Daily Development for
Monday, March 22, 1998
by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
The Reporter for today's DD is Jim Stillman of Murphy, Weir & Butler, Los Angeles
BANKRUPTCY; REORGANIZATION; LOAN SECURED BY PERSONAL RESIDENCE; ADDITIONAL COLLATERAL. The inclusion of "oven, range, washer, dryer and dishwasher" in the boilerplate of a home mortgage does not deprive the loan of its protected status as a claim secured solely by real property that is the debtor's principal residence.
In re Lee, 215 B. R. 22 (9th Cir. BAP 1997).
A secured creditor in a loan "secured solely by real property that is the debtor's residence" enjoys special protection in bankruptcy. Generally speaking, the ordinary loan modification principles applicable to other secured loans do not apply. The debtor is entitled to "payments as usual." In this case, the debtor's plan could not impair the repayment terms of the mortgage or "strip" down its value.
The Bankruptcy Reform Act of 1994 added to Chapter 11 (Section 1123(b)(5)) the same anti-modification language previously available to Chapter 13 lenders under Section 1322(b).
There are two lines of cases, one contending that "any additional security" in the mortgage removes the anti-modification protection (characterized by Lomas Mortgage v. Louis, 82 F.3d 1, 7 (1st Cir. 1996)), and a slightly more generous line, which the Appellate Panel joins, holding that additional security will not cost the lender protected status, so long as the items of property are "inextricably bound" to the real estate or are "an enhancement which is or can, by agreement of the parties, be made a component part of the real property" or are "of little independent value."
Reporter's Comment: The anti-modification language of the Bankruptcy Code is but one example where line-drawing over the inclusion of non-real estate security in real estate mortgages may have consequence. Another is in the case of mixed collateral statutes, such as Cal. Comm Code § 9501(4) -- California's so-called "mixed collateral" foreclosure rule. This section gives the mixed collateral lender substantially easier foreclosure rights in contrast to the strict deficiency-limiting rules applicable to California real estate secured creditors. The statutes, neither Bankruptcy Code nor state law, describe the quantum of additional personal property security that is necessary. "When you take a mortgage in California," CLE panelists quipped after the enactment of Commercial Code § 9501(4), "be sure to take a security interest in the pen the borrower used to sign it."
Editor's Comment: Some cases have found that a home loan lost its protected status when the "boiler plate" included an assignment of rents - which is additional collateral - even though in fact there likely would have been no rents and the language was simply extraneous. Home lenders who value this special protection in bankruptcy must exercise rigid "form control."
There is no point in a home lender trying to figure out whether additional security is "inextricably bound." There is no predicting the result oriented and whimsical interpretations of the bankruptcy courts. The best bet is to stick only to the house and land, and rely on such cases as this one only when the loan officer erroneously used the wrong form.
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