Lee v. U.S. Bank N.A.

102 F.4th 1177

Patricia Benton LEE, Plaintiff-Appellant, v. U.S. BANK NATIONAL ASSOCIATION, Defendant-Appellee.

No. 21-13887

United States Court of Appeals, Eleventh Circuit

Filed: May 23, 2024

Appeal from the United States District Court for the Middle District of Georgia, D.C. Docket No. 7:20-cv-00222-HL

Wesley J. Boyer, Christopher William Terry, Boyer Terry, LLC, Macon, GA, for Plaintiff-Appellant.

Brian Kenneth Jordan, Radha E. Gordon, Aldridge Pite, LLP, Atlanta, GA, for Defendant-Appellee.

Before William Pryor, Chief Judge, and Luck and Ed Carnes, Circuit Judges.

Luck, Circuit Judge:

The bankruptcy code allows debtors to modify or restructure their debts. Yet this grace has its limits. One of those limits is the anti-modification provision in chapter 11. Under the anti-modification provision, a chapter 11 reorganization plan may not "modify the rights of holders of . . . 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). This case asks us to decide the requirements that must be met before a bankruptcy court can apply the anti-modification provision. We hold that there are three. "[F]irst, the security interest must be in real property; second, the real property must be the only security for the debt; and third, the real property must be the debtor's principal residence." In re Wages, 508 B.R. 161, 165 (B.A.P. 9th Cir. 2014). Because the mortgage U.S. Bank held on Patricia Lee's real property met these three requirements, the bankruptcy court did not err in concluding that the anti-modification provision applied to the bank's secured claim. We affirm.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY

Chapter 11 of the Bankruptcy Code

Under chapter 11 of the bankruptcy code, the debtor may file for bankruptcy in the hopes of reorganizing her debts. See 11 U.S.C. § 301. To start the process on a voluntary basis, the debtor must file a petition with the bankruptcy court. See id. Along with the petition, the debtor must include several schedules that spell out her assets, liabilities, income, and expenditures. Fed. R. Bankr. P. 1007(b)(1), (c). And the debtor must also list her home address.

"Filing for bankruptcy under [c]hapter 11 . . . automatically creates 'the estate,' which . . . . consists of essentially all the debtor's property and rights to property." Auriga Polymers Inc. v. PMCM2, LLC ex rel. Beaulieu Liquidating Tr., 40 F.4th 1273, 1278 (11th Cir. 2022). Once the debtor files a voluntary petition under chapter 11, she "enjoys an automatic stay against actions to enforce, collect, assess or recover claims against the debtor or against property of the estate." United States v. White, 466 F.3d 1241, 1244 (11th Cir. 2006).

This automatic stay prevents creditors from taking actions to enforce debts owed to them, and "actions taken in violation of the automatic stay are void and without effect." See id. (alteration adopted) (quoting Borg-Warner Acceptance Corp. v. Hall, 685 F.2d 1306, 1308 (11th Cir. 1982)). That includes foreclosure actions to enforce secured claims against real property. See 11 U.S.C. § 362(a)(3)-(5). "Section 362(c)(1) provides that the stay of an act against the property of the estate continues until such property is no longer property of the estate." White, 466 F.3d at 1244.

But to lift the automatic stay and enforce debts they hold, creditors may apply for relief so that they can take actions that would otherwise be voided by the automatic stay. 11 U.S.C. § 362(d). For example, a bankruptcy court may grant relief from the automatic stay "for cause, including the lack of adequate protection of an interest in property of such party in interest." Id. § 362(d)(1). And the court may grant relief "with respect to a stay of an act against property" if "the debtor does not have an equity in such property" and the "property is not necessary to an effective reorganization." Id. § 362(d)(2).

A debtor "does not have an equity" in the property when "the creditor is undersecured" by the value of the property. See United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 375, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). And "property is not necessary to an effective reorganization" unless it is "essential for an effective reorganization" and the reorganization is "in prospect"—in other words, there must be "a reasonable possibility of a successful reorganization within a reasonable time." Id. at 375-76, 108 S.Ct. 626 (quotations omitted).

Ideally, the end of the chapter 11 process is a judicially approved "plan" that restructures the debtor's obligations. 11 U.S.C. §§ 1123, 1129. But not every obligation of the debtor can be restructured by the bankruptcy court under chapter 11. A plan, for example, can "modify the rights of holders of secured claims," but, under the anti-modification provision, it cannot modify those rights if a creditor's claim is "secured only by a security interest in real property that is the debtor's principal residence." Id. § 1123(b)(5).

