In re Salaheldin Abdelgadir And Afaf Wahbi, BAP No. NV–11–1021–HJoJu.

• Decision Date: 16 August 2011
• Docket Number: Bankruptcy No. 09–23398–LBR.,BAP No. NV–11–1021–HJoJu.
• Citation: 2011 Daily Journal D.A.R. 14329,55 Bankr.Ct.Dec. 135,11 Cal. Daily Op. Serv. 12083,455 B.R. 896
• Parties: In re Salaheldin ABDELGADIR and Afaf Wahbi, Debtors.BAC Home Loans Servicing, LP f/k/a Countrywide Home Loans Servicing, LP, Appellant,v.Salaheldin Abdelgadir; Afaf Wahbi, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

455 B.R. 896

55 Bankr.Ct.Dec. 135

11 Cal. Daily Op. Serv. 12,083

2011 Daily Journal D.A.R. 14,329

In re Salaheldin ABDELGADIR and Afaf Wahbi, Debtors.BAC Home Loans Servicing, LP f/k/a Countrywide Home Loans Servicing, LP, Appellant,

v.Salaheldin Abdelgadir; Afaf Wahbi, Appellees.

BAP No. NV–11–1021–HJoJu.

Bankruptcy No. 09–23398–LBR.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted July 20, 2011.Decided Aug. 16, 2011.

Heidi Parry Stern, Akerman Senterfitt LLP, for appellant.Samuel A. Schwartz, The Schwartz Law Firm, Inc., for appellees.Before: HOLLOWELL, JOHNSON,¹ and JURY, Bankruptcy Judges.

OPINION

HOLLOWELL, Bankruptcy Judge.

BAC Home Loans Servicing a/k/a Countrywide Home Loans Servicing, LP (BAC) appeals the bankruptcy court's order (1) approving the debtors' motion to value and “cram-down” real property subject to BAC's deed of trust, and (2) confirming their chapter 11 plan of reorganization that modified BAC's claim.

The bankruptcy court determined that the debtors could modify BAC's claim secured by the debtors' real property because it found that at the time of plan confirmation, the debtors were not using the property as their residence, exempting it from the anti-modification provision of § 1123(b)(5).²

For the reasons outlined below, we conclude that the appropriate time for determining whether property is a debtor's principal residence is the petition date. Therefore, we REVERSE.

I. FACTS

Salaheldin Abdelgadir and his wife, Afaf Wahbi, (the Debtors) filed for chapter 13 relief on July 27, 2009. On their bankruptcy petition and schedules, the Debtors listed their address as Las Palomas Drive in Las Vegas (the Property). The Debtors scheduled the Property as the only real property they owned. They scheduled an $0 exemption in the Property.³

BAC holds a claim secured by a deed of trust on the Property in the amount of $739,748.⁴ According to the Debtors' schedules, the Property is also subject to a second mortgage in favor of Countrywide Home Lending (Countrywide) in the amount of $175,979. An appraisal of the Property, conducted on August 4, 2009, valued it at $425,000.

The Debtors' purchased the Property for $704,050 in May 2006. The Debtors and BAC ⁵ executed a promissory note, which was secured by a first deed of trust on the Property. In connection with the note and deed of trust, the Debtors filled out a form titled “Occupancy Agreement,” which certified that the Debtors would:

occupy the [Property] as my primary year-round residence, within (15) days of recording of the Deed of Trust/Mortgage executed in connection with my loan. This will confirm our understanding and agreement that I intend to occupy the [Property] as my primary year-round residence....

When the Debtors purchased the Property, they were living in Wisconsin. Shortly after the sale on the Property closed, the Debtors' son moved into the Property and lived there while attending college.⁶ In January 2008, the Debtors moved from Wisconsin to Las Vegas and moved into the Property.

After filing bankruptcy, the Debtors filed a motion to modify Countrywide's claim. The motion asserted that the Debtors “currently reside on a residential property at [Las Palomas Drive].” They contended there was no equity in the Property and proposed to “strip-off” Countrywide's second deed of trust as wholly unsecured. Before the bankruptcy court ruled on the motion, the Debtors sought conversion of their case to chapter 11 in order to “better manage the revaluation and reorganization of their residential real estate.” The bankruptcy court granted the motion to convert on January 15, 2010.

On January 25, 2010, the Debtors filed a change of address from the Property to a residence on Aruba Beach Avenue in Las Vegas. The Debtors subsequently filed a second motion to value collateral and modify the rights of secured creditors, BAC and Countrywide (the Motion to Modify). This time, the Debtors contended the Property was investment property, not subject to the anti-modification provision of § 1123(b)(5). Because the Property was appraised at $425,000, the Debtors argued that BAC's first deed of trust was undersecured. They proposed to bifurcate BAC's claim to a $425,000 secured claim and $314,748 unsecured claim. The Debtors also proposed to avoid Countrywide's second mortgage and reclassify that claim as a general unsecured claim in the amount of $186,085.

