Petition Date Controls Property-Use Determination

Posted by NCBRC - May 23, 2018

An addition to the debtor’s residential property, which he constructed post-mortgage and pre-bankruptcy petition and which he used as a rental unit, made the property multi-use and rendered the anti-modification provision inapplicable. In re Berkland, No. 17-10821 (Bankr. D. Mass. April 6, 2018).

Kenneth Berkland took out a mortgage to purchase his residential property. He later built an addition to the property to be used rent-free by his in-laws. His brother-in-law later moved in and paid $300 per month in rent. At the time he filed for chapter 11 bankruptcy, the value of his property was less than the amount owed on his mortgage and he sought to strip down the debt into secured and unsecured portions under section 1123(b)(5), a provision that mirrors section 1322(b)(2). The servicer for the mortgagee, Specialized Loan Servicing, LLC,  objected on the basis that the property was subject to the anti-modification provision applicable to debt secured “only by” the debtor’s residence.

The court found the chapter 13 case of Lomas Mortgage, Inc. v. Louis, 82 F.3d 1 (1st Cir. 1996) to be controlling as that case, in interpreting section 1322(b)(2), relied in part on analysis of the identical language in section 1123(b)(5).

The court began with the question of whether Mr. Berkland’s use of the property was solely for his own residence, as required by the anti-modification provision, and found that it was not. The court was persuaded that it was multi-use property by the facts that the addition was wholly separate from Mr. Berkland’s residential area and had its own kitchen, living room, bathroom, bedrooms, and entrance. Furthermore, because Mr. Berkland’s brother-in-law paid rent, the property was income-producing. The court rejected Specialized’s arguments that because the tenants were members of Mr. Berkland’s family the property was not being used for commercial purposes, and that the rent paid by his brother-in-law was “nominal.”

Specialized next argued that even if the property were found to be multi-use at the time of the bankruptcy, it was solely the debtor’s residence at the time he took out the mortgage, and that is the point that is relevant to the application of section 1123(b)(5). The court disagreed. In the absence of controlling law in the circuit, it joined its sister courts in finding that the time of filing for bankruptcy was the relevant point for determining the nature of the secured property. It found support for this conclusion in the language of the statute which refers to the “claim” and whether the property “is” solely the debtor’s residence. “Claim” has no relevance outside the bankruptcy context and the present tense “is” relating to the debtor’s use of the property suggests that Congress intended the point of filing for bankruptcy to be the determinative time.

Finally, the court rejected Specialized’s estoppel argument that Mr. Berkland should be bound by his declarations at the time of taking on the mortgage that the property was intended for his residence. As an initial matter, Specialized did not raise this point until late in the proceedings and therefore forfeited it altogether. Even had it not foregone the argument, however, the court found it unpersuasive. There was no evidence that when Mr. Berkland represented his intention to use the property solely as his residence that that was untrue, nor did he make any promise not use it as partially rental property at some later date.

The court thus granted Mr. Berkland’s motion to modify the rights of the mortgage holder in his chapter 11 plan.

Berkland Bankr Mass April 2018


Post a Comment

You must be logged in to post a comment.