In re Scarborough

• Court: U.S. Court of Appeals — Third Circuit
• Writing for the Court: Rendell
• Citation: In re Scarborough, 461 F.3d 406 (3rd Cir. 2006)
• Decision Date: 28 August 2006
• Docket Number: No. 04-4298.,04-4298.
• Parties: In re Frances SCARBOROUGH, Frances Scarborough, Appellant v. Chase Manhattan Mortgage Corporation.

461 F.3d 406

In re Frances SCARBOROUGH Frances Scarborough, Appellant v. Chase Manhattan Mortgage Corporation.

No. 04-4298.

United States Court of Appeals, Third Circuit.

Argued July 27, 2006.

Filed August 28, 2006.

COPYRIGHT MATERIAL OMITTED

Frances Scarborough, [Argued], Philadelphia, PA, Pro Se Litigant.

Scott F. Waterman, Black, Stranick & Waterman, Media, PA, Irwin Trauss, [Argued], Philadelphia Legal Assistance, Philadelphia, PA, Counsel for Amicus-Appellant National Association of Consumer Bankruptcy Attorneys.

Kristina G. Murtha, [Argued], Leslie E. Smilas-Puida, Goldbeck, McCafferty & McKeever, Philadelphia, PA, Counsel for Appellee.

Before RENDELL, AMBRO and ROTH, Circuit Judges.

OPINION OF THE COURT

RENDELL, Circuit Judge.

In this appeal, we must determine whether a mortgage on a multi-unit dwelling in which the debtor resides qualifies for the anti-modification protection afforded by 11 U.S.C. § 1322(b)(2). That provision protects a mortgagee from having its claim in a Chapter 13 bankruptcy proceeding modified if the mortgage is secured "only by a security interest in real property that is the debtor's principal residence." We conclude that a mortgage secured by property that includes, in addition to the debtor's principal residence, other income-producing rental property is secured by real property other than the debtor's principal residence and, thus, that modification of the mortgage is permitted. Consequently, we will reverse the order of the District Court affirming the order of the Bankruptcy Court and remand the case for further proceedings consistent with this opinion.

I.

The facts relevant to this appeal are not in dispute. On May 10, 1988, Appellant Frances Scarborough signed a mortgage ("Mortgage") in favor of Meritor Savings Bank, granting a mortgage lien against her property located at 5116 North Warnock Street, Philadelphia, Pennsylvania ("Property"). The Mortgage secured a note to Meritor Savings Bank executed on the same date in the amount of $30,400.00. The parties agree that the Mortgage was thereafter assigned and that Chase Manhattan Mortgage Corp. is the current holder of the Mortgage.

Scarborough sought protection under Chapter 13 of the Bankruptcy Code on October 31, 2001. In her proceedings, she filed a complaint seeking to bifurcate the claim of Chase Manhattan into a secured claim and an unsecured claim pursuant to 11 U.S.C. § 506(a) and to determine the correct amount of the mortgage arrearage. Scarborough subsequently filed an amended complaint to revise the alleged amounts of the secured and unsecured portions of Chase Manhattan's claim, and to bifurcate Chase Manhattan's lien on her residence to reflect the current market value of the property, with the remainder of the debt becoming unsecured. The Bankruptcy Court held a trial on this adversary proceeding and concluded that Scarborough was barred from bifurcating the secured claim of Chase Manhattan pursuant to the "anti-modification" provision of 11 U.S.C. § 1322(b)(2). The District Court affirmed the ruling of the Bankruptcy Court.

The form of the Mortgage is a "Pennsylvania — Single Family — FNMA/FHLMC Uniform Instrument," which contains a conveyance clause that grants the lender an interest in the Property, as well as "all the improvements now or hereafter erected on the [P]roperty, and all easements, rights, appurtenances, rents, royalties, mineral, oil and gas rights and profits, water rights and stock and all fixtures now or hereafter a part of the [P]roperty." On the same day that Scarborough executed the Mortgage, she also signed a "2-4 Family Rider (Assignment of Rents)" to "amend and supplement the Mortgage" and further secure her note to Meritor Savings Bank. The Family Rider provides that "Borrower unconditionally assigns and transfers to Lender all rents and revenues of the Property" and that, "[u]pon Lender's request, Borrower shall assign to Lender all leases of the Property."

The Property is a two-story semi-detached residence that was converted to a multi-unit dwelling prior to Scarborough's purchase, with one apartment on the first floor and one apartment on the second floor. Scarborough lives on the first floor of the Property and rents the second floor apartment to a tenant pursuant to a lease agreement. She testified at trial that she purchased the Property with the intent of living in one unit and renting the other, and with a goal of eventually acquiring other investment properties. Scarborough further testified that she informed the bank she was buying the Property, in part, as an investment.