Patricia Lee's Mortgage

In 2007, Patricia Lee mortgaged her property—a forty-three-acre tract of land in rural Georgia. As part of the mortgage, Lee signed a note that was secured by a deed on the property. The security deed required Lee to occupy, establish, and use the property as her principal residence and gave the lender, Quicken Loans, the power to foreclose on the property if Lee defaulted on the note. The mortgage was later assigned to U.S. Bank.

Lee, as she was required to do, used the property as her principal residence. She lived in a small brick house on two and one-half acres on the western edge of the property. The rest she leased to a farming company, and that portion of her land was continuously farmed.

Eventually, Lee defaulted on the mortgage. By August 2020, she owed 110 payments on the note for a total amount of $253,070.25. Instead of paying, Lee filed a chapter 11 voluntary bankruptcy petition to restructure her debts. The petition listed her property as her residence with an estimated value of $138,000. And the voluntary petition triggered the automatic stay. See 11 U.S.C. § 362(a).

Then, two things happened. First, Lee filed a proposed reorganization plan to restructure her debts, including the money she owed U.S. Bank under the mortgage. Lee's plan called for payments of $1,000 per month for six months followed by a balloon payment of $138,000 on the seventh month "in full satisfaction of " U.S. Bank's claim.

Second, U.S. Bank moved under 11 U.S.C. section 362(d) for relief from the automatic stay so that it could foreclose on Lee's property. In support, U.S. Bank argued that: its claim was not adequately protected because there was little or no equity in the property; the anti-modification provision prevented the bankruptcy court from approving a chapter 11 reorganization plan that modified U.S. Bank's claim; and the bank's claim was undersecured by Lee's property and Lee could not establish the property was necessary for an effective reorganization.

The bankruptcy court held an evidentiary hearing on U.S. Bank's motion. Lee's son testified that Lee lived on two and one-half acres of the property and that the remaining land had always been farmed. Lee also introduced an aerial photograph that confirmed her house took up only a small portion of the land on the western edge of the property, and she introduced tax documents that described all but two acres of the property as either timberland or agricultural land.

In closing arguments, U.S. Bank asserted that the "plain language" of the anti-modification provision applied to any property a debtor used as a principal residence, whether or not the debtor also used the property for some other purpose. Lee countered that section 1123(b)(5)'s anti-modification provision applied to a claim "secured only by the [d]ebtor's principal residence" and her property wasn't subject to the provision because, "from an acreage standpoint," it was "primarily farmland."

The bankruptcy court agreed with U.S. Bank that the plain language of section 1123(b)(5) did not require that Lee use the property exclusively as her principal residence. And, because it was undisputed that the property was Lee's principal residence, section 1123(b)(5) applied to Lee's mortgage. The bankruptcy court therefore found that it could not confirm Lee's proposed plan and that Lee failed to establish a prospect of reorganization. Thus, the bankruptcy court granted U.S. Bank's motion for relief from the automatic stay.

Lee appealed the bankruptcy court's order to the district court. She argued that the bankruptcy court erred in concluding that section 1123(b)(5)'s anti-modification provision applied to U.S. Bank's secured claim because the anti-modification provision "does not apply to mixed-use properties where the debtor resides in part of the property and derives busines[s] income from other parts of the property." U.S. Bank responded that the bankruptcy court properly relied on section 1123(b)(5)'s plain language, which it argued did not require Lee to use the property only or exclusively as her principal residence. The district court agreed with the bankruptcy court and affirmed the order granting relief from the automatic stay. Lee timely appealed.

STANDARD OF REVIEW

"When we review an order of a district court entered in its role as an appellate court reviewing a bankruptcy court's decision, we independently examine the bankruptcy court's factual and legal determinations, applying the same standards of review as the district court." In re Walter Energy, Inc., 911 F.3d 1121, 1135 (11th Cir. 2018). "We review de novo conclusions of law whether by the bankruptcy court or the district court." Id. (emphasis omitted). And "[w]e review the bankruptcy court's factual findings under the clearly erroneous standard." Id.

DISCUSSION

Like the district court, we take up the same question the bankruptcy court answered. What requirements did...