Wissel v. Deutsche Bank Nat'l Trust Co. (In re Wissel)

619 B.R. 299

IN RE: Conrad WISSEL IV and Tina Wissel, Debtors.

Conrad Wissel IV and Tina Wissel, Plaintiffs,

v.Deutsche Bank National Trust Company, Defendant.

CASE NO.: 18-25812 (SLM)

ADV. NO.: 18-01500 (SLM)

United States Bankruptcy Court, D. New Jersey.

Signed September 14, 2020

Jenny R. Kasen, Esq., Kasen & Kasen PC, 1874 E. Marlton Pike, Suite 3, Cherry Hill, NJ 08003

Douglas J. McDonough, Esq., Frenkel Lambert Weiss Weisman & Gordon, LLP, 80 West Main Street, Suite 460, West Orange, NJ 07052

OPINION ON PARTIAL SUMMARY JUDGMENT

STACEY L. MEISEL, UNITED STATES BANKRUPTCY JUDGE

INTRODUCTION

This case requires the Court to decide the reach of Chapter 11's anti-modification provision, 11 U.S.C. § 1123(b)(5), and the appropriate application of two Third Circuit decisions, In re Ferandos¹ and In re Scarborough.² These decisions addressed facts similar to those at issue here. But, they interpreted a statute that has since changed significantly. To resolve the current dispute, this Court interprets § 1123(b)(5) —along with the defined terms in 11 U.S.C. §§ 101(13A) and 101(27B) —using the plain language approach mandated by Ferandos and Scarborough .³

In 2004, Debtors Conrad and Tina Wissel executed a mortgage as security for a loan that the Creditor, Deutsche Bank, later acquired. The Wissels, now in Chapter 11 proceedings, assert that the value of their home has declined significantly. They ask the Court to bifurcate the Creditor's claim and cram down the secured portion to the value of the real property. The Wissels argue that cram down is appropriate because, when they applied for the mortgage in 2004, they posted collateral—their home—which was both their principal residence and their principal place of business. Relying on the Third Circuit's decision in Scarborough, the Debtors allege that any collateral that is not exclusively used as a principal residence is not subject to the modification protection of § 1123(b)(5).

The Wissels' argument is a faithful application of Scarborough . It would be correct if Congress had not stepped in to make changes. But, Congress intervened to add definitions to the Bankruptcy Code that the Third Circuit did not analyze when making its decisions. After the debtors in Scarborough filed for bankruptcy, the changes that Congress made to the Bankruptcy Code became effective, and the changes clarified the scope of § 1123(b)(5). Specifically, Congress added formal definitions of "debtor's principal residence" and "incidental property." In Scarborough , the Third Circuit noted that these changes were enacted but not effective at the time the debtors filed for bankruptcy. As such, the Third Circuit decided to "leave for another day the question of whether, or how, [the changes] altered the scope of the anti-modification provision."⁴

Accepting this invitation, the Court holds that the definitions Congress added to the Bankruptcy Code plainly extend the reach of § 1123(b)(5). Read with the textual approach of Ferandos and Scarborough , Chapter 11's anti-modification provision now includes a mortgage secured by any property that the debtor uses as a principal residence, as defined by § 101(13A), as well by as any incidental property, as defined by § 101(27B). Deutsche Bank's mortgage satisfies these requirements and is entitled to § 1123(b)(5)'s protection. Therefore, the Debtors' motion for partial summary judgment is DENIED.

JURISDICTION AND VENUE

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of Reference from the United States District Court for the District of New Jersey dated July 23, 1984 and amended September 18, 2012. This matter constitutes a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (K), as it involves the administration of the estate and a determination of the validity, extent, or priority of a lien, respectively. Venue is proper under 28 U.S.C. § 1409. Pursuant to Federal Rule of Bankruptcy Procedure 7052, the Court issues the following findings of fact and conclusions of law.

FACTUAL AND PROCEDURAL BACKGROUND

Debtors Conrad and Tina Wissel (the "Wissels " or "Debtors ") purchased the property at the center of this dispute—955 Lawrence Ave., Westfield, New Jersey 07090 (the "Westfield Property ")—in 1998, executing a mortgage to do so.⁵ On November 2, 2000, the Wissels incorporated Spacia, a business that offered interior and exterior design advice, and sold home furnishings sourced from vendors or manufactured by Spacia itself.⁶

