In re Legowski

• Citation: 167 BR 711
• Decision Date: 24 May 1994
• Docket Number: Bankruptcy No. 93-43218-HJB.
• Parties: In re Franciscek LEGOWSKI, Anna Legowski, Debtors.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

167 B.R. 711 (1994)

In re Franciscek LEGOWSKI, Anna Legowski, Debtors.

Bankruptcy No. 93-43218-HJB.

United States Bankruptcy Court, D. Massachusetts.

May 24, 1994.

Joseph B. Collins, Christopher J. Brown, Cecilia Calabrese, Springfield, MA.

MEMORANDUM

HENRY J. BOROFF, Bankruptcy Judge.

I. INTRODUCTION

The matter before this Court is an objection of Fleet Bank of Massachusetts, as Successor to Federal Deposit Insurance Corporation, as Receiver of Heritage Bank for Savings ("Fleet" or the "Bank"), to the Chapter 13 plan (the "Plan") filed by the debtors, Franciscek Legowski and Anna Legowski (the "Debtors").

II. FACTS

On November 22, 1991, the Debtors borrowed approximately $112,233.81 from Fleet evidenced by a note (the "Note") secured by a mortgage and a collateral assignment of rents on their property located at 9 Maple Street, South Hadley, MA (the "Property"). An appraisal prepared on March 29, 1993 by Property Financial Services for Fleet describes the Property as a "2-family dwelling with 10 rooms, 4 bedrooms, 2 baths and 2260 SF living area."¹ The Debtors reside at one of the two dwellings on the Property. The other unit is rented and provides the Debtors with income in the approximate amount of $450.00 per month.²

The Note provides for repayment over a term of 30 years, but also provides that, at any time after five years from the date of the Note (November 22, 1996), the Bank shall have the right to demand full payment. The Note further provides a warranty by the Debtors/Borrowers that "the proceeds of the loan shall be used solely for business purposes and that this transaction is not a consumer transaction subject to M.G.L. c. 140D, Federal Reserve Board Regulation Z, or other `consumer protection' statues sic, regulations, or restrictions, without exception."³

The Debtors filed their Chapter 13 petition on November 29, 1994. In their schedules, the Debtors list Fleet as a secured creditor holding a secured claim in the amount of $111,067.00 against their Property. Approximately four weeks later, the Debtors filed their Chapter 13 plan (the "Plan") in which the Debtors propose to bifurcate Fleet's claim into a secured claim in the amount of $95,000 and an unsecured claim in the amount of $16,067.00. Section 3(c) of the Plan also provides that:

the maturity date of the claim shall be changed so as to provide that the claim shall be satisfied and the mortgage discharged when the post-filing monthly payments of $903.06 total $95,000 in principal plus interest on the secured portion of the claim. In the event that there are no changes in the interest rate, the claim shall be satisfied in or about January, 2011.

With their Plan on December 29, 1993, the Debtors filed a "Motion to Extend Plan" in which the Debtors sought to extend the repayment period of their Plan from 36 months to 60 months.

On January 24, 1994, Fleet filed an objection to the Debtors' Plan. In that objection and at the hearing held on February 23, 1994 (the "February Hearing"), Fleet complained that: (1) the amounts set forth in the Plan for Fleet's total indebtedness and arrearage, the amount owed for real estate taxes and the value of the Property were all stated incorrectly, and, therefore, the Plan did not comply with 11 U.S.C. §§ 1322(b)(2)-(5); (2) the proposed bifurcation of Fleet's claim into a secured claim and an unsecured claim was impermissible, pursuant to § 1322(b)(2) and the decision of Nobelman v. American Savings Bank, ___ U.S. ___, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), and, in any event, could only be accomplished in an Adversary Proceeding pursuant to Fed.R.Bankr.P. 7001⁴; (3) the Debtors' proposed payment of the secured claim over a twenty year term, but deleting Fleet's right to demand full payment prior to expiration of that term, was an impermissible modification of Fleet's secured claim, in violation of 11 U.S.C. § 1322(c); and, (4) there was no just cause for the Debtors' extension of plan payments from 36 to 60 months.⁵

At the conclusion of the February Hearing, the Court ordered the parties to submit briefs on the bifurcation and modification issues, and left the balance of the disputed factual issues to be set down for an evidentiary hearing after the issuance of a decision.

III. DISCUSSION

A. Bifurcation under Section 1322(b)(2)

Through its oral arguments and legal memorandum, the Debtors assert that: (1) a claim secured by a "two family" dwelling or "duplex", in which one unit is rented out to others, is not protected from modification by the exception carved out in § 1322(b)(2)⁶, and (2) the perfected collateral assignment of rents created additional security for Fleet which disqualifies it from the protection of § 1322(b)(2).

