Holmes v. Cmty. Hills Condo. Ass'n, Inc. (In re Holmes)

• Decision Date: 21 May 2019
• Docket Number: Civ. No. 18-12495 (KM),Bankruptcy Case No. 15-14034 (RG)
• Citation: 603 B.R. 757
• Parties: IN RE Lindsey Catherine HOLMES, Debtor Lindsey Catherine Holmes, Appellant, v. Community Hills Condominium Association, Inc., Appellee.
• Court: U.S. District Court — District of New Jersey

603 B.R. 757

IN RE Lindsey Catherine HOLMES, DebtorLindsey Catherine Holmes, Appellant,

v.Community Hills Condominium Association, Inc., Appellee.

Civ. No. 18-12495 (KM)

Bankruptcy Case No. 15-14034 (RG)

United States District Court, D. New Jersey.

Filed May 21, 2019

Herbert B. Raymond, East Orange, NJ, for Appellant.

James G. Aaron, Ansell, Grimm & Aaron, Esqs., Ocean, NJ, for Appellee.

KEVIN MCNULTY, U.S.D.J.:

The debtor, Lindsey C. Holmes, appeals from an order by Judge Rosemary A. Gambardella of the United States Bankruptcy Court for the District of New Jersey, entered on remand from a prior appeal. (DE 1-2). Judge Gambardella has denied confirmation of the debtor's modified plan and dismissed the voluntary petition for relief under Chapter 13 without prejudice. (DE 1-2; see generally No. 15-cv-6834, DE 9). The plan, the bankruptcy judge found in a careful and detailed decision, was not feasible because a lien for condominium charges could not be modified as a matter of law.

At issue is the scope of 11 U.S.C. § 1322(b)(2). This anti-modification clause, particularly as it interacts with state law, gives rise to a difficult issue of interpretation that has divided the courts; in picking a side, I by no means intend to criticize any court, including the bankruptcy court here, that has seen the matter differently. For the reasons set forth below, I will reverse the dismissal of the Chapter 13 petition and remand for a redetermination of the feasibility of the proposed Plan.

PREFACE: MY 2016 OPINION

The prior remand to the bankruptcy court was structured by the analysis in my prior Opinion. (2016 Op., DE 9) For clarity, I will simply reprint here the most pertinent portions of that Opinion, indented and in a smaller font:

This appeal presents a single issue: whether a condominium association lien is a security interest in the debtor's principal residence, and hence subject to the "anti-modification" clause, 11 U.S.C. § 1322(b)(2). That issue of law is reviewed de novo.SeeIn re American Pad & Paper Co. , 478 F.3d 546, 551 (3d Cir. 2007) ; In re United Healthcare Sys., Inc. , 396 F.3d 247, 249 (3d Cir. 2005). For the reasons set forth below, however, the decision of the bankruptcy court must be REMANDED for factual findings pertinent to that issue.

I. BACKGROUND

Ms. Holmes is a condominium unit owner; Community Hills is the condominium association. Community Hills claims a lien on Holmes's unit representing unpaid condominium assessments. The unit was on the verge of a Sheriff's sale when, on March 9, 2015, Holmes filed a Chapter 13 petition.

Bank of America, which holds a mortgage on the unit, filed a proof of claim of $206,525.23. The value of the property was estimated at $85,000. There seems to be no dispute that the mortgage lien easily exhausts the equity in the property. Holmes filed a schedule showing a net disposable income of $200 per month. She proposed a plan whereby she would pay $200 per month.

Under the "anti-modification clause" of 11 U.S.C § 1322(b)(2), certain security interests relating to the debtor's principal residence cannot be modified. It follows that a plan that relies on the modification of such a principal-residence lien is not feasible as a matter of law; confirmation may therefore be denied without exploration of other pertinent issues. That is what happened here. The bankruptcy court held that Community Hills' lien on the condominium could not be modified, and therefore declined to confirm the plan. It is from that order that Holmes has appealed.

II. DISCUSSION

A. Rones and the N.J. Condominium Act

Holmes acknowledges that the Community Hills unit is her principal residence. She contends, however, that § 1322(b) nevertheless does not apply.

I am initially guided by In re Rones , 551 B.R. 162, 168 (D.N.J. 2016), in which Judge Wolfson discussed many of the issues presented here. Rones starts from the indisputable premise that a Chapter 13 plan may, in general, modify the rights of holders of secured claims. See generally 11 U.S.C. § 506(a)(1). A nominally secured claim will be considered unsecured, however, to the extent it exceeds the value of the collateral, and may be "stripped down" or "crammed" to that value. SeeUnited States v. Ron Pair Enters., Inc. , 489 U.S. 235, 239, 109 S. Ct. 1026, 103 L.Ed.2d 290 (1989).

Section 1322(b)(2) places an important limit on modification of secured claims. It prohibits modification, stripping, or cramming down of claims secured only by a security interest in the debtor's principal residence:

(b) Subject to subsections (a) and (c) of this section, the plan may—

....

