Even if a debtor is not personally liable to the lender, ownership of property is enough to cram down a secured lender in chapter 13, according to Bankruptcy Judge Nancy Hershey Lord of Brooklyn, N.Y.
Furthermore, Judge Lord believes that listing a property as the debtor’s principal residence in two prior bankruptcies is not necessarily a bar to cramming down the mortgage in a third chapter 13 filing by claiming that the property wasn’t the principal residence.
The debtor acquired title to a residential property in 2006 and lived there only a few months. The lender accepted mortgage payments for about a year. The debtor did not assume the note and mortgage, which evidently had a due-on-sale clause. The lender initiated foreclosure about a year later, apparently following payment defaults.
To avoid foreclosure, the debtor filed two prior bankruptcies that were dismissed. In both cases, the debtor listed the home as his “principal residence.”
Again on the eve of foreclosure, the debtor filed a third chapter 13 petition. This time, he scheduled the home as his “primary residence.” Having been living for several years with his daughter, he listed her home as his “street address.” He did not claim a homestead exemption in the property he owned.
The debtor filed a plan premised on cramming down the mortgage to the value of the owned property and making mortgage payments directly to the lender.
Citing Section 1322(b)(2), the lender objected to the plan, contending that the debtor was precluded from cramming down the mortgage because the property was his principal residence. That section allows modification of a secured claim, but not a mortgage on property that is the debtor’s “principal residence.”
Judge Lord defined “principal residence” as the place where the debtor lives “more than any other.” She therefore framed the question as whether the debtor, on the filing date, had been living in the home that he owned “more than he had been living elsewhere.”
After a hearing with witnesses, Judge Lord concluded, as a matter of fact, that the property had not been the debtor’s principal residence “on the filing date or for some years before.”
Without employing a judicial estoppel analysis, Judge Lord considered whether statements in the two prior bankruptcies overcame her fact finding.
The debtor was saved by his limited knowledge of English. Judge Lord said he failed “to appreciate the nuances and distinctions between the terms and meanings that might apply to residential property.” The judge said he “did not misrepresent the status of the property, but instead misunderstood that status, or at least how that status should be described.”
The lender may have fared no better had it raised judicial estoppel. Since the two prior bankruptcies had been quickly dismissed for lack of prosecution, the lender might not have been able to show the required element of judicial reliance on the representation.
Next, the lender contended that the debtor could not modify the mortgage because he neither granted the mortgage nor was personally liable.
Judge Lord said the debtor could modify the mortgage if it was a “claim” under Section 1322(b)(2), as defined in Section 101(5). Quoting from Johnson v. Home State Bank, 501 U.S. 78 (1991), she ruled that the mortgage represented a claim that could be modified because “‘an obligation enforceable only against a debtor’s property would be a “claim” under Section 101(5) of the Code.’”
Having established that the debtor was theoretically entitled to cram down the mortgage, Judge Lord ordered the parties to hold a hearing on valuation. The fact that the debtor was unemployed and without income may bear on whether the debtor eventually succeeds in confirming a plan.