The mortgagor obtained a mortgage on her property in exchange for a security deed, which required her to “occupy, establish, and use the property as her principal residence.” Additionally, the security deed gave the bank the power to foreclose if the mortgagor defaulted. Afterward, the mortgagor defaulted and filed for Chapter 11 bankruptcy. Thus, under 11 U.S.C. § 362(a), an automatic stay was triggered, preventing creditors from enforcing debts owed. The bank requested relief from the automatic stay to foreclose on the mortgagor's property. The bank argued that the mortgagor’s reorganization plan could not be confirmed because of the anti-modification provision of 11 U.S.C. § 1123(b)(5), which provides that a reorganization plan may not modify “a claim secured only by a security interest in real property that is the debtor’s principal residence.” Case law establishes that “the security interest must be in real property… the real property [must] be the only security for the debt…[and] the real property must be the debtor’s principal residence.” In re Wages, 508 B.R. 161, 165 (B.A.P. 9th Cir. 2014). The mortgagor argued that this provision was inapplicable because the property was “primarily farmland," and their residence only took up a minute section of the property. However, the bankruptcy court concluded that 11 U.S.C. § 1123(b)(5) did not require the mortgagor to use the entire property as her principal residence. The mortgagor appealed to the district court, arguing that the bank should not have been granted relief from the automatic stay because “the anti-modification provision ‘does not apply to mixed-use properties where the debtor resides in part of the property and derives business income from other parts of the property.’” The district court affirmed the bankruptcy court's decision, and the mortgagor appealed to the United States Court of Appeals for the Eleventh Circuit. The court had to determine whether the anti-modification provision applied to the bank’s security interest.
In Lee v. United States Bank N.A., 102 F.4th 1177 (11th Cir. 2024), the appellate court affirmed the district court’s ruling. The court found that the anti-modification provision was applicable because the bank’s interest was secured in the mortgagor’s property, there was no additional security, and the property was the mortgagor’s principal residence. 11 U.S.C. § 1123(b)(5). The mortgagor advanced two alternative approaches that would have rendered the provision inapplicable. First, the court rejected what has been referred to as the “Scarborough” approach (which required that property be used exclusively as a primary residence, nothing else) adopted by some other courts. Instead, it adopted a plain-meaning interpretation of the statute. It determined that an ordinary reader would not understand the word “is” to mean “only or exclusively” when used in the phrase “real property that is the debtor’s principal residence.” 11 U.S.C. § 1123(b)(5). Further, the court reasoned that “is” is a conjugated form of “be,” which means “to belong to any given class or group, or to have exhibited a given quality or characteristic.” Webster’s II New Riverside Dictionary 159. The court also reasoned that having an “equal meaning or identity does not mean the thing being described only or exclusively has that meaning or identity and no other.” Furthermore, the court cited amendments by Congress defining “‘debtor’s principal residence to include ‘incidental property,’” which rejects the Scarborough exclusivity approach. Second, the court rejected a totality-of-the-circumstances approach, which looks to the “‘predominant character of the transaction and what the lender bargained within the scope of its lien’ so that the court may classify property as ‘commercial property’ or ‘real property’ used as the debtor’s residence.’” The court found that the approach was not “grounded in the language of 11 U.S.C. § 1123(b)(5).” Ultimately, the court concluded that the requirements were met for the anti-modification provision to apply and affirmed the lower court’s decision to grant the bank relief from the automatic stay.
By Jace Brown: [email protected]
Edited By Maycee Redfearn: [email protected]
Edited By Ashley Boyce: [email protected]
Edited By Hayden Mariott: [email protected]