Tuesday, March 24, 2009

Mortgage Cramdown Legislation Stalled in the Senate, Not Likely Seeing Action Until Late-April, After Easter Break


By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,
Andy@BLSforAttorneys.com


Although there had been some indications that the Senate would quickly take up the Chapter 13 mortgage cramdown legislation after the House of Representatives passed its bill on March 5, because of political distractions and fierce negotiations this will not happen until late April or even later.

Hurry Up and Wait
When the House passed HR 1106, the "Helping Families Save Their Homes Act of 2009" on March 5, the Democratic Senate leadership signaled that it would attempt to bring the matter to a vote within the following week or two. That same day Bloomberg.com reported that the senior communication advisor to Senate Majority Leader Harry Reid, Jim Manley, one of the most powerful Senate staffers, said the Senate could vote on its bill as early as the following week.

But with more than two weeks having
passed and the start of the two week Easter recess a little more than a week away--it starts Friday, April 3--it appears highly unlikely that the Senate will take any action on its bill, S. 61, until after this recess. Indeed, according to a recent Associated Press story, the bill did not make it onto Senator Reid's list of priorities to accomplish before the Easter recess.

The Behind-the-Scenes Negotiations
The Senate situation echos what occurred in the House. There the House Judiciary Committee passed H.R. 200 with amendments on January 27, and the full House was scheduled to vote on it on February 26, but was delayed a week while additional amendments were hammered out and the necessary votes rounded up. (See my earlier Bulletin on this delay in the House.)

The wrangling in the Senate continues the House battles on how much to narrow the types of mortgage eligible for Chapter 13 cramdown. The horsetrading is closely tied to the need to attract virtually every one of the 58 Democratic votes (with the potentially 59th Minnesota vote still tied up in litigation) and a few Republican votes to reach the 60 needed to break filibuster. Republican Arlen Spector of Pennsylvania has long been a potential supporter, but apparently only a narrower version, so Democratic Sen. Evan Bayh of Indiana and he are working on a proposal limiting cramdown only to subprime mortgages. There are also discussions among the Democratic leadership and various creditor organizations, such as the Credit Union National Association, to include provisions favorable to them, in an effort to win their support and that of on-the-fence Senators.


The Personal Politics
While Sen. Dick Durbin of Michigan is the sponsor of S. 61, the "Helping Families Save Their Homes in Bankruptcy Act of 2009," Sen. Christopher Dodd of Connecticut has been an influential and vocal supporter. He is the Chair of the Senate Banking, Housing, and Urban Affairs Committee to which the House bill was referred after it passed. He spoke at the press conference along with Sen. Durbin in early January when the "deal" with Citigroup was announced. (See my Bulletin about that.) In his speech on March 12 to the Consumer Federation of America, he emphasized the importance of and his support for the bankruptcy legislation.

But Sen. Dodd has been buffeted by a number of controversies involving personal financial matters--he is under Senate ethics investigation for a couple of Countrywide mortgages he received, and in the last two weeks has been soundly criticized in the AIG executive bonuses brouhaha. AIG's notorious Financial Products division is based in Connecticut, and Sen. Dodd was the largest recipient of AIG executives' political contributions in the US Senate, according to the Center for Responsive Politics. He vacillated about his role in the stimulus bill which allowed those AIG bonuses, first denying involvement and then trying to pin the blame on the Treasury Department, until Secretary Geithner accepted responsibility. Dodd is up for election in 2010, and in spite of being the longest-serving Senator in his state's history, in a state that has recently tended to vote Democratic, is in a close race with his anticipated Republican challenger.
It is hard to say what effect his political vulnerabilities will have on the controversial bankruptcy legislation, but these circumstances do not seem conducive to risk-taking.

The Latest on the Prospects
A month of delay, including a two week recess, is a very long time in this economic and political environment, making assessing the legislation's prospects impossible. This delay gives opportunity for Senators to be influenced by all the interest groups, especially those who can most afford to pay for that influence. But it also perhaps gives them the opportunity to see the detrimental impact of home foreclosures upon their voting constituents and neighborhoods.

