Opinion ID: 202689
Heading Depth: 2
Heading Rank: 1

Heading: The Bankruptcy Court's Orders

Text: On appeal from a district court's review of a bankruptcy court decision, we review the bankruptcy court's legal conclusions de novo and its factual conclusions for clear error. Brandt v. 8 Bankruptcy Rule 9024 makes Rule 60(b) applicable in bankruptcy. -8- Repco Printers & Lithographics, Inc. (In re Healthco Int'l Inc.), 132 F.3d 104, 107 (1st Cir. 1997). Eastern's appeal from the bankruptcy court's orders raises three issues: whether the bankruptcy court correctly interpreted § 1322(b)(2) of the Bankruptcy Code as allowing bifurcation here; whether Eastern was allowed a reasonable opportunity to object to the valuation of the Jasper Lot collateral; and whether the bankruptcy court correctly applied the burden of proof.9
Section 1322(b)(2) of the Bankruptcy Code states that a Chapter 13 plan may: 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, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims. 11 U.S.C. § 1322(b)(2). Prior to Nobelman v. American Savings Bank, 508 U.S. 324 (1993), there was some disagreement among the circuits as to whether § 1322(b)(2) allowed for bifurcation of undersecured homestead mortgages, such as the one at issue here. See, e.g., Bellamy v. Fed. Home Loan Mortgage Corp. (In re 9 Eastern also raises a fourth issue: whether the bankruptcy court properly relied on Eastern's failure to attempt to reform the mortgage when it allowed the bifurcation. That rationale is only relevant in the case where the Debtor owns the Enfield Lot -- which he does not. Therefore, we do not consider the issue, nor do we place any weight on it in our analysis of the bifurcation issue. -9- Bellamy), 962 F.2d 176, 179 (2d Cir. 1992) (holding that § 1322(b)(2) only prohibits modification of the secured claim, but that the existence and size of the secured claim must be determined according to § 506(a)). In Nobelman, the Supreme Court held that § 1322(b)(2) barred modification of the entire claim -- secured and unsecured portions -- if the claim is secured by the debtor's principal residence.10 508 U.S. at 332. Therefore, in the instant case, if Eastern's claim is secured by the Debtor's principal residence, then the claim cannot be modified by bifurcating it into secured and unsecured claims, even though the value of the security is roughly one-tenth the value of the claim. Despite mistakenly believing that the Debtor owned the Enfield Lot, the bankruptcy court did still rule on this question under the correct set of facts. Ironically, this confusing case is helped somewhat by confusion on a related issue: should a court make the determination of what is the debtor's primary residence 10 Justice Stevens explained the policy behind § 1322(b)(2): At first blush it seems somewhat strange that the Bankruptcy Code should provide less protection to an individual's interest in retaining possession of his or her home than of other assets. The anomaly is, however, explained by the legislative history indicating that favorable treatment of residential mortgagees was intended to encourage the flow of capital into the home lending market. Nobelman, 508 U.S. at 332 (Stevens, J., concurring). -10- for purposes of § 1322(b)(2) at the time of the mortgage, the time of the petition for bankruptcy protection, or some other time? Compare In re Smart, 214 B.R. 63, 68 (Bankr. D. Conn. 1997) (mortgage date), with In re Wetherbee, 164 B.R. 212, 215 (Bankr. D.N.H. 1994) (petition date); see also GMAC Mortgage Corp. v. Marenaro (In re Marenaro), 217 B.R. 358, 360 (B.A.P. 1st Cir. 1998) (noting the uncertainty). Because the issue is not settled, the bankruptcy court analyzed the applicability of § 1322(b)(2) from both the mortgage date and the petition date.11 The un-transferred deed from Ness to the Debtor was dated after the Debtor mortgaged the property to Eastern. Therefore, at the time of the mortgage, the Debtor owned the Jasper Lot and did not claim to own the Enfield Lot. In analyzing the applicability of § 1322(b)(2) at that point in time, the bankruptcy court said that: the Bank had and continues to have a mortgage on the [Jasper Lot] which is burdened with an encroachment. Assuming without deciding that the physical presence of a significant amount [of] the residence on the [Jasper Lot] would be sufficient to bring the [Jasper Lot] within the rubric of primary residence, [Eastern] has failed to prove that an eight to ten foot encroachment is the main part, the principal part, or even an important part of the Debtor's residence. Indeed, from the pictures provided to the Court by the Debtor, it 11 Because in fact the ownership did not change between the time of the mortgage and the time of the petition, the issue of what point in time to determine the principal residence is not relevant to this appeal. -11- appears that the encroachment may only be an unenclosed deck. This is not a situation where a mortgagee has a lien on the primary residence that is comprised of two separately deeded parcels and the debtor is attempting to sell the unimproved lot. This is a case where the Bank did not take a mortgage on the improved lot. To hold that the Bank has a mortgage on the primary residence when admittedly it does not hold a mortgage on the [Enfield Lot] is akin to the tail wagging the dog. Eastern does not challenge the bankruptcy court's finding that the encroachment is not the main part, the principal part, or even an important part of the residence. Therefore, the question before us is whether even some nominal encroachment by a debtor's principal residence on a mortgaged property will trigger the antimodification protections of § 1322(b)(2). We hold that it does not. We begin with the language of the statute. See Consumer Prod. Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980) (the starting point for interpreting a statute is the language of the statute itself). The key phrase in the statute is secured only by a security interest in real property that is the debtor's principal residence. 11 U.S.C. § 1322(b)(2). Eastern argues that the statute is satisfied as long as the debtor resides on the mortgaged property. But that simply begs the question of what constitutes residing when a party actually resides mostly on the -12- adjacent property.12 The text of the statute provides little help in answering this question. See Lomas Mortgage, Inc. v. Louis, 82 F.3d 1, 4 (1st Cir. 1996) (finding the text of the statute ambiguous as to whether § 1322(b)(2) bars modification of a mortgage secured by a multi-family dwelling). In Lomas, we also reviewed the legislative history of § 1322(b)(2), which we do not repeat here. See id. at 4-6. In that case, we noted that the most that could be said of the legislative history was that Congress wanted to benefit the residential mortgage market as opposed to the entire real estate mortgage market. Id. at 5. The concern was that without these protections, mortgage lenders would be too conservative in their lending. Id. This dovetails with Justice Stevens's concurrence in Nobelman, where he notes that § 1322(b)(2) was intended to encourage the flow of capital into the home lending market. 508 U.S. at 332 (Stevens, J., concurring). This policy of preferring mortgage lenders to other lenders in bankruptcy does not necessarily extend to those cases where the lender has failed to exercise reasonable due diligence, 12 Eastern's argument here is that the Debtor should be estopped from denying his judicial admission that he resides at, in the Debtor's words, 26 Jasper St. This is without merit. First, the record is clear that his residence has a street address of 26 Jasper St., even if the majority of the house actually lies on the Enfield Lot. Second, there is no dispute that this house is, indeed, his principal residence. The question is only whether enough of that principal residence lies on the Jasper Lot to trigger § 1322(b)(2). -13- however. Congress's concern is with a well-functioning home lending market, and that market depends in part on mortgage lenders working with due diligence to minimize risk for themselves, and the mortgage market in general. The problem Eastern faces here is as a result of its own failure to properly examine the title to the Jasper Lot before taking the mortgage from the Debtor.13 Had it done so, it would have found the cloud on the title and dealt with it accordingly. We see no reason why § 1322(b)(2) should be used to correct this error. We and other courts have interpreted § 1322(b)(2) narrowly, even after the Nobelman decision. See, e.g., Scarborough v. Chase Manhattan Mortgage Corp. (In re Scarborough), 461 F.3d 406, 411 (3d Cir. 2006) (§ 1322(b)(2) does not bar modification where claim secured by multifamily dwelling, and noting policy of reading § 1322(b)(2) literally and narrowly); Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220, 1226-27 (9th Cir. 2002) (§ 1322(b)(2) does not bar modification where claim is wholly unsecured because of prior lien on primary residence); In re Mann, 13 We understand that the diligence is often delegated to other parties, and that the risk of situations like this are usually covered by title insurance policies. For whatever reason, those systems broke down here. Regardless of whether Eastern may have claims against other parties, it nonetheless must still bear the primary loss for that breakdown. Cf. Focus Inv. Assocs., Inc. v. Am. Title Ins. Co., 992 F.2d 1231, 1236 (1st Cir. 1993) (collecting cases holding that mortgagees and other title insurance holders cannot recover their loan losses from title insurance companies on the basis of a negligent title search by the insurer). -14- 249 B.R. 831, 835-37 (B.A.P. 1st Cir. 2000) (same, and collecting cases); Lomas, 82 F.3d at 4. The policy of encouraging mortgage lending does not require § 1322(b)(2) to be interpreted expansively. Indeed, if we were to allow Eastern's more expansive reading of § 1322(b)(2) here, we could face cases in the future of lenders seeking its protection even when they had never intended to lend against a debtor's principal residence. For example, suppose Eastern and the debtor had a different mistaken belief at the time of the mortgage: that the residence was entirely on the unmortgaged Enfield Lot, not the Jasper Lot. Under such circumstances, where Eastern intended to take a mortgage only on the undeveloped lot, should it be allowed then to claim the benefits of § 1322(b)(2) upon discovering that the residence actually encroached on the mortgaged property? The policy behind § 1322(b)(2) would not be