Case Law Summaries

In re Mendez

• Opinion Date: November 8, 2000
• Real Property Law
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BANKRUPTCY; ANTI-MODIFICATION—Collateralizing a mortgage loan with rents, fixtures, condemnation proceeds, and appurtenant easements does take the mortgage out of the anti-modification provision of bankruptcy chapter 13 because they are considered to be part of the real estate.

Homeowners defaulted on their mortgage and when a foreclosure complaint was filed, they filed their first bankruptcy petition under Chapter 7. That case was closed about seven months later and the lender resumed its foreclosure action. About four months later, the homeowners filed a petition for relief under Chapter 13. In that case, they sought to reduce the lender’s secured claim to the value of the collateral, and to eliminate postpetition interest or reduce the interest rate. Chapter 13 of the Bankruptcy Code allows the modification of 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. In addition to the real property, the mortgage was secured by “all improvements… rents, royalties ... .” The homeowners argued that the rents were personalty and including them as part of the mortgage took the mortgage out of the protection of the anti-modification clause of the Bankruptcy Code. The Court pointed out that New Jersey Law includes rents in the definition of real property under N.J.S. 46:3-16 and, therefore, the homeowners’ argument in that regard was without merit. The homeowners also argued that including fixtures as collateral also took the mortgage out of the anti-modification clause. Prior case law, however, the Court held that fixtures are realty under New Jersey Law. Further, the homeowners argued that the presence of easements as part of the collateral also entitled them to modify the mortgage. According to the Court, an easement is “an interest in land” and is part of the rights, liberties, and privileges referred to in New Jersey Law, and as such, do not constitute additional collateral. Similarly, the homeowners argued that prior case law called for “the strict interpretation of the anti-modification provision” and that the Court should have found that a security interest in “condemnation awards and insurance proceeds” was also additional collateral. According to the Court, however, the right of a mortgagee to a condemnation award under New Jersey Law is not dependent on any provision in the mortgage explicitly granting such right. In New Jersey, a condemnation award is considered a substitute for land as a matter of law. Therefore, the inclusion in a mortgage of a reference to such right does not constitute collateral separate from the mortgaged property. Since the items the homeowners claimed to be additional collateral were found to be part of the real property, the Court held that the anti-modification clause of the Bankruptcy Code prevented modification of the lender’s mortgage. A second issue was whether the lender was entitled to interest on the mortgage arrears if there is no cramdown (bifurcation of the mortgage into a secured portion and an unsecured portion) and the mortgage default is secured under the plan. The United States Supreme Court has held “that an oversecured creditor is entitled to postpetition interest on mortgage arrears paid under a chapter 13 plan, even if the mortgage was silent on the subject and state law would not have required such interest to be paid.” A revision to the Bankruptcy Code overruled that decision, but only as to mortgages entered into after October 22, 1994 and the mortgage in this case was executed prior to that date. Lastly, the homeowners argued that the lender was undersecured and that the Court should have denied interest in arrears pursuant to prior case law. The Court disagreed, holding that postconfirmation interest on arrearages to the full extent of the arrears is allowable as long as the arrearage claim is not larger than the allowed secured claim defined by the Bankruptcy Code sec. 506(a).

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