Cite as: Keith M. Lundin, Lundin On Chapter 13, § 80.12, at ¶ ____, LundinOnChapter13.com (last visited __________).
The fact patterns that test the limits of the protection from modification in § 1322(b)(2) are as diverse as the real and personal property that lenders take as collateral for loans. Many reported decisions struggle with whether a mortgage holder is protected from modification when the creditor is also secured by collateral that is not exactly part of the debtor’s residence.
For example, § 1322(b)(2) does not protect a creditor with a security interest in irrigation equipment in addition to its lien on the debtor’s principal residence.1 A creditor is not secured “only by real property that is the debtor’s principal residence” when the creditor also has a security interest in an adjoining vacant lot.2 A security interest in two 80-acre parcels of real estate and a second home forfeits the protection of § 1322(b)(2).3 A mortgage is not protected from modification when the bank also has a security interest in a bar and grill and farm machinery.4 A second mortgage on the debtor’s principal residence is not protected from modification when the lender also has a security interest in inventory, receivables and equipment that are assets of the debtor’s business.5
When a mortgage holder recorded its foreclosure judgment, the judgment became a lien on a separate unencumbered tract of property owned by the debtor, thus forfeiting the mortgage holder’s protection from modification.6 A debt is subject to modification and not protected by § 1322(b)(2) when the note is secured by three different collateral pledge agreements, only one of which relates to the debtor’s principal residence.7 One court held that a residential mortgage was not protected from modification by § 1322(b)(2) because the creditor also had a security interest in personal property pledged by the debtor’s corporation.8 A supplier that claimed a mortgage on storm doors built into the debtor’s residence is not protected from modification by § 1322(b)(2) because the doors were personalty under state law.9
“Dragnet” or cross-collateralization clauses can cause trouble for mortgage holders. These common clauses provide that the collateral for one loan is also collateral for all other loans between the same debtor and the same lender. A regular customer of a financial institution may have several loans, one secured by the debtor’s principal residence, another secured by the debtor’s car and a third secured by the debtor’s business inventory. If the documents for any of the loans—or a separate guaranty agreement—contains cross-collateralization language, then the loan secured by the debtor’s principal residence becomes a loan secured also by personal property or business property. Cross-collateralization involving deposit accounts and a Chapter 13 debtor’s principal residence are somewhat more likely after the 2001 revisions to Article 9 of the Uniform Commercial Code.10 In one reported case, a residential mortgage was held to be subject to modification because the lender also had a mortgage on the debtor’s nonresidential real estate that contained a dragnet clause.11 This outcome is consistent with the wording of § 1322(b)(2): a home mortgage that is cross-collateralized with a car or other personal property is not secured “only” by a security interest in real property.
Several courts have struggled with the question whether the other collateral must have value, and, if so, how much value, before it forfeits the protection from modification in § 1322(b)(2). As discussed above,12 one court determined that the protection from modification in § 1322(b)(2) was not forfeited by an interest in land bank stock that has no identifiable value.13 In contrast, six years later the same court held that a residential mortgage was subject to modification because the mortgagee also had a lien on the debtor’s nonresidential real estate that contained a cross-collateralization clause, notwithstanding that the value of the nonresidential real property was insufficient to support a secured claim.14 As this court explained, “[T]hat a lien is economically worthless and thus does not constitute a secured claim pursuant to § 506(a), is not relevant, because the lien, nonetheless, exists as a matter of state law. We are concerned merely with the lien’s existence, not with its economic value or its bankruptcy survivability.”15
It is difficult to reconcile these two holdings. The latter result is most consistent with § 1322(b)(2): it is the existence of other collateral, not the value of that collateral, that defeats the statutory requirement that the mortgagee be secured “only by a security interest in real property that is the debtor’s principal residence.” That the value of the other collateral might prove to be negligible, for example, because of other liens, should not change the outcome for § 1322(b)(2) purposes. If value were relevant, impossible questions abound—how much other collateral must there be before a mortgage holder forfeits the protection from modification in § 1322(b)(2)? Is value for this purpose measured based on the hypothetical sale of the other collateral, the amount of income it can produce, the amount of income it actually produces or some other measure?16 Is one dollar enough?17
Sometimes the question whether a claim is protected from modification by § 1322(b)(2) turns on whether the collateral is habitable. For example, in In re Lee,18 the mortgage holder’s collateral was a duplex, one-half of which was occupied as a principal residence by the debtor. The court found that the rental half of the collateral did not forfeit the antimodification protection in § 1322(b)(2) because the rental half was in such disrepair that it was uninhabitable. In contrast, in In re Canterbury,19 an unfinished shell for a residence for which a building permit was not available because the real property on which it sat would not support a septic system was not protected from modification by § 1322(b)(2).
