CECELIA G. MORRIS, CHIEF UNITED STATES BANKRUPTCY JUDGE
Before the Court is a motion to bifurcate a first mortgage lien on real property that the debtor argues is not his principal residence. The mortgage holder counters by arguing that the real property is the debtor's principal residence. The Court agrees with the mortgage holder. Most persuasive is the fact that the debtor opted to participate in this Court's loss mitigation program which ultimately resulted in a HAMP loan modification.
The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and the Amended Standing Order of Reference signed by Chief Judge Loretta A. Preska dated January 31, 2012. This is a "core proceeding" pursuant to 28 U.S.C. § 157(b)(2)(B) (allowance of claims against the estate) and (b)(2)(K) (determining the validity, extent, or priority of liens).
Alan Laycock ("Debtor") filed a chapter 13 petition on January 22, 2013. The Debtor's petition indicates that he holds a fee simple interest in "Residence/Commercial" real property located at 203 Route 28A, Hurley, N.Y. 12443 ("Route 28A Property"). Sched. A, ECF Doc. No. 1. The Route 28A Property is encumbered by a first mortgage lien held by Ocwen Loan Servicing, LLC, Servicer for HSBC Bank USA National Association, as Trustee or Fremont Home Loan Trust 2006-D, Mortgage-Backed Certificates, Series 2006-D ("Ocwen"). As of the petition date, the Debtor was in arrears on his mortgage payments to Ocwen. Sched. D, ECF Doc. No. 1. With a hope of recapitalizing these arrears through a loan modification, the Debtor elected to participate in this Court's Loss Mitigation Program by checking the appropriate box in Section C of the model chapter 13 plan, filed on January 22, 2013. Sec. C, ECF Doc. No. 5. As noted in Section C of the plan, loss mitigation "applies only to the Debtor's residential real property or cooperative apartment." Id.
Pursuant to an Order dated February 15, 2013, the Debtor and Ocwen entered into loss mitigation. ECF Doc. No. 9. Over the next few months, the Debtor provided Ocwen with the requisite documents and both parties apprised this Court of their progress through status reports filed on the docket and at loss mitigation hearings. Loss mitigation ultimately culminated in a HAMP trial loan modification. Stat. Let., ECF Doc. No. 33.
While the parties were engaged in loss mitigation, the Debtor filed a motion to bifurcate Ocwen's mortgage lien into secured and unsecured portions, value the unsecured portion at zero, and then void the unsecured portion. ECF Doc. Nos. 30 and 31. The Debtor also requested that the Court value the Route 28A Property at $90,000 pursuant to an appraisal annexed to the motion and avoid a wholly unsecured second mortgage encumbering the Route 28A Property. The Debtor's second mortgage is held by KeyBank NA.
Ocwen opposed the Debtor's motion, arguing that its first mortgage lien cannot be bifurcated as a matter of law as the Route 28A Property is the Debtor's principal residence
Both the Debtor and Ocwen appeared before this Court on August 27, 2013 for a hearing on the motion. KeyBank did not appear. At the conclusion of the hearing, the Court issued a bench ruling granting the Debtor's motion to avoid KeyBank's second mortgage lien and denying the Debtor's motion to bifurcate Ocwen's first mortgage lien. This opinion follows to provide the parties with the Court's legal justifications for its ruling.
Two provisions of the Bankruptcy Code are operative with respect to the bifurcation of Ocwen's first mortgage lien.
Section 506(d) states:
Section 1322(b)(2) states:
11 U.S.C. §§ 506(d) and 1322(b)(2). The United States Supreme Court has interpreted these provisions in cases factually similar to the case at bar. In Dewsnup v. Timm, the Supreme Court held that a chapter 7 debtor could not strip down a partially secured claim with § 506(d) as the claim was secured by a lien and the claim had been fully allowed pursuant to § 502. 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). One year after Dewsnup, the Supreme Court in Nobelman v. American Savings Bank held that a chapter 13 debtor could not strip down a partially secured mortgage lien on the debtor's principal residence pursuant to § 1322(b)(2). 508 U.S. 324, 331-32, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). Read together, these cases produce one rule: a debtor cannot strip down a mortgage lien on the debtor's principal residence (with either § 506(d) or § 1322(b)(2)) if the mortgage lien is secured by some value in the property.
The first mortgage lien held by Ocwen is secured by some value, regardless of whether the Court accepts the Debtor's or Ocwen's appraisal. The issue then is whether the Route 28A Property is the "debtor's principal residence."
