In re Crump

• Decision Date: 16 April 2015
• Docket Number: Case No. 14–05007–dd
• Citation: 529 B.R. 106
• Court: U.S. Bankruptcy Court — District of South Carolina
• Parties: In re, Robin Gilbert Crump, Debtor.

529 B.R. 106

In re, Robin Gilbert Crump, Debtor.

Case No. 14–05007–dd

United States Bankruptcy Court, D. South Carolina.

Signed April 16, 2015

Entered April 17, 2015

Elizabeth M. Atkins, Charleston, SC, for Debtor.

ORDER

David R. Duncan, Chief US Bankruptcy Judge District of South Carolina

This matter comes before the Court to consider confirmation of a chapter 11 plan filed by debtor Robin Gilbert Crump (“Crump” or “Debtor”) on November 17, 2014, as amended February 9, 2015. Creditor Ameris Bank, successor-in-interest by merger to Coastal Bank (“Ameris Bank”), objects to confirmation and voted to reject the plan. The Court held a preliminary confirmation hearing on the plan on March 24, 2015 and continued the hearing to April 21, 2015 so that the parties could provide the Court with supplemental briefs. After careful consideration of the law, arguments of counsel, and evidence submitted, the Court sustains Ameris Bank's objection.

I. Facts and Procedural History

Crump filed for protection under chapter 11 of the Bankruptcy Code on September 3, 2014. She scheduled a parcel of real property jointly owned with her husband at 940 Joe Rivers Road, Charleston, South Carolina valued at $800,000. The property is encumbered by a first mortgage in favor of Ameris Bank. Ameris Bank filed a proof of claim for $1,846,408 on January 8, 2015. The loan documents attached to the proof of claim show that the loan was originally secured by a first mortgage on the Joe Rivers Road property and a second mortgage on real property located at Broughton Road in Charleston. The principal balance was originally $1,850,000 and the promissory note carries an interest rate of 4.5%. The note requires interest-only payments until maturity on March 25, 2012. The mortgage was signed by the Crump and her husband on March 26, 2009. The parties do not dispute that the loan matured pre-petition, is due in full, and has not been paid. The parties also do not dispute that the lien on the Broughton Road property was released in July 2010.

The Debtor timely filed a plan of reorganization and amended the plan shortly prior to the first confirmation hearing. Relevant here is the plan's proposed treatment of Ameris Bank's claim. Class 2 of the plan proposes to “cure” the Ameris Bank loan. It divides the loan into secured and unsecured portions. With regards to the secured claim, which the Debtor values at $1,260,000, the plan provides for monthly payments of $6,385 for forty-eight months. At the end of the forty-eight months, the Debtor will pay the remaining balance on both the secured and unsecured portions of the loan. Ameris Bank retains its right to foreclose on the property in the event of default throughout the duration of the plan. Any deficiency arising from foreclosure is accounted for in class 12 of the plan, and would receive the same fifteen percent payment over ten years as the other unsecured creditors. Both classes are impaired.

Ameris Bank objects to the plan on the grounds that, inter alia, this treatment is not permissible under the Code. Ameris Bank argues that because its claim is secured by the Debtor's principal residence, 11 U.S.C. § 1123(b)(5)¹ bars the plan from providing for modification of its claim.

Debtor originally stipulated that the claim was secured only by the Debtor's principal residence, but now argues that § 1123(b)(5)'s anti-modification provision is not applicable here because the claim was originally secured by collateral in addition to the Debtor's principal residence. Even if § 1123(b)(5) does apply, the Debtor argues the plan treatment of the claim is not a modification but rather a permissible cure or waiver of default pursuant to § 1123(a)(5)(G). The parties submitted briefs in support of their respective positions.

II. Discussion

Section 1123(b)(5) provides that a chapter 11 plan may modify the rights of holders of secured claims unless the claim is secured only by an individual debtor's principal residence. Ameris Bank argues that this provision applies to its claim and that the plan impermissibly proposes to modify its rights. The Debtor argues that the provision does not apply and, regardless, the Code permits the plan's proposed treatment. As it must, the Court considers first the applicability of the section before turning to whether the proposed treatment is proper.

A. Whether Ameris Bank's Claim is Subject to Modification²

The Debtor first argues that § 1123(b)(5) is not applicable to Ameris Bank's claim because the lien was originally secured by collateral in addition to the principal residence. Ameris Bank argues that because the lien on the additional collateral was extinguished prior to the date of the filing of the petition, its claim is secured solely by the principal residence. The Court agrees with Ameris Bank.

