§ 80.6 — Rental Property, Farmland and Other Income-Producing Property

Revised: June 14, 2004

[1]

On the theory that a “principal residence” is a place where the debtor lives, not a place that produces income, many decisions recognize that a security interest that includes rental property, farmland or other income-producing property is not protected from modification by § 1322(b)(2).1

[2]

The Bankruptcy Reform Act of 1994 offers some support for the view that a security interest in income-producing property forfeits the protection from modification in §1322(b)(2). Section 206 of the 1994 Act amended § 1123(b)(5) to conform the treatment of residential home mortgages in Chapter 11 cases to that required by § 1322(b)(2) in Chapter 13 cases.2 In cases filed after October 22, 1994, a Chapter 11 debtor is prevented from modifying the rights of the holder of a claim “secured only by a security interest in real property that is the debtor’s principal residence”3—the same language that restricts modification of residential mortgages in Chapter 13 cases. Congressman Brooks made these comments about the 1994 amendment of § 1123(b)(5):

        This amendment conforms the treatment of residential mortgages in chapter 11 to that in chapter 13, preventing the modification of the rights of a holder of a claim secured only by a security interest in the debtor’s principal residence. . . . It does not apply to a commercial property, or to any transaction in which the creditor acquired a lien on property other than real property used as the debtor’s residence. See [Hammond v. Commonwealth Mortgage Corp. of America (In re Hammond),] 27 F.3d 52 (3d Cir. 1994); In re Rameriz [sic], 62 B.R. 668 (Bankr.S.D.Cal. 1986).4
[3]

Ramirez was a Chapter 13 case in which the mortgage holder had a security interest in the debtor’s principal residence and in two rental properties that produced 46 percent of the debtor’s net income. The bankruptcy court in Ramirez concluded that § 1322(b)(2) did not prohibit modification of the mortgage. Congressman Brooks’s citation to Ramirez and his comment that the identical antimodification language in § 1123(b)(5) does not apply to “commercial property” support the argument that income-producing property is not protected from modification by § 1322(b)(2). In Lomas Mortgage, Inc. v. Louis,5 the U.S. Court of Appeals for the First Circuit cited Congressman Brooks’s comments about the 1994 amendment of § 1123(b)(5) in support of its holding that a mortgage secured by a three-unit multifamily property is not protected from modification in a Chapter 13 case:

In [the 1994] amendments Congress referred favorably to case law under Chapter 13 holding that the antimodification provision did not apply to multi-family housing, and established that it wished petitions under Chapter 11 and Chapter 13 to treat the matter in the same way. . . . That history specifies that the antimodification provision of § 1123(b)(5) does not apply to a commercial property, or to any transaction in which the creditor acquired a lien on property other than real property used as the debtor’s residence. . . . This passage from the Judiciary Committee Report refers to In re Ramirez, 62 B.R. 668 (Bankr. S.D. Cal. 1986). . . . [T]he inference becomes quite strong that Congress believes the antimodification provision in Chapter 13 does not reach such multi-unit properties. . . . The 1994 Act evidences a deliberate choice on the part of Congress under Chapter 11 to exclude security interests in multi-unit properties like that here from the reach of the antimodification provision based on its understanding that Chapter 13’s antimodification provision did not reach such security interests. To disregard such evidence would frustrate the uniform treatment under Chapters 11 and 13 of secured interests in debtors’ principal residences that was so clearly Congress’s aim in amending § 1123(b)(5). We hold 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.6
[4]

On various theories, a growing number of reported decisions have enforced the protection from modification in § 1322(b)(2) notwithstanding that the lender’s security interest extends to income-producing property not used by the debtor as a principal residence. Some of these decisions are timing cases in which the extent or the use of the collateral changed between the date of the loan and the Chapter 13 petition.7 Other cases seem to hold that the existence of income-producing collateral or the potential for income-producing uses does not automatically pollute the residential character of the property if at least part of the collateral is the debtor’s homestead.

[5]

Three of the cases mentioned above,8 illustrate the nuances of the problem. In In re Smart,9 a single family residence was the debtor’s principal residence at the time of the loan, but at the Chapter 13 petition, the property was leased to an unrelated third party. The bankruptcy court found that the mortgage was protected from modification because the § 1322(b)(2) issue was appropriately measured “from the perspective of the circumstances existing at the time of the subject credit transaction, not the serendipitous or manipulated facts existing on the date of the filing of the petition.”10 In Smart, lack of intent to produce income at the time of the loan overcame actual income-producing use at the petition.

