In re Sandoval
| Decision Date | 31 March 2022 |
| Docket Number | Case No. 21-24190-gmh |
| Citation | 640 B.R. 165 |
| Parties | IN RE: Juan SANDOVAL, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Wisconsin |
Scott Lieske, Milwaukee, WI, Trustee, Pro Se.
Michael Rud, Esserlaw LLC, Milwaukee, WI, for Debtor.
DECISION AND ORDER
Reverse Mortgage Funding LLC objects to confirmation of the chapter 13 plan, contending that the plan must pay its claim in full. As explained below, the plan need not provide for full payment of Reverse Mortgage's claim, so the objection is overruled.
The following facts are uncontested. The debtor's mother died in December 2020. He inherited from her a duplex located at 2533-2535 West Juneau Avenue, Milwaukee, Wisconsin. He currently resides there. His sister rents the duplex's other unit from him.
A mortgage on the duplex secures repayment obligations under a home equity conversion note executed in September 2008 by the debtor's mother, whom this decision and order will refer to as the "borrower." See Claim No. 2, at 9, 11 & 14. The note is nonrecourse, meaning the borrower was not personally liable on it and the note holder can only collect by foreclosing its interest in the property. Reverse Mortgage, which now holds the note and mortgage, filed a proof of claim alleging that it has a claim for $153,812.43 secured in full by the property. Claim No. 2.
The debtor's chapter 13 plan proposes treatment of Reverse Mortgage's claim in three main parts. First, the plan provides for bifurcation of the claim into a $45,000 secured claim—based on a May 2021 appraisal of the duplex, ECF No. 1, at 10—and an unsecured claim for the remainder (nearly $109,000). ECF No. 2, at 4. Second, the plan proposes to pay the secured claim in full, with interest at 4.75%, over about 60 months, but to pay nothing on the unsecured claim (and any other allowed nonpriority unsecured claims). Id. at 4–5. Third, the plan states that "the mortgage shall be satisfied" after the debtor completes all payments under the plan, including "payment of [Reverse Mortgage's] allowed secured claim", and is granted a discharge. Id. at 7.
Reverse Mortgage objects to confirmation of the plan, principally contending that the proposed treatment of its claim violates 11 U.S.C. § 1322(b)(2) ’s "anti-modification" clause, which prohibits a chapter 13 plan from modifying the rights of a holder of a claim secured only by a mortgage on the debtor's principal residence. As a result, Reverse Mortgage argues, the plan does not comply with the provisions of chapter 13, which is a requirement for confirmation of a chapter 13 plan, 11 U.S.C. § 1325(a)(1).
The debtor responds that (1) the anti-modification clause does not apply because the property is not solely his principal residence, but is instead a mixed-use, income-producing duplex, and (2) even if the anti-modification clause would otherwise apply, the plan can modify Reverse Mortgage's rights under § 1322(c)(2) —a statutory exception to the anti-modification clause that applies when the last payment on a claim was originally due before the last payment under the plan is due—because the note became due and payable in full when his mother died.
Section 1322(b)(2) —subject to § 1322(a) & (c), and with the anti-modification clause in bold—permits a chapter 13 plan to "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". There is no dispute that Reverse Mortgage holds a claim secured by a security interest in real property of the debtor.1 Nor is there any dispute that the debtor principally resides in the real property in which Reverse Mortgage has a security interest. The parties dispute only whether that real property "is the debtor's principal residence" despite also being an income-producing rental property. § 1322(b)(2) (emphasis added).
To decide whether § 1322(b)(2) ’s anti-modification provision applies one must begin with its text. RadLAX Gateway Hotel, LLC v. Amalgamated Bank , 566 U.S. 639, 649, 132 S.Ct. 2065, 182 L.Ed.2d 967 (2012) ; Lamie v. United States Trustee , 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004) ; United States v. Ron Pair Enters., Inc. , 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). The Bankruptcy Code defines "debtor's principal residence" in relevant part as "a residential structure if used as the principal residence of the debtor, including incidental property". 11 U.S.C. § 101(13A)(A).2 And the Code defines "incidental property", "with respect to a debtor's principal residence", as "property commonly conveyed with a principal residence in the area where the real property is located", including, among other things, "all easements, rights, appurtenances, [or] fixtures" and "all replacements or additions." § 101(27B)(A)–(C).3 The result is that a chapter 13 plan cannot modify the rights of the holder of a claim secured only by a security interest in "a residential structure" that the debtor uses as his "principal residence", including "property commonly conveyed with a principal residence in the area where the real property is located". § 101(13A)(A) & (27B)(A).
