In re Brooks

• Decision Date: 15 April 2016
• Docket Number: Bankruptcy Case No. 15–21393
• Citation: 550 B.R. 19
• Parties: In re: Norita J. Brooks, Debtor.
• Court: U.S. Bankruptcy Court — Western District of New York

550 B.R. 19

In re: Norita J. Brooks, Debtor.

Bankruptcy Case No. 15–21393

United States Bankruptcy Court, W.D. New York.

Signed April 15, 2016

Mike Krueger, Dibble & Miller, Rochester, NY, for Debtor.

DECISION AND ORDER DENYING DEBTOR'S MOTION TO STRIP–DOWN MORTGAGE UNDER 11 U.S.C. § 1322(b)(2)

PAUL R. WARREN, United States Bankruptcy Judge

The Chapter 13 Debtor, Norita J. Brooks(“Brooks”) has moved, under 11 U.S.C. § 506(a), to have the Court determine the value of her multi-family residence at 160 Seneca Parkway, Rochester, New York (“Property”).Wells Fargo Bank, N.A.(“Wells Fargo”) holds a mortgage on the Property with an outstanding balance due of $300,476.Brooks also moves—and this is her ultimate goal—to strip-down the Wells Fargo mortgage under 11 U.S.C. § 1322(b)(2), so as to limit the amount of the secured mortgage claim to the alleged value of the Property.Brooks asserts that the protections provided for the holders of secured claims under 11 U.S.C. § 1322(b)(2) do not extend to claims secured by real property, on which there sits a multi-family home, within which is Brooks's principal residence and two apartment units.In opposition, Wells Fargo urges the Court to find that Brooks's strip-down attempt is prohibited by 11 U.S.C. § 1322(b)(2).After careful consideration of the record, the arguments of counsel, and the substantial body of conflicting case law—falling into three distinct camps—the Court holds that the mortgage secured by a lien on Brooks's multi-family home, that is also her principal residence, is protected from being stripped-down by operation of 11 U.S.C. § 1322(b)(2).Brooks's motion to strip-down the mortgage lien is, under 11 U.S.C. § 1322(b)(2), in all respects DENIED .The remainder of the motion, attempting to value the Property under 11 U.S.C. § 506(a), is not ripe for determination and is not supported by any reliable evidence of value—that request is DENIED without prejudice.

I.JURISDICTION

The Court has jurisdiction under 28 U.S.C. §§ 157(a),157(b)(1)and1334.This is a core proceeding under 28 U.S.C. § 157(b)(2)(K).This decision constitutes the Court's findings of fact and conclusions of law, to the extent required by Rule 7052 FRBP.

II.FINDINGS OF FACT

On October 30, 1998, Brooks and her husband purchased the Property, on which there sits a 5,252 square foot house (ECF No. 21, Exhibit B;ECF No. 37).The house is a multi-family dwelling, divided into a 3,500 square foot “owner's unit” and two modest apartment units (ECF No. 21, Exhibit B).The Property has been Brooks's principal residence since 1998(ECF No. 36at 2).A mortgage on the Property (now held by Wells Fargo) was recorded on November 2, 1998, securing a debt in the original amount of $150,913 (ECF No. 21, Exhibit C).The mortgage includes a provision requiring Brooks to occupy the Property as her principal residence for at least one year (Id. , Exhibit C ¶ 5).Also included in the mortgage is a boilerplate assignment of rents (but not leases)(Id. , Exhibit C ¶ 17).Fire damaged the home in March 2015, resulting in fire, water, and smoke damage to both rental units (ECF No. 37 ¶ 13).It appears that the Property was in a state of serious structural disrepair long before the fire (Id.¶¶ 4, 10, 17).There is no Certificate of Occupancy for the Property—Brooks admitted that no Certificate of Occupancy has been in place since 2007(ECF No. 21, Exhibit B;ECF No. 37).There is no dispute that the two apartment units were not occupied by tenants, nor could they be because of their damaged condition, as of the date of the petition (ECF No. 21, Exhibit B;ECF No. 37).

In 2007, Wells Fargo commenced a foreclosure action against the Property.Brooks filed a Chapter 13 petition(her first) on March 4, 2009, to stop the foreclosure sale from proceeding (In re Brooks,No. 2–09–20482(JCN), ECF No. 1).A review of Brooks's filings in both bankruptcy cases reveals that a foreclosure proceeding between Brooks and Wells Fargo has been ongoing for at least seven years at the time she filed the petition (her second) in this case(Case No. 2–09–20482, ECF No. 1, Statement of Financial Affairs; Case No. 2–15–21393, ECF No. 1, Statement of Financial Affairs¶ 4).During those seven years, the mortgage claim has increased from (approximately) $150,000 to $300,000, and (according to Brooks) the value of the Property has dropped from (approximately) $174,000 to $70,000 (Case No. 2–09–20482, ECF No. 1, Schedule A; Case No. 2–15–21393, ECF No. 1, Schedules A and B).Wells Fargo was granted a judgment of foreclosure by the State Court in 2015.The foreclosure sale was scheduled for mid-December 2015.On December 11, 2015, Brooks filed a Chapter 13petition to stop the foreclosure sale(ECF No. 1).The Property is the only real estate in which Brooks has an ownership interest (ECF No. 30, Part 1).