The House vote earlier this month had to some degree been slowed down by the controversies of the prior few weeks surrounding the huge stimulus bill, and now Congress is digging into controversial budgetary issues with the same potential effect on the Senate side. And for the first time there are serious hints of the possibility that no version of the legislation will pass, or only a highly restrictive one, given the skepticism expressed by a number of "centrist" Democratic Senators, and by Republican Senators who had appeared more amenable earlier. The fate of the legislation will depend on the direction of the economic and political winds of the next several weeks.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Wednesday, March 11, 2009

The Terms of the Bankruptcy Mortgage Cramdown Bill Passed by the House of Representatives--The Cramdown Itself


By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,
Andy@BLSforAttorneys.com


This Bankruptcy Bulletin presents the core cramdown provisions of the bankruptcy bill which was passed by the House of Representatives last Thursday, H.R. 1106. Each part of the bill outline below refers both to its pertinent Section number in the bill and to the Bankruptcy Code Section it proposes to amend. The full text of the engrossed bill is as passed by the House is at either of these two website: one by govtrack.us and the other by the Library of Congress' THOMAS.

(See my Bulletin of last Friday, March 6, on the passage of this bill in the House, the amendments offered on the floor, and the legislation's prospects in the Senate. An upcoming Bulletin addresses other aspects of the bill affecting Chapter 13, including a major but selective expansion in the jurisdictional debt limits, new rules governing post-petition fees of mortgage creditors, and the bill's applicability to previously filed cases.)

Mortgages eligible for Chapter 13 cramdown (H.R. 1106 Section 103; Bankruptcy Code Section 1322(b)(11)):
  • All mortgages secured by "principal residence" after receiving notice of potential foreclosure.
  • Not restricted to sub-prime or any other category of mortgages.
  • Does NOT include mortgages entered into after the law goes into effect.
Mortgage modifications permitted (Bill Section 103; Code Section 1322(b)(11)):
  • Reducing principal to the value of the residence.
  • Stopping postpetition interest rate adjustments.
  • Extending the term of payment to as long as a total of 40 years.
  • Adjusting interest to the rate as published by the Federal Financial Institutions Examination Council, "plus a reasonable premium for risk."
Payments on modified mortgages may be paid (Bill Section 103; Code Section 1322(b)(11)):
  • "[D]irectly to the holder of the claim."
  • "[T]hrough the trustee during the term of the plan," "at the discretion of the court."
The court may confirm a plan with a mortgage modification that reduces the interest rate but not the principle, if (Bill Section 105; Code Section 1325(d)):
  • The "total monthly mortgage payment is reduced to a percentage of the debtor's income in accordance with the guidelines of the . . . Homeowner Affordability and Stability Plan as implemented March 4, 2009."
  • Allowing for expenses permitted under section 707(b)(2).
  • The debtor could prevent foreclosure and pay a 30-year fully amortizing loan at the reduced interest rate without reducing principle, after allowing for "additional debts and fees that are to be paid in this chapter and thereafter."
Valuation of principal residence for cramdown (Bill Section 103; Code Section 1322(i)):
"Allowed secured claim" is the fair market value of the residence.
If there is a dispute about value, the court determines the value through the appraisal rules of the Federal Housing Administration.

