KEVIN MCNULTY, United States District Judge:
The debtor, Lindsey C. Holmes, appeals from an order by Judge Rosemary A. Gambardella of the United States Bankruptcy Court for the District of New Jersey. (ECF No. 1-2) Judge Gambardella's Order denied confirmation of the debtor's modified plan and dismissed the voluntary petition for relief under Chapter 13 without prejudice.
This appeal presents a single issue: whether a condominium association lien is a security interest in the debtor's principal residence, and hence subject to the "anti-modification" clause, 11 U.S.C. § 1322(b)(2). That issue of law is reviewed de novo. See In re American Pad & Paper Co., 478 F.3d 546, 551 (3d Cir. 2007); In re United Healthcare Sys., Inc., 396 F.3d 247, 249 (3d Cir. 2005). For the reasons set forth below, however, the decision of the bankruptcy court must be REMANDED for factual findings pertinent to that issue.
Ms. Holmes is a condominium unit owner; Community Hills is the condominium association. Community Hills claims a lien on Holmes's unit representing unpaid condominium assessments. The unit was on the verge of a Sheriff's sale when, on March 9, 2015, Holmes filed a Chapter 13 petition.
Bank of America, which holds a mortgage on the unit, filed a proof of claim of $206,525.23. The value of the property was estimated at $85,000. There seems to be no dispute that the mortgage lien easily exhausts the equity in the property. Holmes filed a schedule showing a net disposable income of $200 per month. She proposed a plan whereby she would pay $200 per month.
Under the "anti-modification clause" of 11 U.S.C. § 1322(b)(2), certain security interests relating to the debtor's principal residence cannot be modified. It follows that a plan that relies on the modification of such a principal-residence lien is not feasible as a matter of law; confirmation may therefore be denied without exploration of other pertinent issues. That is what happened here. The bankruptcy court held that Community Hills' lien on the condominium could not be modified, and therefore declined to confirm the plan. It is from that order that Holmes has appealed.
Holmes acknowledges that the Community Hills unit is her principal residence. She contends, however, that § 1322(b) nevertheless does not apply.
I am initially guided by In re Rones, 551 B.R. 162, 168 (D.N.J. 2016), in which Judge Wolfson discussed many of the issues presented here. Rones starts from the indisputable premise that a Chapter 13 plan may, in general, modify the rights of holders of secured claims. See generally 11 U.S.C. § 506(a)(1). A nominally secured claim will be considered unsecured, however, to the extent it exceeds the value of the collateral, and may be "stripped down" or "crammed" to that value. See United States v. Ron Pair Enters., Inc, 489 U.S. 235, 239, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989).
Section 1322(b)(2) places an important limit on modification of secured claims. It
11 U.S.C. § 1322(b)(2) (emphasis added). See Nobelman v. Am. Savings Bank, 508 U.S. 324, 331-32, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993).
There is an exception to the exception — i.e., an avenue of escape from the anti-modification clause of § 1322(b)(2). If the relevant lien, even one on a principal residence, is junior to a lien that exceeds the value of the residence collateral, it is treated as unsecured. Being wholly unsecured, it is of course not secured by a principal residence, and therefore does not fall under § 1322(b)(2). See in re McDonald, 205 F.3d 606, 613-14 (3d Cir. 2000); Rones, 551 B.R. at 168.
So whether a condominium association's lien for assessments is secured only by a security interest in the debtor's unit might depend (inter alia) on whether it is junior to another lien that exhausts the value of the collateral; if it is junior, it might not be secured by anything at all. On that question, Rones found the New Jersey Condominium Act to be dispositive. That statute gives the condominium lien a limited priority:
N.J. Stat. Ann. § 46:8B-21. Thus, under subsection (b), a condominium association's lien is granted priority to the extent of six months' worth of assessments. The condo lien, to that extent, is elevated to first priority. Rones reasoned that the condo lien was, at least to the extent of six months' assessments, secured by the principal residence, because it was senior to other liens. It followed, held Rones, that § 1322(b) applied.
Another issue arises. Assume arguendo that more than six months' assessments are in arrears. Under the NJ Act, the lien is senior only to the extent of six months' worth of assessments. Beyond that, it is junior — "subordinate," in the words of the statute. N.J. Stat. Ann. § 46:8B-21(a). Now it is possible to envision a rule that the lien should be bifurcated into a secured (up to six months) and unsecured (beyond six months) component. Thus bifurcated, it would have a hybrid quality; to the extent the lien is unsecured by the unit, it would not be subject to the "no-modification" rule of § 1322(b).
