HOFFMAN v. OCWEN LOAN SERVICING, LLC
Filing
9
OPINION. Signed by Judge Jose L. Linares on 10/3/16. (cm )
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
Bankruptcy No. 15-10156(JKS)
Inre: JAMES C. HOFFMAN,
Debtor.
JAMES C. HOFFMAN,
:
CIVIL ACTION NO. 16-33 68 (JLL)
Appellant,
:
0PINI0N
V.
OCWEN LOAN SERVICING, LLC,
Appellee.
LINARES, District Judge
James C. Hoffman is a debtor, and he petitioned for Chapter 11 bankruptcy
protection. Hoffinan appeals from a May 23, 2016, order of the United States
Bankruptcy Court, which granted a motion by one of his creditors, Ocwen Loan
Servicing, LLC (hereinafter, “OLS”), to bar a modification of OLS’s claim against real
property owned by Hoffman located in Bloorningdale, New Jersey, pursuant to 11 U.S.C.
§
1 123(b)(5).’ OLS files a brief in opposition to the appeal. (See dkt. 6.) For the
See dkt. 1 (HoffiTlan’s Notice of Appeal); dkt. 1-1 (the Bankruptcy Court order
appealed from); dkt. 1-4 (the opinion underlying the order appealed from); dkt. 3 (Hoffman’s
appeal brief); dkt. 4 (Hoffman’s appendix to the appeal brief); dkt. 4-6 at 20—48 (the transcript of
following reasons, the Court will affinn the Bankruptcy Court order from which Hoffman
appeals.
BACKGROUND
I.
11 U.S.C. 1123(b)(5)
A bankruptcy 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.” 11 U.S.C. 1 123(b)(5) (emphasis added). If a first mortgage covers
a bankruptcy debtor’s principal residence, then the debt cannot be modified downward
even if it exceeds the property’s value, and thus a creditor is entitled to recover the full
amount owed by a debtor on a mortgage. However, if a mortgage covers property that
contains something more than a debtor’s principal residence, such as a multi-family
house, then the debt can be “crammed down” to the property’s value, to the point where a
creditor will be left with (1) a secured claim for an amount equal to the property’s value,
and (2) an unsecured claim for the difference between the debt owed and the property’s
value. See In re Hornitz, No. 13-23757, 2014 WL 372199$, at *3_4 (Bankr. W.D. Pa.
July 24, 2014) (describing the cram-down procedure); In re Harris, No. 10-74280, 2011
WL 5508861, at *2_3 (Bankr. E.D. Mich. Nov. 7, 2011) (describing same).
the oral argument underlying the order appealed from); dkt. 8 (Hoffman’s reply brief). The
Court will refer to documents by the docket entry numbers and the page numbers imposed by the
Electronic Case Filing System when citing to the record from this point forward, unless further
explanation is necessary.
2
II.
Facts
The Court writes for the parties, and will assume a familiarity with the facts and
will not recount them in detail except as necessary for this appeal. Hoffman has owned
the property in issue since 2001, and he refinanced his mortgage on that property in 2007.
(See dkt. 4-4 at 21 (Hoffman’s 2007 refinancing application, which indicates that he had
been living on the property for 6 years).) Hoffman has now defaulted on that loan. The
amount that Hoffman currently owes, i.e., $507,985.94, exceeds the current value of the
property, i.e., $276,000. (See dkt. 1-4 at 4.)
In the proposed bankruptcy plan, Hoffman sought pursuant to Section 1 123(b)(5)
to cram down the debt owed to OLS, which is the servicer of Hoffman’s mortgage, by
arguing that the debt is secured by property that contains his principal residence çj, a
detached guest house. (See dkt. 4-1.) As a result, Hoffman sought to split OLS’s claim
into: (1) a secured claim in the amount of $276,000; and (2) an unsecured claim for the
remaining amount of the debt. OLS objected to this portion of the bankruptcy plan, and
moved to prohibit Hoffman from cramming down the debt owed to OLS.
Hoffinan argued in support of his proposed modification that the appraisal
performed for the refinancing application listed the property as having one unit with an
accessory unit, that the appraisal contained a sketch of the entire property that included a
guest house, and that it contained photographs depicting a “guest house/in law suite”
(albeit in a dilapidated state).
(S dkt.
1-4 at 5; dkt. 4-3 at 1—3; dkt. 4-4 at 12 & 1$.)