And then there is the “adjoining lot” problem. Is a creditor secured only by a security interest in real property that is the debtor’s principal residence when the security interest extends to an adjoining lot or parcel of real property that is not the lot or parcel upon which the debtor’s home is located? The bankruptcy court in In re Beckford20 found that a mortgage secured by adjoining lots, only one of which contained the debtor’s residence, was protected from modification by § 1322(b)(2) because the debtor used the two lots as a single residential unit and it was “unlikely” under state law that the debtor would be permitted to sell the second lot as a separate residential building lot.
It has been held that an uncollateralized personal guaranty does not defeat the protection of § 1322(b)(2) because a guaranty is a promise, not security and a guaranty is not separate property.21 Also, that the debtor’s residence is owned jointly with a nonfiling spouse does not forfeit protection under § 1322(b)(2): “[I]t is not important . . . whether the debtor may have full ownership or an undivided interest, as the undivided interest of the non-filing debtor does not constitute other security. The character and nature of the security is the same . . . the debtor’s principal residence, regardless of whether it is solely or jointly owned.”22
1 In re Lapp, 66 B.R. 67 (Bankr. D. Colo. 1986).
2 In re Morphis, 30 B.R. 589 (Bankr. N.D. Ala. 1983). Accord In re Pruett, 178 B.R. 7 (Bankr. N.D. Ala. 1995) (Security interest in 20 acres of real estate, two chicken houses, and equipment extended to property other than real property. Debtor was entitled to valuation under § 506(a) and to split the mortgage holder’s claim without violating § 1322(b)(2) or Nobelman.).
3 In re Groff, 131 B.R. 703 (Bankr. E.D. Wis. 1991). Accord In re Howard, 220 B.R. 716 (Bankr. S.D. Ga. 1998) (Security interest in 103 acres of unimproved land in addition to a smaller tract that contained the debtor’s principal residence probably forfeits protection from modification in § 1322(b)(2) notwithstanding that the 103-acre tract was foreclosed upon before the petition and is no longer owned by the debtor.).
4 In re Michels, 270 B.R. 737 (Bankr. N.D. Iowa 2001).
5 In re Larios, 259 B.R. 675, 678 (Bankr. N.D. Ill. 2001) (“[T]he language of the security agreement purported to take a security interest in additional collateral, other than the junior mortgage in the residence, namely J & H Marble’s inventory, receivables and equipment. The language in the underlying security agreement determines whether a creditor is entitled to protection from modification . . . . For purposes of applying § 1322(b)(2), it matters not whether the security interest has attached, nor whether it is perfected, only whether it is extant and not released, satisfied or otherwise terminated.”).
6 In re Bookout, 231 B.R. 306, 309–10 (Bankr. E.D. Ark. 1999) (Judicial lien arising from recording of foreclosure judgment also encumbers 60-acre tract owned by the debtor across the street from the principal residence; judicial lien is not protected from modification by § 1322(b)(2). “The Debtors, unlike a more typical debtor, own a 60-acre tracts of substantially unencumbered real property separated only by a road from the real property subject to the Bank’s mortgage. The personal judgment against the Debtors contained in the foreclosure decree constitutes a judicial lien against that 60 acres, which serves as security for the repayment of the Bank’s claim. Therefore, the real property is subject to being sold to satisfy the Bank’s claim. . . . [I]t cannot be disputed that on the date the petition was filed the Bank’s claim was secured by a security interest in the Debtors’ principal residence and a judicial lien in sixty additional acres of real property. . . . [T]he Bank’s claim may be modified pursuant to the terms of a chapter 13 plan.”).
7 In re DeMoss, 59 B.R. 90 (Bankr. W.D. La. 1986).
8 In re Bouvier, 160 B.R. 24, 25 (Bankr. D.R.I. 1993) (On remand, mortgage is not protected from modification by § 1322(b)(2) or by Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993) because in addition to the debtor’s principal residence the mortgage is also secured by a security interest in personal property pledged by a corporation controlled by the debtors. Court rejects mortgage holder’s argument that § 1322(b)(2) protects a mortgage from modification where the only property pledged by the debtors is a personal residence. “Congress apparently did not believe that lenders who obtain additional security were in need of the same protection as those who obtain only residential home mortgages, and we can discern no Congressional intent that such additional security must come from the debtors.”). Accord The Money Store Inv. Corp. v. Cummings (In re Cummings), 214 B.R. 126 (D.N.J. 1997) (Security interest in machinery equipment, inventory, accounts receivable and a life insurance policy owned by the debtor’s corporation forfeit the protection from modification in § 1322(b)(2).).
