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With courts across the country divided on a keyissue of bankruptcy law, a Northern District judge in New York said a “fact-intensive,case-by-case inquiry” is required as jurists struggle to apply anambiguous statute. The issue that has judges so perplexed has to do with theapplicability of the antimodification provision in the Bankruptcy Code tomulti-use dwellings where the debtor occupies one unit. The provision, � 1322(b)(2), was drafted to do two things,both with an eye toward reducing the risk faced by a mortgagee in a Chapter 13proceeding and thus “encourag[ing] the flow of capital into the homelending market.” The provision bars modification of a securedclaimholder’s rights if the security involves a lien on the debtor’s mainresidence. However, it allows modification of an unsecured claimholder’srights. The controversy centers on whether � 1322(b)(2) isapplicable to multi-use dwellings and how its application differs for securedand unsecured claims. Federal courts in New York, mainly in the Western District,are divided on the question and the 2nd U.S. Circuit Court of Appeals has yet to address it. Consequently, there is no definitive answer,either nationally or regionally. Earlier this year, the 9th U.S. Circuit Court of Appeals reversed the Bankruptcy Court and a district court, both of which hadfound that � 1322(b)(2) shields all residential mortgages from modification. In Sieglinde M. Zimmer v. PSB Lending Corp.,01-56950, the 9th Circuit held that the antimodification protection appliesonly to holders of secured claims. However, a majority of the 1st Circuit in LomasMortgage Inc. v. Louis, 82 F.3d 1 (1996), found that the antimodificationprovision applies only when the property at issue is used solely as thedebtor’s principal residence. The Lomas court held that � 1322(b)(2) “does notbar modification of a secured claim on a multi-unit property in which one of theunits is the debtor’s principal residence and the security interest extends tothe other income-producing units.” Northern District Bankruptcy Judge Robert E. LittlefieldJr. has consistently relied on Lomas, concluding that Congress intendedto establish a bright-line test. But Chief Northern District Judge Frederick J.Scullin Jr. disagreed and reversed Judge Littlefield in Litton LoanServicing LP v. Beamon, 5:02-CV-1458. Beamon involved a debtor who lived in one of theunits in a two-family residence. Judge Littlefield held, as he previously had Inre Ferrera, 01-10575 (2002), that multi-use dwellings are not subject tothe antimodification shield. Consequently the mortgage could be modified withinChapter 13. Judge Scullin, however, reversed Judge Littlefield andrejected Lomas. “The court can think of no particularly compellingreason that a residential mortgage on a principal residence that has an atticapartment, whether rented or not, can be modified while a mortgage on avirtually identical house (having, perhaps, one less door) cannot bemodified,” Judge Scullin wrote. “Simply put, the Lomasapproach is inconsistent with the purpose of � 1322(b)(2), at least insofar asit would allow modification of mortgages that are indisputably residential in nature.” Judge Scullin found the approach of Western DistrictBankruptcy Judge Michael Kaplan in In re Brunson, 201 B.R. 351 (1996),more persuasive. In Brunson, Judge Kaplan embraced a case-by-caseanalysis centering on the intent of the parties. He found that antimodificationprotection kicks in if the loan was intended to provide the debtor with aresidence. On the other hand, if the loan was principally a commercialtransaction, then “cramdown” — the process of reducing a secureddebt to the value of its collateral and paying that amount over the life of aChapter 13 plan — is available. Thomas K. Keefe of Lefkowitz & Keefe in Albany appearedfor the debtor. Lisa Milas of Carus & Manniello in Syracuse appeared forLitton Loan.

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