Hoffiman also argued that the portion of the refinancing application entitled “Schedule of
3
Real Estate Owned” listed “2—4” in the colun-in for the type of property, which signified
that the property contained more than one living structure.
($ dkt. 4-2 at 30; dkt. 4-6 at
27.) In addition, he argued that the guest house was rented out intermittently between
2005 and 2010, but he admitted that it: (1) was not rented out when he applied for
refinancing and when the mortgage was finalized in 2007; and (2) has been in a state of
disrepair for some time. (See dkt. 1-4 at 5; dkt. 4-6 at 25.)
In opposition to the modification, OLS argued that Hoffman himself stated in the
refinancing application that the entire property would be used for his main residence
only, and that the mortgage describes the property as containing only one main residence
together with all improvements. (See dkt. 4-2 at 35; dkt. 4-2 at 38.) In addition, OLS
argued that Hoffman left blank the portion of the application that required him to disclose
any rental income from his property. (See dkt. 4-2 at 29.) furthermore, OLS pointed out
that Hoffman certified at the closing that he and his wife were in sole possession of the
property, with no tenants or other occupants. (See dkt. 4-2 at 35.) OLS also argued that
Hoffman did not execute an assigrnnent of rents in connection with the mortgage, and
that the mortgage has no riders indicating that other families would be living on the
property. (See dkt. 1-4 at 5; dkt. 4-6 at 44.)
The Bankruptcy Court acknowledged that the record contained evidence that was
“conflicting.” (Dkt. 4-6 at 45.) The Bankruptcy Court then addressed this matter
pursuant to the controlling precedent from the Third Circuit Court of Appeals concerning
the application of Section 1 123(b)(5) to a bankruptcy plan, which requires a court to
4
inquire “(1) whether the claim is secured only by real property, and (2) whether the real
property is the debtor’s principal residence.” See In re Scarborough, 461 f.3d 406, 411
(3d Cir. 2006). In doing so, again pursuant to the controlling precedent, the Bankruptcy
Court focused on the time period when the refinancing application was pending and when
the underwriting decisions were being made, and thus when a lender would be deemed to
be aware that the loan could be subject to a modification pursuant to Section 1 123(b)(5).
See In re Scarborough, 461 F.3d at 412.
The Bankruptcy Court, in its thorough and well-reasoned analysis following oral
argument, went on to conclude the following:
Here, the closing documents state clearly in several places that the
Property was going to be used as [Hoffman’s] principal residence and was
not rented to third parties. The mortgage lender asked for, and had the right
to rely on, these representations. None of the documents executed at the
time of the loan indicate that the guesthouse was separate collateral for the
loan. [Hoffirian] did not execute an assignment of rents and the mortgage
does not reference any property other than the real property located at
[Hoffman’s address in] Bloomingdale, New Jersey. The affidavit of title
confirms that [Hoffman] and his spouse were in sole possession of the
Property and that there were no tenants or other occupants. Even though
the numbers “2—4” are entered under the “Type of Property” column in the
“Schedule of Real Estate Owned” on the loan application, this is of limited
probative value given the numerous representations throughout the loan
application indicating that the Property consists of one unit and did not
generate income. F or instance, adjacent columns in the same schedule that
5
call for “Gross Rental Income” and “Net Rental Income” from the Property
are left blank. The “Net Rental Income” colunm in the income section of
the loan application is also left blank. Finally, although the guesthouse may
have been rented out intermittently between 2005 and 2010, tHoffrnan]
concedes that it was vacant and did not generate any income at the time of
the loan, which is the only time that matters under Scarborough.
[Hoffman] argues that the mere fact that the guesthouse had income
generating potential at the time of closing is enough under Scarborough to
allow the loan to be modified. But.
.
.
“the issue of whether a property was
a single family residence is more than whether a property contains two
units. The actual use of a property should be considered.” In re Lopez, 511
3.R. 517, 520-21 (Bankr. N.D. Ill. 2014). The guesthouse on [Hoffman’s]
Property had many possible uses that would not produce revenue—a room
for nonpaying guests or family members, a studio, a workshop, a home
office, or just extra storage space. Indeed, the representations by
[Hoffluran] at closing reflect that the guesthouse was and would be used as
part of tHoffman’s] principal residence, not a separate income-producing
unit. Thus, the evidence indicates that the loan was not secured by any
property other than [Hoffman’s] principal residence at the time of the loan.
