In re Laycock

• Citation: 497 B.R. 396
• Decision Date: 01 January 2013
• Docket Number: Case No. 13–35122 (cgm)
• Parties: In re: Alan Laycock, Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

497 B.R. 396

In re: Alan Laycock, Debtor.

Case No. 13–35122 (cgm)

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

Filed 09/25/2013

Andrea B. Malin, Genova & Malin, Attorneys at Law, The Hampton Center, 1136 Route 9, Wappinger Falls, NY, 12590, Attorney for the Debtor.

Thomas Patalano, Dorf & Nelson LLP, International Corporate Center, 555 Theodore Fremd Avenue, Rye, NY, 10580, Attorney for Ocwen Loan Servicing, LLC, as

servicer for HSBC Bank USA, N.A., as Trustee for Fremont Home Loan Trust 2006–D, Mortgage–Backed Certificates, Series 2006—D.

Chapter 13

MEMORANDUM DECISION DENYING DEBTOR'S MOTION TO BIFURCATE OCWEN'S FIRST MORTGAGE LIEN

CECELIA G. MORRIS, CHIEF UNITED STATES BANKRUPTCY JUDGE

Introduction

Before the Court is a motion to bifurcate a first mortgage lien on real property that the debtor argues is not his principal residence. The mortgage holder counters by arguing that the real property is the debtor's principal residence. The Court agrees with the mortgage holder. Most persuasive is the fact that the debtor opted to participate in this Court's loss mitigation program which ultimately resulted in a HAMP loan modification.

Jurisdiction

The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and the Amended Standing Order of Reference signed by Chief Judge Loretta A. Preska dated January 31, 2012. This is a “core proceeding” pursuant to 28 U.S.C. § 157(b)(2)(B) (allowance of claims against the estate) and (b)(2)(K) (determining the validity, extent, or priority of liens).

Background

Alan Laycock (“Debtor”) filed a chapter 13 petition on January 22, 2013. The Debtor's petition indicates that he holds a fee simple interest in “Residence/Commercial” real property located at 203 Route 28A, Hurley, N.Y. 12443 (“Route 28A Property”). Sched. A, ECF Doc. No. 1. The Route 28A Property is encumbered by a first mortgage lien held by Ocwen Loan Servicing, LLC, Servicer for HSBC Bank USA National Association, as Trustee or Fremont Home Loan Trust 2006–D, Mortgage–Backed Certificates, Series 2006–D (“Ocwen”). As of the petition date, the Debtor was in arrears on his mortgage payments to Ocwen. Sched. D, ECF Doc. No. 1. With a hope of recapitalizing these arrears through a loan modification, the Debtor elected to participate in this Court's Loss Mitigation Program by checking the appropriate box in Section C of the model chapter 13 plan, filed on January 22, 2013. Sec. C, ECF Doc. No. 5. As noted in Section C of the plan, loss mitigation “applies only to the Debtor's residential real property or cooperative apartment.” Id.

Pursuant to an Order dated February 15, 2013, the Debtor and Ocwen entered into loss mitigation. ECF Doc. No. 9. Over the next few months, the Debtor provided Ocwen with the requisite documents and both parties apprised this Court of their progress through status reports filed on the docket and at loss mitigation hearings. Loss mitigation ultimately culminated in a HAMP trial loan modification. Stat. Let., ECF Doc. No. 33.

While the parties were engaged in loss mitigation, the Debtor filed a motion to bifurcate Ocwen's mortgage lien into secured and unsecured portions, value the unsecured portion at zero, and then void the unsecured portion. ECF Doc. Nos. 30 and 31. The Debtor also requested that the Court value the Route 28A Property at $90,000 pursuant to an appraisal annexed to the motion and avoid a wholly unsecured second mortgage encumbering the Route 28A Property. The Debtor's second mortgage is held by KeyBank NA.

Ocwen opposed the Debtor's motion, arguing that its first mortgage lien cannot be bifurcated as a matter of law as the Route 28A Property is the Debtor's principal residenceand falls within the anti-modification exception to 11 U.S.C. § 1322(b)(2). ECF Doc. No. 40. Ocwen also attached a Brokers Price Opinion dated April 10, 2013, which indicates that the Route 28A Property has an anticipated sale price of $140,000, much higher than the Debtor's proffered appraisal. KeyBank did not file opposition to the Debtor's motion.

Both the Debtor and Ocwen appeared before this Court on August 27, 2013 for a hearing on the motion. KeyBank did not appear. At the conclusion of the hearing, the Court issued a bench ruling granting the Debtor's motion to avoid KeyBank's second mortgage lien and denying the Debtor's motion to bifurcate Ocwen's first mortgage lien. This opinion follows to provide the parties with the Court's legal justifications for its ruling.

