February 15, 2016

Five Out of Six Not Good Enough

While hitting 5 out of 6 shots may be good on the court, it is not sufficient to prevent modification of a mortgage in the Bankruptcy Court for the Eastern District of Kentucky. The Court recently allowed debtors to modify the debt on their manufactured home despite the anti-modification provision 0f § 1322(b)(2). See In re Snowden, Case No. 15-51308, 2016 Bankr. LEXIS 446 (Bankr. E.D. Ky. Feb. 12, 2016). But this is not the typical modification of a debt secured by a manufactured home where a debtor crams down the unsecured portion based on the treatment of the home as a motor vehicle. In Kentucky, for the lien to be perfected, a manufactured home must either be permanently affixed to real property (KRS 186A.297) or the lien must be noted on the certificate of title (KRS 186A.190). In Snowden, the manufactured home had been affixed through an affidavit of conversion recorded in the land records. That affidavit referenced six lots owned by the debtors but the creditor's mortgage only encumbered five of the six lots.

The mortgage did include the lot on which the manufactured home was located, however, the septic system for the manufactured home was located on the one unencumbered lot. With this integral system being on the unencumbered lot, the Court could not conclude that the five remaining lots were a single parcel. The anti-modification provision prevents a cramdown where the claim is "secured only by a security interest in real property that is the debtor's principal residence." With the separate lots indicating more than one parcel of real estate securing the debt, the creditor was not entitled to the protection of the anti-modification clause. The Court will hear further evidence on the proposed valuation and interest rate before addressing confirmation of the plan.

Snowden raises many questions that creditors must consider when originating a loan secured by separately designated, yet contiguous, parcels on which the debtor will have their principal residence. While the creditor avoided the affixation trap which has snared many a creditor, there was no explanation for why the one lot was omitted from the mortgage. Even if this lot was included, the Court may have still allowed modification because of the various uses for the surrounding lots (second manufactured home for rental). The question that this case does not discussâand is often overlooked when modifying long-term debt in a Chapter 13 Planâis will this debt now be excepted from the discharge under § 1328(a)(1)?