[6]

In GMAC Mortgage Corp. v. Marenaro (In re Marenaro),11 from the inception of the loan, the mortgage holder had a security interest in three contiguous lots. The debtor resided on one lot, and the zoning ordinance permitted the debtor to divide and construct additional residences on the other lots. The debtor never attempted to use the other lots. The bankruptcy court found that the mortgage was protected from modification because “an abstract potential to use property in a different way, never amounting to the gleam in the eye of the owner at the time the mortgage is given,” is insufficient to forfeit the protection from modification in § 1322(b)(2).12

[7]

The bankruptcy court in Brunson v. Wendover Funding, Inc. (In re Brunson)13 held that a mortgage on a two family dwelling only part of which was used as a residence by the debtor may be protected from modification by § 1322(b)(2). The court stated that the intentions of the parties at the time of the loan would control whether the claim was a protected residential lending or an unprotected business or income-producing venture.14

[8]

The same bankruptcy court that produced Brunson later reported a decision that finds a statutory basis for protecting even income-producing property from modification under § 1322(b)(2). In In re Macaluso,15 the mortgage was secured by a single parcel of real estate that contained a tailor shop and two residential apartments, only one of which was occupied by the debtor. Rejecting the analysis of intent in Brunson, the bankruptcy court in Macaluso dissected § 1322(b)(2) to find the mortgage was protected from modification:

As used in [§ 1322(b)(2)], “only” is an adverb modifying “secured”. . . . Wallingford is the holder of a claim whose only security is a mortgage on a certain parcel of real property. Because that property is also the debtor’s residence, Macaluso’s plan may not modify the rights of the mortgage holder. Notably, the statute does not limit its application to property that is used only as a principal residence, but refers generally to any parcel of real property that the debtor uses for that purpose. So long as the only collateral is a single parcel of real estate, it matters not that that parcel may fulfill many uses or be divided into many units. The statutory requirements are fulfilled whenever the debtor principally resides in that real estate or some part thereof.16
[9]

A few courts have side stepped the income-producing property issue when the real property is occupied by the extended family or relatives of the debtor. For example, in In re Guilbert,17 the collateral was a three unit dwelling. One of the units was occupied by the debtor, a second by the debtor’s son and the third was occasionally rented. The bankruptcy court prohibited modification based on this logic:

Section 1322(b) . . . does not say, nor does it in any way imply that if the debtor’s principal residence is also used to house other tenants, paying or otherwise, that it may be open to modification by the home owner. . . . [T]he restriction on modification covers the situation where the lender has only one form of security, the primary residence, irrespective, we believe of whether the property is also used for other purposes by the debtor. . . . [The mortgage holder] is secured in real estate which serves as the Debtor’s primary residence, and which also happens to be the residence of others. However, [the mortgage holder] has no other collateral with which to enforce its rights as a secured creditor. . . . [W]e must follow [Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993)]’ s direction in giving the cited language its literal meaning, which does not contain or imply an exclusion for real property that, in addition to being used as the debtor’s primary residence, might also be used for other purposes.18
[10]

Several courts have extended the protection from modification in § 1322(b)(2) when the debtor uses real property as both a principal residence and a place of business. For example, in Parker v. Federal Home Loan Mortgage Corp. (In re Parker),19 the district court found that the mortgage was protected from modification even though 46 percent of the residence was office space for the debtor’s legal practice. The court used this methodology:

To determine whether Section 1322(b)(2) prohibits modification of a secured claim when the property at issue is used for both residential and commercial purposes, courts have typically considered whether there was significant commercial use of the property or whether the property has inherent income producing potential. . . . Consideration has also been given to whether the lender knew of the mixed use of the property at the time the loan was made. . . . [A]t the time they purchased the Morrison Court property, the Parkers intended to use it only for residential purposes and [the] loan granted to the Parkers by Federal Home was a personal, as opposed to a commercial loan. . . . [D]ebtor has claimed his property as a homestead in each of the three petitions filed in the Bankruptcy Court. Debtor’s property is a single-family home located in a residential neighborhood. . . . [T]he majority of the space in the structure is used for residential purposes. To hold that the property at issue has an inherent income producing potential would place home lenders in a precarious position by making Section 1322(b)(2) inapplicable whenever an individual maintained an office in his home.20
[11]

