In re Brunson

• Decision Date: 25 September 1996
• Docket Number: Bankruptcy No. 96-10367 K,Adv. No. 96-1084 K.
• Citation: 201 BR 351
• Parties: In re Shirley A. BRUNSON a/k/a Shirley A. Champion, Debtor. Shirley A. BRUNSON, Plaintiff, v. WENDOVER FUNDING, INC. and National Fuel Gas Distribution, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Western District of New York

201 B.R. 351 (1996)

In re Shirley A. BRUNSON a/k/a Shirley A. Champion, Debtor Shirley A. BRUNSON, Plaintiff, v. WENDOVER FUNDING, INC. and National Fuel Gas Distribution, Inc., Defendants.

Bankruptcy No. 96-10367 K, Adv. No. 96-1084 K.

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

September 25, 1996.

Peter D. Grubea, Aaron, Dautch, Sternberg & Lawson, Buffalo, New York, for Plaintiff/Debtor.

Anne E. Miller, Shapiro & Kreisman, Rochester, New York, for Wendover Funding, Inc.

Christopher M. Marks, Phillips, Lytle, Hitchcock, Blaine & Huber, Buffalo, New York, for National Fuel Gas Distribution, Inc.

MICHAEL J. KAPLAN, Chief Judge.

This Court today rejects substantial authority to the effect that strip-down of a residential mortgage is always permitted, as a matter of law, as to multi-family dwellings in a Chapter 13 case. This Court believes that the antimodification provision, 11 U.S.C. § 1322(b)(2), may apply in some such instances, depending on the facts of a particular case.

This is an adversary proceeding in a Chapter 13 case in which the Debtor, Shirley A. Brunson, wishes to establish that she may "strip down" the first mortgage on her residence from approximately $40,000 to the $25,000 alleged fair market value of her residence, and may strip down the second mortgage thereon from approximately $1,350 to $0. She seeks to do so despite 11 U.S.C. § 1322(b)(2) and despite the decision of the United States Supreme Court in the case of Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993).

She believes that she may do so because her residence is a two-family dwelling; the lenders were aware of that fact at the time the loans were made; she has generated rental income from the second unit from time to time; she currently operates a day care center for profit from that unit; and as to one of the lenders, the mortgage instrument grants the lender a security interest on any rents generated from the property.

She relies principally on the persuasive authority of Lomas Mortgage, Inc. v. Louis, 82 F.3d 1 (1st Cir.1996) and the authorities cited therein.

The defendants, Wendover Funding, Inc. and National Fuel Gas Distribution, Inc. have moved to dismiss, arguing that strip-down is not permitted on a residential home mortgage under 11 U.S.C. § 1322(b)(2) and Nobelman. The Debtor has cross-moved for judgment on the pleadings.

In the Lomas case (which involved a three-family dwelling), the First Circuit ruled "that the antimodification provision of § 1322(b)(2) does not bar modification of a secured claim on a multi-unit property in which one of the units is the debtor's principal residence and the security interest extends to the other income-producing units." Lomas, 82 F.3d at 1-2. That Court bemoaned a lack of "clear guidance" on the question from either the language or contemporaneous legislative history of § 1322(b)(2), and it resorted to "a species of subsequent, not contemporaneous, legislative history" in order to reach its decision. It ended its decision with the refrain: "If we are wrong as to what Congress intended, legislation can provide a correction." Lomas, 82 F.3d at 7.

This Court shares the frustration of numerous other courts in attempting to interpret this statute which is impenetrable when sought to be applied to a single parcel of land upon which the Debtor resides but which contains two or three dwelling units. As the Lomas court said, ". . . Extending the antimodification provision to multi-family housing would . . . create a difficult line-drawing problem. It is unlikely Congress intended the antimodification provision to reach a 100-unit apartment complex simply because the debtor lives in one of the units." Lomas, 82 F.3d at 6.

This Court believes that the fact that a difficult line-drawing problem is created does not justify the Lomas court's conclusion that the antimodification provision should be limited only to single-family dwellings. This Court does not retreat from difficult problems. In sum, this Court agrees with everything that the Lomas court said except for its interpretation (discussed hereinafter) of the case of In re Ramirez, 62 B.R. 668 (Bankr. S.D.Cal.1986). Thus, this Court agrees with the Lomas court that "the `plain meaning' approach to § 1322(b)(2) appears . . . to be, in the end, inconclusive," Lomas, 82 F.3d at 4, and that the numerous cases that have attempted to resolve the present issue by reference to a "plain meaning" approach are not persuasive. (See for example In re Adebanjo, 165 B.R. 98 (Bankr.D.Conn.1994) and the numerous cases cited therein.)

Further, this Court agrees that the legislative history is silent on the scope of the incentive that Congress wished to give home lenders, and that the contemporaneous legislative history regarding § 1322(b)(2) provides no clear guidance.

Finally, this Court agrees with the Lomas court that reference to the Bankruptcy Reform Act of 1994 and its legislative history is compelling; useful comment was indeed offered when Congress added the identical antimodification language to other chapters of the Code — Chapters 11 and 12.

The Lomas court took the legislative history upon which it relied from a Committee Report. The present Court has found legislative history of identical substance in a different source, and here quotes the floor statements of Congressman Brooks on October 4, 1994:

This amendment conforms the treatment of residential mortgages in chapter 11 to that in chapter 13, preventing the modification of the right of a holder of a claim secured only by a security interest in the debtor\'s principal residence. Since it is intended to apply only to home mortgages, it applies only when the debtor is an individual. It does not apply to a commercial property, or to any transaction in which the creditor acquired a lien on property other than real property used as the debtor\'s residence. See In re Hammond, 276 F.3d 52 sic. The cite should be 27 F.3d 52 (3d Cir.1994); In re Ramirez, 62 B.R. 668 (Bankr.S.D.Cal.1986).

140 Cong.R. H 10,764 (daily ed. Oct. 4, 1994):

While the present Court agrees that this favorable citation of the Ramirez case is instructive as to how Congress thought that the antimodification provision properly applies, this Court respectfully disagrees with the Lomas court's statement that Ramirez "squarely holds that the antimodification provision of § 1322(b)(2) does not apply to multi-unit houses where the security interest extends to the rental units." Lomas, 82 F.3d at 7.

Rather, the present Court believes that the Ramirez case correctly examined the totality of circumstances surrounding the land and the mortgage transaction in concluding the debtor could, in that case, strip down the mortgage loan. This Court interprets Ramirez, and the legislative history of the 1994 legislation, as requiring a case-by-case approach, and as requiring that the Court perform the difficult line-drawing that the First Circuit sought to avoid in Lomas.

The Bankruptcy Court in Ramirez did not make any categorical statement regarding multi-family units. Rather, it...