Eighth Circuit Affirms Bankruptcy Court’s Determination that a “Structure on Blocks” is Not Subject to the Antimodification Provision; Dissent Disagrees

By Karl Johnson posted 13 days ago

  
BANKRUPTCY BULLETIN
Editors-in-Chief
Karl Johnson, Hellmuth & Johnson, PLLC
Jeffrey Klobucar, Bassford Remele, P.A.
Contributing Editor: Amanda Schlitz, U.S. Bank
Eighth_Circuit___Paddock_LLC_v__Bennett.pdf 

                In The Paddock, LLC v. Bennett (In re Bennett), 917 F.3d 676 (8th Cir. 2019), the Eighth Circuit addressed the applicability of the antimodification provision.  The debtors’ Chapter 13 plan proposed a bifurcation of The Paddock’s secured claim in their manufactured home into secured and unsecured parts.  The Paddock objected, arguing that the anti-modification provision of § 1322(b)(2) barred that treatment.  There was no dispute that the manufactured home was the principal residence of the debtors; the only dispute was whether the manufactured home was real property or personal property, which was determined by state (Iowa) law.  The Bankruptcy court held that § 1322(b)(2)’s anti-modification provisions did not apply to the creditor’s claim.  The BAP affirmed, as did the Eighth Circuit – with one dissent.

                The Paddock installed, rented, and sold manufactured homes in a planned neighborhood on land that it owns. Debtors purchased a manufactured home that was financed by The Paddock and agreed to a 990-year lease for the lot under the home that was owned by The Paddock.  In their Chapter 13 bankruptcy, the Debtors’ plan proposed that The Paddock’s claim—secured by a security interest only in their manufactured home—would be bifurcated and treated as partly secured and partly unsecured under § 506(a)(1). 

                Section 1322(b)(2) prohibits modifying the rights of creditors with “a claim secured only by a security interest in real property that is the debtor’s principal residence.”  The Paddock bears the burden of proving that its claim is subject to the anti-modification provision.  As the Bankruptcy Code does not address this situation, and property interests are generally created and defined by state law, the Eighth Circuit looked to Iowa common law, which provides that personal property is a fixture—and thus real property—when: “(1) it is actually annexed to the realty, or to something appurtenant thereto; (2) it is put to the same use as the realty with which it is connected; and (3) the party making the annexation intends to make a permanent accession to the freehold.”  The first two elements, however, are “mainly important in determining the intention of the party making the annexation,” which is “the controlling consideration in determining the whole question.” Stated another way, the “intention is paramount and really the determining factor.”  A party’s intention is a factual question.

                Following an evidentiary hearing, the bankruptcy court found that the home was personal, not real property, and confirmed the Debtors’ plan over The Paddock’s objection.  The Eighth Circuit held that the factual record supported the bankruptcy court’s findings and that “the home is more like a structure on blocks than a structure deeply embedded into the ground,” noting:  

  • The home did not have a foundation; it was placed on pier pads and concrete blocks, and the Debtor credibly testified that one pier pad repeatedly sunk into the ground.
  • The underlying structure used to transport the home was probably still there.
  • Debtors owned the home while The Paddock owned the lot.
  • The terms of the lease did not clearly establish an intent to make the home a permanent accession to the real estate, as the lease:
    • permitted the home’s removal from the property;
    • required The Paddock’s permission to remove the home (but when the loan is paid, title would pass to the Debtors by bill of sale, at which time they may remove it); and
    • allowed termination on 60-days’ notice.
  • The Paddock did not present credible evidence that the home was attached to the ground by a concrete foundation, or that moving the home would damage the home and the lot.

                 The Eighth Circuit explained it gives even “greater deference to the bankruptcy court’s factual findings” where those findings “call for an assessment of witness credibility and where the record contains no contradictory documents or objective evidence.”  Because the bankruptcy court, based on credibility determinations, found nothing demonstrating an intent to make the manufactured home a fixture, its finding that the home was personal property was not clearly erroneous. 

                 The dissent’s view of the evidence compels a contrary finding: “the test for real property under Iowa law clearly favors The Paddock's contention that the structure in question was real property.”  The dissenting opinion found it “rather clear that the structure in this case is annexed to the realty, as the wheels and axles were removed once it was placed on the foundation” and additionally, noted the following facts in the record that support its view that the antimodification provision prohibited confirmation over The Paddock’s objection:

  • While the conveyance was mislabeled "lease," it actually transferred a fee simple absolute ownership interest in their building lot to the debtors;
  • The Paddock’s property manager testified that the foundation was cement or concrete, and that removing the foundational structure would "damage the home" and "damage or destroy the foundation";
  • No one had ever "moved a home out of The Paddock" before.

                 According to the dissent, the bankruptcy court was clearly erroneous in finding that only the Debtor’s testimony was credible and The Paddock’s witness was not credible, and the majority opinion came to the wrong conclusion by giving “too much deference to the bankruptcy court's clearly erroneous factual

conclusions.”

0 comments
4 views

Permalink