served, since Eastern would not have taken the mortgage as a home lender. But the arguments that Eastern has presented here would be equally as applicable in that situation; the mortgaged property would be just as much the Debtor's principal residence as it is in the instant case. The only difference we can see is that the parties had intended the loan in this case to be a home mortgage loan when it was granted. But the statute is silent as to intent and as to type of mortgage; it asks only the objective question of whether the mortgaged property is the debtor's principal residence. Furthermore, we -15- are loath to create a rule that would require courts in the future to have to inquire into the parties' subjective beliefs as to whether a particular mortgage of real property was intended to be a home mortgage or not, especially when the costs of an alternative rule are small and contained. Our ruling today does no more than say that the antimodification provisions of § 1322(b)(2) will not apply if the debtor's principal residence only encroaches on the mortgaged property.14 Lenders can easily avoid this if they do what they have always had the responsibility to do: perform proper due diligence, title examination, and, if necessary, a land survey. The result of our holding is, of course, a windfall for the Debtor. If the facts were as he believed them to be when he took the mortgage loan, he would not be able to strip the loan down by over $100,000. But if we held in Eastern's favor, there would instead be a windfall for the bank. This is not a case where a lender has watched the value of its collateral go down gradually until it is worth less than the loan. Here, the property was never worth as much as Eastern's loan. If it had foreclosed the day after granting the loan, it would have received roughly the same as it receives now: collateral worth $18,500 and an unsecured claim for the balance of the loan. 14 We have no view on the question of how much of a residence must be on the secured property for it to no longer be an encroachment, except to say that it is more than appears in this case. -16- Given its lack of due diligence, we see no reason why the result should be otherwise.15
Eastern also claims that it did not receive adequate notice of an intent to value the collateral. It raises this argument because it failed to object during the valuation hearing, and ordinarily that means that the Debtor's valuation is upheld by default. See Enewally v. Wash. Mut. Bank (In re Enewally), 368 F.3d 1165, 1173 (9th Cir. 2004); In re Brown, 244 B.R. 603, 611 (Bankr. W.D. Va. 2000); see also Campos-Orrego, 175 F.3d at 95 (issues raised for the first time on appeal are deemed waived). It justifies its lack of objection by saying that it never had the notice due under Bankruptcy Rule 3012 that an evidentiary hearing on valuation was going to take place. Bankruptcy Rule 3012 states: The court may determine the value of a claim secured by a lien on property in which the estate has an interest on motion of any party in interest and after a hearing on notice to the holder of the secured claim and any other entity as the court may direct. Eastern cites the case of Piedmont Trust Bank v. Linkous (In re Linkous), 990 F.2d 160 (4th Cir. 1993), for the proposition that, 15 Eastern also argues that the Debtor should be viewed as holding an easement on so much of the Enfield Lot upon which the Debtor's house sits. It says that this would essentially bring all of the house under the mortgage on the Jasper Lot. Because Eastern raises this argument for the first time on appeal, it is deemed waived. Campos-Orrego v. Rivera, 175 F.3d 89, 95 (1st Cir. 1999). -17- in order to satisfy the rule, the court must provide creditors with specific notice that a § 506 valuation hearing is to be held. Id. at 162-63. However, there is some split of authority, with courts in this circuit and others holding that the filing of a Chapter 13 plan is sufficient notice of an intent to strip down and revalue collateral, and no separate motion or hearing is required. See Curtis v. LaSalle Nat'l Bank (In re Curtis), 322 B.R. 470, 481 (Bankr. D. Mass. 2005); McDonough v. Plaistow Coop. Bank (In re McDonough), 166 B.R. 9, 14 (Bankr. D. Mass. 1994); Lee Servicing Co. v. Wolf (In re Wolf), 162 B.R. 98, 107-08 (Bankr. D.N.J. 1993). However, even assuming that the specific notice that Linkous calls for is required in this circuit, it was provided. The hearing that was held on November 23, 2004, covered, in part, the Debtor's motion for secured status under 11 U.S.C. § 506, and Eastern had notice that that was to be the subject. The hearing was described as nonevidentiary, but, Eastern argues, the hearing implicitly became evidentiary, without notice, because the court expected Eastern to provide evidence to refute the Debtor's valuation of the Jasper Lot. At the hearing in question, the bankruptcy judge made very clear that, if valuation were in dispute, then an evidentiary hearing would be necessary. He said that the issue would be decided as a matter of law, without a separate evidentiary hearing, -18- so long as the valuation was unopposed by Eastern. Eastern then argued the legal issue of the interpretation of § 1322(b)(2), but did not argue the actual valuation of the Jasper Lot. At the end