Julie A. Manning, Chief United States Bankruptcy Judge.
In the case of Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), the United States Supreme Court held that Section 1322(b)(2) of the Bankruptcy Code
Most Chapter 13 cases decided after Nobelman address the issue of whether the real property securing the creditor's claim was in fact the debtor's principal residence. In the present case, there is no dispute that the real property securing the creditor's claim is the debtor's principal residence and no dispute that the creditor's claim is undersecured. There is also no dispute that the creditor's claim was secured by other collateral in addition to the debtor's principal residence prior to the filing of the debtor's bankruptcy case. The issue in dispute is: at what point in time does a court determine the collateral that secures the creditor's claim — at the time of the loan transaction or at the time the debtor files its bankruptcy case?
The debtor argues that the court should look the time of the loan transaction to
On June 12, 2015, Charles J. Coyle Jr. (the "Debtor"), filed a Motion to Determine the Secured Status of Liens (the "506 Motion", ECF No. 18)
Prime Bank objected to the 506 Motion and the Chapter 13 Plan on July 7, 2015 (the "Prime Bank Objection", ECF Nos. 21 and 22). The Prime Bank Objection asserts that its claim cannot be modified pursuant to Section 1322(b)(2) and therefore the Chapter 13 Plan cannot be confirmed unless it proposes to pay its claim in full. On March 3, 2016, a hearing was held on the 506 Motion and the Prime Bank Objection. On March 31, 2016, the parties submitted a joint statement of facts (the "Statement of Facts", ECF No. 38), and subsequently filed briefs. On May 11, 2016, a hearing was held on the 506 Motion and the Prime Bank Objection.
The United States District Court for the District of Connecticut has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b). The Bankruptcy Court derives its authority to hear and determine this matter pursuant to 28 U.S.C. § 157(a) and the Order of Reference of the United States District Court for the District of Connecticut dated September 21, 1984. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(1), (b)(2)(A) and (b)(2)(K).
The following constitute the court's Findings of Fact and Conclusions of Law pursuant to Federal Rule of Bankruptcy Procedure 7052. The facts are derived from the Statement of Facts, the record in the Debtor's 2015 Chapter 13 case, and the record in prior bankruptcy cases filed by the Debtor.
1. On June 24, 1999, as part of a commercial loan transaction, a promissory note (the "Note"), in the principal amount of
2. The Note provides that the obligations due under the Note "shall be the joint and several obligation of each and every Maker". See Note, Exhibit A to Debtor's Supplemental Brief, ECF No. 39-1, at p. 4.
3. The Note also provides that the obligations due to Prime Bank were secured by the following collateral:
See Statement of Facts at ¶ 2; Note at p. 3; Coyle Crete, LLC Security Agreement & UCC-1, Exhibit B to Debtor's Supplemental Brief, ECF No. 39-2; Coyle Inc., Paving & Excavating Security Agreement & UCC-1, Exhibit C to Debtor's Supplemental Brief, ECF No. 39-3; Prime Bank's Second Mortgage, Exhibit D to Debtor's Supplemental Brief, ECF No. 39-4.
4. On June 28, 1999, Prime Bank filed UCC-1 Statements to perfect its security interests in the Commercial Assets. See Statement of Facts at ¶ 3; Coyle Crete, LLC Security Agreement & UCC-1; Coyle Inc., Paving & Excavating Security Agreement & UCC-1.
5. The last payment made on the Note was on January 31, 2003. As a result, the Note went into default. See Statement of Facts at ¶ 5.
6. On November 18, 2003, Prime Bank commenced a foreclosure action in the Connecticut Superior Court against the Debtor's principal residence in a case entitled Prime Bank v. Charles J. Coyle, Case No. CV-03-0484078-S (the "Foreclosure Action"). See Statement of Facts at ¶ 6.
7. On February 2, 2004, the Debtor filed a petition under Chapter 11 of the Bankruptcy Code (the "Debtor's Chapter 11 case"), which stayed the Foreclosure Action. See Statement of Facts at ¶ 7. On February 11, 2004, counsel for Prime Bank filed a Notice of Appearance in the Debtor's Chapter 11 case. See
8. On February 12, 2004, after the commencement of the Foreclosure Action and after the Debtor filed his Chapter 11 case, the Commercial Property was sold at a foreclosure sale. Prime Bank did not receive any proceeds from the sale of the Commercial Property and by operation of law, its second mortgage against the Commercial Property was foreclosed. See Statement of Facts at ¶ 4.
