Determining Meaning of Debtors Principal Residence Under BAPCPA

By: Patrick McBurney

St. John's Law Student

American Bankruptcy Institute Law Review Staff

            Affirming the decision of the bankruptcy court, the Bankruptcy Appellate Panel for the First Circuit in Pawtucket Credit Union v. Picchi (In re Picchi),[1] held that a debtor was allowed to modify a creditor’s secured mortgage in a multi-family dwelling because a multi-family house does not fall within section 101(13A)’s definition of a debtor’s principal residence.[2] Pawtucket, the secured creditor, held a second mortgage on the debtor’s two-family home.[3] The debtor, Picchi, resided in one of the units, and rented out the second unit.[4] Picchi’s chapter 13 plan reduced Pawtucket’s secured claim to zero because the appraised value of the property was insufficient to satisfy the secured claim of Picchi’s senior lender.[5] The bankruptcy court determined that Pawtucket’s claim could be modified by Picchi and approved the plan.[6] 

            Section 1322(b)(2) of the Bankruptcy Code (the “Code”) provides that a chapter 13 “plan may . . . modify 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 . . ..”[7] Thus, Pawtucket argued that the debtor’s multi-family dwelling fell within the definition of “debtor’s principal residence”[8] and its claim could not be modified under Picchi’s plan. However, the panel determined that debtor’s multi-family home did not fall within the definition of “debtor’s principal residence,” nor did the term “incidental property”[9] modify the definition of “debtor’s principal residence” so as to include that home. Although Pawtucket claimed that the amendments to both terms under the BAPCPA [Bankruptcy Abuse Prevention and Consumer Protection Act of 2005] were intended to resolve the ambiguity of those terms,[10] the panel determined that the “definitions of ‘debtor’s principal residence’ and ‘incidental property’ introduced by BAPCPA” did not alter the meaning of section 1322(b)(2).[11] Having so held, the panel then relied on a pre-BAPCPA case, Lomas Mortgage, Inc. v. Louis,[12] where debtors were allowed to modify claims secured against multi-family dwellings because Congress favored an interpretation of chapter 13 under which chapter 13’s anti-modification provisions[13] did not apply to multi-family homes.[14] Concluding that Lomas was factually similar, the panel determined that Picchi could strip off Pawtucket’s junior lien pursuant to section 1322(b)(2).[15]

 Although the Picchi panel reached its decision after interpreting the post-BAPCPA definitions of “debtor’s principal residence” and “incidental property”, the panel did not indicate how it would have ruled if it had used the definition as further revised by the Bankruptcy Technical Corrections Act of 2010 (“BTCA”).[16] Section 101(13A) now provides:

The term ‘debtor’s principal residence—(A) means a residential structure if used as the principal residence by the debtor, including incidental property, without regard to whether the structure is attached to real property; and (B) includes and individual condominium or cooperative unit, a mobile or manufactured home, or trailer if used as the principal residence by the debtor.[17]

The new definition for debtor’s principal residence could arguably encompass multi-family homes and bar potential modifications. However, the panel noted that the legislative history of the BTCA, states that it was “not intended to enact any substantive changes to the Bankruptcy Code.”[18] Therefore, future additional decisions may determine that the BTCA does represent a substantive shift in the law, the Picchi panel certainly suggested that lenders considering taking a security interest in multi-family dwellings should be cautious and that pre-BAPCPA case law like Lomas would continue to govern these types of cases.

[18] See id. (citing 156 Cong. Rec. H7158 (daily ed. Sept. 28, 2010) (statement of Rep. Smith)).