Even when the debtor has no personal liability on a mortgage secured by investment property, a chapter 13 plan may modify the mortgage, according to Bankruptcy Judge Kevin R. Huennekens of Richmond, Va.
Judge Huennekens based his decision on the “broad” definition given to “claim” by the Supreme Court in Johnson v. Home State Bank, 501 U.S. 78 (1991).
The debtor had inherited real property encumbered by a $56,500 mortgage at the time he filed a chapter 13 petition. The mortgage debt included about $8,500 in arrears.
The debtor filed a plan to retain the property, pay the arrears over 34 months and make post-petition payments directly to the mortgagee. The debtor conceded that he was not in privity with the mortgagee and that he had no personal liability on the mortgage.
The lender objected to the plan, contending that the debtor had no right to cure the mortgage defaults in the plan because the mortgage did not represent a “claim” against the debtor. Judge Huennekens said that the Fourth Circuit has not decided whether in rem rights alone represent a “claim.”
Indeed, Judge Huennekens said “there is a split of authority as to whether a Chapter 13 plan may cure a defaulted secured claim when no privity of contract exists between the debtor and the creditor.” The majority, he said, invoke the “broad” definition given to a “claim” by Johnson and permit cure. The minority interpret “claim” narrowly and say that no claim exists without personal liability.
The word “claim” is defined in Section 101(5). In part, “claim” means a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”
Judge Huennekens explained that Johnson involved a debtor who aimed for the plan to pay a secured claim even though the debtor’s personal liability had been discharged in a prior chapter 7 case. He described the Supreme Court as having “determined that the secured claim that survived the discharge of a debtor’s personal liability was a ‘claim’ within the meaning of section 101(5) of the Bankruptcy Code. Johnson, 501 U.S. at 84.”
Through the adoption of Section 101(5), Judge Huennekens said that the Supreme Court in Johnson decided that “Congress intended to adopt the broadest possible available definition of ‘claim.’ Id. at 83.”
From Johnson, Judge Huennekens held that “the creditor has a ‘claim’ that may be included in a Chapter 13 plan ‘if it is enforceable against either the debtor or his property.’ Id. at 85.” [Emphasis in original.]
Unable to distinguish Johnson, Judge Huennekens decided that the plan could cure arrears on the mortgage “under the broad definition provided in section 101(5).” Furthermore, the debtor had the right under Section 1322(b)(2) to modify the rights of holders of secured claims.
Because the lender had a secured claim, Judge Huennekens overruled the objection and held that the plan could modify the claim under Section 1322(b)(2).
Even when the debtor has no personal liability on a mortgage secured by investment property, a chapter 13 plan may modify the mortgage, according to Bankruptcy Judge Kevin R. Huennekens of Richmond, Va.
Judge Huennekens based his decision on the “broad” definition given to “claim” by the Supreme Court in Johnson v. Home State Bank, 501 U.S. 78 (1991).