Debtor argues that the Route 28A Property should not be considered his principal residence as "the majority of the courts that have considered the issue have ruled that an otherwise commercial or income producing property will not be given the protection of the anti-modification provision of Section 1322(b)(2) simply because the debtor may reside therein." Mem. Law in Supp. of Mtn., ECF Doc. No. 31, pg. 4. In support, the Debtor states that the Route 28A Property is "zoned light factory/highway commercial[,]" and the Debtor always intended to utilize the
Ocwen argues that the Route 28A Property should be considered the Debtor's principal residence as "the subject premises is a one family, three-bedroom, ranch style home with an attached garage" that the Debtor has owned since 1994. Aff. in Opp., ECF No. 40, ¶ 8, 10. Ocwen also points out that the Debtor's own appraisal concedes that the Route 28A Property is zoned residential, and that HAMP is only available to residential borrowers. Id. at ¶ 15, 28. As the Route 28 Property is the Debtor's principal residence, Ocwen argues that its "lien cannot be bifurcated as it is the primary lien against the Debtor's principal residence and therefore Ocwen's rights in the entire lien are protected under the anti-modification exception of 11 U.S.C.A. § 1322(b)(2)." Id. at ¶ 4 (emphasis in original).
Whether real property is actually a debtor's principal residence, and thus falls within the § 1322(b)(2) anti-modification exception, has confounded bankruptcy courts. In re Moore, 441 B.R. 732, 739 (Bankr.N.D.N.Y.2010) (noting that "[c]ourts have widely disagreed over the proper application of the anti-modification provision, yet each one proclaims that its rule best comports with the `plain meaning,' the legislative history, congressional intent, and/or the fundamental principles of bankruptcy law").
Section 101(13A)(A) of the Bankruptcy Code defines a "debtor's principal residence" as "a residential structure if used as the principal residence by the debtor, including incidental property, without regard to whether the structure is attached to real property."
The focus on "use" has been the central crux of the "principal residence" issue for some time. As discussed below, courts differ over whether real property should be considered a "debtor's principal residence"
On one side of the spectrum is the opinion of the bankruptcy court in In re Macaluso, 254 B.R. 799 (Bankr.W.D.N.Y.2000). The Macaluso court held that the anti-modification exception in § 1322(b)(2) applies to any property that is used as the debtor's principal residence, notwithstanding the fact that the debtor's property in that case included a second residential unit and a store. Id. at 800. The court focused on the language in § 1322(b)(2), finding that the statute "excepts from modification any claim secured by a security interest in real property that is the debtor's principal residence." Id. As the mortgage holder held a claim "on a single parcel of real estate, it matters not that the parcel may fulfill many uses or be divided into many units." Id. So long as the "debtor principally resides in the real estate or some part thereof," the anti-modification exception is triggered and the mortgage securing such real estate cannot be modified. Id.
This result has been criticized. As one bankruptcy court noted: "[t]he problem with the Macaluso approach is that it could conceivably be applied to, for example, a large factory in which a debtor maintains a small apartment as his or her principal residence. This result would be the tail wagging the dog." In re Zaldivar, 441 B.R. 389, 390 (Bankr.S.D.Fla.2011).
Other courts have taken the exact opposite approach. The Third Circuit in In re Scarborough held: "[w]here a creditor takes an interest in real property that is not the debtor's principal residence, such as property that will be used as income-generating rental property, the anti-modification provision [in § 1322(b)(2)] does not apply." 461 F.3d 406, 414 (3d Cir.2006) (emphasis in original); see also In re Moore, 441 B.R. 732, 739 (Bankr.N.D.N.Y. 2010) (following the reasoning of Scarborough to hold that the mortgage holder's claim could be modified because it took a security interest in a single parcel of real property that included income-producing real property in addition to the debtor's principal residence).
Similarly, one of the first cases to deal with this issue, a First Circuit case from 1996, held that "the antimodification provision of § 1322(b)(2) does not bar modification of a secured claim on a multi-unit property in which one of the units is the debtor's principal residence and the security interest extends to the other income-producing units." Lomas Mortgage, Inc. v. Louis, 82 F.3d 1, 6 (1st Cir.1996); see also In re Picchi, 448 B.R. 870, 875 (1st Cir. BAP 2011) (finding that Lomas was good law; the debtor could modify a mortgage holders claim secured by a multi-unit building).
This approach has also been criticized. "The problem with th[e] approach [in Scarborough and Lomas] is that it would permit security interests to be modified on a debtor's principal residence when the debtor decides to rent out a garage apartment or convert a basement into a rentable apartment." In re Zaldivar, 441 B.R. 389, 390 (Bankr.S.D.Fla.2011).
