571 B.R. 891
Bankr. S.D. Florida2017Background
- Debtors John R. Hock and Doreen T. Zic-Hock filed Chapter 11 on October 2, 2014, and live in a historic Delray Beach property (Subject Property) that includes a main residence (their primary residence) and a carriage house with three rental units.
- Original mortgage (2005) was assigned to US Bank; Legacy Bank holds a second mortgage.
- Debtors sought an order under 11 U.S.C. § 1123(b)(5) to value the property, limit US Bank’s secured claim to the property value, and strip Legacy Bank’s second mortgage as wholly unsecured.
- US Bank opposed, arguing § 1123(b)(5)’s anti-modification protection applies because its claim is secured only by the debtors’ principal residence; valuation disputes remain (Debtors: $555,000; US Bank: ~$870,000).
- The court took a threshold legal issue: whether § 1123(b)(5) prevents modification of a lien when the collateral is both the debtor’s principal residence and income-producing (mixed-use).
Issues
| Issue | Debtors' Argument | US Bank's Argument | Held |
|---|---|---|---|
| Whether § 1123(b)(5) permits modification of a secured claim when the collateral is the debtor’s principal residence but also used to generate income | §1123(b)(5) should not apply because the property is income-producing; thus lien may be modified | §1123(b)(5) bars modification because US Bank’s claim is secured only by real property that is the debtors’ principal residence | The court held §1123(b)(5) is unambiguous and bars modification; mixed residential/commercial use does not remove anti-modification protection |
Key Cases Cited
- Conn. Nat'l Bank v. Germain, 503 U.S. 249 (1992) (statutory interpretation principle: start with the statute's text)
- Randall v. Loftsgaarden, 478 U.S. 647 (1986) (the statute's language is the starting point for interpretation)
- U.S. v. Aldrich, 566 F.3d 976 (11th Cir. 2009) (cardinal canon: presume legislature means what it says)
- In re Wages, 479 B.R. 575 (Bankr. D. Idaho 2012) (held §1123(b)(5) plain language protects loans secured by property used as principal residence, even if mixed-use)
- In re Macaluso, 254 B.R. 799 (Bankr. W.D.N.Y. 2000) (interpretation of analogous anti-modification wording; placement of "only" is key)
- Scarborough v. Chase Manhattan Mortg. Corp. (In re Scarborough), 461 F.3d 406 (3d Cir. 2006) (contrasting approach that limits protection to exclusively residential use)