Distribution of post-petition sale proceeds of principal residence (Bill Section 103; Code Section 1322(g)):
  • For sales during 1st year of the Chapter 13 plan, 90% of net proceeds would go to the mortgage holder
  • During the 2nd year, 70%.
  • During the 3rd year, 50%.
  • During the 4th year, 30%.
  • During the 5th year, 10%.
Debtor's prepetition effort to modify mortgage (Bill Section 103; Code Section 1322(b)):
For Chapter 13 cases filed after 30 days after the law's effective date--
  • Timing: Debtor must contact lender or servicer at least 30 before filing the case about modifying the mortgage.
  • Must provide lender or servicer with information about income, expenses, and debt, in a format like the bankruptcy schedules.
  • Must consider any "qualified loan modification"--a newly defined term--presented by the lender or servicer.
  • These requirements are waived if a foreclosure is scheduled within 30 days after filing the Chapter 13 case.
For cases filed before 30 days after the law's effective date--
  • Timing: Must attempt to contact lender or servicer about mortgage modification before filing an initial Chapter 13 plan, or a pre-confirmation or post-confirmation plan (no stated length of time).
Definition of "qualified loan modification" (Bill Section 100; Code Section 101(43A)):
  • Mortgage modification agreement made under the guidelines of the Homeowner Affordability & Stability Plan.
  • Debtor's aggregate housing payment does not exceed a percentage of income consistent with those guidelines.
  • Scheduled payments fully amortize the outstanding loan principal without any periods of negative amortization.
  • May not require debtor to pay any fees to participate.
  • Can't be affected by debtor's filing of a bankruptcy.
Mortgage modification requires court's finding of debtors' good faith (Bill Section 105; Code Section 1325(a)):
  • No good faith if debtor "can pay all of his or her debts. . . without difficulty for the foreseeable future."
  • These debts include "any future payment increases on such debts.
  • These payments include "the positive amortization of mortgage debt.
  • "No good faith if court finds that debtor was "convicted of obtaining by actual fraud the extension, renewal, or refinancing of credit" at issue.
A reduction in mortgage principal requires a court determination of good faith (Bill Section 105; Code Section 1325(a)):
Court must consider whether the mortgage holder had offered an affordable "qualified loan modification" without principal reduction.

Modified mortgage holder retains lien on residence (Bill Section 105; Code Section 1325(a)):
Until the later of a) the payoff of the secured claim, or b) completion of all plan payments (or hardship discharge)

Exclusion of modified mortgage balance from discharge (Bill Section 106; Code section 1328(a)):
Discharge at end of Chapter 13 case excludes the unpaid portion of the "allowed secured claim."


A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.


by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Friday, March 6, 2009

Chapter 13 Mortgage Cramdown Bill Passes House of Representatives, Moves to Senate For New Battle About Amendments

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


Yesterday evening (March 5) the House passed H.R. 1106, the Helping Families Save Their Homes Act of 2009, by a largely party-line vote of 234 to 191. Seven Republicans voted for it, 24 Democrats against. None of the Oregon and Washington Representatives broke party ranks. The vote came a week after debate on the bill began on the floor a week before, and after votes on three substantive amendments, two of which passed and one failed, all again mostly decided on party-line votes. The issue now goes to the Senate, as early as next week according to a spokesman for Senate Majority Leader Harry Reid, as reported by Bloomberg.com.

Senate Prospects

The Senate's bill, S. 61, is identical to the House's original bill, H.R. 200, when both were introduced on January 6, 2009, but has not yet seen any committee action. The consensus appears to be that passage in the Senate of a bankruptcy mortgage modification bill will be more difficult than in the House, if for no other reason than the Senate's rule requiring 60 votes to force a vote, effectively meaning that the bill must have the support of every Democratic Senator and also a couple Republicans. The additional time also gives the lobbying power of the mortgage industry opportunity to further limit the amendment's scope and to continue to try to kill it. However, the continuing downward spiral both in foreclosures and in the general economy may well encourage Senate passage. Of the House Republicans who crossed party lines to vote for H.R. 1106, most were from states with the worst foreclosure situations.

Amendments Made on the House Floor

Of the three amendments debated on the House floor yesterday, the one that was the closest vote, 211-218 (with all Republicans and 37 Democrats voting for in favor) did not pass. It sought to provide that if a residence with a mortgage modified through Chapter 13 is sold after "the effective date of the [Chapter 13 plan," at a net profit beyond the modified principal amount, the mortgage holder would recapture ALL of this profit (instead a portion as provided by another amendment).

The significant substantive amendment which did pass by 263-164, with all Democrats and 10 Republican votes, requires courts to use FHA appraisal guidelines in cases of dispute about a residence's fair market value, prevents Chapter 13 modifications for homeowners deemed to be able to pay their mortgage, extends the negotiation period before filing from 15 to 30 days, and requires the debtor to certify that he or she contacted the lender and provided it with income, expense and debt statements.

The other substantive amendment which passed, near unanimously, 423-2, provides that for debtors with their residence in foreclosure, their pre-filing credit counseling requirement can be met not just before filing but up to 30 days thereafter.

The precise language of these amendments is found in House Report 111-21
and 111-23. In an upcoming Bulletin on this website I will provide a more detailed analysis of the entire bill in its final version.