Perhaps at the limits of this logic, In re McConnell21 holds that a mortgage is protected from modification by § 1322(b)(2) notwithstanding that the lien extends to 60 acres of farmland. The debtor in McConnell had $200,000 of income as an airline pilot and $24,000 of farm income. Using a residential loan application that did not reveal farming activity, the debtor obtained a mortgage on 60 acres of rural land used as a pasture. The bankruptcy court concluded that the mortgage was protected:

[T]he McConnells and the Credit Union entered into a residential loan transaction, the type protected from cram down under 11 U.S.C. § 1322(b)(2). . . . [A]lthough the 60.4 acres covered by the mortgage substantially exceeds [sic] the ground upon which the residence is located, the remaining portion is not in fact used to produce significant income. . . . [N]either Debtor qualifies as a farmer under the Bankruptcy Code, and they are clearly not using the property for any principal purpose other than residing there.22
[12]

By Chapter 13 standards, $24,000 of farm income is hardly insignificant. Without regard to the form of the loan application, 60.4 acres are not ordinarily mistaken to be a “principal residence.” That the debtor did not fit the Bankruptcy Code definition of a farmer suggests that the protection from modification in § 1322(b)(2) measures the owner’s occupation rather than the use of the collateral. By this logic, a debtor who works full-time in a factory and owns a rental property could not modify a mortgage on the rental property if rental income is small relative to the debtor’s wages. There is no foundation in the statute for this outcome.

[13]

“Principal residence” is not a phrase ordinarily used to describe property that is income producing. The First Circuit’s analysis in Louis, quoted above, is true to the language of § 1322(b)(2) to the extent it denies the protection from modification to a mortgage on property with mixed residential and other use at the petition.

[14]

But Louis and other cases draw in the wild card by including in § 1322(b)(2) analysis the intent of the parties at the time of the loan transaction. Section 1322(b)(2) states a “use,” not an “intention,” test: the protection from modification is triggered by a security interest in real property “that is the debtor’s principal residence.” That the mortgage originator and/or the debtor intended the collateral to be a homestead is not determinative if, at the petition, the property is not used by the debtor as a principal residence. Conversely, even multiunit property that is used entirely by the debtor as a principal residence should be protected by § 1322(b)(2) notwithstanding that at the inception of the mortgage, the parties contemplated other uses of one or more units.

[15]

It must be admitted that excluding income-producing property from the protection in § 1322(b)(2), coupled with the filing date rule for determining the use of property,23 could be an invitation to some mischief. An aggressive debtor might abandon a principal residence in anticipation of filing, or convert (part of?) the residence to rental property, modify the mortgage through the plan, then move back in after the dust settles. Such shenanigans are more theoretical than real. Few Chapter 13 debtors have the knowledge of bankruptcy law or the financial resources to pull it off. Also, a sudden change in use of a personal residence on the eve of a Chapter 13 case would invite special attention. The good faith of a debtor who moves on a schedule designed to subject a mortgage to modification would be suspect.24


 

