In re Krus

• Decision Date: 21 February 2018
• Docket Number: Case No.: 17–12413–13
• Citation: 582 B.R. 218
• Court: U.S. Bankruptcy Court — Western District of Wisconsin
• Parties: IN RE: Jason J. KRUS and Trina B. Krus, Debtors.

582 B.R. 218

IN RE: Jason J. KRUS and Trina B. Krus, Debtors.

Case No.: 17–12413–13

United States Bankruptcy Court, W.D. Wisconsin.

Signed February 21, 2018

Jennifer M. Schank, Krekeler Strother, S.C., Madison, WI, for Debtors.

DECISION

Hon. Catherine J. Furay, U.S. Bankruptcy Judge

Debtors Jason and Trina Krus filed their Chapter 13 petition on July 7, 2017. Debtors filed a Chapter 13 Plan, and Creditor Dells Land & Cattle Company II, LLC ("DLCC") objected.

FACTS

The parties have stipulated to the following facts. On June 30, 2016, Debtors and DLCC executed a Land Contract that is secured by real estate located at 1712–1714 9th Avenue, Wisconsin Dells, Wisconsin 53965 (the "Property"). The Property is a duplex. Debtors occupy one unit and rent out the other. Debtors generate income from the rented unit in the amount of $1,425 per month.

Under the Land Contract, Debtors paid $5,000 upon execution and were required to pay the balance of $290,000 over a period ending on July 1, 2019. The Land Contract required Debtor to initially make $2,000 per month principal-only payments to Bank First National to satisfy an underlying note between DLCC and Bank First National. Debtors were also required to make escrow payments to Bank First National in the amount of $520 per month over the entire term of the note. Starting August 1, 2017, Debtors were required to make monthly principal and interest payments computed at an annual rate of 1.75%, compounded monthly. Those payments were also to be made to Bank First National. On August 1, 2018, the principal and interest payment will adjust to an interest rate of 3.5%, compounded monthly. The Land Contract has a maturity date of July 1, 2019, at which time a balloon payment would be due. The current balance due is $278,000.

On the Petition Date, Debtors were in arrears in the amount of $15,120. Debtor's Plan proposes payment of the arrearage of $19,000 over 60 months without interest. It further provides that the regular $2,520 monthly payments will be made outside of the Plan. There will be a balloon payment due on the 60th month for any unpaid principal, interest or other charges.

DISCUSSION

DLCC raises two arguments under which it claims that confirmation of Debtors' Plan must be denied. First, it argues the Land Contract is secured by Debtors' principal residence. Therefore, it asserts, the Plan may not modify DLCC's rights pursuant to section 1322(b)(2). Second, it argues the proposed balloon payment on the Land Contract renders the Plan unfeasible.

1. Anti-modification of claim secured by principal residence

Section 1322(b)(2) provides 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." A Chapter 13 debtor is therefore prohibited from modifying the rights of a claimholder whose interest is secured exclusively by a principal residence.

The issue in this case is that the Property is mixed use—one half is Debtors' principal residence, and the other half is an income-generating rental property. Though countless courts have addressed this issue, there is no controlling decision from the Seventh Circuit.

Overwhelmingly, courts have held that claims secured by mixed-use property are not "secured by a debtor's principal residence" for purposes of section 1322.¹ Their treatment, therefore, is subject to modification through a Chapter 13 plan. The Third Circuit has reasoned that the use of the word "is" in the statute "means that the real property that secures the mortgage must be only the debtor's principal residence in order for the anti-modification provision to apply." Scarborough v. Chase Manhattan Mortg. Corp. (In re Scarborough) , 461 F.3d 406, 411 (3d Cir. 2006) (emphasis in original). Where, as here, Debtors use part of their property to generate income, it would no longer qualify as a principal residence under the language in the Code.

