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In re Scarborough

August 28, 2006


Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Misc. No. 03-mc-00228) District Judge: James McGirr Kelly).

The opinion of the court was delivered by: Rendell, Circuit Judge.


Argued July 27, 2006

Before: RENDELL, AMBRO and ROTH, Circuit Judges.


In this appeal, we must determine whether a mortgage on a multi-unit dwelling in which the debtor resides qualifies for the anti-modification protection afforded by 11 U.S.C. § 1322(b)(2). That provision protects a mortgagee from having its claim in a Chapter 13 bankruptcy proceeding modified if the mortgage is secured "only by a security interest in real property that is the debtor's principal residence." We conclude that a mortgage secured by property that includes, in addition to the debtor's principal residence, other income-producing rental property is secured by real property other than the debtor's principal residence and, thus, that modification of the mortgage is permitted. Consequently, we will reverse the order of the District Courtaffirming the order of the Bankruptcy Court and remand the case for further proceedings consistent with this opinion.


The facts relevant to this appeal are not in dispute. On May 10, 1988, Appellant Frances Scarborough signed a mortgage ("Mortgage") in favor of Meritor Savings Bank, granting a mortgage lien against her property located at 5116 North Warnock Street, Philadelphia, Pennsylvania ("Property"). The Mortgage secured a note to Meritor Savings Bank executed on the same date in the amount of $30,400.00. The parties agree that the Mortgage was thereafter assigned and that Chase Manhattan Mortgage Corp. is the current holder of the Mortgage.

Scarborough sought protection under Chapter 13 of the Bankruptcy Code on October 31, 2001. In her proceedings, she filed a complaint seeking to bifurcate the claim of Chase Manhattan into a secured claim and an unsecured claim pursuant to 11 U.S.C. § 506(a) and to determine the correct amount of the mortgage arrearage. Scarborough subsequently filed an amended complaint to revise the alleged amounts of the secured and unsecured portions of Chase Manhattan's claim, and to bifurcate Chase Manhattan's lien on her residence to reflect the current market value of the property, with the remainder of the debt becoming unsecured. The Bankruptcy Court held a trial on this adversary proceeding and concluded that Scarborough was barred from bifurcating the secured claim of Chase Manhattan pursuant to the "anti-modification" provision of 11 U.S.C. § 1322(b)(2). The District Court affirmed the ruling of the Bankruptcy Court.

The form of the Mortgage is a "Pennsylvania -- Single Family -- FNMA/FHLMC Uniform Instrument," which contains a conveyance clause that grants the lender an interest in the Property, as well as "all the improvements now or hereafter erected on the [P]roperty, and all easements, rights, appurtenances, rents, royalties, mineral, oil and gas rights and profits, water rights and stock and all fixtures now or hereafter a part of the [P]roperty." On the same day that Scarborough executed the Mortgage, she also signed a "2-4 Family Rider (Assignment of Rents)" to "amend and supplement the Mortgage" and further secure her note to Meritor Savings Bank. The Family Rider provides that "Borrower unconditionally assigns and transfers to Lender all rents and revenues of the Property" and that, "[u]pon Lender's request, Borrower shall assign to Lender all leases of the Property."

The Property is a two-story semi-detached residence that was converted to a multi-unit dwelling prior to Scarborough's purchase, with one apartment on the first floor and one apartment on the second floor. Scarborough lives on the first floor of the Property and rents the second floor apartment to a tenant pursuant to a lease agreement. She testified at trial that she purchased the Property with the intent of living in one unit and renting the other, and with a goal of eventually acquiring other investment properties. Scarborough further testified that she informed the bank she was buying the Property, in part, as an investment.

Scarborough testified at trial that the value of the Property was $13,000.00. Chase Manhattan submitted the City of Philadelphia's Board of Revision of Taxes Property Record, which listed the value of the Property as $26,500.00. Scarborough has appealed the Board of Revision of Taxes' valuation, but her appeal had not been decided as of the date of trial.


The District Court had jurisdiction over Scarborough's appeal from the Bankruptcy Court pursuant to 28 U.S.C. § 158(a). We have jurisdiction under 28 U.S.C. § 158(d). Our standard of review is plenary because the issues before us involve statutory interpretation and ...

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