564 B.R. 458
Bankr. E.D.N.Y.2017Background
- Debtor Mary C. Addams filed Chapter 13 on Nov. 30, 2015; her primary residence is a two-family property in Manhasset (the "Thompson Property").
- First mortgage to Chase ≈ $531,000; second mortgage to Michael and Jamie Shapiro ≈ $435,000; Debtor originally hoped to rent part of the duplex to help payments.
- Shapiros obtained foreclosure judgment and a sale was scheduled; Debtor filed bankruptcy on the eve of sale and proposed plans that would "strip down" the Shapiros' lien under § 506 and treat excess as unsecured.
- Debtor sought a valuation and bifurcation of the Shapiros' claim based on the property s multiunit/rental character; Shapiros moved to dismiss, arguing § 1322(b)(2) bars modification of a claim secured only by the debtor's principal residence.
- Court held an evidentiary contested matter on valuation and § 1322(b)(2); parties agreed property was debtor's principal residence and had rental potential; the court found bifurcation barred and valuation unnecessary.
- Because Debtor could not propose a confirmable plan and the case had been pending an extended time, the court dismissed the Chapter 13 case under § 1307(c)(1).
Issues
| Issue | Debtor's Argument | Shapiros' Argument | Held |
|---|---|---|---|
| Whether debtor may bifurcate (strip down) the Shapiros' second mortgage under §§ 506, 1322, 1325 when the lien covers a two-family principal residence that produces rent | Bifurcation allowed because the loan was also secured by assignment of rents and the property has income-producing units, so the lien is not "only" a principal-residence lien | §1322(b)(2) anti-modification clause bars any modification of a claim secured only by the debtor's principal residence; the Shapiros' security (including rents) is part of that residence protection | Court adopts a bright-line statutory-construction approach: under §§ 101(13A) and 101(27B) rents are "incidental property" of a principal residence, so the Shapiros' claim is secured only by the debtor's principal residence and cannot be bifurcated |
| Whether the court must determine property value for purposes of bifurcation | Debtor sought valuation to set the secured portion and enable refinancing/payment of that portion | Shapiros argued valuation is irrelevant if bifurcation is barred | Court held valuation irrelevant once bifurcation is prohibited |
| Whether security interest in rents should be treated as distinct personal-property collateral or as part of the real-property principal-residence collateral | Debtor contended assignment of rents is separate collateral that would defeat the "only" limitation | Shapiros and statute/NY law treat rents as part of the residential real-property collateral | Court held rents are "incidental property" to a principal residence (and under NY law an interest in rents is an interest in real property), so they do not remove the lien from §1322(b)(2) protection |
| Whether dismissal is appropriate for failure to propose a confirmable plan | Debtor argued she had a refinance commitment to fund a plan treating a reduced secured claim | Shapiros and Trustee argued plan depended on an impermissible bifurcation and thus was not confirmable | Court dismissed under §1307(c)(1) for unreasonable delay prejudicial to creditors because Debtor could not file a plan compliant with §§1322 and 1325 |
Key Cases Cited
- RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (clarity-of-statutory-language principles)
- Lamie v. United States Trustee, 540 U.S. 526 (statutory-interpretation rules)
- United States v. Ron Pair Enters., 489 U.S. 235 (court enforces unambiguous statutory text)
- Nobelman v. American Savings Bank, 508 U.S. 324 (anti-modification principle in Chapter 13)
- Lomas Mortgage, Inc. v. Louis, 82 F.3d 1 (1st Cir.) (treatment of multi-unit property vis- -vis §1322(b)(2))
- Scarborough v. Chase Manhattan Mortg. Corp. (In re Scarborough), 461 F.3d 406 (3d Cir.) (anti-modification inapplicable where interest extends to non-residential rental units)