One of the surprising aspects of lending law is the fact that the definition of one of the most basic terms is still in dispute. While one would think the term “primary residence” is clear, there is still substantial litigation over the determinative date for assessing whether or not a home is someone’s primary residence. The reason why this is important is because it provides a host of legal protections. One of the most important protections for lenders is the fact that the loan cannot be modified in a bankruptcy.
In the bankruptcy context, the characteristics and value of most assets and claims are determined as of the date the debtor filed for bankruptcy protection. However, one possible exception to this rule is the date on which to determine the debtor’s primary residence. Some courts have held that the correct date is the date the loan secured against the property was executed. Other courts have held that the correct determinative date is the date of the filing of the bankruptcy petition, which could be years later, and something that lenders could not predict.
In Benafel v. One West Bank, the Ninth Circuit Bankruptcy Appellate Panel found that the determinative date was the filing of the bankruptcy petition. Accordingly, it reversed the lower court’s decision which had found that the proper date was the time that the loan was executed. Originally, the lower court had reasoned that the purpose behind the anti-cramdown provisions for loans on primary residences was to protect lenders. This protection would be weakened if the courts required lenders to not only look at the current status of the borrower, but also look into the future to determine where the borrower may be living. However, the appellate panel found that since the bankruptcy petition date was used to determine the validity of a claim and the value of an asset, that date should also be used as the date for determining someone’s primary residence. While the court noted that there was no controlling case law on the issue, a majority of the courts that had visited the issue had ruled the same way. Accordingly, the
appellate court found that the debtor’s original plan, which included a provision that reduced the loan amount, was viable and could be confirmed.
Takeaway – While this decision is not binding, a majority of courts have come to the same conclusion. As a lender, simply because your loan was once secured by the debtor’s principle residence, that may not be the case if and when the debtor files for bankruptcy. While it is not common practice to monitor where the borrower is living, that may become necessary as more courts continue to support this new interpretation of primary residence.