A few courts have acknowledged the language in section 1322 is ambiguous as applied to mixed-use property subject to a residential mortgage. At least one court, after remarking that the statutory language is inconclusive, simply rejected the view propounded by DLCC here and followed the rule accepted by the Third Circuit.

In re Abrego , 506 B.R. 509, 515 (Bankr. N.D. Ill. 2014). Others have adopted a case-by-case approach taking into account the totality of the circumstances surrounding the land and the mortgage transaction. Brunson v. Wendover Funding (In re Brunson) , 201 B.R. 351, 353 (Bankr. W.D.N.Y. 1996). See also Litton Loan Servicing, LP v. Beamon , 298 B.R. 508, 512 (N.D.N.Y. 2003). Those courts look to the intent of the parties to determine whether they "intended the mortgage in question to be primarily residential versus primarily commercial in nature." Id.

The Court adopts the majority rule. First, to hold that mixed-use property may sometimes qualify as a "principal residence" could lead to an absurd result. As other courts have noted, "[i]t is unlikely Congress intended the anti-modification provision to reach a 100–unit apartment complex simply because the debtor lives in one of the units. Limiting the anti-modification provision to single-family dwellings creates a more easily administered test." Lomas Mortg., Inc. v. Louis , 82 F.3d 1, 6 (1st Cir. 1996). See also Abrego , 506 B.R. at 515.

Moreover, the majority rule more closely matches the language in the statute and lends itself to judicial economy. Section 1322 controls "property that is the debtor's principal residence"—not property that includes or contains the debtor's principal residence. If the Court adopted a totality of the circumstances approach, it would endeavor to reconstruct a factual history from contracts and other available evidence to divine whether the parties intended the contract to be 51% residential or 51% commercial. Meanwhile, the majority interpretation springs directly from the language in the statute and provides a bright line for settling 1322 disputes on mixed-use property. And ultimately, "[e]ven if the Court does not agree with all of the possible outcomes produced by the statutory language, it is Congress, not this Court, that must repair any problems with the Code." Abrego , 506 B.R. at 515.

Even if the Court chose to use a balancing test, the Property should be characterized as commercial. Ms. Krus has been employed since June 2016 as a rental manager. She works for Krus and Sias, LLC, which was formed in June 2016 and in which the Debtors are members. The LLC was formed in the same month Debtors executed the Land Contract. Though it is not totally clear, the record suggests Debtors formed the LLC with the express purpose of using it to rent out the second apartment. It is virtually indisputable there was at least some commercial intent at the time the Land Contract was signed. Debtors appear to have formed an LLC with the sole purpose of starting a commercial housing rental service. Ms. Krus's income flows from the LLC and the amount of income closely matches that which Debtors charge in rent on the second unit.

DLCC requests this Court adopt the case-by-case approach, but it does not offer any justification for why this property should be considered mostly residential. DLCC cites to In re Wages , a case that addressed a somewhat similar factual scenario in the context of a Chapter 11. 479 B.R. 575, 580 (Bankr. D. Idaho 2012), aff'd , 508 B.R. 161 (9th Cir. BAP 2014). There, the property at issue was an 11–acre parcel of land the debtor used as his residence and in the operation of his trucking business. The court declined to follow the "hyperliteral" interpretation of the term "principal residence" and held the anti-modification provision in section 1123(b) applied. Relevant to the instant case, the Wages court observed "the anti-modification provision's practical and policy considerations as applied to multi-family dwellings are not the same as those applicable to a trucking business." Id. at 582. By its own reasoning, Wages is not applicable here.

The anti-modification provision does not apply to Debtors' Plan. As such, the Plan may modify DLCC's rights.

2. Feasibility

DLCC has also objected on the grounds the Plan is not feasible. Debtors bear the burden of proving their Plan meets the requirements of section 1325(a), including feasibility. DLCC argues the Plan is not feasible because it proposes a balloon payment at the end of the 60–month term on DLCC's claim.

In considering balloon payments in a Chapter 13, other courts have ruled "debtors must show by definite...