In re Berkland

582 B.R. 571

IN RE Kenneth BERKLAND, Debtor

Case No. 17–10821–FJB

United States Bankruptcy Court, D. Massachusetts, Eastern Division.

Signed April 6, 2018

John A. Ullian, Law Offices of Ullian & Assoc., Braintree, MA, for Debtor.

MEMORANDUM OF DECISION ON DEBTOR'S MOTION FOR DETERMINATION OF EXTENT OF SECURED CLAIM

Frank J. Bailey, United States Bankruptcy Judge

By the motion before the Court, chapter 11 debtor Kenneth Berkland ("the Debtor") seeks a determination, as against the holder of the first position mortgage on his principal residence ("the Mortgagee"), (i) that the fair market value of the mortgaged real property is $850,000, (ii) that consequently the Mortgagee's claim, which exceeds $1,400,000, is a secured claim only to the extent of $850,000.00, and (iii) that 11 U.S.C. § 1123(b)(5) does not prohibit the debtor from modifying the rights of the holder of the secured claim through a chapter 11 plan.¹ The Mortgagee, through its loan servicer, Specialized Loan Servicing LLC ("Specialized"), has objected to the motion.² The parties have now agreed on the property's fair market value and submitted the remaining issue for adjudication on a statement of agreed facts. Their dispute is now limited to the single issue of whether § 1123(b)(5) prevents the modification of the Mortgagee's rights. This memorandum sets forth the Court's findings of fact and conclusions of law. On the basis of these, the Court now determines that § 1123(b)(5) does not prohibit the debtor from modifying the rights of the Mortgagee.

PROCEDURAL HISTORY

After a preliminary hearing on this motion, the Court scheduled an evidentiary hearing and, in conjunction therewith, required the parties to submit a joint pretrial memorandum. They did, but in it they indicated that they had agreed on all of the facts, as set forth in a Joint Statement of Facts they filed with the Joint Pretrial Memorandum. They further stated that the scheduled evidentiary hearing was unnecessary, and they asked that it be canceled. As requested, the Court canceled the evidentiary hearing, indicated that the matter was deemed submitted on the Joint Statement of Facts, and set a deadline for the parties to submit briefs on the remaining legal issue. On the deadline, each party did file a brief, and together they filed what they entitled an Updated Statement of Facts. They have not withdrawn the original statement of facts. The statements of facts, original and updated, are identical except in two respects: (i) the updated includes one additional agreed fact: specifically, that the fair market value of the Property is $912,500.00; and (ii) the original includes three exhibits—a loan application, a loan approval summary, and an occupancy agreement—but the updated includes none. I take the agreed facts that constitute the record in this matter to include all the recited facts in the updated statement and, because the original was not withdrawn, the three exhibits attached to the original.

As exhibits to his memorandum, the Debtor submitted four photographs, and he makes reference to these in his arguments. Likewise, as an exhibit to its memorandum, Specialized attached (in addition to the three exhibits to the parties' Joint Statement of Facts) a document that it says is the mortgage given by the Debtor to the mortgagee's predecessor in interest. Notwithstanding these submissions, the four photographs and the alleged mortgage are not part of the factual record in this case, and the Court will not consider them in adjudicating this matter.

FINDINGS OF FACT

Agreed Facts

The parties have stipulated and agreed to the following facts, which I reproduce here verbatim :

1. On June 30, 1998, Debtor became the owner of property located at 24 Old Town Road, Walpole, MA 02081 (the "Property") by virtue of a Quitclaim Deed recorded in the Norfolk County Registry of Deeds on June 30, 1998 in Book 12626 at Page 445.

2. On or about September 18, 2006, Debtor applied for a loan with Argent Mortgage Company, LLC in the amount of $850,000.00.

3. The Loan Application indicates the following:

a. The Property had one (1) unit;

b. The purpose of the loan was a refinance; and

c. The Property would be Debtor's primary residence.

4. According to a Loan Approval Summary prepared by Argent Mortgage Company, LLC the Property is described as an owner occupied single family residence.

5. Based upon the Loan Application, on September 21, 2006 Argent Mortgage Company, LLC extended a loan to Debtor in the amount of $850,000.00 (the "Loan") as evidenced by a promissory note of even date and secured by a first priority mortgage recorded in the Norfolk County Registry of Deeds on September 27, 2006 in Book 24111 at Page 465 (the "Mortgage").

