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,

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Unpublished Memorandum Opinion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Although unpublished,Judge Dunn's memorandum opinion is worth a look because it provides a handy review of two superficially similar concepts--the "homestead" for exemption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
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