Any analysis of a statute must begin with the plain language. See Milavetz, Gallop & Milavetz, P.A. v. U.S., 559 U.S. 229, 236, 130 S.Ct. 1324, 176 L.Ed.2d 79 (2010). Section 1123(b)(5)³ provides that a 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....

By its terms, § 1123(b)(5) allows debtors to propose modifications of claims, other than those secured by the debtor's principal residence. Claims are generally determined as of the date of the filing of the petition. See 11 U.S.C. § 502(b). A claim is defined broadly for bankruptcy purposes as a “right to payment,” 11 U.S.C. § 101(5)(A), and is classified as secured or unsecured. 11 U.S.C. § 506(a). Claims are deemed “allowed,” that is, enforceable in the bankruptcy case, except to the extent that “such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law....” 11 U.S.C. § 502(b)(1). The determination of claim allowance therefore requires a court to consider the claim in the context of the applicable nonbankruptcy law; here, South Carolina law.⁴ Travelers Cas. and Sur. Co. of Am. v. Pac. Gas and Elec. Co., 549 U.S. 443, 450, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007) (“[W]hen the Bankruptcy Code uses the word ‘claim’ ... it is usually referring to a right to payment recognized under state law.”).

Ameris Bank has a claim. It is presently secured only by the Debtor's principal residence. The mortgage documents show that Ameris Bank's claim was originally also secured by a second mortgage on the Broughton Road property. However, Ameris Bank released its right to enforce its lien against the Broughton Road property. A release is generally defined as “the act of giving up a right or claim to the person against whom it could have been enforced.” Black's Law Dictionary (9th ed. 2009). South Carolina law permits the “release of a portion of any mortgaged interest in real property from the lien of the mortgage.” S.C.Code Ann § 29–3–470 (1976). Thus, upon the release of the Broughton Road property, Ameris Bank no longer had any rights or interest with regards to that property. Ameris Bank's lien presently extends only to the Joe Rivers Road property: the principal residence of the Debtor. Its claim is secured only by a security interest in real property that is the Debtor's principal residence.

The Debtor disagrees with this analysis. She argues that because the original security agreement encumbered two parcels of property, Ameris Bank's claim is not one secured solely by the principal residence. This proposition has support in the case law.⁵

Courts holding that the loan documents determine whether the claim is secured solely by the principal residence focus on the use of the phrase “security interest” in the statute. They note that the Code defines security interest as a “lien created by agreement” without reference as to whether or not that agreement is enforceable. 11 U.S.C. § 101(51) ; In re Larios, 259 B.R. 675, 678 (Bankr.N.D.Ill.2001) ; In re Howard, 220 B.R. 716, 718 (Bankr.S.D.Ga.1998). These courts conclude that because this definition is so broad, if the security agreement covers more than the debtor's principal residence, then the loan is modifiable. Larios, 259 B.R. at 679 (finding support for this position from the legislative history showing the anti-modification provision was enacted to protect the lender whose only collateral is the traditional home mortgage). If there is a later change resulting in the lender being no longer secured by the additional collateral, then “the mortgagee is at its peril” for not changing the documents. In re Scarborough, 461 F.3d 406, 410–12 (3d Cir.2006) (holding that a claim secured by both the debtor's principal residence and income-producing properties [a multifamily unit] is subject to modification). These courts note that at the time the loan is made, lenders determine their exposure and how best to protect themselves. Id. at 412. Considered among these risks is whether the loan would be modifiable in a bankruptcy case. In re Proctor, 494 B.R. 833, 840 (Bankr.E.D.N.C.2013). Creditors choosing to secure their loans with additional collateral should not be also be protected by an anti-modification provision. Id. They bargained for a modifiable loan and protected themselves accordingly. Id.

Other court criticize this analysis as improperly “focus[ing] on sub-phrases” and considering policy implications when the language of the statute is clear. In re Abdelgadir, 455 B.R. 896, 903 (9th Cir. BAP 2011). This Court agrees. The language of the statute bars modification of “a claim secured only by a security interest in real property.” 11 U.S.C. § 1123(b)(5) (emphasis added). “Unless some federal interest requires a different result,” these claims are analyzed under state. 11 U.S.C. § 502(b)(1) ; Butner v. U.S., 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (“The justifications for application of state law are not limited to ownership interests; they apply with equal force to security interests....”). Considering only the initial loan...