Patricia Lee v. U.S. Bank National AssociationPatricia Lee v. U.S. Bank National Association
D.C. Docket No. 7:20-cv-00222-HL
Before WILLIAM PRYOR, Chief Judge, and LUCK and ED CARNES, Circuit Judges.
LUCK, Circuit Judge:
The bankruptcy code allows debtors to modify or restructure their debts. Yet this grace has its limits. One of those limits is the anti-modification provision in chapter 11. Under the anti-modification provision, a chapter 11 reorganization plan may not “modify the rights of holders of . . . a claim secured only by a security interest in real property that is the debtor‘s principal residence.”
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
Chapter 11 of the Bankruptcy Code
Under chapter 11 of the bankruptcy code, the debtor may file for bankruptcy in the hopes of reorganizing her debts. See
“Filing for bankruptcy under [c]hapter 11 . . . automatically creates ‘the estate,’ which . . . consists of essentially all the debtor‘s property and rights to property.” Auriga Polymers Inc. v. PMCM2, LLC ex rel. Beaulieu Liquidating Tr., 40 F.4th 1273, 1278 (11th Cir. 2022). Once the debtor files a voluntary petition under chapter 11, she “enjoys an automatic stay against actions to enforce, collect, assess or recover claims against
This automatic stay prevents creditors from taking actions to enforce debts owed to them, and “actions taken in violation of the automatic stay are void and without effect.” See id. (alteration adopted) (quoting Borg-Warner Acceptance Corp. v. Hall, 685 F.2d 1306, 1308 (11th Cir. 1982)). That includes foreclosure actions to enforce secured claims against real property. See
But to lift the automatic stay and enforce debts they hold, creditors may apply for relief so that they can take actions that would otherwise be voided by the automatic stay.
A debtor “does not have an equity” in the property when “the creditor is undersecured” by the value of the property. See United Sav. Ass‘n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 375 (1988). And “property is not necessary to an effective reorganization” unless it is “essential for an effective reorganization” and the reorganization is “in prospect“—in other words, there must be “a reasonable possibility of a successful reorganization within a reasonable time.” Id. at 375-76 (quotations omitted).
Ideally, the end of the chapter 11 process is a judicially approved “plan” that restructures the debtor‘s obligations.
Patricia Lee‘s Mortgage
In 2007, Patricia Lee mortgaged her property—a forty-three-acre tract of land in rural Georgia. As part of the mortgage, Lee signed a note that was secured by a deed on the property. The security deed required Lee to occupy, establish, and use the property as her principal residence and gave the lender, Quicken Loans, the power to foreclose on the property if Lee defaulted on the note. The mortgage was later assigned to U.S. Bank.
Lee, as she was required to do, used the property as her principal residence. She lived in a small brick house on two and one-half acres on the western edge of the property. The rest she leased to a farming company, and that portion of her land was continuously farmed.
Eventually, Lee defaulted on the mortgage. By August 2020, she owed 110 payments on the note for a total amount of $253,070.25. Instead of paying, Lee filed a chapter 11 voluntary bankruptcy petition to restructure her debts. The petition listed her property as her residence with an estimated value of $138,000. And the voluntary petition triggered the automatic stay. See
Second, U.S. Bank moved under
The bankruptcy court held an evidentiary hearing on U.S. Bank‘s motion. Lee‘s son testified that Lee lived on two and one-half acres of the property and that the remaining land had always been farmed. Lee also introduced an aerial photograph that confirmed her house took up only a small portion of the land on the western edge of the property, and she introduced tax documents that described all but two acres of the property as either timberland or agricultural land.
In closing arguments, U.S. Bank asserted that the “plain language” of the anti-modification provision applied to any property a debtor used as a principal residence, whether or not the debtor also used the property for some other purpose. Lee countered that
The bankruptcy court agreed with U.S. Bank that the plain language of
Lee appealed the bankruptcy court‘s order to the district court. She argued that the bankruptcy court erred in concluding that
STANDARD OF REVIEW
“When we review an order of a district court entered in its role as an appellate court reviewing a bankruptcy court‘s decision, we independently examine the bankruptcy court‘s factual and legal determinations, applying the same standards of review as the district court.” In re Walter Energy, Inc., 911 F.3d 1121, 1135 (11th Cir. 2018). “We review de novo conclusions of law whether by the bankruptcy
DISCUSSION
Like the district court, we take up the same question the bankruptcy court answered. What requirements did U.S. Bank have to meet for the anti-modification provision to apply to its secured claim on Lee‘s real property?
