664 B.R. 104
Bankr. M.D. Penn.2024Background
- Donald and Sharon Gurnari filed a joint Chapter 13 bankruptcy petition, listing their Scranton, PA duplex as their residence and proposing a plan to bifurcate (cramdown) U.S. Bank's mortgage claim.
- U.S. Bank holds a mortgage of $167,125.83 on the property, which matured over 10 years ago; the Debtors valued the property at $55,000, while U.S. Bank provided no property value in its proof of claim.
- Debtors proposed a plan to pay U.S. Bank the appraised value (not the full amount of the claim) over 60 months and to use projected rental income to fund the plan.
- The Chapter 13 trustee objected to plan confirmation on grounds of feasibility, citing unreliable rental income and insufficient income based on Debtors' schedules.
- U.S. Bank objected to both the feasibility of the plan and to the proposed cramdown of its claim, asserting the anti-modification provision of §1322(b)(2) barred modification since the mortgage was secured by the Debtors’ principal residence.
- At the evidentiary hearing, both parties presented appraisals; the court found for U.S. Bank's higher (but adjusted downward) valuation and denied confirmation for feasibility, but ruled on legal cramdown and valuation issues.
Issues
| Issue | Gurnari Argument | U.S. Bank Argument | Held |
|---|---|---|---|
| Whether Debtors can cramdown U.S. Bank’s secured claim | Multi-unit property + Scarborough = anti-modification does not apply; eligible for cramdown | Property is Debtors’ principal residence; anti-modification bars cramdown | Debtors may bifurcate/modify U.S. Bank’s claim under §1322(c)(2) since mortgage matured pre-petition, regardless of Scarborough issue |
| Proper valuation of the property for cramdown | $55,000 based on their appraisal | $100,000 based on Bank's more recent, thorough appraisal | Court adopts Bank’s appraisal, but adjusts for condition, setting value at $85,000 |
| Appropriate interest rate for modified secured claim | 6% interest per plan proposal | 10.5% interest | 10.5% (prime + 2%), per Till formula approach |
| Feasibility of the proposed plan | Plan is feasible with rental income contribution | Insufficient, unreliable income and speculative rental contributions | Plan not feasible; confirmation denied; Debtors allowed to amend plan |
Key Cases Cited
- In re Scarborough, 461 F.3d 406 (3d Cir. 2006) (cramdown/modification of multi-unit property under Chapter 13)
- Assocs. Com. Corp. v. Rash, 520 U.S. 953 (1997) (replacement value standard for cramdown valuation)
- In re Heritage Highgate, Inc., 679 F.3d 132 (3d Cir. 2012) (burden-shifting and proof requirements for collateral valuation under §506(a))
- Till v. SCS Credit Corp., 541 U.S. 465 (2004) (formula approach for setting cramdown interest rates)