§ 80.3     Non-Purchase Money, “Short-Term” and Real Estate-Secured Loans for Purposes Other Than Acquiring Residence
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 80.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The plain language of § 1322(b)(2) protects from modification any claim that is secured only by a security interest in real property that is the debtor’s principal residence, without regard to the purpose of the loan, the priority of the lien or the characteristics of the lender. The legislative history of § 1322(b)(2) is sparse, but nothing in that history suggests that the protection from modification in § 1322(b)(2) is limited to any particular kind of loan, any particular kind of lender or any particular lending purpose.1

[2]

A substantial number of courts have read the plain language in § 1322(b)(2) to prohibit modification of any security interest in real property that is the debtor’s principal residence, without regard to whether the loan enabled the debtor to purchase the home, without regard to whether the loan is a first, second or lesser mortgage2 and without regard to the nature of the lending institution or the underlying purpose of the loan.3

[3]

A few courts have misread § 1322(b)(2) to protect from modification only lenders that make “enabling” loans or purchase-money loans—loans to purchase real property used by the debtor as a personal residence. For example, it has been held that § 1322(b)(2) does not protect from modification a lender that takes a security interest in the debtor’s residence to secure a preexisting debt.4 Courts have held that § 1322(b)(2) was only intended to protect long-term first mortgages; thus, subordinate mortgages and short-term or non-purchase-money mortgages are not protected from modification.5 When the proceeds of the original loan were used to acquire real estate that was not the debtor’s principal residence, it has been held that the loan is not protected from modification by § 1322(b)(2) notwithstanding that the property is used as the debtor’s principal residence at the filing of the Chapter 13 petition.6

[4]

Nothing in the language of § 1322(b)(2) or in its legislative history indicates that Congress intended the limited interpretation of § 1322(b)(2). One of the first courts to adopt the view that § 1322(b)(2) protects only long-term enabling loans found congressional intent to “provide stability in the residential long-term home financing industry and market” notwithstanding that “the legislative history is silent” of any such intent.7 This admission is misconstrued in later cases as proof that Congress intended to restrict the antimodification effect of § 1322(b)(2) to certain kinds of loans by certain kinds of lenders.8 There is no legislative history and no statutory support for the restrictive reading of the exception to modification in § 1322(b)(2).

[5]

Nothing in § 1322(b)(2) suggests that the length of the contract repayment term has anything to do with whether a real estate-secured claim is protected from modification. However, much controversy developed whether § 1322(b)(2) prohibited the rescheduling for payment in full of “short term” residential mortgages.9 The 1994 amendments to the Code added § 1322(c)(2), which provides “notwithstanding subsection (b)(2)” a Chapter 13 plan can provide for payment consistent with § 1325(a)(5) of a claim secured only by a security interest in real property that is the debtor’s principal residence when “the last payment on the original payment schedule . . . is due before the date on which the final payment under the plan is due.”10 New § 1322(c)(2) permits debtors in Chapter 13 cases filed after October 22, 1994, to modify a short-term home mortgage like any other secured claim and pay it consistent with § 1325(a)(5). The “notwithstanding subsection (b)(2)” in the first sentence of new § 1322(c) would be surplusage unless Congress perceived that short-term home mortgages were otherwise subject to the antimodification provision of § 1322(b)(2). Subsequent to the 1994 amendments, there has been some controversy whether “notwithstanding subsection (b)(2)” in § 1322(c)(2) means what it says.11 The better reasoned decisions conclude that new § 1322(c)(2) is an “exception” to the exception in § 1322(b)(2)—permitting Chapter 13 plans to modify “short term” mortgages without offending § 1322(b)(2).12


 

1  See H.R. Rep. No. 95-595, at 429 (1977); S. Rep. No. 95-989, at 141 (1978); 124 Cong. Rec. H11,106–07 (daily ed. Sept. 28, 1978) (remarks of Congressman Edwards), S17,423 (daily ed. Oct. 6, 1978) (remarks of Sen. DeConcini).

