A Three-Way Split on the 1322(b)(2) Antimodification Provision and An Emerging Minority View


The recent passing of Justice Scalia served in part as a reminder of how stark the difference in results may be between a plain language approach to statutory interpretation and one which relies on legislative intent.  Reasonable minds may differ and find equally compelling support for their positions, whether in statutory language, legislative history and Congressional intent, caselaw, or various combinations of them all.  As exercised through courts sitting in equity, bankruptcy law is rife with splits in authority when applied to analogous facts.  These splits are all the more striking when they give rise to multiple approaches.  Perhaps most impressive is the situation currently found in the Western District of New York , where the “antimodification provision” found in Code section 1322(b)(2) is currently the subject of three distinct interpretations in that district alone.

In seeking confirmation of a chapter 13 plan, a debtor may bifurcate a secured claim, potentially “stripping down” the claim to one that is secured up to the value of the underlying collateral, leaving any deficiency, including arrearages, as an unsecured claim.[1]  However, any such treatment of a secured claim is limited by the strictures of, among other Code provisions, those found in Code section 1322 governing the contents of a chapter 13 plan.[2]  For example, pursuant to the 1322(b)(2) antimodification provision, a chapter 13 plan may “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence[.]”[3]  As discussed below, a conflict among courts has arisen when interpreting and applying the antimodification provision in cases where the secured claim at issue is secured by real property that serves only in part as the debtor’s primary residence, and which further contains additional units utilized for rental or other commercial purposes.

Brief History of the Section and Related Provisions  

The section 1322(b)(2) antimodification provision was enacted as part of the Bankruptcy Code of 1978.[4]  As the United States Supreme Court has noted—together with other courts interpreting section 1322(b)—the antimodification provision was enacted amid Congressional debate over how to encourage increased participation by lenders in the residential mortgage market.[5]

A conflict initially arose among Circuit Courts regarding how to reconcile section 1322(b)(2) with Code section 506(a), which led to the Supreme Court granting certiorari on the issue.[6]  In Nobelman, the dispute arose from the treatment of a secured lender’s claim under a proposed chapter 13 plan, where the promissory note at issue was secured by a deed of trust on the debtor’s condominium.  The plan bifurcated the claim into a secured portion based on the uncontroverted value of the property (including arrearages), but left the creditor with a worthless unsecured portion of its claim given that general unsecured creditors were slated to receive no distributions under the plan.[7]  In delivering the opinion of the Court, Justice Thomas explained that the rights and claims of a creditor, although not mutually exclusive, are two singularly discrete concepts.  Because the term “rights” is not defined in the Code, the Court assumed that Congress left the determination of property rights to state law.[8]  A secured creditor’s contractual rights—specifically, those of a lender/mortgagee—are reflected in the mortgage instruments, enforceable under state law, and bargained for by the mortgagor and the mortgagee.[9]  The term “claim,” however, is defined in Code section 101(5) and exists as just one of a creditor’s many rights.  According to the plain language of section 1322(b)(2), a further distinction is made between a “secured claim” and a “claim secured only by a [homestead lien],” the latter of which includes both the secured and unsecured components of the claim.[10]  Under the facts before it, the Court reasoned that the treatment of the secured claim under the proposed chapter 13 plan pursuant to § 506(a) impermissibly sought to modify the creditor’s rights under the section 1322(b)(2) antimodification provision.[11]

A year after Nobelman, the Bankruptcy Reform Act of 1994 added the exact language of section 1322(b)(2) to chapters 11 and 12.  The legislative history of Code section 1123(b)(5) indicates that Congress expressly tracked the antimodification language applicable in chapter 13 cases so that it  may have the same force and effect in a chapter 11 case.[12]  The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) defined a “debtor’s principal residence” as 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[.]”[13]  BAPCPA further clarified the meaning of “incidental property” associated with the debtor’s principal residence to include, among other things, property commonly understood to be conveyed with a principal residence, rent, and all other rights.[14]

Upon this background of statutory enactments, courts since Nobleman have wrestled with what it means to have “a claim secured only by a security interest in real property that is the debtor’s principal residence.”  Specifically, what is the permissible treatment of such a claim when it is secured by real property which includes multiple units, only one of which is the debtor’s principal residence?  In In re Brooks, the bankruptcy court discussed how three distinct, conflicting approaches have been taken in the Western District of New York alone. [15]  In Brooks, the debtor lived in a multi-family home, which served as her principal residence.[16]  The mortgage on her residence included a provision requiring her to occupy the premises, as well as an assignment of rents.[17]  In proposing her chapter 13 plan, the debtor sought to have the property valued pursuant to Code section 506(a), and to ultimately have the secured claim stripped down and provided for in her plan pursuant to section 1322(b)(2).[18]  Before adopting what is currently considered the minority view, Judge Warren discussed the three approaches of the Western District of New York as a reflection of how courts in general have difficulty in agreeing on a uniform interpretation of the antimodification provision.

