Rodney Allen McCowan

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
RODNEY ALLEN MCCOWAN,
DEBTOR.
CASE NO.
09-10347-8-JRL
Chapter 11
ORDER
This case is before the court on the debtor’s motion to confirm his chapter 11 plan and
the motion of Bank of America for relief from the automatic stay. A hearing took place in
Raleigh, North Carolina on May 27, 2010.
BACKGROUND
On November 30, 2009, Rodney McCowan (the “debtor”) filed a voluntary petition for
relief under chapter 11 of the Bankruptcy Code. Bank of America’s secured claim derives from
a promissory note signed by the debtor and his ex-wife on April 5, 2002 in the original principal
amount of $1,725,000. This note was secured by a deed of trust encumbering land at 222
Tennwood Court in Durham, North Carolina and any future improvements on the land. In
October of 2004, the construction of a residence on the property (the “Tennwood house”) was
complete, and the note converted from a construction loan to a permanent mortgage loan.
SO ORDERED.
SIGNED this 21 day of June, 2010.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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Subsequently, the debtor, his ex-wife, and their family moved into the Tennwood house. In
January of 2005 the debtor began commuting from Durham, North Carolina to California where
he obtained employment. The debtor made his last full monthly mortgage payment in September
2008, and he did not made any other payments until February of 2010, which was two months
after the petition date. The debtor’s 27-year old son currently lives in the Tennwood house, and
the debtor plans to move back into the house at the conclusion of the bankruptcy proceedings.
The debtor currently works for a company based in Massachusetts and resides in hotels
there during the week. He resides on most weekends in an apartment leased by his girlfriend,
Debra Landers, in California, but spends three to four nights a month in the Tennwood house.
Landers’ California based company currently pays her a salary of $300,000. The debtor and his
ex-wife legally separated on July 1, 2006 and are now divorced. Currently, debtor and his ex-
wife remain jointly and severally obligated on the promissory note.
DISCUSSION
Section 362 of the Bankruptcy Code provides that a debtor’s bankruptcy automatically
stays “any act to obtain possession of . . . or to exercise control over property of the estate,” as
well as “any act to collect . . . or recover a claim against the debtor that arose before the
commencement of the case . . . .” 11 U.S.C. §362(a)(3),(6). However, the court may terminate
the automatic stay - (1) for cause, including lack of adequate protection of a property interest;
and (2) if the debtor has no equity in the property and the property is not necessary to an
effective reorganization. Id. § 362(d)(1)-(2). In order for property to be necessary for an
effective reorganization, the debtor must demonstrate that an effective reorganization is
realistically possible; the mere fact that the property is indispensable to the debtor’s survival is
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insufficient. See In re Albany Partners, Ltd. 749 F.2d 670, 673 (11th Cir. 1984). The plan for
reorganization must have a reasonable probability and must be more than a “mere financial pipe
dream.” In re Global Ship Systems, LLC, 391 B.R. 193, 208 (Bankr. S.D. Ga. 2007).
Bank of America argues that it is entitled to relief from the stay under both provisions of
§362(d). First, Bank of America argues that cause exists to lift the stay because its interest in the
collateral is not adequately protected. Second, Bank of America asserts that there is no equity in
the property and that the property is not necessary for an effective reorganization because the
debtor has no reasonable possibility of successfully reorganizing. In response, the debtor asserts
that the automatic stay should not be lifted because Bank of America’s interest in the collateral is
adequately protected as the debtor has been making monthly interest payments, and the proposed
plan of reorganization is feasible and confirmable.
At hearing, Bank of America and the debtor stipulated the value of the Tennwood house
to be $870,000. The balance on the mortgage is $1,423,000, and thus the debtor does not have
any equity in the property. The Debtor’s proposed treatment of Bank of America’s claim would
pay approximately $1,600,000 over a period of 30 years at 5 percent interest and would have a
total payout with a present value of $870,000. Bank of America filed notice of conditional
election under 11 U.S.C. § 1111(b)(2) in the event that the court would not grant relief from the
stay.
In her testimony, Landers testified that she has and will continue to contribute $6,300 per
month to the debtor in order to compensate for the difference between the debtor’s income and
his monthly expenses. While not currently married to the debtor, Landers maintains that she
intends to make these monthly payments to the debtor for the next 30 years. While Landers has
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1The antimodification provision in § 1322(b)(2) mirrors that of the one in §1123(b)(5).
Since there are relatively few cases which deal with § 1123(b)(5), it is appropriate to use cases
interpreting § 1322(b)(2). In re Lievsay, 199 B.R. 705, 708 (B.A.P. 9th Cir. 1996) (explaining
how the congressional intent to harmonize § 1123(b)(5) and § 1322(b)(2)’s treatment of home
mortgages, and the nearly identical language of the two sections justify such an approach). Id.