The Operation of Spacia, Inc., and the 2004 Refinancing

According to Debtor Conrad Wissel, the Debtors operated Spacia on the Westfield Property from 2003 to 2006, renovating the interior in order to showcase the business and market Spacia's products.⁷ Debtor Conrad Wissel claims that the Wissels used various areas—including the living and dining rooms, kitchen, and outdoor space—"for product display, photo shoots, meeting with customers, product testing and launch events."⁸ He also attests that Spacia had "dedicated space" in an "office/library" area with typical office supplies, as well as a workshop with work benches and tools in the Westfield Property's garage.⁹

Asserting these facts, the Debtors claim that Spacia was operational on the Westfield Property in 2004 when they applied for and received a new mortgage.¹⁰ According to a loan application attached to Conrad Wissel's certification (the "Loan Application "),¹¹ in December of 2004 the Wissels sought a new loan of $1,365,000, of which $1,192,473 was designated to refinance a mortgage executed in 1999 and held by Washington Mutual.¹² The Wissels would receive a total of $144,562 in cash.¹³ The Loan Application showed Conrad Wissel as the designated Borrower and Tina Wissel as the Co-Borrower.¹⁴ It stated that the Westfield Property had a market value of $2,100,000.¹⁵

The Loan Application required the Wissels to make various declarations about their finances and the nature of the Westfield Property, which—as is typical in a refinancing—would serve as collateral for the new mortgage.¹⁶ In at least two places on the Loan Application, the Wissels asserted, by checking a box, that they intended to use the Westfield Property as their "primary residence."¹⁷ The Debtors could have instead indicated, by checking other boxes, that the Westfield Property would be their "Secondary Residence" or an "Investment," but chose not to do so.¹⁸ In a third location on the Loan Application, the Wissels certified that they owned an interest in a property that was a "principal residence" within the previous three years.¹⁹

Where the Loan Application requested employment information, Conrad Wissel indicated that he was self-employed at two companies, Spacia and Impressions Software.²⁰ He said that he worked at Spacia for four years.²¹ He listed the Westfield Property as the address for both companies.²² The Wissels also reported monthly rental income of $2,369, but did not indicate its origin.²³ At oral argument, the Debtors conceded that Spacia did not pay the rental income listed on the Loan Application and confirmed that Spacia never paid any rent.²⁴

On December 8, 2004, the Wissels executed a note in favor of Washington Mutual for $1,365,000.²⁵ In return, Washington Mutual secured a new mortgage (the "Creditor's 2004 Mortgage ") on the Westfield Property.²⁶ The underlying mortgage agreement (the "2004 Mortgage Agreement ") provided the following:

Borrower does hereby mortgage, grant, and convey to Lender the following described property located in Union County, New Jersey... which currently has the address of 955 Lawrence Avenue, Westfield, New Jersey 07090...TOGETHER WITH all the improvements now or hereafter a part of the property, and all easements, appurtenances, and fixtures now or hereafter a part of the property. All replacements and additions shall also be covered by this Security Instrument.²⁷

The Wissels also agreed to make certain payments into an escrow fund for insurance and taxes.²⁸ On May 12, 2010, Washington Mutual assigned the note and the Creditor's 2004 Mortgage to Deutsche Bank ("Deutsche Bank " or "Creditor ").²⁹

The Bankruptcy Case

On August 7, 2018, the Wissels filed a joint voluntary petition under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code ").³⁰ They filed their schedules on September 13, stating that they operate another business—Pure Couture, Inc., d/b/a/ Couture 9—out of the Westfield Property.³¹ They also indicated that they have an equitable or legal interest in Spacia and Impressions Software, but that the entities are not operational.³² They also filed a request for the opportunity to participate in the Court's Loss Mitigation Program regarding the Creditor's 2004 Mortgage on the Westfield Property.³³ No one objected to the LMP request. The Court ordered the Debtors and Creditor to participate in the LMP on September 17, 2018.³⁴

The Debtors Seek to Cram Down Creditor's Mortgage

On October 2, 2018, the Debtors filed an adversary complaint.³⁵ The complaint asks the Court to determine the validity and extent of Creditor's 2004 Mortgage against the Westfield Property pursuant to 11 U.S.C. §§ 506(a) and 1123(b)(5).³⁶ The adversary complaint alleges, among other things, that at the time of loan origination the Debtors provided Washington Mutual with notice that the Westfield Property was both their principal residence and their principal place of business.³⁷ Additionally, the Debtors assert that the Westfield Property now has a fair market value of only $750,000³⁸ —significantly less than the $2,100,000³⁹ value at the time they received the Creditor's 2004 Mortgage—and is also subject to a first mortgage in the amount of $150,000.⁴⁰ Because the Debtors argue that the Westfield Property is not covered by the anti-modification provision in § 1123(b)(5), they ask the Court to bifurcate the Creditor's mortgage into two claims: (1) a secured claim that is crammed down to the remaining...