Case law forecloses that approach. The rule is applied broadly, and the exception strictly:
In re Rones, 551 B.R. at 168.
Applying the "one dollar rule," Rones held that "because a portion of the Lien was secured by a security interest in the debtor's principal residence, no portion of the Association's lien could be stripped off under Section 1322." 551 B.R. at 171 (citing In re McDonald, 205 F.3d at 613-14).
But hold on, says Holmes. The Rones analysis does not even come into play unless the lien at issue is a "security interest." Otherwise, § 1322(b)(2), by its plain language, does not apply at all.
A "security interest," as the term is used in § 1322(b)(2) and elsewhere, is defined as a "lien created by an agreement." 11 U.S.C. § 101(51). As such, it is to be distinguished from a "statutory lien," i.e., one "arising solely by force of a statute on specified circumstances or conditions."
Rones, says Holmes, did not squarely face that definitional issue. Indeed, it appears that Rones accepted the conclusion of the bankruptcy court that the lien was created by agreement: "[T]he Bankruptcy Court itself observed when determining whether the Lien was consensual or statutory, [that] the Condominium Act did not create the Lien — it was created by the Master Deed.... [T]he Condominium Act merely altered the priority of a portion of the Lien." 551 B.R. at 171.
But the NJ Act seemingly can operate to create a lien; consider the language of N.J. Stat. Ann. § 46:8B-21(a), quoted above ("The association shall have a lien on each unit for any unpaid assessment ... upon proper notice to the appropriate unit owner"). And the subsection (b) priority operates to elevate, not just any old lien, but "[a] lien recorded pursuant to subsection a."
So it is not so simple to say that there is a security interest (i.e., one arising from agreement), as to which the Act merely sets a priority. Remember, the condominium association's lien is secured by the unit (which is underwater on its mortgage) only to the extent it can be regarded as senior to the mortgage. So the priority issue under the State Act is inextricably intertwined with the issue of whether the lien is secured by the unit at all.
There is more. The § 1322(b) no-modification rule applies to a lien secured only by a security interest (i.e., a contractual lien). But this lien, says Holmes, is also secured by a statutory lien, defined as one
The case law has meandered as to whether a condominium lien like this one is a statutory or consensual one. See In re Rones, 531 B.R. 526 (Bankr. D.N.J. 2015) (surveying case law), rev'd, 551 B.R. 162 (D.N.J. 2016). As the Bankruptcy Court observed in Rones, the issue may depend on how and when a lien arose. A consensual lien arises from the purchase of the unit, but depends on other facts, such as the content of the master deed and presumably the existence of an arrearage. A statutory lien, too, depends on facts such as the filing of the master deed, notice to the unit holder, and recordation. And the operation of priority rules, particularly where the mortgage exceeds the value of the property, will determine whether the lien is secured at all.
I think that the bankruptcy court should have first crack at these issues. Some of these ramifying issues may be mooted by a clear set of facts. Here, says Holmes, by contrast with Rones, the bankruptcy court never made a finding as to whether this lien was created by contract or only by statute. Community Hills did not submit the master deed or by-laws for the court's consideration. It is not clear that a security interest, in the sense of a lien arising by contract, perfected and secured by equity in the unit, even exists. To determine that, the bankruptcy court must make specific findings as to the facts and determine the priority of such a security interest.
The parties have not pointed this court to any facts about the creation or perfection of any contractual lien, notice to the unit holder under the State Condominium Act, recordation, or other pertinent facts. Rather, the facts and contentions seem to have evolved and tumbled out over the course of multiple attempts by the debtor to propose a feasible plan. It is not at all clear that the bankruptcy court was given a fair opportunity to assess the issues.
For the foregoing reasons, the order of the bankruptcy court is reversed and remanded for further consideration. The parties shall present the matter to the bankruptcy judge in a manner that permits the judge to make factual findings as to the existence, priority, and recordation of (a) any security interest; (b) any statutory lien; (c) the priority of such; and (d) relatedly, whether any such lien is secured by equity in the property. I express no view as to whether, even if all of these issues were decided favorably to the debtor, the plan would be a feasible and confirmable one.
11 U.S.C. § 101(53).
The other possibility, not relevant here, is a "judicial lien," i.e., one "obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding." 11 U.S.C. § 101(36).