9th Cir BAP: Yes, Cramdown a Lien Secured by Residence in 1322

A home lien cramdown is not like a building collapse

9th Cir BAP: Yes, Cramdown a Lien Secured by Residence in 1322

It’s possible to bifurcate a secured debt on a home or HELOC in a Chapter 13 bankruptcy, but timing matters.

SUMMARY

In In re Lee and Chen, 2023 WL 7489928 (BAP 11/13/23), the Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) held that § 1322(c)(2) is an exception to § 1322(b)(2), and that the Chapter 13 debtors were able to bifurcate and cramdown a secured debt on their residence that matures during the plan.

The BAP also reviewed the Ninth Circuit’s rule interpreting § 109 and debt limit eligibility and found that it provides some flexibility and is not rigid in all cases.

FACTS

Jason Lee and Janice Chen (“Debtors”) filed a Chapter 13 bankruptcy petition on January 26, 2022. The purpose of the bankruptcy was stop a foreclosure and to address prepetition defaults. The defaults were on two deeds of trust: their mortgage with IndyMac Bank and their home equity line of credit (“HELOC”), which at the time of filing was held by Mission Hen, LLC. The HELOC matures on January 15, 2027, during the term of the proposed plan.

In their schedules, Debtors listed the residence valued at $1.045 million, with the first mortgage as a secured claim of approximately $950,000, with the HELOC as a disputed secured claim of just under $500,000.

house debt cramdown
Live shot of a house cramdown which didn’t use Section 1322

The HELOC was bifurcated in the schedules and the plan as $373,180.67 unsecured and $92,489.74 secured. The Debtors filed the Motion to Value under 506(a) to bifurcate Mission Hen’s claim, and Mission Hen objected to the plan and motion.

After an evidentiary hearing on home valuation, the bankruptcy court issued an order finding the property worth $1.225 million on the date of filing, with a ruling that made the secured part of the Mission Hen claim $265,473.06 and the unsecured portion $204,030.50.

Based on that ruling, what followed was a series of amended plans by Debtors and objections to plan by Mission Hen. The plans attempted to cure the new feasibility issues with family contributions, and added occasional increases in the plan payments.

The objections to the amended plans included many assertions, and also raised for the first time two new issues: that the plan violated the anti-modification provision of § 1322(b)(2); and that the Debtors were ineligible because the unsecured debt, counting the $200,000 portion of its own claim, violated the debt limit of $419,275 in § 109(e).

Ultimately, the bankruptcy court confirmed the fourth amended plan over Mission Hen’s objections. The court rejected Mission Hen’s argument that the anti-modification provision of Section 1322(b)(2) prevented cramdown of its HELOC. Mission Hen appealed to the BAP, which affirmed.

House lien cramdown possible in some Chapter 13 bankruptcy cases
A house cramdown isn’t a disaster, but if it uses 1322 in a Chapter 13, a good thing, removing a HELOC or second mortgage

REASONING

Anti-Modification Provision of § 1322(b)(2)

The BAP first reviewed Debtors’ motion to bifurcate the claim under § 506(a) and bifurcate part of its claim as unsecured, and found nothing in § 1322 barring it.

Section 1322(b)(2) contains what is known as the “anti-modification provision.” This says, in pertinent part, that the plan may “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence.”

The BAP then quickly highlighted § 1322(c)(2), which provides an exception to the anti-modification provision. This states:

“Notwithstanding subsection (b)(2)… in a case in which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor’s principal residence is due before the date on which the final payment under the plan is due, the plan may provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title.”

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Because the Mission Hen HELOC matures before the final plan payment comes due, it appears to be subject to § 1322(c)(2). Does subsection (c)(2) create an exception to subsection (b)(2), and if so, does it allow modification of the claim, or merely the payment terms? The BAP continued its in-depth analysis.

Nobelman

The BAP reviewed the Supreme Court’s decision in Nobelman v. American Savings Bank, 508 U.S. 324 (1993). In Nobelman, the Supreme Court found that the proposed Chapter 13 plan bifurcation of a secured creditor’s lien into secured and unsecured claim was not allowed because it would require a modification of the rights of the secured lienholder, which was prohibited by § 1322(b)(2).
However, the BAP noted that shortly after Nobelman was decided, Congress enacted § 1322(c)(2). As such, Nobelman, the BAP wrote, “does not help us construe the amended statute.”

Decisions by other Circuits and Bankruptcy Courts

The BAP then observed that the appellate courts in the Ninth Circuit have not yet addressed whether § 1322(c)(2) permits bifurcation and cramdown of an undersecured, soon-to-mature claim. It then reviewed rulings of other circuits and bankruptcy courts, and found others have settled the issue, all in the affirmative.

The Fourth Circuit Court of Appeals recently decided the issue when it ruled, “Therefore, the legislative history’s express reference to payment modification—and silence as to claim modification—does not provide grounds for ignoring Section 1322(c)(2)’s plain language, which authorizes claim modification, as well as payment modification.” Hurlburt v. Black, 925 F.3d 154, 166 (4th Cir, 2019) (en banc), overturning Witt v. United Companies Lending Corp. (In re Witt), 113 F.3d 508 (4th Cir, 1997).

