The Eleventh Circuit recently affirmed a decision by the bankruptcy court which rejected a debtor’s reorganization plan under Chapter 11 of the bankruptcy code because the plan sought to modify secured debt. Lee v. U.S. Bank Nat’l Ass’n, No. 21-13887, 2024 WL 2349896, at *1 (11th Cir. May 23, 2024)[i]. Debtor, Patricia Lee (“Lee”), filed for Chapter 11 bankruptcy protection seeking to modify or restructure her debts, including a debt owed to US Bank which was secured by Lee’s principal residence. Relying on the “anti-modification” provision of 11 U.S.C. § 1123(b)(5), US Bank opposed Lee’s plan which proposed to reduce Lee’s mortgage debt from $253,070.25 to (roughly) $144,000.[ii]

Section 1123(b)(5) prohibits a debtor from restructuring or modifying debt which is secured by real property that is the debtor’s principal residence. Lee argued US Bank’s secured debt did not satisfy the requirements of § 1123(b)(5) and therefore did not apply. The Court conducted a detailed analysis of § 1123(b)(5) and concluded the provision applied if the following three requirements were met: (1) “the security interest must be in real property;” (2) “the real property must be the only security for the debt;” and (3) “the real property must be the debtor’s principal residence.” Lee did not dispute that the security interest was in real property and that the real property was the only security for the debt.[iii]

However, Lee argued that the secured property, which consisted of 43 acres, was “primarily farmland” because about 41 of 43 acres were leased to third parties for commercial farming. Lee’s principal residence only occupied about two acres of the real property. Lee reasoned the fact the property was “mixed-use,” and the primary use was commercial farming, the third requirement of § 1123, i.e., that the property “is the debtor’s principal residence,” could not be met. The bankruptcy court, Georgia’s Middle District and the Eleventh Circuit all disagreed finding there to be no exclusivity requirement in the plain and unambiguous language which pertained to the property being the debtor’s principal residence. [iv]

The Court concluded the fact the property was used for both farming and as a principal residence was of no import. The property was the debtor’s principal residence and that was all that was required by the plain language of § 1123(b)(5). The Court held that “the anti-modification provision applie[d] to U.S. Bank’s security interest” so the bankruptcy court’s rejection of Lee’s proposed chapter 11 plan was proper.  In rendering its ruling the Court relied in part on In re Hock¸ 571 B.R. 891 (Bankr. S.D. Fla. 2017),  which Diaz Anselmo & Assoc. P.A. handled. In Hock the bankruptcy court similarly denied a Debtor’s request to modify their homestead which was also an investment property.

[i] All future references or quotations are to this citation unless indicated otherwise.

[ii] Lee, at *2.

[iii] Lee, at *3. All future references or quotations are to this citation unless indicated otherwise.

[iv] Lee, at *5-6. All future references or quotations are to this citation unless indicated otherwise.