We begin, where we always must, with the text of the statute. In re BFW Liquidation, LLC, 899 F.3d 1178, 1188 (11th Cir. 2018). Under
(A) property commonly conveyed with a principal residence in the area where the real property is located;
(B) all easements, rights, appurtenances, fixtures, rents, royalties, mineral rights, oil or gas rights or profits, water rights, escrow funds, or insurance proceeds; and
(C) all replacements or additions.
Read together,
As the bankruptcy court found, the three requirements of
Pushing back on this conclusion, Lee argues that we (and the bankruptcy court) are misreading the requirements for
Under the first approach, commonly known as the Scarborough approach, some courts have read the anti-modification provision to require that the debtor use her real property only or exclusively as her principal residence and for no other purpose. The First Circuit, after finding chapter 13‘s identical anti-modification provision ambiguous, reached this result by looking to the legislative history of
Although few courts have followed Lomas, the Third Circuit reached the same result by “focus[ing] on” the anti-modification provision‘s “plain language.” In re Scarborough, 461 F.3d 406, 411 (3d Cir. 2006) (quotation omitted). In Scarborough, the Third Circuit reasoned that “[b]y using the word ‘is’ in the phrase ‘real property that is the debtor‘s principal residence,’ Congress equated the terms ‘real property’ and ‘principal residence.‘” Id. By focusing on the “is,” the Scarborough court concluded that “[a] claim secured by real property that is, even in part, not the debtor‘s principal residence does not fall under the terms of” the anti-modification provision. Id. (emphasis omitted). In other words, the anti-modification provision required that the debtor‘s real property had to be used only or exclusively as her principal residence. See id.
We disagree with the Scarborough approach‘s reading of the anti-modification provision. First, unlike the First Circuit, we need not rely on legislative history to understand
Second, the average speaker of American English would not understand “is,” as used in
By the same token, the average man would understand that “real property that is the debtor‘s principal residence” does not mean that the real property is only or exclusively the debtor‘s residence and nothing else. He would understand that the property could also be the principal residence of the debtor‘s roommate, the place where the debtor has her weekend lemonade stand, and the spot where she farms honey from her beehive.
The Scarborough court and the dissenting opinion point to a different definition. “Is,” they say, means to “equate[].” See Scarborough, 461 F.3d at 411 (finding that Congress used “is” to “equate[] the terms ‘real property’ and ‘principal residence‘“); see also Webster‘s II New Riverside University Dictionary 159 (also defining “be” to mean “[t]o equal in meaning or identity“); Webster‘s Third New International Dictionary 189 (also defining “be” to mean “to equal in meaning,” to “have the same connotation . . . as,” and “to constitute the same idea or object as“). But, again, to have equal meaning or identity does not mean the thing being described only or exclusively has that meaning or identity and no other. Atlanta may be equal in meaning to the Georgia state capital. But it is also equal in meaning to the seat of Fulton County and the home of the Eleventh Circuit.3
The Scarborough approach—reading “is” to mean only or exclusively—is even further off the mark after the 2005 amendments to the bankruptcy code. In the 2005 amendments, Congress defined “debtor‘s principal residence” to include “incidental property,” which can itself include other property interests in addition to the debtor‘s residence.4 See Wissel, 619 B.R. at 312-13 (“These additions represent a clear [c]ongressional statement that ‘real property’ and ‘debtor‘s principal residence’ are no longer coterminous.“); see also, e.g., Wages, 508 B.R. at 166 (rejecting this interpretation because the bankruptcy code “does not equate the term ‘real property’ with ‘debtor‘s principal residence‘“). The “debtor‘s principal residence” can now include, for example, “[e]scrow funds, insurance proceeds, and miscellaneous proceeds.” See In re Birmingham, 846 F.3d 88, 99 (4th Cir. 2017). And it can now include the rent the debtor makes from leasing the property, the profits from oil and gas extracted from the property, and the rights to minerals and water on the property. See
Turning away from the meaning of “is,” Lee pivots by arguing that the term “only” as used in
