In re Wong

598 B.R. 827

IN RE: Beverly WONG, Debtors.

Case No. 18-17666-LSS

United States Bankruptcy Court, D. Maryland, at Greenbelt.

Signed March 13, 2019

Entered March 14, 2019

Steven L. Goldberg, McNamee Hosea, Greenbelt, MD, for Debtor

MEMORANDUM OPINION

LORT S. SIMPSON, U.S. BANKRUPTCY JUDGE

Before the Court¹ is the Amended Disclosure Statement² (the "Disclosure Statement"), filed by Debtor, Beverly Wong, the Objection to Amended Disclosure Statement,³ filed by Bank of America, N.A. (the "Bank"), the Motion for Relief from the Automatic Stay⁴ (the "Stay Motion"), filed by the Bank, and Debtor's Opposition⁵ thereto. The Court held a hearing on these matters on March 5, 2019. At the hearing, the parties stipulated to the admission of exhibits, Debtor's counsel proffered Debtor's testimony, and the Court heard oral argument.

I. Findings of Fact.

In September 1997, Debtor and her husband, Tien Wong, purchased a residential house in Montgomery County, Maryland, known as 146 Grafton Street, Chevy Chase, Maryland (the "Property"). At the time of purchase, Debtor and Mr. Wong intended to and did occupy the Property as their principal residence. In April 2002, Debtor and Mr. Wong executed a promissory note (the "Note") in the amount of $ 1,000,000.00 in favor of the Bank. The parties also executed a refinance deed of trust (the "Deed of Trust"), which provides the Bank with a first-priority lien against the Property. The Deed of Trust contains a Second Home Rider (the "Second Home Rider"). The Second Home Rider provides that "Borrower shall occupy, and shall only use, the Property as Borrower's second home. Borrower shall keep the Property available for Borrower's exclusive use and enjoyment at all times ...." However, Debtor proffered that, while she had resided in Florida in 2001 and part of 2002, she primarily resided in the Property at the time she executed the Note and Deed of Trust (collectively, the "Loan Documents").

By its own terms, the Note fully matured on April 25, 2009. Debtor, Mr. Wong, and the Bank executed four Modification and Extension Agreements for the Note. The parties entered the fourth and final Modification and Extension Agreement on October 31, 2013 (the "Fourth Extension Agreement"). Pursuant to the Fourth Extension Agreement, all amounts owed by Debtor and Mr. Wong under the Note were due by August 31, 2014. Debtor and Mr. Wong defaulted on the Note by not repaying the Note in full by the maturity date.

On March 22, 2017, the Bank filed a foreclosure action against the Property in the Circuit Court for Montgomery County, Maryland. The Bank scheduled a foreclosure sale of the Property for June 29, 2018.

Debtor initiated this Chapter 11 bankruptcy case on June 6, 2018. The Property was Debtor's principal residence on the petition date. Debtor has made monthly adequate protection payments to the Bank of $ 3,466.00 since filing this case. The Bank filed a timely proof of claim in this case asserting a secured claim of $ 866,42.66 (the "Claim"). Debtor has not objected to the Claim. The value of the Property on the petition date was at least $ 1,850,000.00.

On February 22, 2019, Debtor filed her Amended Plan of Reorganization (the "Plan") and the Disclosure Statement. Debtor seeks to modify the Bank's rights through the Plan. Debtor proposes to pay the Claim over the life of the Plan and a monthly principal and interest payment of $ 4,100.00. The Plan further provides for full payment of the Claim by November 30, 2020. The Bank objects to the Disclosure Statement on the ground that the Plan is patently unconfirmable because it seeks to restructure a matured loan secured solely by Debtor's principal residence in violation of 11 U.S.C. § 1123(b)(5).⁶ Debtor responds that the Bank's rights are modifiable because the Second Home Rider establishes that the Property was not Debtor's principal residence at the time Loan Documents were executed. Further, Debtor argues that Bank knowingly waived protection under § 1123(b)(5) by including the Second Home Rider in the Deed of Trust.

At the hearing, the Court informed the parties that, in the interest of simplicity and expedience, it would take the issue of whether the Bank's rights are subject to modification through the Plan under advisement. The Court further informed the parties that it would recommence the hearing, if necessary, following issuance of the Court's ruling on that issue.

