A Troublesome Prospect: Section 1322(b)(2) and a New Generation of Mixed-Use Developments

Abstract

A festering ambiguity buried within the thirteenth chapter of the Bankruptcy Code threatens to shadow future rehabilitations of any mixed-use development owned by one or more individuals or proprietorships eligible to file for relief under that chapter. The reason for this pendant danger reflects the relative appeal of this particular rehabilitative corpus, one for which policymakers have long exhibited an affinity. Specifically, although Chapters 11 and 13 empower debtors to propose a plan to restructure their finances, many small business owners can and often do opt for the cheaper process promised by the latter, that “cornerstone of the bankruptcy system.” If this propensity endures, certain indebted mixed-use properties will soon have to confront the lexicographical challenge posed by § 1322(b)(2), a subsection commonly known as Chapter 13’s “anti-modification provision” or its “anti-modification exception.” In its current guise, § 1322(b)(2) capacitates any Chapter 13 debtor to “modify the rights” of the holder of a secured claim unless that claim is “secured only by a security interest in real property that is the debtor’s principal residence.” On its face, this language predicates § 1322(b)(2)’s reach on an ostensibly easy question: does the relevant property, however large or small, whether the home of one or many, qualify as the “principal residence” of one or more debtors? Unfortunately, no feat of interpretive legerdemain can yield a crisp answer, and the existence of a divide over this section's reach is not itself widely-appreciated by scholars or lawyers. Because the chances of successful Chapter 13 relief for many mixed-use debtors will depend upon § 1322(b)(2)’s construction, this entropic jurisprudence merits examination, especially during amidst a the lengthy period of economic turbulence and the spate of insolvencies now likely at hand.

Reprinted from Norton Bankruptcy Law Adviser with permission of Thomson Reuters. Copyright © 2020. Further use without the permission of Thomson Reuters is prohibited. For further information about this publication, please visit https://legal.thomsonreuters.com/en/products/law-books or call 800.328.9352.

Note: Reprinted from Norton Bankruptcy Law Adviser Issue 6 with permission of Thomson Reuters. Copyright © 2020. Further use without the permission of Thomson Reuters is prohibited. For further information about this publication, please visit https://legal.thomsonreuters.com/en/products/law-books or call 800.328.9352.

Keywords: mixed use, dual use, Chapter 13, Chapter 11, wage earner, reorganization, plan, bankruptcy, 1322, 1325, chapter XIII, Bankruptcy Act of 1898, holistic, bright line, Bulson, Eubanks, Nosek, Cano, Hammond, Nobleman, Hurlburt, Lomas, Lamie, Baker Botts

JEL Classification: K10, K11, K12, K13, K19, K20, K22, K23, K29, K30, K35, K36, K39, K40, K41, K42, K49, N11, N12, N21