Party Unity

In the final 234-191 vote on the bill, the seven Republicans voting in favor are from Florida, Ohio, Delaware, New York and North Carolina, and the 24 Democrats voting against are from the South and Border States, and the greater Midwest.

Interestingly, the Republicans tended to vote more as a block with the exception of the key 1st amendment and the final vote. The opposition seems to be somewhat more united than the proponents. We shall see if that carries through to the Senate.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report, certainly by the end of next week (March 13). PLEASE EMAIL ME at the address below IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED.


by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Thursday, March 5, 2009

Annuity Bought for $10,000 by Debtor a Few Months Before Filing Chapter 7 Case is Not Exempt Either as Life Insurance or a Private Retirement Plan


By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,
Andy@BLSforAttorneys.com



Simpson v. Burkart (In re Simpson)

Ninth Circuit Court of Appeals, Case No. 07-15626
February 23, 2009

The Ninth Circuit panel agreed with both the bankruptcy court and the Bankruptcy Appellate Panel that a single-premium annuity purchased by debtor a few months before filing Chapter 7 was not exempt as either life insurance or private retirement account under California exemption statutes.

Although this opinion turns on statutory interpretation of California statutes, it is of broader interest because it addresses two important general issues:
a) what factors determine whether an annuity with life insurance components qualifies for a life insurance exemption, and
b) the role of debtor's subjective intent in determining whether an annuity qualifies for a retirement exemption.

(The BAP opinion being appealed from, Simpson v. Burkart (In re Simpson), 366 B.R. 64 (9th Cir. B.A.P. 2007) was authored by Judge Randall Dunn writing for the three-judge BAP.)

Essential Facts
The Annuity: Simpson paid $10,000 to buy an annuity "a few months" before filing a Chapter 7 bankruptcy.
  • Simpson was the annuity contract owner and annuitant (the person entitled to receive benefits or payments from the annuity); his two sons were the beneficiaries.
  • Non-qualified for IRS purposes, meaning that contributions to it are not tax-deductible.
  • No loan value, so could not be borrowed against.
  • If the annuity was surrendered before 2043 when Simpson was to begin receiving payments from it, he would have to pay a 10% early surrender penalty.
  • If Simpson were to die before 2043--when he would be 95 years old, his beneficiaries could either surrender the annuity and receive the principal and interest, or could wait until that date and receive the payments as usual.
  • Cute twist: Simpson bought the annuity through his bankruptcy attorney, who sold financial products as an apparent side business.
Judge Dunn's BAP Opinion Corrected on Methodology
The Ninth Circuit called "incorrect" the BAP opinion's statement that "[w]hether an annuity contract qualifies as exempt life insurance under California law is a factual determination that we review under the clearly erroneous standard.” Instead, the Ninth Circuit asserted:
we undertake two inquiries. The first is a question of statutory interpretation, that is, whether the claimed statutory exemption includes the asset at issue. . . .. If the statutory exemption categorically includes the questioned asset, then the inquiry is at an end. If the asset is not categorically embraced within the statutory exemption, then the question is whether, as a factual matter, the particular financial instrument qualifies for the exemption. . . . . Statutory interpretation and whether a particular policy qualifies as a life insurance policy are questions of law subject to de novo review. We do, however, review factual findings for clear error.
Life Insurance Exemption

The pertinent exemption statute states: "Unmatured life insurance policies (including endowment and annuity policies), but not the loan value of such policies, are exempt without making a claim."

As to the first inquiry, the Court determined that, notwithstanding the parenthetical reference to "annuity policies," "single-premium annuities are not included categorically within California’s statutory life insurance exemption." It based this on a prior BAP opinion's "careful statutory analysis" which concluded that the purpose of this parenthetical language was "to clarify that life insurance that includes the essential features of an annuity or endowment policy does not lose its exempt character." But that language apparently did not add annuities to this category of exemptions, which "applies only to life insurance."

On the second inquiry, in response to debtor's argument that the annuity "is actually a life insurance policy," the Ninth Circuit held that a "single-premium annuity that provides a guaranteed stream of income and has no contingencies that can divest the debtor or his beneficiaries of their right to payment is an investment, not a life insurance policy."