1  Chase Manhattan Mortgage Corp. v. Thompson (In re Thompson), 352 F3d 519 (2d Cir. 2003) (Based on stipulated fair market value, mortgage secured by three-unit property is bifurcated under § 506(a), and the unsecured portion is discharged through the Chapter 13 case; bankruptcy court properly rejected mortgage holder’s argument that rental income should be added to the stipulated value based on an assignment of rents clause.); Lomas Mortgage, Inc. v. Louis, 82 F.3d 1, 3–6 (1st Cir. 1996) (Citing the 1994 legislative history to the amendments to § 1123(b)(5), mortgage secured by a three-unit multifamily property is not protected from modification by § 1322(b)(2), and thus the debtors can strip down the mortgage to the value of the collateral. “[Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993)] . . . did not address the question of what secured claims would be considered ‘secured only by a security interest in real property that is the debtor’s principal residence.’ . . . [The legislative history to the 1978 Code] does tend to show that with § 1322(b)(2) Congress wanted to benefit the residential mortgage market as opposed to the entire real estate mortgage market. . . . Nevertheless, the legislative history does not state with clarity how a mortgage on a mixed property, one with both residential and investment characteristics, should be treated. . . . But there is guidance from another source: the amendments to Chapter 11 contained in the Bankruptcy Reform Act of 1994.”); Ford Consumer Fin. Co. v. Maddaloni (In re Maddaloni), 225 B.R. 277, 279 (D. Conn. 1998) (Applying Lomas Mortgage, Inc. v. Louis, 82 F.3d 1 (1st Cir. 1996), and declining the analysis in Brunson v. Wendover Funding, Inc. (In re Brunson), 201 B.R. 351 (Bankr. W.D.N.Y. 1996), security interest in a two-family dwelling where only one of the units is the debtor’s principal residence is not protected from modification by § 1322(b)(2). “Consistent with the majority of courts that have examined this issue, this court adopts the [Louis] court’s analysis of § 1322(b)(2) and finds that the provision is inapplicable when the creditor’s security interest extends to other income-producing units in addition to the debtor’s principal residence.”); In re Stivender, 301 B.R. 498, 500 n.2 (Bankr. S.D. Ohio 2003) (“The antimodification provision of 11 U.S.C. § 1322(b)(2) does not protect a mortgage secured by a multi-family structure in which only one unit is used as the debtor’s residence.”); In re Bosch, 287 B.R. 222 (Bankr. E.D. Mo. 2002) (Claim secured by business assets and principal residence can be modified notwithstanding that the business assets had been liquidated or were beyond levy at the petition.); Enewally v. Washington Mut. Bank (In re Enewally), 276 B.R. 643 (Bankr. C.D. Cal. 2002) (Mortgage on income-producing real property is not protected from modification by § 1322(b)(2); debtors can strip down the mortgage to the value of the collateral under § 506(a) and then cure defaults and maintain the original contract payments until the allowed secured claim is paid in full, notwithstanding that payments will extend beyond the five-year maximum that applies to payments under the plan itself.), rev’d in part, No. SA CV 02-459-GLT (C.D. Cal. Nov. 26, 2002); In re Kimbell, 247 B.R. 35, 38 (Bankr. W.D.N.Y. 2000) (“[T]his Court joins with the clear majority of Courts and holds that a mortgage secured by a multi-family structure where only one unit is used as the debtor’s residence is not protected by the antimodification provision of Section 1322(b).”); In re Falotico, 231 B.R. 35 (Bankr. D.N.J. 1999) (Mortgage secured by three-family house when the debtor resides in part and rents part is not protected from modification by § 1322(b)(2); however, inequitable conduct by debtor in filing three Chapter 13 cases to stop foreclosures, negotiating in bad faith, failing to pay taxes such that mortgage is now unsecured and proposing a plan that pays mortgage holder next to nothing justifies sua sponte dismissal with prejudice to refiling for 12 months.); In re Donahue, 221 B.R. 105, 111–12 (Bankr. D. Vt. 1998) (Claim is not protected from modification by § 1322(b)(2) because it is secured by four 10-acre lots only one of which is used by the debtor as a principal residence. Claim was originally secured by a 50-acre parcel. Before the petition, 10 of the 50 acres were sold and the proceeds paid to the creditor. At the petition, the debtor’s mobile home, a drilled well and an outhouse occupied one of the 10-acre tracts, the other three were undeveloped. Plan proposed to surrender the three undeveloped lots and to pay the value with interest of the fourth lot through the plan. “At the commencement of this case, the ten acre lot designated ‘3D’ and a mobile home was Debtor’s primary residence, and the remaining thirty acres were divided into three additional lots. Ordinarily, excess property surrounding a debtor’s home would not sufficiently remove § 1322(b)’s constraints. . . . A claim secured by property not intended for occupancy by the debtor, but for some commercial or income producing purpose, however, is not protected. . . . [A] claim securing real estate divided into several lots does not benefit from § 1322(b)(2) and may be modified by Debtor, even if Debtor occupies one of the lots as his principal residence. . . . These lots are easily partitioned from the rest, each fronted by a public road (Bullfrog Hollow Road), not occupied by Debtor, and easily