In the end, Lee and the dissenting opinion‘s reading of the anti-modification provision would have us insert language that Congress didn‘t put in the statute. See Hock, 571 B.R. at 897 (“To apply the principal-residence-only bright line approach, the [c]ourt would have to unilaterally add the word ‘only’ or ‘exclusively’ to the text of [section] 1123(b)(5) . . . .“); see also Schayes, 483 B.R. at 215 (emphasizing that “[t]here simply is no second ‘only’ in the statutory language of [section] 1123(b)(5)“). Specifically, the dissenting opinion (quoting from a bankruptcy treatise) reads the anti-modification provision as applying “only if the real estate mortgage covers . . . the principal residence and no other property.” Dissenting Op. at 7 (omission in original) (parenthetically quoting 7 Collier on Bankruptcy ¶ 1123.02[5] (16th ed. 2024)). But this reading moves the “only” to modify a different term, switches “covers” for “is,” and adds the italicized words that are not in
If we don‘t adopt the Scarborough approach, as a fallback, Lee cites a second, case-by-case, totality-of-the-circumstances approach that focuses heavily on the parties’ subjective intentions and was first set out in In re Brunson, 201 B.R. 351 (Bankr. W.D.N.Y. 1996), by a bankruptcy court in the Western District of New York. Some courts have described this case-by-case approach as looking to whether the property is used “for significant commercial purposes” rather than as the debtor‘s principal residence. Hock, 571 B.R. at 897 (quotation and emphasis omitted); Wages, 508 B.R. at 167 (quotation and emphasis omitted). This approach looks to the totality of the circumstances to determine the “predominant character of the transaction[] and what the lender bargained to be within the scope of its lien” so that the court may classify the property as “‘commercial’ property” or “real property used as the debtor‘s residence.” See Brunson, 201 B.R. at 354. If the bankruptcy court determines that “the transaction was predominantly viewed by the parties as a loan transaction to provide the borrower with a residence, then the anti[-]modification provision” applies. Id. “If, on the other hand, the transaction was viewed by the parties as predominantly a commercial loan transaction,” then it doesn‘t. Id.
We reject this approach as well because “[r]eweighing the totality of the circumstances is ordinarily not a preferable way to approach a question of law.” Ring v. Boca Ciega Yacht Club Inc., 4 F.4th 1149, 1158 (11th Cir. 2021). “Basing a decision on the totality of the circumstances is ‘an empty incantation—a mere conjurer‘s trick that serves to hide’ the court‘s real reasons for its decision.” Id. at 1159 (quoting Holder v. Hall, 512 U.S. 874, 943-44 (1994) (Thomas, J., concurring in the judgment)). “The rule of law demands more.” Id.
That‘s because the totality-of-the-circumstances approach isn‘t grounded in the language of
In short, we hold that
AFFIRMED.
WILLIAM PRYOR, Chief Judge, Dissenting:
This appeal requires us to decide what “is” means. The anti-modification provision of the Bankruptcy Code forbids a chapter 11 reorganization plan from modifying a creditor‘s rights in a claim that is secured only by an interest in “real property that is the debtor‘s principal residence.”
In 2007, Patricia Lee mortgaged her 43-acre tract of land in southern Georgia. Lee uses only a small fraction of the tract as her principal residence: her 1,595-square-foot house and driveway sit on a two-and-a-half-acre yard on the edge of the land. She leases the remaining 40.5 acres to a third-party farmer who uses the land exclusively for commercial farming:
2 WILLIAM PRYOR, C.J., Dissenting 21-13887
Nonetheless, the bankruptcy court ruled that the anti-modification provision of the Bankruptcy Code prevented the modification of mortgagee U.S. Bank‘s interest in Lee‘s property. The anti-modification provision prohibits a chapter 11 plan from modifying creditors’ rights in “a claim secured only by a security interest in real property that is the debtor‘s principal residence.”
The bankruptcy court concluded that the anti-modification provision applied because U.S. Bank‘s security interest is in Lee‘s real property; Lee‘s real property is the only security for the claim; and the real property “is” Lee‘s principal residence because the real property “contains” Lee‘s principal residence. The bankruptcy court reasoned that it was immaterial that most of the secured parcel was used exclusively for commercial farming, and not as Lee‘s principal residence, because the anti-modification provision does not require that the property be used “only” as the debtor‘s principal residence. And even if the statute did require that the debtor use the property exclusively as her principal residence, the bankruptcy court ruled that the provision would still apply because the adjoining farmland constitutes “incidental property” under the definition of “debtor‘s principal residence.” See
Our decision should begin and end with the text of the statute, Heyman v. Cooper, 31 F.4th 1315, 1318 (11th Cir. 2022), by giving the text its “plain, ordinary, and most natural meaning,” Boca Ciega Hotel, Inc. v. Bouchard Transp. Co., 51 F.3d 235, 237 (11th Cir. 1995). The anti-modification provision bars a chapter 11 reorganization plan from modifying creditors’ rights in “a claim secured only by a security interest in real property that is the debtor‘s principal residence.”