II. Discussion.

The Court must determine whether the Plan is unconfirmable based on the modification of the Bank's rights thereunder. While courts ordinarily reserve confirmation issues for the confirmation hearing, a court may disapprove a disclosure statement where the underlying plan is clearly unconfirmable.⁷ If the Plan violates § 1123(b)(5)'s anti-modification provision, it would be clearly unconfirmable. Courts are split on the proper temporal focus for determination of the debtor's principal residence under § 1123(b)(5). The Fourth Circuit has not weighed in on the controversy.⁸ Some courts have adopted the petition date approach, whereby the court determines the debtor's principal residence based on the state of affairs as of the petition date. Other courts have adopted the loan origination approach, which focuses on the time the parties created the relevant security interest. Those courts look to the applicable loan documents to answer the question.

" ‘[I]nterpretation of the Bankruptcy Code starts where all such inquiries must begin: with the language of the statute itself.’ "⁹ For terms defined under the Bankruptcy Code, the Court applies the Code's definition.¹⁰ For terms not defined in the Bankruptcy Code, the Court looks to their ordinary meaning, which may be discerned from dictionaries.¹¹ Only when the statutory language is ambiguous on a particular point, may the court consider legislative history.¹²

Section 1123(b)(5) provides that a Chapter 11 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, or leave unaffected the rights of holders of any class of claims."¹³ Section 101(13A) defines "debtor's principal residence" as "a residential structure if used as the principal residence by the debtor, including incidental property, without regard to whether that structure is attached to real property."¹⁴ Accordingly, if the Property is Debtor's principal residence, as defined in § 101(13A), the Plan is unconfirmable. The parties disagree about the temporal focus of the Court inquiry.

Many courts adopting the petition date approach highlight that approach's consistency with resolving other claim issues as of the petition date. In re Abdelgadir .¹⁵ the Ninth Circuit Bankruptcy Appellate Panel held as follows:

Based on the grammatical structure of the statute, the words "secured only by a security interest in real property that is the debtor's principal residence" modifies "claim " and describes the type of claim that is excepted from modification.... The plain language of § 1123(b)(5) excepts a particular type of claim from modification. As discussed above, a creditor's right to payment, whether it later is deemed secured or unsecured depending on the value of the collateral, is fixed at the petition date. Therefore, our statutory analysis leads us to conclude that the determinative date for whether a claim is secured by a debtor's principal residence is, like all claims, fixed at the petition date.¹⁶

In In re Crump,¹⁷ the Bankruptcy Court for the District of South Carolina reasoned that because the amount of a claim and its status as either secured or unsecured is determined as of the petition date, it makes sense to determine the nature of the security interest at that time.¹⁸ In re Cohen ,¹⁹ , the Bankruptcy Court for the District of New Hampshire held "that since ‘claim’ is a word of art in bankruptcy that describes a creditor's right to payment in a bankruptcy proceeding, the Court should look to the status of the property as collateral as of the petition date and not the date of the mortgage."²⁰

Conversely, courts adopting the loan origination approach often focus on the parties' intent upon their creation of the security interest as well as the perceived legislative intent behind the adoption of the provision. In In re Scarborough , the Third Circuit held that "the critical moment is when the creditor takes a security interest in the collateral."²¹ The Third Circuit reasoned that "[i]t is at that point in time that the underwriting decision is made and it is therefore at that point in time that the lender must know whether the loan it is making may be subject to modification in a Chapter 13 proceeding at some later date."²²

Many courts following the Third Circuit's lead believe the legislative history supports the loan origination approach.²³ In Nobelman v. American Sav. Bank ,²⁴ the Supreme Court addressed whether § 1322(b)(2), § 1125(b)(5)'s twin in Chapter 13, prohibited bifurcation of claims secured by the debtor's principal residence. In a concurrence, Justice Stevens explained the provision's legislative history as follows:

At first blush it seems somewhat strange that the Bankruptcy Code should provide less protection to an individual's interest in retaining possession of his or her home than of other assets. The anomaly is, however, explained by the legislative history indicating that favorable treatment of residential mortgagees was intended to encourage the flow of capital into the home lending market.²⁵

In In re Proctor ,²⁶ the court addressed a factual scenario like the matter before the Court. In adopting the loan origination approach, that court held as follows:

[T]his court's conclusion rests upon the thoughtful and useful discussions set out by proponents of both views, above, and also on the fact that courts within [the fourth] circuit frequently reach decisions in related "determination of principal

...