Other courts eschew bright-line rules in favor of a totality of the circumstances or case-by-case approach. As stated in In re Brunson, "[e]ach case must turn on the intention of the parties." 201 B.R. 351, 353 (Bankr.W.D.N.Y.1996). To evaluate the parties' intentions, "[t]he Court must focus on the predominant character of the
Some courts believe that the case-by-case approach is "most consistent with Congressional intent" in enacting § 1322(b)(2). The "entire point of the anti-modification provision of § 1322(b)(2) is to `encourage the flow of capital into the home lending market' by reducing risk to mortgagees[.]" Zaldivar, 441 B.R. at 390-91 (citing Nobelman v. Am. Sav. Bank, 508 U.S. 324, 332, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993)). Taking congressional intent into mind, some courts believe "it makes a good deal of sense to look at the substance of the bargain between the parties to determine whether strip-down is prohibited by § 1322(b)(2)." Zaldivar, 441 B.R. at 390; see also Litton Loan Servicing, L.P. v. Beamon, 298 B.R. 508, 512 (N.D.N.Y. 2003) (discussing how the Brunson approach is most consistent with Nobelman and Congress' intent in including the antimodification in § 1322(b)(2)).
The Brunson approach has also been sharply criticized. The Third Circuit in Scarborough noted "that the multi-factor test introduces uncertainty and unpredictability to residential mortgage transactions because it requires courts to engage in subjective, hindsight analysis as to the intent of the parties." Scarborough, 461 F.3d at 414. Furthermore, two Ninth Circuit Bankruptcy Appellate Panel cases have held that the "the appropriate time for determining whether property is a debtor's principal residence is the petition date." In re Benafel, 461 B.R. 581, 585 (9th Cir. BAP 2011); In re Abdelgadir, 455 B.R. 896, 898 (9th Cir. BAP 2011); but see In re Proctor, 494 B.R. 833, 840 (Bankr. E.D.N.C.2013) (determining whether property is a debtor's principal residence based on the mortgage documents, not the petition date). If the Ninth Circuit Bankruptcy Appellate Panel's view is correct, and the petition date is the appropriate time to determine whether property is a "debtor's principal residence," a court would be precluded from evaluating the parties' intent at the time they entered into the loan transaction.
Regardless of which test this Court applies, the Debtor already conceded that the property is his "principal residence." Pursuant to the Loss Mitigation Program Procedures, Section II, Part B, a debtor may only seek loss mitigation on "any real property or cooperative apartment used as a principal residence in which an eligible Debtor holds an interest." See Gen. Ord. M-451 (June 17, 2013) (adopting the Loss Mitigation Program Procedures).
Focusing this Court's attention on the Brunson test, the Debtor argued that the Route 28A Property is "zoned light factory/highway commercial and is improved by a small building in which the debtor dwells and a full service wood-working factory." Mem. Law in Supp. of Mtn., ECF No. 31, pg. 6 (noting also that the "dwelling is unfinished and unsuitable for family living."). Notwithstanding this assertion, the Debtor's appraisal indicates that the property is zoned R/60, which is described as "RESIDENTIAL MIN LOT SIZE 60,000 SF." The second argument, that the property is improved by a small building, is equally unavailing. The Debtor's appraisal notes that the Route 28A property is a 6 room, 3 bedroom ranch, with a full basement that was built in 1960.
The Debtor also argues that "[u]pon advice of the mortgagee, the debtor agreed to execute a residential mortgage agreement," although the mortgagee was "aware of the commercial nature of the property as at the time of application debtor's sole source of income was from his wood working business located thereon." Mem. Law in Supp. of Mtn., ECF No. 31, pg. 7. The parties' intent at the time they entered into the mortgage contract is relevant under Brunson, although the Debtor has put forth no documentary evidence to substantiate his assertions. The Court is left to rely on the Debtor's 2006 residential mortgage contract, pursuant to which the Debtor agreed (in Covenant # 6) to occupy the property as his principal residence. If the mortgage contract had no owner-occupancy requirement, the Debtor would have a much stronger argument for strip down. See Zaldivar, 441 B.R. at 391; Brunson, 201 B.R. at 354. Even if this Court were to adopt the Brunson test, it appears that this Debtor bargained for a residential mortgage on a piece of real property that he has resided in since the mid-1990s.
The Debtor's motion to bifurcate Ocwen's lien is denied. After participating in loss mitigation, and ultimately accepting a HAMP loan modification, the Debtor is estopped from arguing that the Route 28A property is not his principal residence.
The Debtor also seeks to avoid a junior mortgage lien held by KeyBank. KeyBank did not file an objection to this motion. The Court grants this portion of the motion, unopposed.