valued. Based on the fact that a 10 acre parcel has already been sold with the permission of Creditor, and that both appraisals show the property as subdivided into four building lots, we hold that § 1322(b)(2) does not apply. Creditor’s claim is not secured only by a security interest in real property that is Debtor’s principal residence and Debtor may modify Creditor’s rights by distributing the divided thirty acres and paying fair market value to Creditor for the remaining 10 acres through the plan.”), rev’d on other grounds, 232 B.R. 610, 615 (D. Vt. 1999) (Denial of confirmation and relief from the stay were “predicated on a clearly erroneous factual finding” that the 10-acre lot and mobile home retained by the debtor was the debtor’s principal residence and was necessary to an effective reorganization. “No evidence was introduced at the hearing regarding the primary residence issue. Rather, Judge Conrad relied upon arguments of counsel. . . . It is unclear to the Court whether Donahue’s mobile home constituted his primary residence. On remand, a full evidentiary hearing should be conducted to address this issue.”); In re DaCosta, 204 B.R. 1, 4 (Bankr. D. Mass. 1996) (Lomas Mortgage, Inc. v. Louis, 82 F.3d 1 (1st Cir. 1996), could be distinguished where debtors live in a two family dwelling, but the debtor’s extended family occupies the entire property and the debtor has never rented any of the property to anyone. “In the instant case, the first floor rental unit in the Debtors’ residence is not income-producing. Rather, it has the potential to be income-producing.” Applying In re French, 174 B.R. 1 (Bankr. D. Mass. 1994), mortgage is not protected from modification because of an assignment of rents, the forms used were commercial and documents indicate that the parties contemplated property other than a principal residence.); In re Del Valle, 186 B.R. 347, 349 (Bankr. D. Conn. 1995) (Debtor can bifurcate a mortgage secured by a two-family dwelling. The debtors rent one floor and live with their children on the other. The mortgage document provides for an additional security interest in rents. “[Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993)] never specifically addressed the issue of when a claim is considered to be secured ‘only by a security interest in real property that is the debtor’s principal residence.’ . . . CHFA holds a security interest in the Debtor’s entire building, which includes both the Debtor’s principal residence and one income producing rental unit.”); In re Lebrun, 185 B.R. 665 (Bankr. D. Mass. 1995) (Mortgage on real property that was used by the debtor as a residence at the time of mortgaging, but that is now used to “generate rental income,” is not protected from modification by § 1322(b)(2).); In re McGregor, 172 B.R. 718, 720–21 (Bankr. D. Mass. 1994) (Section 1322(b)(2) does not prohibit modification of a mortgage secured by a four-unit apartment complex, notwithstanding that the debtors live in one unit. “Countrywide’s reliance on [Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993)] is misplaced. In that case, the creditor’s claim was secured only by a security interest in the debtors’ principal residence. Countrywide, in contrast, has a security interest in the debtor’s entire building, which includes both her principal residence and three income-producing-units. . . . In this case, the real estate is not merely residential, it also contains income-producing units. . . . Countrywide’s claim may therefore be bifurcated notwithstanding section 1322(b)(2).” Once bifurcated, the debtor must pay the secured portion of the claim in full during the life of the plan consistent with § 1325(a)(5) and 1322(c), or the debtor must take advantage of § 1322(b)(5) by maintaining regular contract payments at the original interest rate for the life of the plan and thereafter until the underlying note is paid in full. The debtor’s proposal to change the monthly mortgage payment and interest rate and pay the balance of the note over the 22 years remaining on the original contract is not confirmable.); In re Legowski, 167 B.R. 711, 714–15 (Bankr. D. Mass. 1994) (Claim secured by a two-family dwelling, one side of which is used by the debtor as a principal residence, the other side of which is rented and provides the debtor with income, is not protected from modification by § 1322(b)(2). “The [Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993)] decision offered little guidance on this issue. . . . This Court is inclined to follow that line of authority which has held that a claim secured by the debtor’s residence and property which has ‘inherently income producing’ power is not protected from modification by § 1322(b)(2). . . . Fleet’s claim, which is secured by a two family dwelling, consisting of the debtor’s residence and another rented dwelling, may be modified pursuant to § 1322(b)(2).” The debtor’s proposal to extend the repayment period for 20 years is not permitted by §§ 1322(c) [redesignated as § 1322(d) by the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 301, 108 Stat. 4106 (1994)] and 1325(a)(5).); Adebanjo v. Dime Sav. Bank (In re Adebanjo), 165 B.R. 98, 103–04 (Bankr. D. Conn. 1994) (Bank’s mortgage is not protected from modification by § 1322(b)(2) as interpreted in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993), where collateral is a three-family residential dwelling, two units of which are rented and produce substantial rental income. “[W]here