6. Debtor obtained this financing through a mortgage broker. Debtor expressly stated the purpose of the refinancing was to pay off the existing mortgage and to use the excess funds toward the approximately 1,600 square foot addition suite described in clause 7.³

7. In connection with the Loan closing on September 21, 2006 Debtor executed an Occupancy Agreement indicating that he intended to occupy the property as his primary residence and acknowledging that Argent Mortgage Company, LLC relied upon this representation in making the Loan.

8. In the spring of 2007 Debtor began construction of an addition (the "Addition") in the Property, which concluded in the fall of 2007.

9. The Addition was constructed for the purpose of providing a residence for Debtor's mother and father in law and is described as an approximately 1,600 square foot space with two bedrooms, a living room, a kitchen, a full bath and a separate entrance.

10. Debtor's mother and father in law resided in the Addition from completion of construction to approximately 2014. There was no written lease agreement with Debtor's mother and father in law.

11. Debtor's brother in law, Ronald Lampert, has resided in the Addition from 2014 to the present and pays $300.00 per month in rent inclusive of all utilities. There is no written lease agreement with Ronald Lampert.

12. Movant is the servicer for U.S. Bank National Association as Trustee for the Certificate Holders of Citigroup Mortgage Loan Trust, Inc. Asset–Backed Pass Through Certificates Series 2007–AMC1 ("U.S. Bank"). U.S. Bank is the current holder of the Mortgage by virtue of an assignment of mortgage recorded in the Norfolk County Registry of Deeds on October 16, 2012 in Book 30564 at Page 130.

13. The parties agree that the fair market value of the Property is $912,500.00.

Further Findings

14. In material part, the Loan Occupancy Agreement referred to in paragraph 7 above states as follows:

The undersigned Borrower(s) [the Debtor] of the above captioned property [the Property] understand that one of the conditions of the loan is that the Borrower(s) occupy the subject property and Borrower(s) do hereby certify as follows:

1. Borrower intends to occupy the property as Borrower's primary residence.

2. Borrower intends to occupy the property during the 12 month period immediately following the loan closing as the primary residence of the Borrower (i.e., the property will be "owner occupied").

3. If Borrower's intention changes prior to the loan closing, Borrower agrees to notify Lender immediately of that fact.

4. Borrower understand that Lender may not make the loan in connection with subject property without this Occupancy Agreement.

5. Borrower acknowledges Lender has relied on the Borrower's representation of occupancy in securing said loan, the interest rate or funding said loan.

15. The Loan Application further indicates that the number of units of the Property is one.

JURISDICTION

This is a proceeding to determine the value of a secured claim for purposes of a plan of reorganization and to determine whether the claim may be modified in a chapter 11 plan. These matters arise under the Bankruptcy Code and in a bankruptcy case and therefore fall within the jurisdiction given the district court in 28 U.S.C. § 1334(b) and, by a standing order of reference, see L.R. 201 (D. Mass.), referred to the bankruptcy court pursuant to 28 U.S.C. § 157(a). They are core proceedings within the meaning of 28 U.S.C. § 157(b)(1). 28 U.S.C. § 157(b)(2)(B) and (L) (core proceedings include confirmations of plans and the allowance or disallowance of claims). The bankruptcy court accordingly has authority to enter final judgment on the motion.

POSITIONS OF THE PARTIES

In relevant part, § 1123(b)(5) of the Bankruptcy Code states that "a plan," meaning a plan under chapter 11, "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[.]" 11 U.S.C. § 1123(b)(5). The language of this subsection is identical to a parallel provision in chapter 13, at 11 U.S.C. § 1322(b)(2) ("the 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"). With respect to § 1322(b)(2), the Court of Appeals for the First Circuit has held "that the antimodification provision of § 1322(b)(2) does not bar modification of a secured claim on a multi-unit property in which one of the units is the debtor's principal residence and the security interest extends to the other income-producing units." Lomas Mortgage, Inc. v. Louis , 82 F.3d 1, 7 (1st Cir. 1996). The parties agree, as does the Court, that Lomas should be viewed as controlling for purposes of construing the meaning of the same language in § 1123(b)(5), especially since, in Lomas , the Court of Appeals relied heavily on the legislative history of § 1123(b)(5) to reach its holding as to § 1322(b)(2).

The Debtor argues that Lomas governs here. He argues that the antimodification clause does not apply because, as in Lomas , the Property is a multi-unit property, one unit of which is income producing, and the Mortgagee's security interest extends to all...