The Eleventh Circuit Court of of Appeals resolved the issue the same way, which the BAP found persuasive. “In the instant case, the plain language of the statute indicates a clear congressional intent to except certain short-term mortgages from the general rule prohibiting the modification of claims secured only by an interest in a debtor’s primary residence in a Chapter 13 proceeding.” Am. Gen. Fin., Inc. v. Paschen (In re Paschen), 296 F.3d 1203, 1207 (11th Cir, 2002).

The BAP found a similar holding by the Sixth Circuit Bankruptcy Appellate Panel in First Union Mortg. Corp. v. Eubanks (In re Eubanks), 219 B.R. 468, 474 (6th Cir. BAP 1998).

Closer to home here in California, the BAP found two bankruptcy court cases which reached the same conclusion: In re Collier-Abbott, 616 B.R. 117 (Bankr Ct EDCA 2020), and In re Bagne, 219 B.R. 272 (Bankr Ct EDCA, 1998).

Mission Hen asked the BAP to pass over all that authority and rely instead on an overruled case (Witt) and a dissent (from Hurlburt), which the appellate panel declined. In doing so, it stated: “Rather, we agree with the overwhelming weight of authority that § 1322(c)(2) is not ambiguous and allows a modification of Mission Hen’s claim.”

Rule of the Last Antecedent

As to whether the entire claim can be modified, or only the payment can be changed, the BAP analyzed the “rule of the last antecedent.” This is the canon of statute interpretation that says that qualifying phrases, absent a contrary intention, refer only to the last antecedent.

It then applied that rule to the language in § 1322(c)(2): “…the plan may provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title.”

To what does the “as modified” apply: payment or claim? The “as modified” phrase was found to refer only to the last antecedent, which in this case is “claim” and not “payment.” Further, the BAP, citing Paschen (supra), wrote that had Congress intended “as modified” to apply to “payment,” it could have written “payments as modified on the claim” or “modified payments on the claim.”

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Other statutory interpretation analyses

The BAP agreed with Paschen that a reading of the statute which applies “as modified” to “claim” reflects an explicit statement of § 1322(c)(2)’s purpose of being enacted after Nobelman. To wit: “claims that fall within its ambit are subject to bifurcation into secured and unsecured parts, with the unsecured portion subject to ‘cramdown’ pursuant to § 1325(a)(5).” Paschen at 1208.

It then pivoted to the rule of statutory construction that says where the legislature uses language in one part of the statute and not another, different meanings are intended. The BAP noted that § 1322(a)(2) uses the phrase “full payment” and by not using “full payment” in § 1322(c)(2) but only “payment,” that this demonstrates Congress’ intent to not require full payment in subsection (c)(2).

Debtors’ Chapter 13 Eligibility under § 109(e)

The BAP then turned to the issue of whether Debtors are bound to the debt calculations in their schedules, which exceed both the secured and unsecured debt limits.

It recited the a rule that when a debt is undersecured, the unsecured part is counted as unsecured debt for eligibility purposes. Soderlund v. Cohen (In re Soderlund), 236 B.R. 271, 273-274 (9th Cir. BAP 1999).

However, that’s not the end of the inquiry. “Eligibility should normally be determined by the debtor’s originally filed schedules, checking only to see if the schedules were made in good faith.” Scovis v. Henrichsen (In re Scovis), 249 F.3d 975, 982 (9th Cir. 2001). In other words, debt limit eligibility is not a simple issue of math, but also one of good faith.

The BAP then observed that there is no allegation that the Debtors’ schedules were not filed in good faith, and that Scovis did not intend inflexibility. By focusing on the Ninth Circuit’s choice of “normally,” the BAP concluded that irrespective of good faith, an eligibility analysis can go beyond the schedules.

It then stated that this case is not normal, and eligibility was raised much later in the case than usual, in fact, after an evidentiary hearing. Emphasizing no indication of bad faith or dishonesty, the BAP said Scovis should not be applied mechanically, and concluded the bankruptcy court did not err when it ruled they were eligible.

AUTHOR’S COMMENTS

This important appellate ruling is one of first impression in the Ninth Circuit, and makes clear that in § 1322, subsection (c)(2) taketh away what subsection (b)(2) giveth.

The BAP correctly found that the plain language of subsection (c)(2) and purpose of its implementation is a clear exception to the anti-modification provision.

The clarity from this decision provides opportunities for attorneys representing debtors to give relief to their clients by inquiring when a claim secured by a debtor’s residence will mature. If possible, counsel can time the filing of the Chapter 13 accordingly and bifurcate and stripdown undersecured liens using § 1322(c)(2).

It’s also is a reminder of the Ninth Circuit’s holding in Scovis and the debt limits of § 109(e) provide flexibility in some situations. This may be not be much of an issue presently with the Bankruptcy Threshold Adjustment and Technical Corrections Act which drastically increased Chapter 13 debt limits. However, the Act is scheduled to sunset in June 2024, and this issue may again become key, especially given the high home values in many areas throughout California.