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In re Cervelli

213 B.R. 900 (D. N.J. 1997)

BANKRUPTCY; MORTGAGES —In a Chapter 13 proceeding under the Bankruptcy Code, a mortgage on a primary residence can be modified if the mortgagee has an interest in other property of the debtor. Here, where the mortgage contained an assignment of rents, the debtor argued that such an assignment constituted additional collateral. The Court ruled that rents, issues, and profits were already in the definition of real property. Therefore, the mortgage couldn’t be modified, but where, as here, the mortgagee would not have a secured position after satisfaction of the first mortgage, its mortgage could be modified on that basis.

In January 1996, a husband and wife defaulted on a second mortgage of their home. The mortgage was held by a mortgagee who had no interest in any other of the borrower’s property except the primary residence. Later that year, the husband filed a voluntary petition in bankruptcy under Chapter 13 of the Bankruptcy Code (“Code”). The debtor sought a determination that the mortgage was not subject to protection of the anti-modification provision of Section 1322(b)(2) of the Code by reason of the fact that the mortgage was secured by “additional collateral”, specifically an assignment of rents. Additionally, the debtor claimed that since the mortgagee had the right to rents and immediate possession of the premises, the mortgagee’s lien may be divided into secured and unsecured claims, with the unsecured claims subject to modification. In opposition, the mortgagee claimed that the debtor may not strip-off its lien because the anti-modification provision applies even when the mortgage is completely unsecured.

Section 1322(b)(2) of the Code states that a plan of reorganization under the Code may modify the rights of holders of secured claims if the claim is secured by more than just an interest in the debtor’s principal residence. The Bankruptcy Court found two issues to be relevant to its analysis of the anti-modification provision of Section 1322 (b)(2). First, the Court considered what constituted “additional collateral” for purposes of removing a mortgagee’s claim from the protection of the anti-modification provision. The Court agreed with case law holding that when boilerplate language in a mortgage document makes no real attempt to reach collateral that is personalty, the creditor receives protection of the anti-modification provision. The Court found that the “additional collateral” language in the loan documents simply mirrored the language in the statutory definition of real property, which includes “rents, issues and profits,” N.J.S.A. 46:3-16, and did not truly attempt to create a security interest in collateral beyond that granted in the debtor’s primary residence. However, the second issue was the one on which the Court’s decision ultimately turned.

The Court considered whether or not the creditor’s claim was protected under Section 1322(b)(2) if it was determined that the claim was completely unsecured. The Court found a split of authority concerning proper application of a Supreme Court decision upholding the anti-modification provision for holders of totally unsecured claims. Nobelman v. American Savings Bank, 508 U.S. 324 (1993). Many courts have read Nobelman narrowly, concluding that a second mortgagee must have at least some interest in property securing its claim after satisfaction of the senior mortgage in order to receive protection of the anti-modification provision. Similarly, if a mortgagee’s claim is secured in any amount, however slight, its rights may not be modified in any way, if the only security interest is in a debtor’s principal residence. This analysis shifts the focus from the rights of the holders of secured claims (as was dispositive in Nobelman) to the value of the claim itself. Other courts have read Nobelman broadly, concluding that even where the amount of a first mortgage exceeded the value of the debtor’s residence, the debtor was prohibited from modifying the totally unsecured second mortgage, unless the claim was secured by property other than the primary residence. The Bankruptcy Court agreed with the former line of cases, stating that a mortgagee’s secured claim must have some value in order to receive protection of the anti-modification provision. Otherwise, the Court felt that any rights asserted by a creditor would be illusory. The Court also stated its preference for a fresh start for Chapter 13 debtors rather than protecting a non-purchase money lender in instances where the lien on a debtor’s residence is wholly unsecured.

The Court concluded that protection under the anti-modification provision of Section 1322(b)(2) applies only to claims that are secured claims, as defined by Section 506(a) of the Code, and that the claim of a second mortgagee is unsecured, in fact and in law, when the value of the debtor’s principal residence is less than the balance owed on the first mortgage. Accordingly, the creditor in this case was only entitled to protection of Section 1322(b)(2) if it retained at least some security in the property after satisfaction of the first mortgage. Since there was no such security remaining, the mortgagee’s lien was avoided by the debtor and was to be removed of record upon the debtor’s successful completion of his Chapter 13 plan.


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