The “Totality of the Circumstances”

In In re Brunson,[19] Judge Kaplan first articulated the “totality of the circumstances” approach in 1996.[20]  His analysis began with a decision by the First Circuit Court of Appeals, which he agreed with only insofar as it found a plain meaning interpretation of the provision inconclusive, the cases supporting this approach unpersuasive, and the legislative history silent as to the scope of the incentive Congress may have sought to provide home lenders.[21]  However, Judge Kaplan disagreed with the Circuit Court’s bright-line ruling that the antimodification provision does not apply to multi-unit houses where the lender’s lien extends to rental units, thereby limiting its availability to only single-unit residences.[22]  In discussing a variety of factors a court may consider—from whether the debtor owned additional rental property or other potential residences, to the department of the bank from which the loan originated, the demographics of the local housing market, and whether the lender considered potential business uses of the property—Judge Kaplan held that the “Court must focus on the predominant character of the transaction, and what the lender bargained to be within the scope of its lien.”[23]  Although such an approach would be fact-intensive, Judge Kaplan stated, “This Court does not retreat from difficult problems.”[24]

A Bright-Line Rule

Four years later, in In re Kimbell, Judge Ninfo confronted the issue when presented with a debtor who sought to bifurcate a claim secured by a two-family house, where the debtors occupied one unit as their residence.[25]  Although acknowledging the legislative climate at the time section 1322(b)(2) was enacted and seeming to rely on Congressional intent, the Court did not explicitly state that the terms of the provision are ambiguous.  The Court held that multi-unit structures are not protected by the provision as a matter of law, and left any potential impact of such holding to be addressed by Congress, should it choose to do so.[26]  Whereas Judge Kaplan criticized the First Circuit’s earlier conclusions, Judge Ninfo agreed with the Circuit Court’s musing that, “It is unlikely that Congress intended the antimodification provision to reach a 100-unit apartment complex simply because the debtor lives in one of the units.”[27]

The Plain Language Approach

Months later, in In re Macaluso, Judge Bucki set forth yet another interpretation of the antimodification provision in the Western District of New York.[28]  The facts were again similar to those before Judges Kaplan and Ninfo, as the property at issue was comprised of multiple units, including the debtor’s residence, a tailor shop, and an additional apartment.  Judge Bucki found the antimodification provision unambiguous and eschewed any reference to legislative history.[29]  He focused on the term “only”, concluding that the term is an adverb modifying “secured” in the phrase “secured only by a security interest in real property that is the debtor’s principal residence.”[30]  The applicability of the antimodification provision hinged on whether the only collateral securing the claim is a single parcel of real estate, regardless of how many units it may be divided into or however many uses it may have, distinguishing this approach from those cases limiting the provision’s application to property that is used only as a principal residence.[31]  Further adding to the debate over how to interpret the antimodification provision, the Third Circuit Court of Appeals later expounded upon the bright-line rule set forth by the First Circuit and followed by Judge Ninfo, employing a plain language interpretation and reasoning that Congress equated “real property” with “principal residence” when drafting the antimodification provision to read, “real property that is the debtor’s principal residence.”[32]

A Split Worthy of Supreme Court Consideration

The three approaches found in the Western District of New York indicate the issue regarding interpretation of the section 1322(b)(2) antimodification provision is ripe for Supreme Court consideration and clarification.  Judge Kaplan’s “totality of the circumstances” approach hews closely to what similar courts believe honors both Congressional intent, as well as the relative intent of each of the parties entering into the agreement sought to be modified by a chapter 13 plan.  However, just one of the difficulties in discerning the legislative intent behind Code section 1322(b)(2) was highlighted in the Brunson opinion, noting that cases cited to in Congressional floor statements prior to the provision’s enactment are themselves subject to conflicting interpretations.[33]  Opting for a bright-line rule, Judge Ninfo so strongly disagreed with the “totality of the circumstances approach” that he believed “such a fact-finding process is the equivalent, from a practical business perspective when such mortgagees must evaluate risk-reward and cost-benefit in underwriting these mortgages, of a holding that the antimodification provision does not apply.”[34]

Although seemingly preferable on its face, an objective plain language approach is not without its own downfalls.  In adopting the minority, plain language approach, the Brooks Court enunciated a three-pronged approach recently adopted by the Ninth Circuit Bankruptcy Appellate Panel: (i) the mortgagee’s interest must be secured by real property; (ii) the real property must be the only security for the debt; and (iii) the real property must also be the debtor’s principal residence.[35]  An issue arises when determining whether the real property is the only security.  In Brunson, Kimbell, and Brooks, all three Courts made note of whether and to what extent the lender had a lien on rents.[36]  BAPCPA defined “debtor’s principal residence” and clarified “incidental property” as including rents, a concept further supported by the plain language of the Uniform Commercial Code.[37]  However, “incidental property” also includes any “rights,” and according to the Nobelman Court’s concept of this term, the second prong of the plain language approach may be viewed as so broad that it swallows itself whole, making it a nullity.

