655 B.R. 340
9th Cir. BAP2023Background
- Debtors Jason Lee and Janice Chen filed Chapter 13 in January 2022; their residence was subject to a first mortgage and a HELOC held by Mission Hen that matured January 15, 2027.
- Debtors proposed a plan that would bifurcate Mission Hen’s second-position HELOC into secured and unsecured portions and cram down the unsecured portion, paying the secured portion at 5% interest.
- The bankruptcy court valued the residence at $1.225 million, fixing Mission Hen’s secured portion at $265,473.06 and unsecured portion at $204,030.50.
- Mission Hen objected on three main grounds: (1) §1322(b)(2)’s anti-modification rule bars bifurcation of a residence-secured claim; (2) the Debtors were ineligible under §109(e) because unsecured debt exceeded the statutory cap; and (3) the plan was not feasible because the parental contribution supporting payments was inadequately supported.
- The bankruptcy court overruled Mission Hen’s objections, finding §1322(c)(2) permits modification of claims that mature during the plan term, the Debtors were eligible after applying the court’s valuation, and the parental contribution made the plan feasible. The BAP affirmed.
Issues
| Issue | Mission Hen’s Argument | Debtors’ Argument | Held |
|---|---|---|---|
| Whether §1322(c)(2) permits bifurcation/cramdown of a mortgage that matures during the plan | §1322(b)(2) bars modification of claims secured only by the debtor’s residence; §1322(c)(2) allows only modification of payment terms, not the claim itself | §1322(c)(2) is an explicit exception to §1322(b)(2) and, via incorporation of §1325(a)(5), authorizes modifying the claim (valuation, bifurcation, cramdown) | §1322(c)(2) allows modification of the claim (bifurcation and cramdown) when final payment under the original schedule is due before plan completion; Nobelman’s holding does not control post-amendment cases |
| Whether Debtors were eligible under §109(e) (unsecured debt cap) | Debtors’ original schedules show unsecured debt exceeding the statutory limit, so they are ineligible | Schedules were filed in good faith; court may apply its later valuation (from the evidentiary hearing) to determine actual unsecured amounts | Court may rely on its valuation rather than the raw scheduled amounts where schedules were filed in good faith and the valuation was later fixed; Debtors were eligible |
| Whether plan was feasible (sufficiency of parental contribution) | The declaration supporting the parental contribution was unsubstantiated; payments exceed net income after month 9 | Trustee did not object; parents’ declaration and available cash support payments; parents can increase contributions if needed | Feasibility is a factual finding; the bankruptcy court’s acceptance of the parental contribution was not clearly erroneous and the plan was feasible |
Key Cases Cited
- Nobelman v. American Sav. Bank, 508 U.S. 324 (1993) (Supreme Court held pre-amendment that §1322(b)(2) barred bifurcating a residence-secured claim)
- Hurlburt v. Black, 925 F.3d 154 (4th Cir. 2019) (en banc) (held §1322(c)(2) authorizes bifurcation and cramdown of soon-to-mature residence loans)
- Am. Gen. Fin., Inc. v. Paschen (In re Paschen), 296 F.3d 1203 (11th Cir. 2002) (construed §1322(c)(2) as a plain-language exception permitting modification of certain residence-secured claims)
- Witt v. United Companies Lending Corp., 113 F.3d 508 (4th Cir. 1997) (earlier Fourth Circuit decision holding §1322(c)(2) limited to payment-term modification)
- Scovis v. Henrichsen (In re Scovis), 249 F.3d 975 (9th Cir. 2001) (schedules normally determine §109(e) eligibility unless good-faith exceptions apply)
- First Union Mortg. Corp. v. Eubanks (In re Eubanks), 219 B.R. 468 (6th Cir. BAP 1998) (interpreting §1322(c)(2) to permit valuation/bifurcation and considering legislative purpose)