Home Mortgage Lender Defeats Proposed Loan Modification In Chapter 11

Posted on by Neil E. McCullagh

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This month we review an important recent victory for home mortgage lenders. In Lee v. United States Bank N.A.,[1] a federal appeals court ruled that a home mortgage loan could not be modified in a Chapter 11 bankruptcy case even though the borrower used the mortgaged property for more than just her principal residence. The case appears to be the first one in which a federal appeals court ruled in favor of a lender on this issue, and it also highlights a risk that home mortgage lenders should be aware of.

The Facts

In 2007, the borrower signed a promissory note secured by a deed of trust on her 43-acre property. The deed of trust required the borrower to use the property as her principal residence. The borrower used 2.5 acres as her residence and leased the remaining acreage to a farming company, which farmed those acres continuously.

In 2019, the borrower filed a Chapter 11 bankruptcy case. She owed $253,000 on the loan at the time. In the bankruptcy case, she valued the 43 acres at $138,000 and asked the bankruptcy court to confirm a reorganization plan that would allow her to repay that amount, plus six thousand dollars of interest payments, “in full satisfaction of” the loan.

The lender asked the bankruptcy court to lift the bankruptcy stay to allow foreclosure on the property, arguing that the reorganization plan could not be confirmed because it violated the “anti-modification” provision of Chapter 11, which states that a plan may not –

"modify the rights of holders of . . . a claim secured only by a security interest in real property that is the debtor's principal residence."[2]

Congress created the anti-modification provision to promote stability and certainty in the home-lending market and encourage the flow of capital into the market.

In response, the debtor argued that the anti-modification provision did not apply – i.e., that she should be able to modify the loan – because although she lived on the 43 acres, it was not her “principal residence” because it was primarily farmland. In her words, the anti-modification provision "does not apply to mixed-use properties where the debtor resides in part of the property and derives business [s] income from other parts of the property."

The Decision

The appeals court, like the lower courts that had considered the case, decided that the anti-modification provision did apply – i.e., that the borrower could not modify the loan – because although the 43 acres were mostly farmland, the borrower nonetheless used it as her principal residence.

The appeals court’s logic seems sound insofar as the anti-modification provision states that the real estate must be the debtor’s principal residence but does not state that the real estate must be only the debtor’s principal residence.

Nonetheless, two other federal circuit courts of appeal have already ruled that a loan secured by a multi-unit dwelling can be modified in bankruptcy even if one of the units is the debtor’s principal residence. In one of those cases, the court rested its ruling on legislative history of the anti-modification provision.[1] In the other case, the court concluded that the plain language of the anti-modification provision does, in fact, mean that only real property that is only the debtor’s principal residence is protected from modification.[2]

While those cases involved multi-unit dwellings instead of farmland, that distinction seems unimportant because farmland, like a multi-dwelling unit, is used to generate income instead of serving solely as a residence for the borrower.

Similarly, in the Lee case, a lengthy dissenting opinion delved into the meaning of “is” in the English language and argued that the court was improperly reading “is” in the anti-modification provision – “real property that is the debtor's principal residence” – to mean “includes”. The dissent further argued that while the borrower’s entire 43 acres could conceivably qualify as her principal residence – because the Bankruptcy Code defines “debtor’s principal residence” to include “incidental property”, which includes “property commonly conveyed with a principal residence in the area where the real property is located” – the borrower had not proved that it qualified as such.

Lower Court Opinions

Some lower courts have also concluded that a residential mortgage loan cannot be modified even though the borrower uses part of the mortgaged real estate to generate income. For example, the courts did not allow loan modification in cases in which (a) the borrowers operated a trucking company out of their house and used the land around the house to park the trucks; (b) the borrower’s property included a tailor shop, an apartment that was rented out to a tenant, and a second apartment that was the borrower’s principal residence; or (c) the borrower used part of his house as a boarding house.[3]

However, the courts that control federal law in Virginia have not yet weighed in on this issue.


As noted above, the purpose of the anti-modification provision is to create certainty and stability in the home-lending market. Nonetheless, home lenders should be aware that (a) there is uncertainty about whether the provision applies if the borrower uses the mortgaged real estate to generate income in addition to using it as a residence, and (b) if the provision does not apply, then the loan is subject to being modified, including reducing the portion of the loan that must be repaid down to the value of the real estate, if the borrower files Chapter 11 or Chapter 13 bankruptcy.

* Mr. McCullagh gratefully acknowledges the assistance of Lacey Wallace, an intern with Spotts Fain and a rising second-year law student at Mercer University School of Law, in preparing this article.

[1] The case cite is 102 F.4th 1177 (11th Cir. May 23, 2024).
[2] The anti-modification provision in Chapter 11 bankruptcy is 11 U.S.C. §1123(b)(5). An identical provision, 11 U.S.C. §1322(b)(2), applies, albeit with some exceptions, in Chapter 13 bankruptcy cases.
[3] The case is Lomas Mortg. v. Louis, 82 F.3d 1 (1st Cir. 1996).
[4] The case is Scarborough v. Chase Manhattan Mortg. Corp. (In re Scarborough), 461 F.3d 406 (3rd Cir. 1996).
[5] The cases are, respectively, Wages v. J.P. Morgan Chase Bank, N.A. (In re Wages), 508 B.R. 161 (9th Cir. BAP 2014); In re Macaluso, 254 B.R. 799 (Bankr. W.D.N.Y. 2000); and In re Kelly, 2016 Bankr. Lexis 2088 (Bankr. S.C. 2016).

About the Author

Neil E. McCullagh is an attorney who works with banks on a wide variety of issues, including lending, insolvency, workouts, creditors' rights, bankruptcy, and collections.

Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.