The majority and I agree about several matters. I agree with the majority that these provisions of the Code are “unambiguous” and yield three requirements for anti-modification protection: first, the security interest must be in real property; second, the real property must be the only security for the debt; and third, the real property must be the debtor‘s principal residence. Maj. Op. at 19. And I agree that the first two requirements are satisfied here: Lee does not dispute that U.S. Bank‘s claim is secured by her real property or that her real property is the only security for the claim.
But I disagree with the majority that the anti-modification provision‘s third requirement is satisfied. That requirement turns on the meaning of the word “is“: the statute applies only to “real property that is the debtor‘s principal residence.”
The term “is“—the third-person singular present tense of the verb “to be,” see Is, THE AMERICAN HERITAGE DICTIONARY (3d ed. 1992)—has at least two ordinary meanings, see Advance Tr. & Life Escrow Servs., LTA v. Protective Life Ins., 93 F.4th 1315, 1330 n.4 (11th Cir. 2024) (“‘Many words have more than one ordinary meaning.‘” (quoting Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts § 6, at 70 (2012))). The first is the descriptive “is.” This “is” links a subject and predicate so as to signify that the subject “ha[s] . . . a specified quality or characteristic” or that it “belong[s] to a specified class or group.” Be, THE AMERICAN HERITAGE DICTIONARY (3d ed. 1992). The sentence, “The ocean is vast,” uses a predicate adjective, “vast,” to describe a quality possessed by the subject, “the ocean.” Similarly, the sentence, “A dog is a mammal,” uses a predicate nominative, “mammal,” to describe a class to which the subject, “a dog,” belongs. But there is also the “is” of equivalence. This
The surrounding text makes plain that the anti-modification provision uses the “is” of equivalence. See Hibbs v. Winn, 542 U.S. 88, 101 (2004) (applying the “cardinal rule” that a word “gathers meaning from the words around it” (citation and internal quotation marks omitted)). The provision sandwiches “is” between two key determinants of meaning: “that” and “the.” See
The majority purports to be applying the descriptive “is” to the anti-modification provision, see Maj. Op. at 12–13, but it, in fact, substitutes a different word entirely: only by mistaking “is” for “includes” can the majority construe the statute to reach Lee‘s property. The difference is dispositive. To “include” means “to take in or contain one or more things as part of something larger.” Include, THE AMERICAN HERITAGE DICTIONARY (2d ed. 1982). No question, Lee‘s 43-acre tract contains (i.e., “includes“) her principal residence. But most of Lee‘s property is commercial farmland that, both parties agree, Lee does not use as her principal residence. So unless the farmland is “incidental property,” see
Indeed, simple examples prove why neither sense of “is” could support the majority‘s interpretation. Consider the descriptive “is“—the ordinary meaning of “is” that the majority says the statute employs. That variant conveys that a predicate describes a quality or characteristic possessed by a subject or a class to which the subject belongs. The descriptive “is” does not narrow the predicate‘s descriptive scope—the predicate properly describes a quality possessed by the entire subject. Cf. United States v. Masino, 869 F.3d 1301, 1306–07 (11th Cir. 2017) (holding that because the federal gambling statute “applies only to a gambling business that ‘is a violation of the law,’ . . . ‘the government must prove more than a violation of some state law by a gambling business. The gambling business itself must be illegal.‘” (citation omitted) (first quoting
Now consider the “is” of equivalence—the ordinary meaning that the statute actually employs. That sense of “is” designates that a subject and predicate are equal to one another. When the majority says that “Atlanta is the capital city of Georgia,” the majority is clearly saying that Atlanta and the capital city of Georgia are the same thing, with the same boundaries. But, as explained, Lee‘s real property does not have the same boundaries as her principal residence (unless the non-residential portion is “incidental property“)—Lee‘s property instead only includes her principal residence. So the majority‘s interpretation of the anti-modification provision is more like saying, “Georgia is Atlanta.” Most United States citizens would immediately spot the error: Georgia includes Atlanta, but it is not Atlanta.