Scarborough testified at trial that the value of the Property was $13,000.00. Chase Manhattan submitted the City of Philadelphia's Board of Revision of Taxes Property Record, which listed the value of the Property as $26,500.00. Scarborough has appealed the Board of Revision of Taxes' valuation, but her appeal had not been decided as of the date of trial.

II.

The District Court had jurisdiction over Scarborough's appeal from the Bankruptcy Court pursuant to 28 U.S.C. § 158(a). We have jurisdiction under 28 U.S.C. § 158(d). Our standard of review is plenary because the issues before us involve statutory interpretation and conclusions of law. In re CellNet Data Sys., Inc., 327 F.3d 242, 244 (3d Cir.2003).

III.

The normal rule in bankruptcy is that a claim that is secured by a lien on property is treated as a secured claim "only to the extent of the value of the property on which the lien is fixed." United States v Ron Pair Enters., Inc., 489 U.S. 235, 239, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). To the extent that the amount of the claim is greater than the value of the property, it is considered unsecured. 11 U.S.C. § 506(a)(1).¹ "Thus, a claim that is not fully collateralized can be modified, and the creditor said to be `crammed down' to the value of the collateral." In re Ferandos, 402 F.3d 147, 151 (3d Cir.2005).

Section 1322(b)(2) of the Bankruptcy Code carves out an exception to this general rule. That provision permits a debtor in a Chapter 13 case 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." 11 U.S.C. § 1322(b)(2) (emphasis added). The purpose of § 1322(b)(2) is "to encourage the flow of capital into the home lending market" by affording anti-modification protection to home mortgage lenders. Nobelman v. Am. Sav. Bank, 508 U.S. 324, 331, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) (Stevens, J., concurring); see also Ferandos, 402 F.3d at 151 ("The legislative history of § 1322(b)(2) `indicates that it was designed to protect and promote the increased production of homes and to encourage private individual ownership of homes . . . .'" (quoting In re Davis, 989 F.2d 208, 210 (6th Cir.1993))).

Scarborough argues there are two reasons that the anti-modification protection of § 1322(b)(2) does not apply here. First, she contends that the Mortgage and Family Rider grant Chase Manhattan an interest in collateral that is not real property, namely, rents derived from the Property. Second, she argues that the anti-modification provision does not apply to a claim secured by a multi-unit property in which one unit is the debtor's principal residence and the other is an income-producing rental unit.

A.

We have little trouble rejecting Scarborough's first argument based on our reasoning in Ferandos. We look to state law to determine whether rents are deemed to be real property. Ferandos, 402 F.3d at 155. Under Pennsylvania law, real property is defined to include rents. See 21 Pa. Stat. Ann. § 3 (West 2001); In re Abruzzo, 245 B.R. 201, 209 (Bankr. E.D.Pa.1999), vacated on other grounds, 2000 WL 420635 (E.D.Pa. Apr.10, 2000); Marine Nat'l Bank v. Nw. Pennsylvania Bank & Trust Co., 308 Pa.Super. 154, 454 A.2d 67, 70 (1982). "Accordingly, the grant of an interest in rents does not render the claim secured by anything other than the real property." Ferandos, 402 F.3d at 155. Thus, Chase Manhattan is not denied the protection of § 1322(b)(2) merely because it took an interest in rents derived from the Property.

B.

Scarborough's second argument presents a question of first impression for our Court: whether a claim secured by an interest in real property that includes the debtor's principal residence as well as other income-producing rental property is "a claim secured only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)(2). Based on the plain language of § 1322(b)(2), we conclude that a creditor does not receive anti-modification protection for a claim secured by real property that includes both the debtor's principal residence and other rental property that is not the debtor's principal residence.

By using the word "is" in the phrase "real property that is the debtor's principal residence," Congress equated the terms "real property" and "principal residence." Put differently, this use of "is" means that the real property that secures the mortgage must be only the debtor's principal residence in order for the anti-modification provision to apply. We thus agree with the reasoning of the Bankruptcy Court for the District of Connecticut when it noted that § 1322(b)(2) "protects claims secured only by a security interest in real property that is the debtor's principal residence, not real property that includes or contains the debtor's principal residence, and not real property on which the debtor resides." In re Adebanjo, 165 B.R. 98, 104 (Bankr.D.Conn.1994). A claim secured by real property that is, even in part, not the debtor's principal residence does not fall under the terms of § 1322(b)(2). Consequently, "real property which is designed to serve as the principal residence not only for the debtor's family but for other...