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only been to Durham a few times, she pledges that she and the debtor intend to “integrate” their
lives in one place, in the Tennwood house, upon the plan’s confirmation. Landers also indicates
that she intends to find comparable employment at another technology company upon moving to
the Durham area. She has not had any interviews or phone calls for potential job offers at this
point.
The court finds that Bank of America is entitled to relief under §362(d)(2). There is no
equity in the collateral and there is no reasonable possibility of an effective reorganization. First,
the plan for reorganization is not possible because it violates the anti-modification provision of
11 U.S.C. § 1123(b)(5). This provision prohibits the modification of “a security interest in real
property that is the debtor’s principal residence.” Id. When determining whether real property is
a person’s principal residence under § 1123(b)(5) and § 1322(b)(2),1 courts are split on the
appropriate time. In re Roemer, 421 B.R. 23, 25 (Bankr. D.D.C. 2009). Some courts say the
appropriate time for this determination is when the debtor grants the security interest. See In re
Smart, 214 B.R. 63, 68 (Bankr. D. Conn. 1997). Other courts say it is the time the debtor files
the petition. See In re Wetherbee, 164 B.R. 212, 215 (Bankr. D.N.H. 1994).
According to the record the principal residence of the debtor is Durham at either time.
First, the Tennwood house is the principal residence if the appropriate time is the date of the
petition - November 30, 2009. Although the debtor is spending weekends in California
temporarily with Landers, there is no evidence that he registered to vote in California, voted in
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California, had a vehicle registered in California, or leased the Tennwood house; these were all
factors other bankruptcy courts used to make the principal residence determination. See, e.g., In
re Saglio, 153 B.R. 4, 5 (Bankr. D.R.I. 1993). On the other hand, at the time of the petition, the
debtor’s two cars were registered and located in North Carolina, and he has filed state taxes in
North Carolina every year since 2004. The debtor’s son was and is living in the Tennwood
house free of charge so that it can be maintained until the debtor and Landers move into it. At
hearing, the debtor testified that he and Ms. Landers intended to move back to the house at the
conclusion of the bankruptcy proceedings.
The same finding results for the other time period, the time the debtor completed the loan
agreement - October 6, 2004. At this time, the expressed intent of the debtor was for the home to
be his principal residence. 	In determining whether a property is the principal residence at the
time the loan was made, courts have looked at the “predominant character of the transaction, and
what the lender bargained to be within the scope of its lien. If the transaction was predominantly
viewed by the parties as a loan transaction to provide the borrower with a residence, then the
antimodification provision will apply.” In re Brunson, 201 B.R. 351, 353 (Bankr. W.D.N.Y.
1996). Here this was clearly the case as the deed of trust dated April 5, 2002 and its later
amended version both state that “Borrower shall occupy, establish, and use the property as
borrower’s principal residence . . . .” (See Construction Loan Rider 1).
Based on these facts it would elevate form over substance to deny that the Tennwood
house is the debtor’s principal residence. According to his testimony, he spent four years
designing it as his “dream home.” Members of his family have occupied it continuously and he
stays there regularly. The entire purpose of this bankruptcy is to modify the terms of the Bank of
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America loan so that he can retain it as his principal residence. Applying the antimodification
provision here aligns with the congressional intent of encouraging home mortgage lending as the
Supreme Court stated in Nobelman. In re Brunson, 201 B.R. 351 (Bankr. W.D.N.Y. 1996)
(citing Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228
(1993). As the principal residence at both time periods is the Tennwood house, this loan cannot
be modified and thus the debtor’s plan is not feasible.
Second, the debtor has no reasonable possibility of effectively reorganizing because the
debtor’s proposed plan payments are not feasible. The debtor has hardly changed his lifestyle
during the chapter 11 proceeding and has seen a deficit most months; the only way he will cover
his expenses and monthly payments according to the chapter 11 plan is if Landers makes
monthly contributions of $6,300 for the next 30 years. According to both the debtor and
Landers’ testimony, these payments are the key to the success of the plan, yet the debtor has
failed to provide sufficient evidence that they can be depended upon over the life of the plan.
There is no evidence that Landers is likely to promptly find a job in this area which will pay her
$300,000. Furthermore, Landers is not obligated on the note and there is insufficient evidence
that she will continue making these payments once the bankruptcy proceedings are over. As
Bank of America’s loan cannot be modified and the debtor has not convinced the court that he
can make the monthly payments as proposed in the plan, there is no reasonable possibility that
the plan will be confirmed. Thus there is cause to lift the stay because there is no equity in the
property and the property is not necessary for an effective reorganization.
Based on the foregoing, Bank of America’s motion for relief from the stay is
ALLOWED. Confirmation of the debtor’s chapter 11 plan is DENIED.
“END OF DOCUMENT”
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