Fleet's argument is twofold. First, it asserts that the protection from claim modification contained in § 1322(b)(2) is not strictly limited to mortgages on single family residences. Second, Fleet argues that the collateral assignment of rents, which granted Fleet the right to collect rents after default without taking possession, did not create an additional security interest or separate item of collateral. Massachusetts law, Fleet asserts, also grants a mortgagee the right to collect rents upon a mortgagor's default, although such right can only be exercised after the mortgagee takes possession. Accordingly, Fleet argues that the Debtors' Property, as a whole, constitutes residential property, and, therefore, any modification of Fleet's claim is prohibited by § 1322(b)(2) and the Supreme Court's decision in Nobleman.

Prior to Nobelman, several courts addressing the meaning of § 1322(b)(2) found that claims secured by the debtor's residence and other income producing property could be modified pursuant to § 1322(b)(2). See e.g. In re Torres Lopez, 138 B.R. 348 (D.P.R. 1992); Zablonski v. Sears Mortgage Corp. (In re Zablonski), 153 B.R. 604 (Bankr. D.Mass.1993)⁷; In re McVay, 150 B.R. 254 (Bankr.D.Or.1993); In re Ramirez, 62 B.R. 668 (Bankr.S.D.Cal.1986). See also In re Jackson, 136 B.R. 797 (Bankr.N.D.Ill.1992) (a mortgage encumbering a two-flat unit, where the debtor lived in one unit and occasionally rented the other, was not protected from modification under § 1322b2).

In determining that a claim secured by income producing property is not precluded from modification by § 1322(b)(2), courts have occasionally focused on the income producing potential of the realty. See In re Torres Lopez, 138 B.R. at 351 ("the property itself must have some inherent income-producing power . . . the mere fact that debtor's place of business is located on the premises does not imbue debtor's property with income producing potential"); In re McVay, 150 B.R. at 257 (the debtors' property used as a residence and a bed and breakfast establishment "clearly had inherent income producing power"); In re Ramirez, 62 B.R. at 670 (creditor's security interest on debtor's residence and two income producing rental units could be modified under § 1322b2). Some courts have also focused on the debtor's actual use of the property in addition to the income producing potential of the realty. See e.g. In re McVay, 150 B.R. at 254 (1322b2's anti-modification provision did not apply to secured creditor's security interest in real property used as debtor's principal residence and as a bed and breakfast establishment, noting, that "a substantial portion of the debtor's `principal residence' was devoted to the bed and breakfast operation"); In re Ramirez, 62 B.R. at 668 (Bankr. S.D.Cal.1986) (debtor's actual use of his property was as a residence and a rental property which provided almost 46% of debtor's net income). See also In re Glenn, 760 F.2d 1428 (6th Cir.1985), cert. denied, 474 U.S. 849, 106 S.Ct. 144, 88 L.Ed.2d 119 (1985); In re Ballard, 4 B.R. 271 (Bankr. E.D.Va.1980).

The Nobelman decision offered little guidance on this issue. The Supreme Court, in that case, addressed a mortgagee's objection to bifurcation of its claim which was secured only by a deed of trust on debtors' principal residence, namely, a single family condominium. ___ U.S. at ___, 113 S.Ct. at 2108.⁸ Since Nobelman, few decisions have analyzed the precise issue of whether a mortgagee's claim secured by the debtor's residence and other rental property is protected from modification under § 1322(b)(2). In the recent decision of In re Wetherbee, 164 B.R. 212 (Bankr.D.N.H.1994), Chief Bankruptcy Judge Yacos found a Chapter 13 debtor could modify the rights of the first mortgagee which, on the date of the filing, held a claim secured by a two family residence used as both a residence and as rental property (even though the property was a single family dwelling used solely as the debtor's primary residence on the date of the origination of the loan and mortgage). 164 B.R. at 213. The Wetherbee court simply concluded that the plain language of § 1322(b)(2) did not prohibit the debtor from modifying the mortgagee's claim which was secured by the debtor's residence and rental property on the date of the filing. Id.

In the recent decision of In re Guilbert, 165 B.R. 88 (Bankr.D.R.I.1994), Judge Votolato rejected the debtor's attempt to modify a mortgagee's security interest in a three unit dwelling, including the debtor's residence, the debtor's son's residence, and a unit which was "only occasionally rented." 165 B.R. at 89. The court ruled that § 1322(b)(2) "does not say, nor does it in any way imply that if the debtor's principal residence is also used to house other tenants, paying or otherwise, that it may be open to modification by the home owner." Id. The court found that the language in Nobelman dictated a reading of the statute which was faithful to the legislative intent of § 1322(b)(2) (i.e., the protection of the flow of capital into the home lending market). Id.

This Court is inclined to follow that line of authority which has held that a claim secured by the debtor's residence and property which has ...