In re: Boardman, No. 10-12656 (Bankr. ND Calif., February 7, 2011).
In this case, a California bankruptcy weighed in on whether a debtor may modify the rights of a creditor secured by a mortgage in the debtor's personal residence. Where a residence is also a source of income, does it fall within this rule? The court was the first to answer the question in the 9th Circuit.
Generally, in a Chapter 13 bankruptcy, section 1322(b)(2) precludes a debtor from modifying or lowering a creditor's right to payment for a loan secured "only by a security interest in property that is the debtor's principal residence." However, when a the property at issue is used not just as a principal place of residence, but as a source of income from rent, other circuits have held that section 1322(b)(2) does not apply to prevent modification of the claim.
Here, the debtors owned a property with two independent homes resting on it - one in which the debtors resided, and the other which they rented out for income. The debtors attempted to modify the bank's claim of $629,000, so that the bank would be paid the amount of $400,000, which the debtors claimed was the value of the home. The bank in this case contested the above position that their claim was modifiable, but not because they disagreed with the position of the court on 1322(b)(2). Instead, the bank argued that the debtors were estopped, or prevented, from denying that there was only one home on the property because their loan application recited that they had no rental income from the property. The court, however, was unconvinced by the argument, reasoning that the debtors did not intend to deceive the bank, and that there is no evidence that they would not have lent to the debtors had they known they would rent out the other home on the property.
However, the court did hold that the debtor's plan, as proposed, did not meet the requirements of section 1325(a)(5)(B)(i)(I) of the code. This section requires that the holder of a secured claim retain its lien until the full amount of its debt under nonbankruptcy law has been paid or the Chapter 13 discharge is entered. The debtor's plan, the court held, was to convey the deed to the debtors and release the debtors of the lien after they would be paid the $400,000 value of the home, and this violates section 1325(a)(5)(B)(i)(I).
For this reason, the debtor's plan had to be denied confirmation, but the underlying holding that a debtor who rents out another residence on his property may modify that loan amount in Chapter 13, while a lender with only a single-family home or who does not rent out the other properties cannot modify that loan.
