In re McGregor, Bankruptcy No. 94-41302-JFQ.

Citation172 BR 718
Decision Date21 October 1994
Docket NumberBankruptcy No. 94-41302-JFQ.
PartiesIn re Katherine M.J. McGREGOR, a/k/a Mary Jo K. Higginbotham, Debtor.
CourtUnited States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

Ralph Stein, Salem, NH, for Katherine M.J. McGregor.

Richard Askenase, Shapiro & Kreisman, Framingham, MA, for Countrywide Funding Corp.

OPINION

JAMES F. QUEENAN, Jr., Chief Judge.

Katherine M.J. McGregor (the "Debtor") proposes a chapter 13 plan which bifurcates a thirty year mortgage on her four-unit apartment building into secured and unsecured portions, reduces the interest rate from 10½% to 8%, and pays the secured portion over the twenty-two years remaining under the mortgage note. The questions presented, in addition to feasibility, are (i) whether the Debtor's use of one of the units as a residence prohibits bifurcation, (ii) whether the proposed modification requires that payments be completed during the five year life of the plan, and (iii) if the plan as proposed must be completed during five years, whether bifurcation can be accomplished without a change in the interest rate so long as defaults are cured and monthly payments called for by the note are made until the secured portion of the claim is paid in full. I hold bifurcation is permissible, but the Debtor must keep the same interest rate and make the payments required by the note until the secured portion of the claim is paid in full.

On October 15, 1986, the Debtor and her former husband obtained a loan of $211,500.00 from National Mortgage Co., Inc. The loan was secured by a first mortgage on real estate at 33 Summit Street, Haverhill, Massachusetts. It was evidenced by a note payable over thirty years, bearing interest at 10.5% per annum. The note has since been assigned to Countrywide Funding Corporation ("Countrywide"), which objects to the Debtor's plan.

On March 25, 1994, the Debtor filed a petition for relief under Chapter 13. As of the petition date, the principal balance of Countrywide's mortgage was $202,792.93. Countrywide filed a proof of claim on March 30, 1994 for $43,170.78, which includes 14 outstanding pre-petition mortgage payments, along with costs and interest. The fair market value of the property is in dispute. The Debtor asserts it is worth $100,000.00 and Countrywide values it at $135,000.00. Both parties have had the property appraised. I will consider the valuation issue later.

The property is a wooden structure with four apartments. The Debtor lives in one apartment with her fiance, and rents the others to tenants. The apartments generate $1,800.00 in rental income per month, exclusive of the Debtor's rent (but including her fiance's). The Debtor also has monthly income of $1,504.00 as an employee of Mary Immaculate Nursing Home, Hampstead Hospital. Thus her total monthly income is $3,304.00. Her monthly expenses are estimated at $2,330.00. Therefore, the Debtor has excess monthly income of $974.00 to pay monthly plan payments of $818.00.

The Debtor's plan seeks to bifurcate Countrywide's claim into a secured claim of $100,000.00 and an unsecured claim of $102,792.93. The arrearage and costs are to be paid under her five year plan through monthly installments of $635.00. The unsecured portion of Countrywide's claim is to be paid 14 cents on the dollar, contemporaneous with the arrearage payments. These payments have a five year payout period under the plan.

The note calls for monthly payments for principal and interest of $1,934.68. Regular mortgage payments of $782.07 are to be paid Countrywide under the plan. This amount was arrived at by amortizing the Debtor's valuation of the collateral, $100,000.00, over the note's remaining twenty-two years at an 8% interest rate (prime plus 2%). These payments are to be made directly to Countrywide, who retains its lien on the property.

I. BIFURCATION OF THE MORTGAGE

Countrywide first objects to the Debtor's plan on the ground bifurcation of its mortgage is prohibited by section 1322(b)(2). This section provides:

(b) Subject to subsection (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. (emphasis added)

Section 1322(b)(2) was recently interpreted by the Supreme Court in Nobelman v. American Savings Bank, ___ U.S. ___, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). In that case, the chapter 13 debtors' proposed plan reduced their $71,335.00 mortgage, which was secured only by their residence, to $23,500.00 to reflect the property's fair market value. The remainder of the claim was treated as unsecured. This was done in reliance on section 506(a), under which a creditor's claim is a secured claim only "to the extent of the value of such creditor's interest in the estate's interest in such property." The Court held bifurcation was prohibited by section 1322(b)(2). The Court distinguished between the meaning of "secured claim" under section 506(a) and "rights" of the holder of a secured claim referred to in section 1322(b)(2). The Court ruled that the statute's protection of "rights" included more than the creditor's secured claim. Id. at 2110. As the Court saw it, the rights protected included the creditor's contractual rights with respect to interest rates, monthly payments terms and repayment terms. As these rights were protected from modification by section 1322(b)(2), the plan was not confirmable. Id. at ___, 113 S.Ct. at 2111.

Countrywide's reliance on Nobelman is misplaced. In that case, the creditor's claim was secured only by a security interest in the debtors' principal residence. Countrywide, in contrast, has a security interest in the debtor's entire building, which includes both her principal residence and three income-producing units. Countrywide argues that the phrase "secured only by a security interest in real property that is the debtor's principal residence" should be interpreted to refer to a claim which has as its only collateral real estate that includes the debtor's residence. If that were the intention of Congress, the statute should refer to real property that "includes" the residence. Instead, the word "is" appears, which more aptly describes an equivalence between the real estate and the residence. In this case, the real estate is not merely residential, it also contains income-producing units.

I find support in Judge Boroff's recent decision, In re Legowski, 167 B.R. 711 (Bankr.D.Mass.1994). There, the chapter 13 debtors proposed to bifurcate their mortgage into secured and unsecured claims. The court held that section 1322(b)(2) did not prohibit the modification. Id. at 714. The real estate at issue was a two family house with one unit rented out, providing monthly income. The court focused on the plain language of the statute, which protects claims secured "only" by a security interest in real property that is the debtor's principal residence. The court reasoned that a claim secured by the debtor's residence and property which has "inherently income producing" power does not come within section 1322(b)(2)'s ambit. Id. at 714. See also In re Torres Lopez, 138 B.R. 348 (D.P.R.1992); Adebanjo v. Dime Savings Bank, FSB (In re Adebanjo), 165 B.R. 98 (Bankr.D.Conn.1994); 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 Zablonski v. Sears Mortgage Corp. (In re Zablonski), 153 B.R. 604 (Bankr.D.Mass.1993) (bifurcation permitted where structure contained two apartments, one of which was occupied by debtor). Compare In re Guilbert, 165 B.R. 88 (Bankr. D.R.I.1994) (debtor prohibited by § 1322(b)(2) from modifying mortgagee's security interest in three unit dwelling which included debtor's residence, debtor's son's residence and a unit which was rented only occasionally).

Countrywide's claim may therefore be bifurcated notwithstanding section 1322(b)(2).

II. LENGTH OF PAYMENTS ON THE SECURED CLAIM

Countrywide poses an alternative argument in the event the court permits bifurcation of its claim. It concedes that under section 1325(a)(5) a plan may provide for payment of a secured claim through payments having a value, as...

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