the security includes property which is not intended for occupancy by the debtor’s family, but is intended for use by one or more other families or by a commercial concern, the claim is not protected. . . .The plain language of § 1322(b)(2) supports that result. That subsection protects claims secured only by a security interest in real property that is the debtor’s principal residence, not real property that includes or contains the debtor’s principal residence, and not real property on which the debtor resides. The terms ‘real property’ and ‘principal residence’ are thus equated, suggesting that real property which is designed to serve as the principal residence not only for the debtor’s family but for other families is not encompassed by the clause. . . . [T]he [bank’s] claim is secured by an interest in real property that is not, and was not intended to be, the debtor’s principal residence, i.e. the two rental units in which the debtors do not reside. The property is inherently income-producing. The [bank’s] claim is thus not protected by § 1322(b)(2), even if Nobelman is given full effect in this case. Nobelman did not overrule [Bellamy v. Federal Home Loan Mortgage Corp. (In re Bellamy), 962 F.2d 176 (2d Cir. 1992)]’s holding that undersecured claims may generally be bifurcated in chapter 13 cases, but only Bellamy’s holding that such bifurcation is not a modification prohibited by § 1322(b)(2) where a secured claim is secured only by the debtor’s principal residence.”); In re Wetherbee, 164 B.R. 212 (Bankr. D.N.H. 1994) (Real property that the debtor vacated and converted to rental property prior to the petition is no longer the debtor’s principal residence, and a mortgage secured by the property is not protected from modification by § 1322(b)(2), notwithstanding that the property was the debtor’s principal residence at the time the loan was originally made.); In re Saglio, 153 B.R. 4 (Bankr. D.R.I. 1993) (Real property that the debtor vacated over one year before the petition and that is rented at the time of the petition is not the debtor’s principal residence and is not protected from modification by § 1322(b)(2).); In re McVay, 150 B.R. 254, 256–57 (Bankr. D. Or. 1993) (Real property that serves dual purpose both as a bed and breakfast and as the debtors’ principal residence is collateral other than the debtors’ principal residence, and the mortgage can be modified without violating § 1322(b)(2). “Transamerica maintains that ‘homestead’ and ‘principal residence’ are synonymous, therefore, if real property qualifies as a homestead under Oregon law, it should also be regarded as the principal residence of the debtors for purposes of § 1322(b)(2). . . . The debtors argue that the court should focus on whether or not there was significant actual commercial use of the property or whether the property has inherent income producing potential. . . . Here, a substantial portion of debtor’s ‘principal residence’ is devoted to the bed and breakfast operation. Indeed, the majority of the space in the structure is used for that purpose. The debtors are actually using the property as a bed and breakfast establishment for the purpose of generating income. The property clearly has inherent income producing power which the debtors are utilizing. The fact that Transamerica knew about the mixed use of the property at the time it made the loan to the debtor is significant. . . . Since the Congressional purpose behind § 1322(b)(2) was to provide preferred treatment to home lenders, . . . Congress obviously intended no preferred or special protection for commercial lenders in the context of § 1322(b)(2).”); In re Dinsmore, 141 B.R. 499 (Bankr. W.D. Mich. 1992) (Second mortgage secured by debtor’s residence and commercial real estate is not protected from modification by § 1322(b)(2).); In re Molitor, 133 B.R. 1020 (Bankr. D.N.D. 1991) (Section 1322(b)(2) does not protect a contract for deed from modification when the underlying real property is rental farmland, notwithstanding that the farmland is rented to a family member at lower than fair market value. Rental property is not residential property.); In re Hink, 81 B.R. 489 (Bankr. W.D. Ark. 1987) (Section 1322(b)(2) does not prohibit modification of bank’s claim secured by debtor’s homestead and by a commercial office building.); In re Hines, 64 B.R. 684 (Bankr. D. Colo. 1986) (Creditor cannot claim exemption from modification under § 1322(b)(2) when it holds a security interest in 20 acres of income-producing orchards together with the debtor’s principal residence.); In re Ramirez, 62 B.R. 668 (Bankr. S.D. Cal. 1986) (Section 1322(b)(2) does not prohibit modification of claim secured by real property that includes the debtor’s residence but also contains two rental units that produce 46% of the debtor’s net income.); In re Foster, 61 B.R. 492 (Bankr. N.D. Ind. 1986) (When the creditor has financed a large income-producing tract of land upon which the debtors happen to reside, the creditor is engaged in commercial lending that is not protected by § 1322(b)(2). “The incidental presence of a dwelling does not defeat the essential agricultural nature of the transaction.”); In re Leazier, 55 B.R. 870 (Bankr. N.D. Ind. 1985) (Debtor is not prohibited from modifying security interest when collateral is an 80-acre income-producing tract of land that includes the debtor’s principal residence. Section 1322(b)(2) is not intended to protect financing of income-producing assets.).