To make this determination, the Court looked to the following list of non-exclusive factors from the BAP opinion Turner v. Marshack (In re Turner), 186 B.R. 108, 117 (9th Cir. B.A.P. 1995):
(1) whether the annuity is truly contingent;
2) whether the debtor can accelerate the maturity date;
3) whether the debtor can borrow against the policy;
4) who owns the policy;
5) whether payment of the premium is consistent with an investment or payment;
6) whether the seller was licensed to sell life insurance in the debtor’s state;
7) what, if any, is the opinion of testifying experts;
8) what provisions of the application are also part of the policy; and
9) whether a life insurance policy in the debtor’s state must contain a death benefit.
The Ninth Circuit held that the BAP did not err in concluding that, based on the bankruptcy court's findings, the debtor's annuity was not a life insurance policy. The BAP had focused on six of the above factors, determining that the annuity is not life insurance because:

  • "the payments under the . . . Annuity are not contingent upon debtor's life" (above factor 1);
  • the "Annuity does not allow for the debtor to accelerate the maturity date" (factor 2);
  • the "Annuity . . . does not allow the debtor to borrow against it" (factor 3);
  • “[i]nstead of creating an immediate estate for the benefit of others, the annuitant [reduced his] immediate estate in favor of future contingent income." (factor 4);
  • the "limited death benefits do not change the fundamental purpose of the . . . Annuity — to provide the debtor with fixed, periodic payments for life or a stated period of time, without requiring his death to trigger [the annuity obligor]’s obligation to pay" (factor 5); and
  • the annuity obligor was"authorized to sell life insurance . . .[but this is] not dispositive as to whether the annuity contract qualifies as life insurance . . .." (factor 6)
The only "death benefit" of the annuity was that upon debtor's death his beneficiaries would not have to pay the 10% early-surrender penalty and received an accelerated vesting of accrued interest; "those features do not change the 'fundamental purpose' of the . . . Annuity."

"Private Retirement Plan"
The pertinent exemption statute states:
All amounts held, controlled, or in process of distribution by a private retirement plan, for the payment of benefits as an annuity, pension, retirement
allowance, disability payment, or death benefit from a private retirement plan are exempt.
To be a "private retirement plan," the asset must fit into one of the following definitions:
(1) Private retirement plans, including, but not limited to, union retirement plans.
(2) Profit-sharing plans designed and used for retirement purposes.
(3) Self-employed retirement plans and individual retirement annuities or accounts provided for in the Internal Revenue Code of 1986.

Starting again with the first inquiry, the Court asked if under this statute a single-premium annuity would "categorically" fit under the the term, "private retirement plan." It reviewed California case law, which did not directly address whether a single-premium annuity would qualify as a private retirement plan, observing that not a single one of the appellate decisions interpreting the term did so "to include independent retirement investments." From this the Court inferred that such annuities would not "qualify categorically under California law as a private retirement plan."

And on the second inquiry, whether this particular annuity qualifies for the exemption, the debtor argued that it was a private security plan under subsection (1) above "because he subjectively intended to use it as one." But the Court cited an earlier Ninth Circuit opinion, Lieberman v. Hawkins (In re Lieberman), 245 F.3d 1090, (9th Cir. 2001) to determine that "debtor's subjective intent for or use of the asset is irrelevant to this analysis." That same earlier opinion held that "private retirement plans" under subsection (1) applied "only to retirement plans set up by private employers, 'not by individuals acting on their own, outside the employment sphere.' " As such, debtor's annuity here did not qualify as a "private retirement plan"


by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Monday, March 2, 2009

Ch. 13 Debtor Living in Tri-Plex Can Claim A Homestead AND Cram Down his Mortgage Holder's Claim As Not "Secured Only by Debtor's Principal Residence"


By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,
Andy@BLSforAttorneys.com

In re Melvin Hight Grimes
Bankruptcy Court for the District of Oregon, Case No. 08-34275-rld13
Unpublished Memorandum Opinion
February 5, 2009


Although unpublished,Judge Dunn's memorandum opinion is worth a look because it provides a handy review of two superficially similar concepts--the "homestead" for exemption purposes and "real property that is the personal residence" for mortgage cramdown purposes--and explores the interplay between the two. The seemingly counterintuitive conclusion that a residence can be a "homestead" while it not a "principal residence" is here made sensible.

