A bankruptcy judge in Buffalo, N.Y., adopted the minority, although emerging, opinion that a debtor in either chapter 11 or 13 cannot strip down a mortgage when the debtor’s residence is also used commercially.
Bankruptcy Judge Paul R. Warren described what he characterized as three conflicting approaches. Two adopt what the courts see as the plain meaning of Sections 1322(b)(2) and 1123(b)(5), while the third focuses on congressional intent.
The case involved an individual’s home that had two smaller rental units. The debtor proposed a chapter 13 plan that would strip down the mortgage debt to the value of the property. The debtor contended that the prohibition in Section 1322(b)(2) did not apply because the property was not used exclusively as the bankrupt’s principal residence.
The lender objected to the plan and won in Judge Warren’s April 15 decision.
Section 1322(b)(5) permits a plan to modify a mortgage so long as the property is not the debtor’s principal residence.
Judge Warren was persuaded by the 2014 In re Wages decision from the Ninth Circuit Bankruptcy Appellate Panel, where the property was both the debtor’s residence and a trucking business. Assuming the other prerequisites in Section 1322(b)(5) are met, the appellate panel bars a debtor from stripping down a mortgage if “some portion” of the property is used as the debtor’s principal residence.
Judge Warren believes that the Wages approach is the most consonant with the statute’s plain meaning.
The judge declined to adopt the similarly bright-line approach from the Third Circuit’s 2006 decision in Scarborough v. Chase Manhattan Mortgage Corp. Believing the same statute was not ambiguous, the circuit court held that the strip-down prohibition does not apply if the property has a use in addition to being the debtor’s principal residence.
The third approach is a case-by-case method looking to the “totality of the circumstances” and inquiring whether the loan was intended to be primarily residential or commercial. Courts using the third method believe they are implementing the intent of Congress.