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In re John J. Cummings

214 B.R. 126 (U.S. Dist. Ct. D. N.J. 1997)

BANKRUPTCY; MORTGAGES—A business loan to a corporation was secured by business assets as well as by a mortgage on the sole shareholder’s principal residence. In a Chapter 13 bankruptcy where a lender has a security interest in property in addition to a debtor’s principal residence, the creditor’s rights can be modified. Despite the creditor’s argument that the “other” assets did not belong to the debtor’s estate, but to the corporation, the Court allowed modification.

A lending company made a loan to a corporation, secured by various corporate assets, an assignment of the life insurance policy of the sole shareholder of the corporation, and a second mortgage on his (and his wife’s) principal residence. The husband and wife filed for bankruptcy under Chapter 7 of the Bankruptcy Code and filed a motion to bifurcate the lender’s claim into secured and unsecured claims. The judge converted the case into a Chapter 13 case and approved the bifurcated payment plan.

The District Court stated the issue to be whether a debtor in a Chapter 13 proceeding may modify the rights of a lender where the lender has a security interest in property in addition to the debtor’s principal residence. Section 506(a) of the Bankruptcy Code permits debtors to split creditor claims into secured and unsecured claims. However, Section 1322 (b)(2) limits a debtor’s ability to use Section 506(a) to affect creditors’ rights when a creditor’s rights are secured only by a mortgage on a debtor’s principal residence. The debtors in this case contended that because there was collateral in addition to the principal residence, the loan may be modified. The lender claimed that no part of the other collateral was part of the debtors’ estate, and because its only lien on the debtors’ personal property was the residence, the mortgage should be protected by Section 1322 (b)(2). The District Court held that any collateral in addition to a debtors’ personal residence is sufficient to take a mortgage outside the anti-modification provision of Section 1322(b)(2), and that this claim could be bifurcated because the mortgage was secured by two types of additional collateral. Specifically, the lender had an interest in the husband’s life insurance and in corporate assets. The Court found this to be clearly in line with prior Third Circuit decisions holding that rents, issues, and profits are items of independent value. Although the creditor in this case claimed this precedent was not relevant because the additional collateral in those cases was the debtor’s personal property and not that of a third party or corporation, the District Court found that Section 1322(b)(2) does not state or imply that the additional security must be given by the debtors personally. Modification is allowed regardless of whether the additional collateral is personal property of the debtor. To take advantage of the anti-modification provision, a creditor must limit its lien to the residence, otherwise a debtor may modify the rights of a creditor and bifurcate its claim into secured and unsecured portions.


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