.’” Ki Se Lee v. Ashcroft, 368 F.3d
218, 223 (3d Cir. 2004) (citation omitted). Applying the principle here would seem to
support NLI’s contention – because Congress included “particular language” (“in which
the estate has an interest”) modifying “property” in § 506(a), but omitted that “particular
language” modifying “property” in § 506(b), Congress intended the disparate exclusion,
i.e., Congress intended to limit “property” to that belonging to the estate for purposes of §
506(a), but not to that belonging to the estate for purposes of § 506(b).
But this approach is fatally incomplete because it ignores the remainder of
subsections (a) and (b). Subsections (a) and (b) work closely together, and one cannot
correctly understand and apply the latter before understanding and applying the former.
Section 506(b) only permits post-petition interest where an “allowed secured claim is
secured by property” which exceeds the value of the “allowed secured claim.” The
meaning of “allowed secured claim” dictates the outcome here. Section 506(a) defines an

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2We will also affirm the District Court’s application of the Katzes’ settlement
payment of $250,000 to the principal amount of the loan debt. A creditor may only apply
payments on a debt to post-petition interest and costs to the extent the debt is oversecured,
and must otherwise apply such payments to reduce the principal of the debt. See In re
Indian Palms Assocs., Ltd., 61 F.3d 197, 201 (3d Cir. 1995). Unless interest accrues on a
debt during bankruptcy, there are no “theories that would support the allocation of post-
petition payments to something other than a reduction of the principal debt.” Id. at 211.
The District Court correctly concluded that NLI’s claim as to the DeNofas was not
oversecured and did not accrue post-petition interest, and therefore correctly applied the
Katzes’ payment to reduce the principal of the loan debt.
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“allowed secured claim” as a claim secured by “property in which the estate has an
interest … to the extent of the value of such creditor’s interest in the estate’s interest in
such property[.]” 11 U.S.C. § 506(a) (emphasis added). Thus, quite plainly, the “allowed
secured claim” of NLI that we must examine for purposes of post-petition interest under §
506(b) is limited to the extent of the value of the property of the DeNofas’ bankruptcy
estate which secures it. See 5 Collier on Bankruptcy ¶ 506.04[1] (15th rev. ed. 2003)
(“For purposes of section 506(b), a secured claim is ‘oversecured’ to the extent that the
value of the creditor’s interest in the estate’s interest in property is greater than the
amount of the creditor’s allowed prepetition claim.”) (footnotes omitted) (emphasis
added). There is no dispute that the DeNofas’ property alone does not exceed the value
of NLI’s claim. Therefore, we will affirm the District Court’s ruling that NLI is not
entitled to any post-petition interest.2
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