BAC filed an opposition. First, BAC alleged that the value of the Property was $440,000, according to an appraisal done on March 4, 2010. Additionally, BAC argued the Property was, at all times, the Debtors' “principal residence” and protected from modification. BAC questioned the residency of the Debtors, noting that the Debtors did not amend their schedules to demonstrate there were leases for either their occupancy of the Aruba Beach property or the rental of the Property. The Debtors filed a reply on April 1, 2010, and submitted the lease agreements for Aruba Beach and the Property.

On March 9, 2010, the Debtors filed a plan of reorganization. They filed an amended plan (Plan) on May 19, 2010. The Plan similarly proposed to cram-down BAC's claim to the Property value of $425,000. BAC objected, again contending that even if the Debtors were allowed to modify its claim, which it argued they were not, the value of the Property was $440,000.

Prior to a hearing on the Motion to Modify and the Plan, the Debtors and BAC filed additional briefing regarding the issue of whether the Debtors could modify BAC's claim under § 1123(b)(5). The Debtors took the position that whether the Property was a principal residence for purposes of § 1123(b)(5) was a determination to be made at the time of plan confirmation. BAC, on the other hand, asserted that the character of property must be determined at the time the creditor takes a security interest in the collateral. Alternatively, BAC argued that the bankruptcy court should look to the character of property as of the petition date, since that is the date that exemptions are fixed. Either way, BAC asserted that the Debtors could not circumvent § 1123(b)(5) and modify its claim secured by the Property.

An evidentiary hearing on the Motion to Modify, combined with a hearing on the Debtors' Plan and disclosure statement, was held on July 1, 2010 (the Hearing). At the Hearing, the parties stipulated to value the Property at $440,000. Thus, the only issue for resolution was whether, for purposes of § 1123(b)(5), the Property was the Debtors' principal residence and at what date that determination should be made.

The bankruptcy court acknowledged that, in connection with Plan confirmation, the requirement of good faith must be satisfied. “Good faith is always an issue ..., if, for example, somebody, you know, had a piece of property, and they moved out, and then it was obvious they're going to move back the next month, that raises an issue of good faith.” Hr'g Tr. (July 1, 2010) at 17. To that end, the Debtors provided testimony about their purchase of the Property and their residency there.

The bankruptcy court held a follow-up hearing on October 28, 2010, to set forth its findings of fact and conclusions of law orally on the record. The bankruptcy court found that the Debtors met all plan confirmation requirements and decided to confirm their Plan. It allowed the modification of BAC's claim because it concluded that the time to determine whether the Debtors' Property was their principal residence was at the date of confirmation. The bankruptcy court found that the Debtors were not living at the Property at the time of the Hearing, and because the Property had been rented, that it was investment property. Finally, the bankruptcy court found that there was no bad faith or manipulation on the part of the Debtors in moving from the Property.

On December 21, 2010, the bankruptcy court entered its order granting the Motion to Modify. On December 22, 2010, the bankruptcy court entered its order confirming the Debtors' Plan. BAC timely appealed both orders, asserting the bankruptcy court erred in determining that BAC's claim was not secured by the Debtors' principal residence and was subject to modification.

II. JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b). We have jurisdiction under 28 U.S.C. § 158.

III. ISSUE

What is the determinative date for whether a claim is secured by a debtor's principal residence subject to the Bankruptcy Code's anti-modification provision?

IV. STANDARDS OF REVIEW

We review the bankruptcy court's statutory construction of § 1123(b)(5) de novo. Lee v. Home Sav. of Am. (In re Lee), 215 B.R. 22, 24 (9th Cir. BAP 1997), citing, In re Consol. Pioneer Mortg., 178 B.R. 222, 225 (9th Cir. BAP 1995).

V. DISCUSSION

Resolving the question of when a claim is determined to be secured by a debtor's principal residence for purposes of § 1123(b)(5) begins “ ‘where all such inquiries must begin: with the language of the statute itself.’ ” Ransom v. FIA Card Servs., N.A. (In re Ransom), ––– U.S. ––––, 131 S.Ct. 716, 723–24, 178 L.Ed.2d 603 (2011) quoting United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). Section 1123, entitled “Contents of Plan,” provides that a chapter 11 plan of reorganization 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, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims[.]

11 U.S.C. § 1123(b)(5).⁷ By its plain language, § 1123(b)(5) allows debtors to modify the rights of creditors holding certain claims—secured claims and unsecured claims, but sets out a rule against modifying claims that are secured by a debtor's principal residence.⁸

A “claim” is a defined term under the Bankruptcy Code. 11 U.S.C. § 101(5). Additionally, whether a...