9 In re Cotton, 199 B.R. 967, 968–69 (Bankr. D. Neb. 1996) (Creditor that provided and installed custom storm doors, took a purchase money security interest and claimed a mortgage after storm doors were installed is not secured only by real property and can be modified. “Pacesetter’s interest in the goods it has manufactured and installed is not merely incidental to an interest in the debtor’s real property. . . . [T]he goods were personalty and independent of the real estate. Pacesetter is a vendor of personal property. . . . Pacesetter’s rights could still be modified assuming that the goods were fixtures. . . . Pacesetter is not part of the class of creditors that Congress intended to protect by enacting section 1322(b)(2).”).
10 See § 124.1 [ Claims Secured by Bank Deposits, “Shares” or Escrow Account Balances ] § 80.8 Claims Secured by Bank Deposits, “Shares” or Escrow Account Balances.
11 In re Graham, 144 B.R. 80 (Bankr. N.D. Ind. 1992).
12 See § 124.1 [ Claims Secured by Bank Deposits, “Shares” or Escrow Account Balances ] § 80.8 Claims Secured by Bank Deposits, “Shares” or Escrow Account Balances.
13 See In re Foster, 61 B.R. 492 (Bankr. N.D. Ind. 1986) (Security interest in debtor’s land bank stock does not forfeit protection from modification in § 1322(b)(2) because the value of the land bank stock certificates is “illusory.”). Accord Rolle v. Chase Manhattan Mortgage Corp. (In re Rolle), 218 B.R. 636, 640 (Bankr. S.D. Fla. 1998) (“[N]ominal or de minimus value in collateral” does not forfeit the protection from modification in § 1322(b)(2).).
14 In re Graham, 144 B.R. 80 (Bankr. N.D. Ind. 1992). Accord United States Rural Hous. & Cmty. Dev. Serv. v. Loper (In re Loper), 222 B.R. 431, 438 (D. Vt. 1998) (Security interest in personal property including ranges, refrigerators, washers and dryers forfeits the protection from modification in § 1322(b)(2) notwithstanding that the personal property may be nearly valueless and that the mortgage holder’s security interest may not be perfected. “[T]he issue of whether a residential mortgagee’s claim may be bifurcated turns on the nature of the property securing the claim, not on the value of that property.”); In re Barrett, 188 B.R. 285, 286 (Bankr. D. Or. 1995) (Creditor forfeited protection from modification in § 1322(b)(2) because of a security interest in livestock and farm equipment notwithstanding that superior lien exhausted all value in the personal property. “[V]aluation of the creditor’s collateral at the time of the bankruptcy filing does not determine whether the creditor qualifies under 11 U.S.C. § 1322(b)(2) . . . . Rather qualification rests on the contractual rights between the parties as of the date the debtors file their bankruptcy petition. . . . The Bank does not qualify under 11 U.S.C. § 1322(b)(2) . . . . Its contractual rights include not only a mortgage against the farm but also a security interest in livestock and farm equipment with all the attendant privileges to foreclose upon the latter upon default, which indeed it did.”).
15 144 B.R. at 84.
16 See, e.g., In re McConnell, No. 03-60110, 2003 WL 21289944 (Bankr. D. Minn. May 30, 2003) (unpublished) (Mortgage is protected from modification notwithstanding that lien extends to 60 acres of farmland when debtor realized $24,000 of farm income but also had $200,000 of income as an airline pilot. Bankruptcy court did not separately value the 60 acres of pasture land but observed that the $24,000 was not “significant income” and the debtor did not qualify as a farmer under Bankruptcy Code.).
17 This is a variation on the question whether there must be value to support a secured claim before the protection from modification is available to a home mortgage holder under § 1322(b)(2) and Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993). See § 128.1 [ Modification of Unsecured Home Mortgage: Before and After BAPCPA ] § 80.13 Modification of Unsecured Home Mortgage: Before and After BAPCPA.
18 137 B.R. 285 (Bankr. E.D. Wis. 1991).
19 127 B.R. 586 (Bankr. S.D. W. Va. 1991).
20 247 B.R. 27 (Bankr. D. Conn. 2000).
21 In re Hemsing, 75 B.R. 689 (Bankr. D. Mont. 1987).
22 In re Turner, 118 B.R. 382, 384 (Bankr. D.S.C. 1989).