In re Lister

593 B.R. 587

IN RE: James M. LISTER, Amy F. Lister, Debtor

Case No. 17-12377

United States Bankruptcy Court, S.D. Ohio, Western Division.

Signed September 25, 2018

Nicholas A. Zingarelli, Zingarelli Law Office, LLC, Cincinnati, OH, for Debtor.

DECISION SUSTAINING U.S. BANK TRUST, NA'S OBJECTION TO CONFIRMATION [Docket Number 18]

Beth A. Buchanan, United States Bankruptcy Judge

U.S. Bank Trust, NA (the "Creditor") argues that the proposed cramdown of the Creditor's secured claim by Debtors Amy and James Lister ("Debtors") in their chapter 13 plan [Docket Number 17] is prohibited by the anti-modification provision of 11 U.S.C. § 1322(b)(2). The Debtors maintain that the anti-modification provision does not apply because Creditor's claim is secured by real property that is not solely the Debtors' principal residence. For the reasons that follow, this Court finds that 11 U.S.C. § 1322(b)(2) precludes the modification of the Creditor's claim.

I. FINDINGS OF FACT

The parties stipulated [Docket Number 24] to the following facts:

1. Debtors own the real property located at and commonly referred to as 10038 State Route 775, Scottown, Ohio 45678 (the "Property").

2. Debtors have owned the Property since 1996.

3. The Property consists of two adjacent parcels of real estate that are both pledged as collateral through a consensual mortgage for the debt owed to Creditor. The mortgage in question was executed on May 16, 2005 and was recorded with the Lawrence County Recorder's office on May 26, 2005. The mortgage fully matures on May 16, 2025.

4. The Debtors have owned and operated a home childcare on the premises for the past twenty-one years. This encompasses the entirety of the time that Creditor has held a mortgage against the Property.

5. Debtors receive monthly rent in the amount of approximately $600.00 for the rental of a separate structure that exists on the Property. The separate structure serves as a residence for a third-party.

Debtors began the rental of this separate structure in October of 2014.

6. Debtors and Creditor agree that the information presented in the stipulations is submitted in lieu of testimony of the Debtors and such information is accepted as truthful and accurate. Creditor waives its rights to cross examination of the Debtors as witnesses.

7. Debtors obtained an appraisal of the entirety of the Property on April 25, 2017, with such appraisal being completed by licensed appraiser Jeffrey Hunter. A copy of the appraisal has been filed with the Court as ECF No. 9 and shall be considered Joint Exhibit 1 (the "Appraisal"). This Appraisal shall be admitted as evidence.¹

The parties further stipulated [Docket Number 43] to the admission of the following additional exhibits, which were attached to the parties' respective briefs:

a. Debtors' Exhibits

i. Exhibit A – Deed

ii. Exhibit B – Mortgage

iii. Exhibit C – Lawrence County Auditor Property Cards

b. Creditor's Exhibits

i. Exhibit A – Lawrence County Auditor Property Cards

ii. Exhibit B – Debtors' 2016 Bankruptcy Petition

iii. Exhibit C – Debtors' 2016 Bankruptcy Docket

iv. Exhibit D – Foreclosure Complaint

v. Exhibit E – Answer to Foreclosure Complaint

vi. Exhibit F – Debtors' Notice of Filing Real Estate Appraisal

vii. Exhibit G – Creditor's Proof of Claim

II. ANALYSIS

Jurisdiction over this matter is vested in this Court by virtue of 28 U.S.C. § 1334(b) and the General Order of Reference entered in this District. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L).

Section 1322(b)(2)² provides that a chapter 13 "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 [.]" 11 U.S.C. § 1322(b)(2) (emphasis added). This is known as the anti-modification provision or exception.

The two threshold legal issues before this Court are: (1) whether the anti-modification provision of § 1322(b)(2) applies to a security interest in real property that is the debtor's principal residence, if that property also hosts commercial activities—so called "mixed-use properties;" and, (2) the point in time for determining the debtor's "principal residence" status under § 1322(b)(2). Courts have grappled with these issues for the past twenty-plus years. Before weighing in, this Court will endeavor to summarize the divergent approaches.

A. Section 1322(b)(2) and "mixed-use property"

There are three differing approaches for determining the applicability of the antimodification provision where the real property at issue serves as more than the debtor's principal residence. The vast majority of the cases in the mixed-use context involve real property that includes the debtor's principal residence as well as other income-producing rental property.