I do agree with the majority that neither ordinary meaning of “is” requires exclusivity. See Maj. Op. at 12–13. A subject can be equal to, or possess the quality or characteristic of, more than one predicate. Four “is” two plus two, but it “is” also three plus one. A dog “is” a mammal, but it “is” also man‘s best friend. The same logic applies to the subject “real property” of the anti-modification provision. To fall within the statute, secured property need not be used “only or exclusively” as the debtor‘s principal residence and nothing else—it may also be “the principal residence of the debtor‘s roommate, the place where the debtor has her weekend lemonade stand, and the spot where she farms honey from her beehive.” Maj. Op. at 12.
To satisfy the statute‘s requirements, the entire property must also be the debtor‘s principal residence—meaning, the
Of course, some property uses are incompatible with residency by the debtor, meaning that their presence on the property will necessarily negate the conclusion that the debtor uses the entire property as her principal residence. Renting a discrete portion of the property to another tenant would be an example, absent a lease provision granting concurrent possessory rights to the debtor-landlord See 49 AM. JUR. 2D Landlord and Tenant § 469 (2024) (the “implied covenant of quiet enjoyment” protects the “tenant‘s right to exclusive possession” of the premises (emphasis added)); see also, e.g., Abrego, 506 B.R. at 511 (explaining that “[t]he majority of courts to have considered this question” have held that the anti-modification provision is inapplicable if the secured property “is a multi-unit property and the debtor resides in only one unit“). In such a case, the property should be excluded from anti-modification protection unless the leased portion constitutes “incidental property” within the Code‘s definition of “debtor‘s principal residence.”
The Code‘s definition of “debtor‘s principal residence” does not undermine my interpretation. See Maj. Op. at 14–15. In 2005 and 2010, Congress expanded the definition of “debtor‘s principal residence.” See Bankruptcy Abuse Prevention and Consumer Protection Act, Pub. L. No. 109–8, § 306(c), 119 Stat. 23, 80–81 (2005); Bankruptcy Technical Corrections Act, Pub. L. No. 111–327, § 2, 124 Stat. 3557, 3557 (2010). A principal residence is no longer limited only to the debtor‘s brick-and-mortar home, but also includes “incidental property,” which is “property commonly conveyed with a principal residence in the area where the real property is located“; “all easements, rights, appurtenances, fixtures, rents, royalties, mineral rights, oil or gas rights or profits, water rights, escrow funds, or insurance proceeds“; and “all replacements or additions.”
Some bankruptcy courts have reasoned that because the Code defines “debtor‘s principal residence” to include property interests that are not “real property” (like escrow funds, insurance proceeds, and mobile homes), the anti-modification provision cannot be read to “equate the term ‘real property’ with ‘debtor‘s principal residence.‘” In re Wages, 508 B.R. 161, 166 (B.A.P. 9th Cir. 2014); accord In re Wissel, 619 B.R. 299, 312–13 (Bankr. D.N.J. 2020). But our sister circuits have correctly rejected
This language “plainly contains two requirements“: first, the secured property must “be real property,” and second, the secured property must “be the debtor‘s principal residence.” Reinhardt, 563 F.3d at 562; accord Ennis, 558 F.3d at 345–46. The Code‘s expansion of the definition of “debtor‘s principal residence” affected only the second requirement; it did not nullify the first requirement that the property be “real property.” Ennis, 558 F.3d at 346; see Reinhardt, 563 F.3d at 563 (“[N]o matter how broad the definition of ‘debtor‘s principal residence,’ it still must also be ‘real property’ for the anti-modification provision to apply.“). Because the operative provision limits its scope to “real property,” it excludes some “incidental property.” Compare
The statutory definitions support my interpretation. If the anti-modification provision covered any real property that merely includes a debtor‘s principal residence, there would be little need for Congress to define a debtor‘s principal residence as including, for instance, “property commonly conveyed with a principal residence in the area where the real property is located.” See
Because the majority incorrectly holds that Lee‘s 40.5 acres of commercial farmland need not be her “principal residence” for the anti-modification provision to apply, it does not address whether the farmland constitutes “incidental property” to Lee‘s principal residence. See
The question under the statute is not whether the property and residence were actually conveyed together. Property is “incidental property” to a debtor‘s principal residence if it is “property commonly conveyed with a principal residence in the area where the real property is located.”
For all these reasons, I respectfully dissent.