 

2  See § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman. See also § 8.12  Home Mortgage Problems.

 

3  11 U.S.C. § 1123(b)(5), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 206, 108 Stat. 4106 (1994).

 

4  140 Cong. Rec. H10,767 (section-by-section analysis by Congressman Brooks) (emphasis added).

 

5  82 F.3d 1 (1st Cir. 1996).

 

6  82 F.3d at 6–7. Compare Lievsay v. Western Fin. Sav. Bank (In re Lievsay), 199 B.R. 705, 709 (B.A.P. 9th Cir. 1996) (In a Chapter 11 case analyzing the analogous provisions of §§ 1123(b)(5) and 1322(b)(5), “[h]ere, the debtor has shown that he used the property for his office. However, he has not shown that this use added significant value to the property or that the bank relied on the additional security offered by his home office. In the absence of that proof, we are not prepared to say that the bank had sufficient security in assets that were not part of the debtor’s principal residence that the bank should be denied the protection of section 1123(b)(5).”).

 

7  See also § 121.2 [ Timing Issues: Prepetition Changes in Collateral or Use ] § 80.5  Timing Issues: Prepetition Changes in Collateral or Use.

 

8  See § 121.2 [ Timing Issues: Prepetition Changes in Collateral or Use ] § 80.5  Timing Issues: Prepetition Changes in Collateral or Use.

 

9  214 B.R. 63 (Bankr. D. Conn. 1997).

 

10  214 B.R. at 68. See also §§ 121.1 [ Timing Issues: Lien Waiver, Surrender or Avoidance ] § 80.4  Timing Issues: Lien Waiver, Surrender or Avoidance and 121.2 [ Timing Issues: Prepetition Changes in Collateral or Use ] § 80.5  Timing Issues: Prepetition Changes in Collateral or Use.

 

11  217 B.R. 358 (B.A.P. 1st Cir. 1998).

 

12  217 B.R. at 360–61. Accord In re Beckford, 247 B.R. 27, 30 (Bankr. D. Conn. 2000) (Mortgage on adjacent lots is protected from modification by § 1322(b)(2) when residence is located on one lot but the second lot has always been treated by the debtor as residential property and may not be subject to separate sale or development. Citing GMAC Mortgage Corp. v. Marenaro (In re Marenaro), 217 B.R. 358 (B.A.P 1st Cir. 1998), “the two lots at issue have been used together to provide a single-family residence for the debtor’s family and for no other purpose. The location of the driveway and off-street parking area supports the conclusion that, although the house may be located within the confines of one lot, both lots have been used together as one residence. The debtor has presented no evidence that she has ever used any portion of the property for any purpose other than her principal residence. . . . Connecticut case law does not support the debtor’s argument that lot 20 is saleable as a building lot.”). See also § 121.2 [ Timing Issues: Prepetition Changes in Collateral or Use ] § 80.5  Timing Issues: Prepetition Changes in Collateral or Use.

 

13  201 B.R. 351 (Bankr. W.D.N.Y. 1996).

 

14  201 B.R. at 353–54 (“[E]ach case must turn upon the intention of the parties: Was home-ownership the predominant intention (and rental income simply a means to that end) or was investment income or the operation of a business the predominant purpose of the transaction? . . . The types of factors that the Court should consider are: whether the Debtor (to the lender’s knowledge) owned other income producing properties or other properties in which she could choose to reside; whether she had a principal occupation other than as landlord, and the extent to which rental income or other business income produced from the real estate contributed to her income; whether her total income was particularly high or particularly low; whether the mortgage was handled through the commercial loan department or the residential mortgage loan department of the lender; whether the interest rates applied to the mortgage were home loan rates or commercial loan rates; the demographics of the market (e.g. are ‘doubles’ a much more affordable ‘starter home’ than a single, in that locale); and the extent to which, and purpose for which, potential business uses of the land (such as farming) were considered by the lender. . . . If the transaction was predominantly viewed by the parties as a loan transaction to provide the borrower with a residence, then the antimodification provision will apply. If, on the other hand, the transaction was viewed by the parties as predominantly a commercial loan transaction, then stripdown will be available.”).