Reverse Mortgage's claim is secured by a mortgage—which is a security interest, see § 101(51) —in the duplex, granting it the right to collect on any debts governed by the home equity conversion note from the property, identified by its legal description, "together with all the improvements now or hereafter erected on the property, ... all easements, rights, appurtenances, and fixtures now or hereafter a part of the property", and "[a]ll replacements and additions". Claim No. 2, at 14. The debtor does not contend that Reverse Mortgage's claim is secured by any other interest in any other property. And the debtor does not dispute that he uses as his principal residence a residential structure that is an improvement erected on the property. See ECF No. 1, at 2 (). Reverse Mortgage's claim therefore seems obviously to be one "secured only by a security interest in real property that is the debtor's principal residence". § 1322(b)(2).
The debtor, however, contends that Reverse Mortgage's claim does not fall within the scope of § 1322(b)(2) ’s anti-modification clause because it is secured by a security interest in a duplex, and he only resides in half of it, while his sister rents and occupies the other half. He argues that, as a result, the claim is not secured by a security interest in real property that is his principal residence, but instead by real property that merely includes his principal residence. Rights arising from a claim secured by a security interest in such a "mixed use" property, the argument goes, are not protected by the anti-modification clause. See ECF No. 24, at 3; see also, e.g., Scarborough v. Chase Manhattan Mortg. Corp. (In re Scarborough) , 461 F.3d 406, 411 (3d Cir. 2006) ( ).
The debtor's argument fails because he eschews the Bankruptcy Code's text, relying instead on case law. He concedes that "[c]ourts are split on whether 11 U.S.C. § 1322(b)(2) prohibits the modification of claims secured by mixed-use real estate" but nevertheless asks this court to align with "[s]everal courts" that "have ruled that it does not prohibit modification and adopt the ‘residential use only’ approach followed by" the First and Third Circuits. ECF No. 24, at 3 (citing Lomas Mortg., Inc. v. Louis , 82 F.3d 1 (1st Cir. 1996), and Scarborough , 461 F.3d 406 ); see also In re Krus , 582 B.R. 218, 220 & n.1 (Bankr. W.D. Wis. 2018) (); In re Colcord , No. 15-46941, 2015 WL 5461543, at *3–4 (Bankr. E.D. Mich. Sept. 16, 2015) ().
None of these decisions are binding on this court, however. The leading cases for the "residential use only" approach—the First Circuit's 1996 Lomas decision and the Third Circuit's 2006 Scarborough decision—both construed the anti-modification clause without regard to § 101 ’s definitions of "debtor's principal residence" and "incidental property", which were added in 2005. See Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, § 306(c), 119 Stat. 23, 80–81; see also Scarborough , 461 F.3d at 412 n.2 (). In subsequent decisions, courts have often elected to follow Scarborough ’s lead without addressing the effect, if any, of the 2005 Act's definitions. See, e.g., Krus , 582 B.R. at 220. Others stayed the course by "reject[ing] the suggestion that these definitions, when combined and inserted into § 1322(b)(2), cure the ambiguity in the anti-modification clause" identified in cases like Lomas . E.g., Pawtucket Credit Union v. Picchi (In re Picchi) , 448 B.R. 870, 875 (B.A.P. 1st Cir. 2011).
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In re Berry
... ... be used to cramdown the entirety of a secured lien" (ECF ... No. 68, at 6), which, as noted above, is dispensed with ... below ... [5] This court recently addressed the ... application of §1322(c)(2) to a reverse mortgage in ... In re Sandoval, 640 B.R. 165 ... (Bankr. E.D. Wis. 2022). The court there concluded that ... §1322(c)(2) permitted a debtor who inherited real estate ... subject to a reverse-mortgage lien to confirm a plan that ... modified the rights of the lienholder. Id. at ... 173-79 ... ...