(2) 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....

11 U.S.C. § 1322(b)(2) (emphasis added). SeeNobelman v. Am. Savings Bank , 508 U.S. 324, 331–32, 113 S. Ct. 2106, 124 L.Ed.2d 228 (1993).

There is an exception to the exception—i.e. , an avenue of escape from the anti-modification clause of § 1322(b)(2). If the relevant lien, even one on a principal residence, is junior to a lien that exceeds the value of the residence collateral, it is treated as unsecured. Being wholly unsecured, it is of course not secured by a principal residence, and therefore does not fall under § 1322(b)(2). SeeIn re McDonald , 205 F.3d 606, 613–14 (3d Cir. 2000) ; Rones , 551 B.R. at 168.

So whether a condominium association's lien for assessments is secured only by a security interest in the debtor's unit might depend (inter alia ) on whether it is junior to another lien that exhausts the value of the collateral; if it is junior, it might not be secured by anything at all. On that question, Rones found the New Jersey Condominium Act to be dispositive. That statute gives the condominium lien a limited priority:

[quoting N.J. Stat. Ann. § 46:8B-21(a) & (b). The statute is set out in an Appendix to this opinion.]

.... Thus, under subsection (b), a condominium association's lien is granted priority to the extent of six months' worth of assessments. The condo lien, to that extent, is elevated to first priority. Rones reasoned that the condo lien was, at least to the extent of six months' assessments, secured by the principal residence, because it was senior to other liens. It followed, held Rones , that § 1322(b) applied.

Another issue arises. Assume arguendo that more than six months' assessments are in arrears. Under the NJ Act, the lien is senior only to the extent of six months' worth of assessments. Beyond that, it is junior—"subordinate," in the words of the statute. N.J. Stat. Ann. § 46:8B-21(a). Now it is possible to envision a rule that the lien should be bifurcated into a secured (up to six months) and unsecured (beyond six months) component. Thus bifurcated, it would have a hybrid quality; to the extent the lien is unsecured by the unit, it would not be subject to the "no-modification" rule of § 1322(b).

Case law forecloses that approach. The rule is applied broadly, and the exception strictly:

[I]f even one dollar of a creditor's claim is secured by a security interest in a debtor's principal residence, then the entire claim—both secured and unsecured portions—cannot be modified under Section 1322. SeeIn re Vidal , No.'s 12-11758, 12-12319, 12-12340, 12-12563, 2013 WL 441605, *3, 2013 Bankr. LEXIS 496, at *8 (Bankr. D. Del. Feb. 5, 2013) ("If there is even a single dollar of value available for the junior lienholder in the collateral, however, § 1322(b)(2) requires that the plan treat the junior claim as fully secured."); see alsoIn re Kennedy , No. 12-11223, 2013 WL 2480258, at *1–2, 2013 Bankr. LEXIS 2350, at *4 (Bankr. D. Del. June 10, 2013). This rule is known as the "one dollar rule."

In re Rones , 551 B.R. at 168.

Applying the "one dollar rule," Rones held that "because a portion of the Lien was secured by a security interest in the debtor's principal residence, no portion of the Association's lien could be stripped off under Section 1322." 551 B.R. at 171 (citing In re McDonald , 205 F.3d at 613–14 ).

B. Security interest vs. statutory lien

But hold on, says Holmes. The Rones analysis does not even come into play unless the lien at issue is a "security interest." Otherwise, § 1322(b)(2), by its plain language, does not apply at all.

A "security interest," as the term is used in § 1322(b)(2) and elsewhere, is defined as a "lien created by an agreement." 11 U.S.C. § 101(51). As such, it is to be distinguished from a "statutory lien," i.e. , one "arising solely by force of a statute on specified circumstances or conditions."¹ The categories are mutually exclusive. See In re Young , 477 B.R. 594 (W.D. Pa. 2012).

Rones , says Holmes, did not squarely face that definitional issue. Indeed, it appears that Rones accepted the conclusion of the bankruptcy court that the lien was created by agreement: "[T]he Bankruptcy Court itself observed when determining whether the Lien was consensual or statutory, [that] the Condominium Act did not create the Lien—it was created by the Master Deed .... [T]he Condominium Act merely altered the priority of a portion of the Lien." 551 B.R. at 171.

But the NJ Act seemingly can operate to create a lien; consider the language of N.J. Stat. Ann. § 46:8B-21(a), quoted above ("The association shall have a lien on each unit for any unpaid assessment ... upon proper notice to the appropriate unit owner"). And the subsection (b) priority operates to elevate, not just any old lien, but "[a] lien recorded pursuant to subsection a."

So it is not so simple to say that there is a security interest (i.e. , one arising from agreement), as to which the Act merely sets a priority. Remember, the condominium association's lien is secured by the unit (which is underwater on its mortgage) only to the extent it can be regarded as senior to the mortgage. So the priority issue under the State Act

...