 

2  Detailed elsewhere, many courts have held that § 1322(b)(2) does not protect from modification a wholly unsecured mortgage. See § 128.1 [ Modification of Unsecured Home Mortgage: Before and After BAPCPA ] § 80.13  Modification of Unsecured Home Mortgage: Before and After BAPCPA.

 

3  Allied Credit Corp. v. Davis (In re Davis), 989 F.2d 208, 210 (6th Cir. Mar. 24, 1993) (Jones, Siler, Peck) (“[T]he language of § 1322(b)(2) is clear and unambiguous on its face and does not permit the interpretation that the statute has application only to ‘enabling’ loans.”); Smith v. Reeves (In re Reeves), 164 B.R. 766, 767–68 (B.A.P. 9th Cir. Mar. 14, 1994) (Russell, Ollason, Jones) (The prohibition against modification in § 1322(b)(2) applies to a short-term mortgage that has fully matured, notwithstanding that the original loan was not used to purchase the debtor’s principal residence. “Section 1322(b)(2) makes no distinction between short term and long term loans or types of lenders. . . . [Section] 1322(b)(2) does not contain a purchase money requirement. . . . Even though this debt obligation stems from short term financing which was not used to purchase the principal residence, . . . § 1322(b)(2) is applicable since the note was secured solely by [the debtors’] personal residence.”); Metropolitan Mortgage & Sec. Co. v. Rubottom (In re Rubottom), 134 B.R. 641 (B.A.P. 9th Cir. Dec. 31, 1991) (Ashland, Volinn, Ollason) (Prohibition against modification of a home mortgage in § 1322(b)(2) applies to a junior lienholder, here a third mortgage holder.); In re Harris, 94 B.R. 832 (D.N.J. Jan. 19, 1989) (Rodriguez) (Section 1322(b)(2) does preclude modification of even a short-term home improvement loan that meets the § 506(a) definition of a secured claim.); In re Bradshaw, 56 B.R. 742 (S.D. Ohio Dec. 13, 1985) (Holschuh) (There is no exception in § 1322(b)(2) for non-purchase-money mortgages. The section prohibits the debtor from modifying the interest rate in a second mortgage notwithstanding that the second mortgage was not purchase money when the second mortgage is fully secured only by the debtor’s principal residence.); In re Carr, 318 B.R. 517, 519 (Bankr. W.D. Wis. Nov. 30, 2004) (Martin) (Non-purchase-money mortgage to fund a business venture is protected from modification by § 1322(b)(2) when only collateral is the debtor’s principal residence. “[A] few earlier cases had limited the prohibition of § 1322(b)(2) to modifications of purchase money mortgages. . . . However, nothing in the language of § 1322(b)(2) or in its legislative history indicates that Congress intended that limited interpretation of § 1322(b)(2).”); In re Moser, 247 B.R. 431, 433–34 (Bankr. N.D. Ohio Mar. 9, 2000) (Speer) (Even a non-purchase-money security interest in real property that is the debtors’ principal residence is protected from modification by § 1322(b)(2). The loan secured by the debtors’ principal residence was a consolidation loan, and the mortgage was not used to purchase the property. “[Section] 1322(b)(2) is unambiguous as written . . . . [Section] 1322(b)(2) is fully functional . . . and . . . the lack of a requirement against applying a non–purchase money mortgage to the anti-modification clause of § 1322(b)(2) is not necessarily inconsistent with the statute’s intent. . . . Consequently, this Court holds that the anti-modification clause of § 1322(b)(2) applies even if the underlying mortgage placed against the residence was not used to secure the purchase price of the property.”); In re French, 174 B.R. 1, 4 (Bankr. D. Mass. Nov. 17, 1994) (Boroff) (“While the legislative design to protect the home-lending industry is apparent, this Court is unconvinced that Congress intended to protect only purchase money mortgages. . . . [A]lthough G.L.B.’s claim arose out of Debtors’ guaranty through a so-called ‘commercial’ transaction, it still qualifies as a ‘claim’ within the meaning of the Code. Accordingly, the Court rejects the notion that § 1322(b)(2) only protects purchase money mortgages securing the Debtor’s principal residence.”); Equitable Bank, N.A. v. Witomski (In re Witomski), 126 B.R. 205, 207 (Bankr. D. Md. Mar. 27, 1990) (Schneider) (Section 1322(b)(2) prohibits modification of an “indemnity deed of trust” granted by the debtor to secure the guaranty of payment of a commercial promissory note executed by a corporation. “The language in § 1322(b)(2) does not differentiate between long term mortgage and short term indemnity deeds of trust, but speaks only generally in terms of ‘a claim secured only by a security interest in real property that is the debtor’s principal residence.’”); In re Braylock, 120 B.R. 61, 63 (Bankr. N.D. Miss. Apr. 24, 1990) (Houston) (Nothing in § 1322(b)(2) suggests it is “designed for a particular type loan. Until Congress amends § 1322(b)(2), this court is reluctant to constrict its parameters as some courts have recently done.”); In re Schum, 112 B.R. 159, 162 n.5 (Bankr. N.D. Tex. Mar. 23, 1990) (Abramson) (Finding no legislative distinction between long-term and short-term mortgages, the practical effect of allowing modification of short-term mortgages would “penalize lenders which may have taken a greater risk in extending short-term credit to those who could not otherwise qualify for a long-term mortgage.”); In re Marrero, 111 B.R. 384 (Bankr. D.P.R. Jan. 18, 1990) (De Jesus) (Section 1322(b)(2) applies to home mortgages that are not long-term and not purchase money.); In re Diquinzio, 110 B.R. 628 (Bankr. D.R.I. Feb. 14, 1990) (Votolato) (The prohibition against modification in § 1322(b)(2) is not limited to long-term purchase-money residential mortgages.); In re Ross, 107 B.R. 759 (Bankr. W.D. Okla. Nov. 22, 1989) (Lindsey) (Section 1322(b)(2) protects the holders of short-term second or subsequent liens in addition to purchase-money liens.); Roberts v. Skiba (In re Roberts), 99 B.R. 653 (Bankr. W.D. Pa. Apr. 28, 1989) (Bentz) (Section 1322(b)(2) prohibits modification of a short-term mortgage that enabled the debtors to construct a home.); In re Allen, 75 B.R. 344 (Bankr. S.D. Ohio Apr. 21, 1987) (Sellers) (Notwithstanding that § 1322(b)(2) is overbroad to the extent that it protects not only lenders with purchase-money mortgages but also loans for purposes unrelated to the purchase or improvement of real property, § 1322(b)(2) prohibits a change in interest rate or extension of term of non-purchase-money second mortgage fully secured by debtor’s principal residence.); In re Hobaica, 65 B.R. 693 (Bankr. N.D.N.Y. Oct. 17, 1986) (Gerling) (Sketchy legislative history should not be used to alter the unambiguous language of § 1322(b)(2). A mortgage secured only by the debtor’s principal residence cannot be modified notwithstanding that loan proceeds were not used to purchase the residence.); In re Schilling, 64 B.R. 319 (Bankr. D. Nev. Aug. 25, 1986) (Thompson) (The special protection of § 1322(b)(2) is not limited to institutional lenders or to purchase-money security interests.); In re Hubbard, 30 B.R. 39 (Bankr. W.D. Mo. May 31, 1983) (Pelofsky) (Debtors may not modify the rights of a creditor whose claim is secured only by real property that is the debtors’ principal residence even though the debt was not incurred to enable the debtors to purchase the residence.).