Brooks amended her schedules on March 22, 2016, to disclose the fact that she has been holding a check from her insurance carrier in the amount of $85,000 (ECF Nos. 30 and 37).It appears that Brooks had that check in her possession for a considerable period of time before she filed this Chapter 13 case(ECF No. 37 ¶¶ 15–17).The check is jointly payable to Brooks and Wells Fargo(and others) and would appear to be an asset of the bankruptcy estate under 11 U.S.C. § 541(a)(Id.¶ 14).¹Both Brooks and Wells Fargo agree that the value of the Property would change (presumably upward) if repairs were completed (ECF Nos. 35 and 36).Neither party has ventured to guess what the Property might be worth if $85,000 worth of repairs were performed—certainly Brooks's valuation “expert” offered no opinion on the matter (ECF No. 21, Exhibit B).

On December 18, 2015, Wells Fargo filed an Objection to Confirmation, asserting that the proposed plan improperly bifurcates its claim under the mortgage into secured and unsecured portions in violation of 11 U.S.C. § 1322(b)(2)(ECF No. 13).On March 4, 2016, Brooks filed the motion now before the Court—to value the Property under § 506(a) and to strip-down the secured claim of Wells Fargo under § 1322(b)(2)(ECF No. 21).

III.DISCUSSION

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).The issue before the Court is whether the statutory protection given to secured creditors under § 1322(b)(2) applies to a security interest in real property that is a debtor's principal residence, if that residence happens to be a multi-family home with income potential.

Dozens of courts have wrestled with the issue of whether 11 U.S.C. § 1322(b)(2) prohibits strip-down of a secured claim on a debtor's principal residence, if the real property also hosts commercial activities—whether they be a tailor shop, a trucking business, or a multi-unit home with apartments to let.After nearly twenty years of judicial grappling, three distinct and triangularly-opposing camps have emerged among the federal courts.So much has been written by courts representing all three camps, explaining the rationale supporting each's answer to the question, that this Court can do little to add anything of value to the analysis.The Court will join one camp in answering the question without fanfare.And so, with a stiff upper lip, the Court today embarks on a quest, as have dozens of other courts, to attempt to determine how many angels can dance on the head of a pin.

Among the bankruptcy judges of the Western District of New York, three distinct and opposing approaches have been taken in answering the question.SeeIn re Brunson,201 B.R. 351(Bankr.W.D.N.Y.1996)(Kaplan, J.);In re Kimbell,247 B.R. 35(Bankr.W.D.N.Y.2000)(Ninfo, J.);In re Macaluso,254 B.R. 799(Bankr.W.D.N.Y.2000)(Bucki, J.).The motion by Brooks seems to suggest that this Division of the Court is bound by Kimbell, and if not bound, she invites this Court to ratify and adopt Kimbell and its progeny(ECF No. 21 ¶¶ 6–7;ECF No. 36).To be clear, this Court is not bound by Kimbell.See, e.g.,In re Moore,441 B.R. 732, 738–39(Bankr.N.D.N.Y.2010)(citingIn re Ford,415 B.R. 51, 60–61(Bankr.N.D.N.Y.2009) )(holding“where there is not clear Second Circuit precedent and where lower courts are vehemently split on a single issue, it is critical for the bankruptcy court to independently interpret the plain language of the Code”);see alsoIn re Dembrosky,235 B.R. 245(Bankr.W.D.N.Y.1999).

The question was first addressed by a bankruptcy judge in this District twenty years ago.In re Brunson,201 B.R. 351(Bankr.W.D.N.Y.1996)(Kaplan, J.).In Brunson,the court adopted a case-by-case analysis to determine whether the anti-modification provision under § 1322(b)(2) applies to multi-family dwellings.The Brunson court looked at the totality of circumstances to determine whether, at the time of the transaction, the parties predominantly intended to enter into a transaction that was primarily residential or primarily commercial in nature.Brunson,201 B.R. at 353;see alsoLitton Loan Serv., LP v. Beamon,298 B.R. 508, 512(N.D.N.Y.2003);In re Zaldivar,441 B.R. 389, 390(Bankr.S.D.Fla.2011).Courts adopting this approach favor it as being most consistent with Congressional intent in enacting § 1322(b)(2).Brunson,201 B.R. at 353–54;see alsoIn re Zaldivar,441 B.R. at 390–91.And so the first camp was constructed using a case-by-case fact finding approach.

Four years after Brunson, the question was addressed by a second bankruptcy judge in this District.SeeIn re Kimbell,247 B.R. 35(Bankr.W.D.N.Y.2000)(Ninfo, J.).The Kimbell court rejected the fact-finding approach used in Brunson in favor of a “bright line rule.”Id. at 37–38.Kimbell looked to Congressional intent to decide the issue, adopting the view of the First Circuit in Lomas Mortgage, Inc. v. Louis,82 F.3d 1(1st Cir.1996).Kimbell,247 B.R. at 37 n....