Discussion

Two provisions of the Bankruptcy Code are operative with respect to the bifurcation of Ocwen's first mortgage lien.

Section 506(d) states:

To the extent that a lien secures a claim again the debtor that is not an allowed secured claim, such lien is void, unless—(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or (2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.

Section 1322(b)(2) states:

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. §§ 506(d) and 1322(b)(2). The United States Supreme Court has interpreted these provisions in cases factually similar to the case at bar. In Dewsnup v. Timm, the Supreme Court held that a chapter 7 debtor could not strip down a partially secured claim with § 506(d) as the claim was secured by a lien and the claim had been fully allowed pursuant to § 502. 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). One year after Dewsnup, the Supreme Court in Nobelman v. American Savings Bank held that a chapter 13 debtor could not strip down a partially secured mortgage lien on the debtor's principal residence pursuant to § 1322(b)(2). 508 U.S. 324, 331–32, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). Read together, these cases produce one rule: a debtor cannot strip down a mortgage lien on the debtor's principal residence (with either § 506(d) or § 1322(b)(2)) if the mortgage lien is secured by some value in the property.

The first mortgage lien held by Ocwen is secured by some value, regardless of whether the Court accepts the Debtor's or Ocwen's appraisal. The issue then is whether the Route 28A Property is the “debtor's principal residence.”

A. Is the Route 28A Property the Debtor's Principal Residence?

Debtor argues that the Route 28A Property should not be considered his principal residence as “the majority of the courts that have considered the issue have ruled that an otherwise commercial or income producing property will not be given the protection of the anti-modification provision of Section 1322(b)(2) simply because the debtor may reside therein.” Mem. Law in Supp. of Mtn., ECF Doc. No. 31, pg. 4. In support, the Debtor states that the Route 28A Property is “zoned light factory/highway commercial[,]” and the Debtor always intended to utilize the premises for commercial purposes. Id. at pg. 6. The Debtor currently operates a full service wood-working factory on the Route 28A Property. Id. Given that the property is predominantly commercial in nature, the Debtor argues that it “is not well suited for a single family residence and is occupied by the debtor due to his financial situation.” Id.

Ocwen argues that the Route 28A Property should be considered the Debtor's principal residence as “the subject premises is a one family, three-bedroom, ranch style home with an attached garage” that the Debtor has owned since 1994. Aff. in Opp., ECF No. 40, ¶ 8, 10. Ocwen also points out that the Debtor's own appraisal concedes that the Route 28A Property is zoned residential, and that HAMP is only available to residential borrowers. Id. at ¶ 15, 28. As the Route 28 Property is the Debtor's principal residence, Ocwen argues that its “lien cannot be bifurcated as it is the primary lien against the Debtor's principal residence and therefore Ocwen's rights in the entire lien are protected under the anti-modification exception of 11 U.S.C.A. § 1322(b)(2).” Id. at ¶ 4 (emphasis in original).

Whether real property is actually a debtor's principal residence, and thus falls within the § 1322(b)(2) anti-modification exception, has confounded bankruptcy courts. In re Moore, 441 B.R. 732, 739 (Bankr.N.D.N.Y.2010) (noting that “[c]ourts have widely disagreed over the proper application of the anti-modification provision, yet each one proclaims that its rule best comports with the ‘plain meaning,’ the legislative history, congressional intent, and/or the fundamental principles of bankruptcy law”).

B. Relevant Statutory Authority and Case Law

Section 101(13A)(A) of the Bankruptcy Code defines a “debtor's principal residence” as “a residential structure if used as the principal residence by the debtor, including incidental property, without regard to whether the structure is attached to real property.” ¹11 U.S.C. § 101(13A) (emphasis added). Section 101(13A) was amended in December 2010 pursuant to Bankruptcy Technical Corrections Act of 2010 (“BTCA”). SeePub.L. 111–327, 124 Stat. 3557 (Dec. 22, 2010). The 2010 amendment added the phrase “if used as the principal residence by the debtor,” and was intended to clarify “that [this] definition pertains to a structure used by the debtor as a principal residence.” SeeIn re Picchi, 448 B.R. 870, 872 (1st Cir. BAP 2011) (citing 156 Cong. Rec. H7158 (daily ed. Sept. 28, 2010)).² After this amendment, one court has argued that “the definition of ‘principal residence’ in § 101(13A) unambiguously hinges on how the debtor actually uses the structure, not the debtor's intentions at any point in time.” In re Schayes, 483 B.R. 209, 213 (Bankr.D.Ariz.2012).

The focus on “use” has been the central crux of the “principal...