[T]he Court finds that [Hoffman’s] proposed modification of
[OLS’s] claim is prohibited under section 1 123(b)(5). It would be
inequitable to allow [Hoffman] to represent that the Property is a single
family, non-income producing principal residence and then disregard this
representation in [Hoffman’s] bankruptcy proceedings. Such a result would
be contrary to the purpose of the anti-modification provision, which was
6
intended to.
.
.
encourage the flow of capital into the home lending market
by affording anti-modification protection to home mortgage lenders[.]
(Dkt. 1-4 at 8—10 (quotation marks, citations, and footnotes omitted); see also dkt. 4-6 at
20—48.)
ANALYSIS
A federal district court has jurisdiction to hear an appeal from a bankruptcy court’s
final judgment, order, and decree. See 28 U.S.C.
§
158(a). The district court reviews a
bankruptcy court’s legal determinations de novo and its factual findings for clear error.
See In re Wettach, 811 F.3d 99, 104 (3d Cir. 2016). The district court may find that the
factual findings of a bankruptcy court are clearly erroneous only “if they are completely
devoid of a credible evidentiary basis or bear no rational relationship to the supporting
data.” In re Macri, 642 Fed.Appx. 128, 128—29 (3d Cir. 2016) (quotation marks and
citation omitted).
Hoffman argues that the Bankruptcy Court erred upon finding that the loan was
secured by only a principal residence. However, the Court discerns no legal errors upon
a de novo review of the Bankruptcy Court’s legal determinations. The Bankruptcy Court
correctly found
as it was required to do by the holding in In re Scarborough
that
when determining whether more than a principal residence is on the property in issue,
“the critical moment is when the creditor takes a security interest in the collateral.
.
.
.
It is
at that point in time that the underwriting decision is made and it is therefore at that point
in time that the lender must know whether the loan it is making may be subject to
7
modification in a [bankruptcy] proceeding at some later date.” In re Scarborough, 461
F.3d at 412. The Bankruptcy Court thus correctly focused on the time period covering
the refinancing application process.
Furthermore, upon a review of the oral argument transcript and the opinion
underlying the order of the Bankruptcy Court, the Court discerns no clear error with the
Bankruptcy Court’s factual determinations concerning the characterization of Hoffiiian’s
property. Contrary to Hoffman’s arguments on appeal, the Bankruptcy Court carefully
considered the factors that favored Hoffman’s position, i.e., that the “Schedule of Real
Estate Owned” listed “2—4” in the column for type of property, that the appraisal noted an
accessory unit on the property, and that the additional structure may have had intermittent
tenants between 2005 and 2010. (Cf dkt. 3 at 19 (Hoffman arguing on appeal that the
Bankruptcy Court “discounted the inconsistencies in that loan application and completely
ignored the property description and drawings of the property in the lender’s appraisal”).)
The Bankruptcy Court then found that those factors favoring Hoffman were
outweighed by the other evidence in the record, which included: (1) Hoffman’s
admission that the other structure was not rented out during the time of the refinancing
application process in 2007; (2) Hoffiman’s assertion in the application that all of the
structures on the property were part of his principal residence; (3) the description of the
property in the mortgage stating that it contained only one main residence together with
all improvements; (4) Hoffman’s failure to enter any infonmation on the portion of the
application that required him to disclose rental income; (5) the absence of an assigmment
8
__________
by Hoffman of rents in connection with the mortgage; and (6) Hoffman’ s certification at
the closing that he and his wife were in sole possession of the property, with no tenants or
other occupants. (See dkt. 1-4 at
5.)2
This Court finds that the Bankruptcy Court’s
conclusions were supported by credible evidence and that they were rational.
CONCLUSION
The Court will therefore affirm the May 23, 2016, order of the United States
Bankruptcy Court. The Court will enter an appropriate order.
L. LINARES
States District Judge
Dated: October
016
2
OLS also argues in its appellee brief that Hoffman has neither provided his tax returns
from 2005 through 2010, nor submitted proof that he registered as a landlord with the
municipality, in order to support his contention that he rented his property at all from 2005
through 2010. (see dkt. 6 at 16.) Hoffman offers no response to this argument in his reply brief.
(See generally dkt. 8.)
9
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?