Courts Hopelessly Split on Modifying Mortgages on Mixed-Use Residential Properties
Until the Supreme Court speaks, courts at all levels will remain hopelessly split on the ability of debtors in chapters 11 and 13 to modify mortgages securing properties that are the debtors’ principal residences but also generate commercial income.
Bankruptcy Judge Beth A. Buchanan of Cincinnati collected authorities on all sides of the two major questions: (1) May a debtor modify a mortgage on mixed-used property; and (2) what is the date for determining the property’s use?
The questions are identical in chapters 11 and 13 under Sections 1123(b)(5) and 1322(b)(2). The statutes provide that a “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 . . . .”
The debtors in Judge Buchanan’s case had operated a daycare business in their home for 21 years. The property included a separate building that the debtors had been renting for three years at $600 a month. The mortgage lender had objected to their chapter 13 plan, which would have modified the mortgage. Judge Buchanan sustained the objection in her September 25 opinion, ruling that the debtors could not modify the mortgage, even though the property had longstanding commercial use.
Judge Buchanan first addressed the question of whether a debtor may modify a mortgage on a mixed-use property. She said that the First and Third Circuits and a majority of courts have adopted a bright-line rule allowing modification of a mortgage if residential property also has commercial use. However, the courts reached their conclusions by employing different logic: The First Circuit followed the plain language of the statute, while the Third Circuit analyzed legislative history.
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