The Issues
1) Under § 1322(b)(2) can a Chapter 13 Debtor, Grimes, owner of a triplex who lives in one of the units and rents out the others, modify the rights of Countrywide, its mortgage holder, because the mortgage is secured by more than "only" an interest in his "personal residence"?
2) If so, can Grimes nevertheless claim a homestead exemption in the triplex?

The Answers
Judge Dunn said: If Grimes brought the triplex for investment and income purposes, and the documentation and other evidence so reflects, even if he subsequently moved into one of the units while continuing to rent out the others, the mortgage holder's interest is secured by a security interest in property that is overall income-producing and therefore not "secured only" by an interest in Grimes' "principal residence." And since he lives there, he can claim a homestead, and there is nothing in § 1322(b)(2) or the rest of the Code saying that he cannot.

The Essential Facts

Grimes bought a triplex in 2006 for investment and rental income purposes, while living in a single family residence. The trust deed for the triplex contained an occupancy provision requiring him to "occupy, establish, and use the . . . Property as [his] principal residence . . . unless Lender otherwise agrees in writing." The trust deed contained a "Rider" which deleted this occupancy provision, and added a requirement for rent loss insurance plus an assignment of rents.He could not maintain the payments on his residence, surrendered it to the lender, moved to one of the triplex units, and in 2008 filed this Chapter 13 case.

"Principal Residence"

Section 1322(b)(2) allows a chapter 13 plan to
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 . . ..
Judge Dunn ruled that the evidence showed that Grimes purchased the triplex for investment and rental income purposes. This evidence included Grimes' unrefuted testimony, and the documentation in the trust deed "Rider" deleting the occupancy provision from the trust deed and adding provisions pertaining to the rental income.

The judge relied greatly on an opinion of Judge Radcliffe, In re McVay, 150 B.R. 254 (Bankr. D. Or. 1993) to refute the creditor's argument that Grimes can't avoid having the triplex be considered his "principal residence" for § 1322(b)(2) purposes because he claimed the triplex for his homestead exemption. The Chapter 13 debtors in McVay owned property that was both their bed and breakfast business and their residence. As Judge Dunn characterized the lender's argument in that case: "If the debtors claimed a homestead exemption in the Property, it should be considered their principal residence, with the result that modification of the Loan would be precluded." To the contrary, Judge Radcliffe held that in the context of mixed use properties, the appropriate focus is "upon the actual use of the property to produce income." Since § 1322(b)(2) restricts modification only when a secured claim is secured ONLY by a security interest in "debtor's principal residence," when the security interest is also in income-producing property, then that secured claim can be modified. "[C]onsistent with In re McVay, [Judge Dunn] conclude[d] that Mr. Grimes is not precluded by § 1322(b)(2) from modifying the treatment of Countrywide’s secured claim in his chapter 13 plan."

Homestead Exemption

As to whether Grimes could claim a homestead exemption in the triplex even if it is not his "principal residence" for cramdown purposes, Judge Dunn held that:

1) The heart of the issue was that the standards are very different for determining a) whether a debtor may claim a residence as a homestead and b) whether or not that real estate is a "principal residence" as to mortgage modification. The former is based on Oregon statutory and case law, requiring, for example, that it be "interpreted liberally." "Nothing in § 1322(b)(2) or in any other provision of the Bankruptcy Code precludes a debtor from claiming a homestead exemption in real property with respect to which secured claims can be modified in a chapter 13 plan."

2) Practically speaking here, Countrywide's secured claim was being crammed down to the value of the triplex, with the result that there is still no equity to which a homestead exemption could attach. And Judge Dunn dismissed any potential future benefit from Grimes from his claimed homestead exemption to be "purely speculative, with no support in the evidentiary record before me."

3) And finally, Countrywide lost procedurally: its failure for having raised its objection to the homestead exemption by 30 days after the § 341(a) meeting resulted in its waiver of it objection pursuant to Federal Rule of Bankruptcy Procedure 4003(b).



by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys