§ 79.2 — Principal Residence Redefined by BAPCPA

Revised: July 13, 2007

[1]

It has long been true under § 1322(b)(2) that a Chapter 13 plan cannot modify the rights of a claim “secured only by a security interest in real property that is the debtor’s principal residence.”1 This special protection for real estate loans secured by a debtor’s principal residence has been nibbled at the edges by debtors living in mobile homes, manufactured homes, house trailers and the like.2 The issue often becomes a question of state law: is the debtor’s residence considered to be “real property” under state law? If it is real property and is used as the debtor’s principal residence, then it is eligible for protection from modification in a Chapter 13 case.

[2]

Because the protection from modification in § 1322(b)(2) extends to a claim secured “only” by a security interest in real property that is the debtor’s principal residence, debtors have sometimes overcome the anti-modification provision by proving that the lender’s security interest extends to other property. Property interests that have been found to forfeit the protection from modification in § 1322(b)(2) include an assignment of rents,3 insurance policies, proceeds or premiums,4 bank deposits or escrow account balances5 and rental property or other income-producing property.6 Battles have been fought over the boilerplate in mortgage documents to determine whether furniture, fixtures, equipment, appliances, machinery, easements, appurtenances, mineral rights and the like are real property for purposes of § 1322(b)(2).7

[3]

BAPCPA reached for more protection for claims secured by real property that is a Chapter 13 debtor’s principal residence. “Reached for” is descriptive because it is anything but clear whether any new protection was realized. BAPCPA added a new subsection (13A) to § 101 as follows:

The term “debtor’s principal residence”—
(A) means a residential structure, including incidental property, without regard to whether that structure is attached to real property; and
(B) includes an individual condominium or cooperative unit, a mobile or manufactured home, or trailer.8
[4]

“Incidental property” in new § 101(13A) is further defined in new § 101(27B):

The term “incidental property” means, with respect to a debtor’s principal residence—
(A) property commonly conveyed with a principal residence in the area where the real property is located;
(B) all easements, rights, appurtenances, fixtures, rents, royalties, mineral rights, oil or gas rights or profits, water rights, escrow funds, or insurance proceeds; and
(C) all replacements or additions.9
[5]

The new definition of “debtor’s principal residence” in § 101(13A) placed in context in § 1322(b)(2) would provoke a belly laugh were it not such an important section of Chapter 13. The lobbyists who wrote this part of BAPCPA redefined “debtor’s principal residence” to include all manner of habitation “without regard to whether that structure is attached to real property” and extended the term to include mobile or manufactured homes and trailers; but they left the statutory predicate that the protection from modification in § 1322(b)(2) is available to a claim secured only by a security interest in “real property” that is the debtor’s principal residence.

[6]

After BAPCPA, a residential structure that is not attached to real property can be a debtor’s principal residence, but a debt secured by that structure is protected from modification by § 1322(b)(2) only if it is also “real property.” A debtor’s principal residence now includes all of the incidental property listed in new § 101(27B), but only incidental property that is “real property” retains the protection from modification in § 1322(b)(2).

[7]

Creditors with security interests in mobile homes, trailers and the like will insist that Congress intended to extend the protection from modification in § 1322(b)(2) to collateral that is not necessarily real property under state law. This argument collides squarely with the problem that “debtor’s principal residence” appears other places in the Bankruptcy Code without the “real property” predicate that appears in § 1322(b)(2).10 The new definitions in § 101(13A) and (27B) have application in the Bankruptcy Code other than the less than thrilling impact of the new sections on the protection from modification in § 1322(b)(2).

[8]

The new definition of debtor’s principal residence in § 101(13A) will affect the curing of defaults in Chapter 13 cases under § 1322(c)(1). A Chapter 13 plan can cure defaults with respect to a lien on the debtor’s principal residence under § 1322(b)(3) and (b)(5) until the residence is sold at a foreclosure sale conducted in accordance with applicable nonbankruptcy law.11 The new definition of a debtor’s principal residence will extend this “foreclosure sale” limitation on a Chapter 13 debtor’s power to cure default to residential structures that are not attached to real property and to condominium or cooperative units, to mobile or manufactured homes and to trailers. There will be interesting cases when state law provides a mechanism other than “foreclosure sale” for lienholders to realize on a security interest in a camping trailer or mobile home that the debtor uses as a principal residence.

[9]

The BAPCPA amendments to § 101(13A) remove any doubt that a debtor’s principal residence includes mobile or manufactured homes and trailers that become real property when state law conditions permit. A “residential structure” can be a debtor’s principal residence even if it is not attached to real property, but that residential structure would then be protected from modification only if it is also considered real property under state law. Debtors who live on boats, for example, have occasionally won the argument that the boat is a principal residence for homestead exemption purposes notwithstanding that it is not attached to real property. The BAPCPA amendments to § 101(13A) would extend this logic to the anti-modification protection of creditors in § 1322(b)(2) if state law allows a structure that is not attached to real property to be treated as if it is real property when it is a principal residence.

[10]

The problems with the new definition of principal residence in § 101(13A) have become quickly manifest in reported cases. For example, in In re Moss,12 Green Tree held a perfected security interest in a mobile home that was owned by the debtor and it was undisputed that the mobile home was the debtor’s principal residence. Unfortunately for Green Tree, the debtor did not own the land on which the mobile home was located. The Chapter 13 plan proposed to modify the balance of the debt on the mobile home by bifurcation and cramdown to the value of the mobile home. Green Tree objected to confirmation on the ground that the mobile home was protected from modification by § 1322(b)(2).

[11]

Citing In re Sturgill13 and In re Shepherd,14 Green Tree argued that the antimodification principle in § 1322(b)(2) was extended by the new definition in § 101(13A) to protect claims secured by a principal residence without regard to whether the creditor also had a security interest in the real property on which the mobile home was located. The bankruptcy court found that under Alabama law, the mobile home was considered to be a “motor vehicle” because the mobile home and the real property on which it sat were not titled in the same individual. Citing § 101(13A), the bankruptcy court acknowledged that the mobile home was the debtor’s principal residence for purposes of § 1322(b)(2) notwithstanding that it was a motor vehicle, not real property, under Alabama law. But these two conclusions did not deliver Green Tree protection from modification because a motor vehicle was not real property under Alabama law. As explained by the Moss court:

Section 1322(b)(2) provides that a debtor’s plan may not modify the rights of secured creditors who hold “a security interest in real property that is the debtor’s principal residence.” The terms “real property” and “debtor’s principal residence” are two distinct terms of art that require individual analyses. Whereas the Court must look to state law in determining whether a debtor’s residence constitutes “real property,” the Court must look to Section 101(13A) in determining whether the same property constitutes the “debtor’s principal residence.” Therefore, although a residential structure may constitute a “debtor’s principal residence” under federal bankruptcy law, it does not necessarily constitute “real property” under state law.15
[12]

At least one of the courts cited by Green Tree in Moss bought the proposition that § 101(13A), as amended by BAPCPA, extends the antimodification protection in § 1322(b)(2) to a mobile home without regard to whether the debtor owns or the creditor has a lien on the real property where it is located. In Shepherd,16 EMC had a lien on a mobile home that was the debtor’s principal residence. The debtor did not own and EMC had no lien on the underlying real property. The bankruptcy court found the broad new definition in § 101(13A) produced an absurd outcome if the real property requirement in § 1322(b)(2) was read as a precondition to the protection from modification:

Even a cursory reading of § 1322(b)(2) and § 101(13A) evidences that these statutes are in conflict and cannot be reconciled as written. Section 1322(b)(2) expressly provides that a debtor may not modify a claim “secured only by a security interest in real property that is the debtor’s principal residence,” while § 101(13A) expressly provides that a debtor’s principal residence means the residential structure, including a mobile home, “without regard to whether that structure is attached to real property.” . . . [R]eading the newly adopted § 101(13A) definition of “debtor’s principal residence” in conjunction with § 1322(b)(2) results in an absurdity, because § 1322(b)(2) must now be construed to provide that a debtor may not modify the claims of a creditor holding a security interest in the debtor’s residential structure, including a condominium, cooperative, mobile home, or trailer, irrespective of whether it is attached to the real property, but only if the security interest includes the real property. . . . H.R. Rep. 109-31, Pt. 1, at 72, 109th Cong., 1st Sess. (2005) . . . does . . . provide assistance as it clearly indicates that Congress intended to broaden the scope of what constitutes a “debtor’s principal residence” beyond the “real property” anti-modification limitations of § 1322(b)(2) to include a freestanding “residential structure” such as a mobile home, manufactured home, or trailer. . . . [I]t seems apparent that Congress intended for this definition as set forth in § 101(13A) to apply specifically to the anti-modification provisions concerning home mortgages, thereby broadening the scope of § 1322(b)(2) to prohibit modification of obligations owed to creditors holding security interests in residential structures such as condominiums and mobile homes, despite the fact that a debtor does not own, and the creditor does not hold a lien upon, the real property upon which such structures are located. . . . Whether the creditor does or does not hold a security interest in the real property upon which the structure might be located is immaterial. To hold otherwise would render § 101(13A) meaningless surplusage.17
[13]

Moss and Shepherd obviously take different routes through the interaction of § 101(13A) and § 1322(b)(2). In Moss, the bankruptcy court reads Shepherd to have concluded that Tennessee law treated the mobile home as real property notwithstanding that the debtor did not own any dirt.18 It is not at all clear from the Shepherd opinion that the bankruptcy court read Tennessee law to treat a mobile home as real property. Rather, Shepherd seems to hold that the antimodification protection in § 1322(b)(2) extends to a mobile home newly defined as a debtor’s principal residence without regard to whether that mobile home was “real property” under state law. The expansive reading of § 101(13A) in Shepherd simply stands in contrast to the more rigorous analysis in Moss. The bankruptcy court in Moss gives effect to all of the moving parts in § 101(13A) and § 1322(b)(2) without producing the absurd outcome feared by the bankruptcy court in Shepherd.


 

1  11 U.S.C. § 1322(b)(2), discussed in § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.

 

2  See § 123.1 [ Mobile Homes ] § 80.7  Mobile Homes.

 

3  See § 126.1 [ Claims Secured by an Assignment of Rents ] § 80.10  Claims Secured by an Assignment of Rents.

 

4  See § 125.1 [ Claims Secured by Insurance Policies, Proceeds or Premiums ] § 80.9  Claims Secured by Insurance Policies, Proceeds or Premiums.

 

5  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.

 

6  See § 122.1 [ Rental Property, Farmland and Other Income-Producing Property ] § 80.6  Rental Property, Farmland and Other Income-Producing Property.

 

7  See § 126.2 [ Claims Secured by Fixtures, Furniture, Equipment, Appliances, Machinery, Easements, Appurtenances, Mineral Rights, Water Rights and the Debtor’s First Born ] § 80.11  Claims Secured by Fixtures, Furniture, Equipment, Appliances, Machinery, Easements, Appurtenances, Mineral Rights, Water Rights and the Debtor’s First Born.

 

8  11 U.S.C. § 101(13A).

 

9  11 U.S.C. § 101(27B).

 

10  See, e.g., 11 U.S.C. §§ 1322(c)(1), 522(p)(2)(B).

 

11  11 U.S.C. § 1322(c)(1), discussed in § 130.1 [ Prepetition Defaults ] § 82.1  Prepetition Defaults—When is Property “Sold” at Foreclosure?.

 

12  No. 07-10126, 2007 WL 1076688 (Bankr. S.D. Ala. Apr. 4, 2007).

 

13  337 B.R. 599 (Bankr. W.D. Ky. 2006).

 

14  354 B.R. 505 (Bankr. E.D. Tenn. 2006).

 

15  2007 WL 1076688, at *2.

 

16  354 B.R. 505 (Bankr. E.D. Tenn. 2006).

 

17  354 B.R. at 510–12.

 

18  Moss, 2007 WL 1076688, at *2 (“In In re Shepherd . . . [t]he court apparently applied Tennessee law in reaching its conclusion that the debtor’s mobile home constituted real property.”).