Although most secured claims can be modified in bankruptcy, claims “secured only by a security interest in property that is the debtor’s principal residence” cannot be modified in individual cases in Chapter 13 and in many Chapter 11 cases. Moreover, these claims may only be modified in subchapter V of Chapter 11 if the loan was used “primarily in connection with the small business of the debtor” and was not used to purchase the property. For that reason, determining whether the claim is secured by “the debtor’s principal residence” is an extremely important determination. “Principal residence” is defined in the Bankruptcy Code to mean “a residential structure if used as the principal residence by the debtor, including incidental property, without regard to whether that structure is attached to real property.” 11 U.S.C. § 101(13A)(A). “Incidental property” is defined in section 101(27B) of the Bankruptcy Code to mean “with respect to a debtor’s principal residence-
(A) Property commonly conveyed with a principal residence in the area where the real property is located;
(B) all easements, rights, appurtenances, fixtures, rents, royalties, mineral rights, oil or gas rights or profits, water rights, escrow funds, or insurance proceeds, and
(C) all replacements or additions.
Here, the court was asked to construe 11 U.S.C. § 1123(b)(5), which applies to individual Chapter 11 debtors whose case is not under subchapter V. The debtor, a Georgia resident, had one large 43-acre parcel of property. The debtor’s principal residence was a small house on two and one-half acres of the property. However, the debtor leased the rest of the property to a farming company that had consistently farmed the land. The debtor sought to modify the mortgage on the property. Both the bankruptcy court and the district court held that the mortgage could not be modified and that the automatic stay could be lifted to allow the lender to foreclose on the property.
In Lee v. United States Bank Nat'l Ass'n, 102 F.4th 1177 (11th Cir. 2024), the Eleventh Circuit Court of Appeals affirmed the orders of the lower court in a decision that is favorable to lenders. Disagreeing with other courts, the Eleventh Circuit focused on the word “is” and held that because the property “is” the debtor’s principal residence, the mortgage could not be modified. It noted that the Bankruptcy Code includes “incidental property in the definition of “principal residence” and held that the farmland came within that definition. The court set forth its test: " ‘[f] irst, the security interest must be in real property; second, the real property must be the only security for the debt; and third, the real property must be the debtor's principal residence.” In re Wages, 508 B.R. 161, 165 (B.A.P. 9th Cir. 2014). Because the mortgage [the bank] held on . . . Lee's real property met these three requirements, the bankruptcy court did not err in concluding that the anti-modification provision applied to the bank's secured claim.”
One judge dissented, disagreeing with the court’s interpretation of the word is and focusing on the definition of “principal residence.”
By: The Editors