 

15  254 B.R. 799 (Bankr. W.D.N.Y. 2000).

 

16  254 B.R. at 800. Accord Litton Loan Servicing, LP v. Beamon, 298 B.R. 508, 512 (N.D.N.Y. 2003) (Rejecting Lomas Mortgage, Inc. v. Louis, 82 F.3d 1 (1st Cir. 1996), mortgage on two-family residence is protected from modification by § 1322(b)(2). The debtor resided in one-half of a two-family residence and rented the second unit. “[T]he [Louis] court arbitrarily excluded multi-family residences that are both used as a principal residence and covered by a residential mortgage from the reach of § 1322(b)(2). The Court can think of no particularly compelling reason that a residential mortgage on a principal residence that has an attic apartment, whether rented or not, can be modified while a mortgage on a virtually identical house (having, perhaps, one less door) cannot be modified. Simply put, the [Louis] approach is inconsistent with the purpose of § 1322(b)(2), at least insofar as it would allow modification of mortgages that are indisputably residential in nature. . . . [I]t may be true that an owner-occupied 100-unit complex is outside the scope of what Congress had in mind when it enacted § 1322(b)(2). However, it is doubtful that such a complex would be secured by a residential mortgage.”).

 

17  165 B.R. 88 (Bankr. D.R.I. 1994), rev’d on other grounds, 176 B.R. 302 (D.R.I. 1995).

 

18  165 B.R. at 89–90. Accord In re DaCosta, 204 B.R. 1, 4 (Bankr. D. Mass. 1996) (Lomas Mortgage, Inc. v. Louis, 82 F.3d 1 (1st Cir. 1996), could be distinguished where debtors live in a two family dwelling, but the debtor’s extended family occupies the entire property and the debtor has never rented any of the property to anyone. “In the instant case, the first floor rental unit in the Debtors’ residence is not income-producing. Rather, it has the potential to be income-producing.” Applying In re French, 174 B.R. 1 (Bankr. D. Mass. 1994), mortgage is not protected from modification because of an assignment of rents, the forms used were commercial and documents indicate that the parties contemplated property other than a principal residence.).

 

19  179 B.R. 492 (E.D. La. 1995).

 

20  179 B.R. at 494–95. Accord In re Torres Lopez, 138 B.R. 348 (D.P.R. 1992) (That the debtor’s principal residence is also the debtor’s place of business does not forfeit the protection from modification in § 1322(b)(2). A place of business is not necessarily equivalent to income producing property: “the property itself must have some inherent income-producing power. The mere fact that [the debtor’s] place of business is located on the premises does not imbue debtor’s property with income-producing potential. Since the property here has no inherent income producing power it is not excepted under subsection (b)(2).”); In re Macaluso, 254 B.R. 799 (Bankr. W.D.N.Y. 2000) (Mortgage is protected from modification by § 1322(b)(2) notwithstanding that the property contains a tailor shop and two residential apartments, only one of which is occupied by the debtor.). See also Lievsay v. Western Fin. Sav. Bank (In re Lievsay), 199 B.R. 705, 709 (B.A.P. 9th Cir. 1996) (In a Chapter 11 case analyzing the analogous provisions of §§ 1123(b)(5) and 1322(b)(5), “[h]ere, the debtor has shown that he used the property for his office. However, he has not shown that this use added significant value to the property or that the bank relied on the additional security offered by his home office. In the absence of that proof, we are not prepared to say that the bank had sufficient security in assets that were not part of the debtor’s principal residence that the bank should be denied the protection of section 1123(b)(5).”).

 

21  No. 03-60110, 2003 WL 21289944 (Bankr. D. Minn. May 30, 2003) (unpublished).

 

22  2003 WL 21289944, at *4.

 

23  See §§ 121.1 [ Timing Issues: Lien Waiver, Surrender or Avoidance ] § 80.4  Timing Issues: Lien Waiver, Surrender or Avoidance and 121.2 [ Timing Issues: Prepetition Changes in Collateral or Use ] § 80.5  Timing Issues: Prepetition Changes in Collateral or Use.

 

24  Good faith requirement for confirmation is discussed beginning at § 103.1  In General Lack of good faith as a ground for dismissal is discussed in § 152.2  Cause for Dismissal—In General and § 152.4  Cause for Dismissal, Including Bad-Faith, Multiple and Abusive Filings.