Manufactured Home Loans: Deciding Whether the Chapter 13 Anti-Modification Provision Applies Can Be A Vexatious Issue

The Paddock, LLC v. Bennett (In re Bennett), 584 B.R. 15 (8th Cir. B.A.P. 2018) –

The debtors proposed a chapter 13 plan that modified the rights of a creditor whose claim was secured by their manufactured home. The creditor objected on the grounds that its claim was covered by the prohibition on modifying a mortgage secured by a debtor’s principal residence. The bankruptcy court confirmed the plan and the lender appealed.

The creditor was in the business of installing, renting and selling manufactured homes in a planned neighborhood that it owned. The debtors first rented a manufactured home, and then purchased it with financing provided by the creditor pursuant to an installment sales contract. The debtors also leased the lot where the home was located under a ground lease with the creditor. Under the installment sales contract and the ground lease the debtors were responsible for paying personal property taxes, and the creditor paid real estate taxes on the lot.

Section 506 of the Bankruptcy Code provides that the claim of a creditor secured by a lien on estate property is treated as a secured claim equal to the value of the creditor’s interest and an unsecured claim to the extent of any deficiency. Apparently the creditor’s claim was underwater since the debtors’ plan treated the claim as partially secured and partially unsecured.

Under section 1322(b)(2) a chapter 13 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.” The creditor contended that this section prohibited the modification contemplated by the plan.

The court noted that for the anti-modification provision to apply, a claim must be secured by (1) real property, (2) and only real property, (3) that is the debtor’s principal residence. In this case all parties agreed that the home was the debtors’ principal residence. So, the key question was whether the manufactured home was real property or personal property, which in turn required a determination under the laws of the state where the home was located.

It was implicit that the manufactured home began life as personal property. However, under state law personal property can become a fixture that will be classified as real property. The court commented that there is a dividing line between real and personal property and determining on which side of the line particular property belongs is “often a vexatious question.”

Under applicable state law the determination of whether something is a fixture involves a typical approach of considering three factors: (1) is the item actually annexed to the real property, (2) is it put to the same use as the real property, and (3) did the party annexing the item intend it to be a permanent accession – with the third factor being the most important.

Physical attachment to the soil is not essential, although in some cases the method of attachment may conclusively establish the intent. An employee of the creditor testified that any home installed in the community would be placed on a full concrete foundation, although the witness was not present when the home was installed, nor did she inspect the home.

Contrary to that testimony, the debtor testified that there was no cement foundation behind the plastic skirting that surrounded the home. Rather there was a crawlspace with piers and blocks that required adjustment to keep the home level. The bankruptcy court found the debtor’s testimony more credible. And if a manufactured home can be jacked up, placed on wheels and moved, that would indicate that it is personal property.

The creditor also argued that the home was a fixture based on language in the lease which stated that the parties “agree that the Home shall be installed as a permanent improvement and fixture.” However, the bankruptcy court agreed with the debtors’ argument that this was not determinative.

Upon full payment title was to be transferred by a bill of sale, which is more commonly used for personal property. Further, the prohibition on removing the home from the lot without the creditor’s permission applied only until the loan was paid or refinanced; and the lease could be terminated on 60 days’ notice. In addition, the fact that the home was taxed as personal property as opposed to real property was considered by the court.

Accordingly, since the bankruptcy court’s findings were not clearly erroneous and it properly applied the law, the BAP affirmed the conclusion that the manufactured home was personal property so that the anti-modification provision did not apply.

Classification of a manufactured home as real or personal property can have significant consequences for the status of a loan secured by the home. The uncertainty inherent in a common law analysis that includes an emphasis on one party’s intent can lead to an unpleasant surprise for lenders. To address this uncertainty, some states offer procedures that will provide clear evidence of the classification of a manufactured home. For example, initially some sort of certificate of title is issued, which establishes that the home is personal property. After a home has been installed on a lot invoking a procedure involving surrender of the certificate will establish that the home has become real property.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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