9. On June 28, 2004, after the commencement of the Foreclosure Action, the filing of the Debtor's Chapter 11 case, and the foreclosure sale of the Commercial Property, Prime Bank did not renew the UCC-1 Statements securing the Commercial Assets. Therefore, Prime Bank's perfected security interests in the Commercial Assets lapsed. See Statement of Facts at ¶ 3.
10. On February 10, 2005, the Debtor's Chapter 11 case was converted to a Chapter
11. On July 11, 2012, more than seven (7) years after the Debtor was granted a discharge, Prime Bank filed a Motion for Relief from Stay seeking relief to continue to prosecute the Foreclosure Action it commenced in 2003 against the Debtor's principal residence. See
12. On July 31, 2012, an Order Granting Motion for Relief from Stay entered to allow Prime Bank to return to state court to prosecute the Foreclosure Action. See Statement of Facts at ¶ 8.
13. On March 4, 2013, a judgment of foreclosure by sale was entered in the Foreclosure Action. The judgment scheduled a sale of the Debtor's principal residence to be conducted on July 13, 2013. See Statement of Facts at ¶ 8; Judgment of Foreclosure dated March 4, 2013, Exhibit B to Prime Bank Objection, ECF No. 21-2.
14. On July 11, 2013, two days prior to the scheduled foreclosure sale, the Debtor filed a Chapter 13 Petition (the "Debtor's 2013 Chapter 13 case"). See Statement of Facts at ¶ 8; Chapter 13 Petition, ECF No. 1 in Case No. 13-31334.
15. On April 7, 2014, the Debtor's 2013 Chapter 13 case was dismissed for failure to propose a confirmable plan. See Statement of Facts at ¶ 8; Dismissal Order, ECF No. 28 in Case No. 13-31334.
16. On January 26, 2015, Prime Bank obtained a new foreclosure sale date in the Foreclosure Action. See Statement of Facts at ¶ 9; Reopened Judgment of Foreclosure dated January 26, 2015, Exhibit C to the Objection to the 506 Motion, ECF No. 21-3.
17. On May 1, 2015, the day before the scheduled foreclosure sale, the Debtor filed the instant Chapter 13 case (the "Debtor's 2015 Chapter 13 case"). See Statement of Facts at ¶ 9; Chapter 13 Petition, ECF No. 1.
18. At the time the Debtor's 2015 Chapter 13 case was filed:
Prime Bank argues that Section 1322(b)(2) prevents modification of its claim because the only remaining collateral securing its claim when the Debtor's 2015 Chapter 13 case was filed was the Debtor's principal residence. Because the Debtor and Prime Bank do not agree on the point in time at which the court should determine the collateral securing Prime Bank's claim, the court will decide that issue. The court concludes that to determine if modification of Prime Bank's claim is permissible under Section 1322(b)(2), it
In support of this conclusion, the court reviewed the post-Nobleman decision of the Connecticut Bankruptcy Court in the case of Adebanjo v. The Dime Savings Bank of New York, FSB (In re Adebanjo), 165 B.R. 98 (Bankr. D. Conn. 1994). The creditor in Adebanjo argued that Section 1322(b)(2) protected its mortgage claim from modification even though its claim was secured by the debtor's principal residence and two rentals units in which the debtor did not reside. The court disagreed with the creditor's argument and held that the plain language of Section 1322(b)(2) protects claims secured only by a security interest that is the debtor's principal residence, not real property that includes or contains the debtor's principal residence. Id. at 104 (emphasis added). Although the Adebanjo decision is instructive, it does not address the precise issue in this case — whether a creditor's claim can be modified if the
Another post-Nobleman Connecticut Bankruptcy Court decision provides additional guidance on the issue. In the case of In re Smart, 214 B.R. 63 (Bankr. D. Conn. 1997), the court addressed the issue of whether bifurcation of a Chapter 13 debtor's mortgage could occur when the real property securing the creditor's claim was not the debtor's principal residence on the petition date, but was the debtor's principal residence at the time of the loan transaction. Id. at 64. Although the primary issue to be decided in Smart was the appropriate reference date for determining the "principal residence" of the debtor, the court held:
Id. at 68 (citing In re Brunson, 201 B.R. 351 (Bankr. W.D.N.Y. 1996)). Thus, Smart held that the date of the loan transaction and not the date of the filing controlled whether the creditor's claim secured by the debtor's principal residence was barred from modification under Section 1322(b)(2).
