Whether a Chapter 11 plan may modify a mortgage upon the Debtors’ principal residence which contains leaseholds was at issue in In Re: Hock, Case No: 14-32157-BKC-PGH, Chapter 11, US BKY, SD Fla., August 15, 2017. (Unfortunately, I do not have a non-copyrighted link, thought I understand it is on Westlaw.) The Debtors’ historical Delray Beach property included a main house in the front which was the Debtors’ residence, and a carriage house in the back which included three units. Two of the units were leased continually since the debtors purchased the property over 10 years earlier. The third unit was vacated after seven years of occupancy by a single tenant.

US Bank held a first mortgage that originally contained a primary residency which was deleted by a “1-4 Family Rider.” Legacy Bank held a second mortgage.

The Debtors moved to value the property, to determine the secured status of Legacy Bank’s second mortgage, and to modify the rights of both lenders. Hock asserted that the mortgages exceeded the value of the property rendering at least a portion of Legacy Bank’s claim as unsecured.

The Court’s analysis turned upon the Bankruptcy Code requirement that in Chapter 11 a plan may

… modify the rights of holders of secured claims, other than a claim secured only by security interest in real property that is the debtor’s principal residence.

11 U.S.C. §1123(b)(5) (Emphasis applied by Court). If the Code is unambiguous the Court should not undertake further interpretation; thus, the Court determined no ambiguity. The term “secured only” modifies the term “security interest” not modifying “real property.”

The term “debtor’s principal residence” is not exclusively the debtor’s principal residence, but may be a residence that includes incidental nonresidential property. As a result, the Code section 1123(b)(5) does not allow Debtors to modify US Bank’s first mortgage because US Bank’s claim is secured only by a security interest in real property that is debtor’s principal residence. Legacy Bank’s second mortgage may be solely unsecured for which another evidentiary hearing would have to be scheduled.

The Court generously acknowledged that this issue has not been addressed by the U.S. 11th Circuit, and that different conclusions have been reached between Florida Districts, and even between judges within the Southern District of Florida. Perhaps the Court is foreshadowing that this matter will or should be addressed by a District Court and then the 11th Circuit!

Michael J. Gelfand

Past Chair

Real Property, Probate and Trust Law Section

of The Florida Bar

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Note: This article is not legal advice. Statements and comments made are not those of The Florida Bar or the RPPTL Section

© 2017 Michael J. Gelfand

Michael J. Gelfand

Florida Bar Board Certified Real Estate Attorney

Florida Supreme Court Certified Mediator:

Civil Circuit Court & Civil County Court

Fellow, American College of Real Estate Attorneys