• Sixth Circuit Affirms Cramdown of Secured Interest in Mobile Home
  • July 2, 2009 | Author: Eliot G. Bastian
  • Law Firm: Frost Brown Todd LLC - Office
  • In Reinhardt v. Vanderbilt Mortgage & Finance Inc.1, the Sixth Circuit Court of Appeals held in a matter of first impression, that: (1) cramdown2 of secured interest in unattached mobile home was authorized, despite the mortgagee’s secured interest in real property beneath home; and (2) state law was not preempted by the United States Bankruptcy Code’s anti-modification provision. This was also the conclusion reached by the bankruptcy court in overruling the objections of the secured creditors in the lower court’s approval of the debtor’s chapter 13 plan.

    As background, the debtors filed for Chapter 13 bankruptcy protection, including in the schedule of assets was their mobile home, which was listed as personal property and the land it sat upon, which was listed as real property. The debtors proposed plan called for the cramdown of the creditor’s secured claim for mobile home and land that the reflected current estimated value of both, and any remainder left was general unsecured component. The secured creditor to the mobile home and the real estate it sat upon filed an objection to the proposed chapter 13 plan. The bankruptcy court overruled the secured creditor’s objection to the proposed plan. In its ruling, the bankruptcy court cited 11 U.S.C. § 1322(b)(2), which permits a bankruptcy court to modify a secured creditor’s rights with respect to any claim “other than a claim secured only by a security interest in real property that is the debtor’s principal residence.” The bankruptcy court then found that although debtors’ mobile home qualified as “debtor’s principal residence” under the newly amended Code, a modification was still permissible because the mobile home did not constitute “real property.” The secured creditor appealed the approval of the plan by the court.

    On appeal, the secured creditor argued that because the definition of “debtor’s principal residence” specifically includes mobile homes that are not attached to the land, and because the secured creditor also has a security interest in the real property beneath the home, the appellate court should find that the secured creditor meets the anti-modification requirement without resorting to the definition of real property under Ohio state law. This argument presented an issue of first impression for the Sixth Circuit Court of Appeals: Whether § 1322(b)(2) of the Code precluded the modification of a secured interest in an unattached mobile home if the secured creditor also holds a security interest in the real property beneath the home.

    The Sixth Circuit held that because Ohio state law is clear in that debtors’ mobile home is not real property, the bankruptcy court correctly held that it could modify the creditor’s secured claim on the mobile home under § 1322(b)(2), despite the creditor’s secured interest on both the mobile home and real property beneath it. See Ohio Rev. Code § 5701.02(B)(2).

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    1 See Reinhart v. Vanderbilt Mortgage & Finance Inc., 563 F.3d 558 (6th Cir. April 29, 2009) (Clay, J.).

    2 A “cramdown” is a reduction of the secured balance on a home mortgage loan ordered by a bankruptcy court. A bankruptcy court may reduce the balance of the secured claim to the current appraised value of the home, while the amount of the claim in excess of the current property’s value becomes an unsecured claim. See 11 U.S.C. § 506(a). The term “cramdown” comes from the fact that the reduction is enforced over the secured creditor’s objection.