While it is true that the underlying facts of this case are different because there is no dispute that the Debtor's principal residence secures Prime Bank's claim, the rationale in Smart can and should be applied to the facts of this case. The "serendipitous" or possibly "manipulated" facts of the instant case are that when the Debtor's 2015 Chapter 13 case was filed, the only remaining collateral from which Prime Bank could possibly satisfy its claim was the Debtor's principal residence. However, in applying the rationale in Smart, which looks to "circumstances existing at the time of the subject credit transaction...", the Prime Bank Objection fails and therefore its claim can be modified. Smart, at 68.
The conclusion that the Prime Bank Objection fails is further based on the case of In re Bulson, 327 B.R. 830 (Bankr. W.D.Mich. 2005). The Bulson court concluded that it is "at that point in time that the underwriting decision is made and it is therefore at that point in time that the lender must know whether the loan it is making may be subject to modification in a Chapter 13 proceeding at some later date."
Furthermore, the Third Circuit Court of Appeals case of Scarborough v. Chase Manhattan Mortg. Corp. (In re Scarborough), 461 F.3d 406 (3d Cir. 2006), also supports the court's conclusion. Scarborough agrees with Bulson, holding that courts should look to the date of the loan transaction in determining whether Section 1322(b)(2) applies. "... [T]he critical moment [in determining whether Section 1322(b)(2) applies] is when the creditor takes a security interest in the collateral". Id. at 412. Scarborough also cites to the Connecticut Bankruptcy Court case of Adebanjo, focusing on the analysis which noted that Section 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." Id. at 411 (referencing In re Adebanjo, 165 B.R. at 104 (emphasis in original)). As the Scarborough court pointed out, "a creditor who takes any interest in personal property forfeits the benefit of § 1322(b)(2), so [too] does a creditor whose claim is secured by any real property that is not the debtor's principal residence." In re Scarborough, 461 F.3d at 411 (emphasis in original). Although Scarborough involved an analysis of Section 1322(b)(2) as applied to a multi-unit dwelling, the holding in Scarborough is the same as the holding in Smart.
Prime Bank heavily relies on Rogers v. Eastern Savings Bank, et. al. (In re Rogers), 489 B.R. 327 (D. Conn. 2013), in support of the position that its claim cannot be modified. Prime Bank asserts that "the facts of this case are identical to Rogers in all material respects." However, Prime Bank's reliance on Rogers is misplaced. Not only is the factual scenario different from the present case, but the material question addressed by the Rogers court was whether a debtor could utilize the provisions of Section 1322(b)(2) when that debtor was discharge ineligible due to a previous Chapter 7 discharge. That issue is not present in this case.
Prime Bank also cites to In re Boisvert, 156 B.R. 357 (Bankr. D. Mass. 1993), which reached a different result in deciding the relevant time to determine the collateral securing a creditor's claim under Section 1322(b)(2). In Boisvert, the court looked to the date of the filing of the petition to determine the collateral that existed, as opposed to looking to the collateral pledged at the time of the loan transaction. This court respectfully declines to follow the reasoning of Boisvert, choosing instead to following the reasoning of the Smart, Bulson, and Scarborough courts.
At the time the Debtor granted Prime Bank a second mortgage on the Debtor's principal residence, the Note was secured by collateral other than only by the Debtor's principal residence. Prime Bank was clearly aware that the Note was secured by collateral other than only by the Debtor's principal residence.
Applying the reasoning of Adebanjo, Smart, Bulson, and Scarborough to this case, it is undisputed that at the time the Note was executed, Prime Bank's claim was secured by collateral that included, but was not limited to, the second mortgage on the Debtor's principal residence. If loan documents grant a creditor a security