1. Approach # 1: Real property that is only the debtor's principal residence (the "Bright-Line Only Approach" )

The "majority" of courts have adopted a bright-line approach concluding that the antimodification provision does not apply unless the real property is only the debtor's principal residence. See e.g. , Scarborough v. Chase Manhattan Mortg. Corp. (In re Scarborough) , 461 F.3d 406, 411 (3rd Cir. 2006) ; Lomas Mortg., Inc. v. Louis , 82 F.3d 1, 7 (1st Cir. 1996) ; In re Abrego , 506 B.R. 509, 515 (Bankr. N.D. Ill. 2014) (adopting and describing this approach as the majority approach); In re Bulson , 327 B.R. 830, 845 (Bankr. W.D. Mich. 2005). Two circuit courts adopt this approach, although for different reasons.

The Court of Appeals for the Third Circuit looked to the plain language of § 1322(b)(2) in concluding that the anti-modification provision does not extend to mixed-use property. In re Scarborough , 461 F.3d at 411.

By using the word "is" in the phrase "real property that is the debtor's principal residence," Congress equated the terms "real property" and "principal residence." Put differently, this use of "is" means that the real property that secures the mortgage must be only the debtor's principal residence in order for the anti-modification provision to apply. We thus agree with the reasoning of the Bankruptcy Court for the District of Connecticut when it noted that § 1322(b)(2)"protects claims secured only by a security interest in real property that is the debtor's principal residence, not real property that includes or contains the debtor's principal residence, and not real property on which the debtor resides ." In re Adebanjo , 165 B.R. 98, 104 (Bankr. D. Conn. 1994). A claim secured by real property that is, even in part, not the debtor's principal residence does not fall under the terms of § 1322(b)(2).

Id. (emphasis in original).

In contrast, the Court of Appeals for the First Circuit looked to the legislative history for reaching the conclusion that § 1322(b)(2) does not apply to mixed-use property. Lomas , 82 F.3d at 4.

[The creditor in Lomas argues] that the term "only" modifies "by a security interest in real property" and the term "that is the debtor's principal residence" further modifies "real property." [The creditor's] reading results in § 1322(b)(2) applying when (1) the security interest is only in real property (as opposed to personal, intangible or other non-real property) and (2) the real property is the "debtor's principal residence." Under this reading, there is no need that the real property be "only" the debtor's principal residence.

The [debtors], in contrast, argue (1) that "only" modifies the entire phrase "by a security interest in real property that is the debtor's principal residence"; and (2) that the word "is" requires complete and exclusive identity between "real property" and "principal residence."

[The creditor] criticizes the [debtors'] reading on the ground that the statutory language does not explicitly state that the real property must be "exclusively" the debtor's principal residence. The [debtors] criticize [the creditor's] reading on the ground that the statutory language does not explicitly state that the real property must merely "contain" or "include" the principal residence.

Id. at 3-4. Concluding that the " ‘plain meaning’ approach to § 1322(b)(2) appears to us to be, in the end, inconclusive," id. at 4, the Lomas court conducted an extensive review of the legislative history behind § 1322(b)(2), ultimately concluding that the anti-modification provision does not reach multi-unit properties even where the debtor resides in one of the units. Id. at 7.

Critics of this approach note that it is too easy for the debtor to manipulate the outcome by converting their residential property to a commercial use on the eve of bankruptcy. See e.g. , In re Zaldivar , 441 B.R. 389, 390 (Bankr. S.D. Fla. 2011) ("The problem with this approach is that it would permit security interests to be modified on a debtor's primary residence when the debtor decides to rent out a garage apartment or convert a basement into a rentable apartment.").

2. Approach # 2: Real property that includes the debtor's principal residence (the "Bright-Line Includes Approach" )

An "emerging" minority of courts have adopted a similar bright-line test reaching the opposite conclusion of the courts adopting the Bright-Line Only Approach. The courts following this approach conclude that § 1322(b)(2) applies as long "as the debtor principally resides in some portion of the real property." In re Brooks , 550 B.R. 19, 24-25 (Bankr. W.D.N.Y. 2016) (emphasis in original); see also Wages v. J.P. Morgan Chase Bank, N.A. (In re Wages) , 508 B.R. 161, 167 (9th Cir. BAP 2014) (interpreting identical language under § 1123(b)(5) ); In re Hock , 571 B.R. 891, 898 (Bankr. S.D. Fla. 2017) (interpreting identical language under § 1123(b)(5) ); In re Macaluso , 254 B.R. 799, 800 (Bankr. W.D.N.Y. 2000).

Also looking to the plain language of the statute, these courts conclude that the placement of the word "only" in the phrase "secured only by a security interest in real property that is the debtor's principle residence," is an adverb modifying "secu...