As Judge Warren made clear in his Brooks opinion, absent a higher court ruling otherwise providing guidance, lower courts remain compelled to independently interpret the antimodification provision,[38] implicitly compelling the Supreme Court to take up the issue.


[1]   See generally 11 U.S.C. § 506(a) (2016) (providing for a claim secured by a lien on property of the estate to be allowed as “a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property[.]”).

[2]   11 U.S.C. § 1322 (2016).

[3]   See 11 U.S.C. § 1322(b)(2) (2016).

[4]   See generally, Lomas Mortgage v. Louis, 82 F.3d 1, 4–6 (1st Cir. 1996) (providing thorough explication of section’s history).

[5]   Nobelman v. Am. Savs. Bank, 508 U.S. 324, 332 (1993) (Stevens, J., concurring) (citing to Grubbs v. Houston First Am. Savs. Ass’n, 730 F.2d 236, 245–46 (5th Cir. 1984)).

[6]   Nobelman, 508 U.S. at 326–27.

[7]   See id. at 326–27.

[8]   See id. at 329 (citing to Butner v. United States, 440 U.S. 48, 54–55 (1970)).

[9]   Id. at 329–30.

[10]   Id. at 331.

[11]   Id. at 331.

[12]   See Lomas, 82 F.3d at 6 (citing to H.R. Rep. No. 835, 103d Cong., 2d Sess. 46 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3354).

[13]   See 11 U.S.C. § 101(13A) (2016).  Although the 2010 amendments altered the definition, and would thus impact the antimodification provision, Congress did not intend to enact any substantive change to the Code.  See 156 Cong. Rec. H8535 (daily ed. Dec. 16, 2010) (statement of Rep. McHenry).

[14]   See 11 U.S.C. § 101(27B) (2016).

[15]   In re Brooks, No. 15-21393 (Bankr. W.D.N.Y. Apr. 15, 2016).

[16]   Op. at 1.

[17]   Op. at 2.

[18]   Op. at 1.

[19]   Brunson v. Wendover Funding (In re Brunson), 201 B.R. 351 (Bankr. W.D.N.Y. 1996).

[20]   Brunson v. Wendover Funding (In re Brunson), Adv. Pro. No 96-1084 K, 201 B.R. 351 (Bankr. W.D.N.Y. 1996).  Although accredited with developing the approach, the Brunson Court did not adjudicate the applicability of the provision to the facts, yet rather denied the cross-motions for judgment pending an evidentiary hearing consistent with the decision.  Id. at 354.

[21]   Id. at 352–53 (citing to Lomas Mortgage v. Louis, 82 F.3d 1 (1st Cir. 1996)).

[22]   Id. at 353.

[23]   Id. at 353–54; see also Litton Loan Servicing, LP v. Beamon, 298 B.R. 508 (N.D.N.Y. 2003) (following Brunson); In re Zaldivar, 441 B.R. 389 (Bankr. S.D. Fla. 2011) (same).

[24]   Brunson, 201 B.R. at 352.

[25]   In re Kimbell, 247 B.R. 35 (Bankr. W.D.N.Y. 2000).

[26]   See id. at 37–38.

[27]   Id. at 37, n. 4 (citing to Lomas, 82 F.3d at 6).

[28]   In re Macaluso, 254 B.R. 799 (Bankr. W.D.N.Y. 2000).

[29]   Id. at 799.

[30]   Id.

[31]   See id.

[32]   See Scarborough v. Chase Manhattan Mortg. Corp. (In re Scarborough), 461 F.3d 406, 414 (3d Cir. 2006).

[33]   See Brunson, 201 B.R. at 352–53 (discussing First Circuit gleaning bright-line rule from case Court cites to in holding “totality of the circumstances” is proper approach) (citing to In re Ramirez, 62 B.R. 668 (Bankr. S.D. Cal. 1986)).

[34]   Kimbell, 247 B.R. at 38, n. 5.

[35]   See Brooks, Op. at 7 (citing to Wages v. J.P. Morgan Chase Bank, N.A. (In re Wages), 508 B.R. 161, 167 (B.A.P. 9th Cir. 2014), aff’g, 479 B.R. 575 (Bankr. D. Idaho 2012)).

[36]   Brunson, 201 B.R at 353 (discussing “boilerplate lien on such incidents of ownership as rental income” as perhaps one of several factors in determining whether home-ownership or investment income was intention of parties to mortgage); Kimbell, 247 B.R at 37 (noting that property was only collateral and lien did extend to rents or profits); Brooks, Op. at 9–11 (analyzing whether rents constituted additional collateral).  The Macaluso opinion does not mention whether the lender had a lien on rents.

[37]   See Brooks, Op. at 10 (discussing UCC § 9-109(d)(11) as including rents with interests in or liens on real property for purposes of determining personalty excluded from scope of secured transactions law) (citing to In re Mayer-Myers, 345 B.R. 127, 130 (Bankr. D. Vt. 2006)).

[38]   Id. at 5 (citations and quotations omitted).

Leave a reply