 

4  Bank of Va. v. Lindamood, 34 B.R. 330 (Bankr. W.D. Va. Nov. 9, 1983) (Pearson) (Section 1322(b)(2) protects only lenders involved in home mortgage financing and not lenders who take security interests in a residence to secure other debts.).

 

5  In re Wilson, 144 B.R. 318, 319 (Bankr. W.D. Va. Aug. 14, 1992) (Pearson) (“[Section] 1322(b)(2) . . . excludes first deed of trust mortgages on debtor’s principal residence which has been construed as including only classic first mortgage financing instruments in purchasing homes. . . . [T]he statute authorizes modification of the second deed of trust note in this Chapter 13 case.”); In re Williams, 109 B.R. 36, 42 (Bankr. E.D.N.Y. Dec. 21, 1989) (Eisenberg) (Congress intended to protect only the long-term residential home mortgage financing industry. “Congress did not intend to provide . . . protection to lenders who provide short term consumer financing to individuals and take a junior lien on their home as collateral.”); In re Shaffer, 84 B.R. 63 (Bankr. W.D. Va. Mar. 15, 1988) (Pearson) (Reaffirming Bank of Virginia v. Lindamood, 34 B.R. 330 (Bankr. W.D. Va. Nov. 9, 1983) (Pearson), § 1322(b)(2) does not protect from modification a junior “short-term” lien on the debtor’s real estate.), aff’d in part sub nom. Capitol Credit Plan, Inc. v. Shaffer, 116 B.R. 60, 62 (W.D. Va. July 6, 1988) (Williams) (Although recognizing that a literal reading of § 1322(b)(2) would extend the protection for modification to consumer debts that are secured by mortgages on a debtor’s principal residence even though the debt did not enable the debtor to acquire the home, the court notes that “courts are constantly called on to cure a poorly drafted statute.” Concluding that protection of a non-purchase-money mortgage securing an ordinary consumer debt might be within the letter of § 1322(b)(2) but would not be “within its spirit nor within the intention of its makers,” the decision affirms bankruptcy court’s confirmation of a plan that modifies the terms of the second mortgage on the debtor’s principal residence.).

 

6  In re Hildebran, 54 B.R. 585 (Bankr. D. Or. Nov. 13, 1985) (Wilhardt) (At the time of execution of the original note, debtors did not reside on the real estate securing the loan and creditor was not providing residential financing. The fact that the debtors used the property as their principal residence at the time of filing does not invoke the protection of § 1322(b)(2) and cannot change the original character of the loan.). But see § 121.2 [ Timing Issues: Prepetition Changes in Collateral or Use ] § 80.5  Timing Issues: Prepetition Changes in Collateral or Use.

 

7  See United Cos. v. Brantley, 6 B.R. 178, 189 (Bankr. N.D. Fla. Sept. 18, 1980) (Sauls).

 

8  See, e.g., In re Williams, 109 B.R. 36 (Bankr. E.D.N.Y. Dec. 21, 1989) (Eisenberg); Bank of Va. v. Lindamood, 34 B.R. 330 (Bankr. W.D. Va. Nov. 9, 1983) (Pearson).

 

9  See § 142.1 [ Demand, Matured and Balloon Loans; “Short-Term” Mortgages before October 22, 1994 ] § 85.1  Demand, Matured and Balloon Loans; “Short-Term” Mortgages before October 22, 1994.

 

10  11 U.S.C. § 1322(c)(2), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 301, 108 Stat. 4106 (1994), discussed in § 143.1 [ Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994 ] § 85.2  Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994.

 

11  See §§ 143.1 [ Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994 ] § 85.2  Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994 and 144.1 [ Prepetition Foreclosure Judgment: Curing Default, Payment in Full or Modification under § 1322(c)(2)? ] § 85.3  Prepetition Foreclosure Judgment: Curing Default, Payment in Full or Modification under § 1322(c)(2)?.

 

12  See § 143.1 [ Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994 ] § 85.2  Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994. See, e.g., In re Brown, 428 B.R. 672 (Bankr. D.S.C. Mar. 2, 2010) (Waites) (Reverse mortgage on home inherited by debtor from her mother was accelerated and became due on death of mother, permitting debtor to pay mortgage in full over life of plan under § 1322(c)(2) without transgressing § 1322(b)(2).); Blythe v. HSBC Bank USA, N.A. (In re Blythe), No. 08-350, 2009 WL 2922022 (Bankr. E.D. Pa. Aug. 25, 2009) (Raslavich) (Section 1322(c)(2) permits modification of mortgage when last payment is due before final plan payment—an exception to § 1322(b)(2). Lien value may be determined under § 506 when debtors’ complaint seeks to reduce amount of secured claim and adjust ongoing rate of interest.).