THE SMALL BUSINESS BANKRUPTCY BLOG
Testing the Limits of the SBRA: Can a Debtor Use the SBRA to Lien Strip a $1.5 Million Mortgage on Her Home? Maybe....
One advantage of the SBRA is that it permits qualifying debtors to modify (i.e., strip) the mortgages from their residences under certain circumstances. A small business debtor will now be permitted to modify a mortgage secured by a residence if the proceeds of the loan were used for the small business rather than for acquiring the residence. So, what happens in the grey area where the residence also serves as a business? The case of In re Ventura, 2020 Bankr. LEXIS 985 (Bankr. E.D.N.Y. Apr. 10, 2020) took up the issue and held in favor of the debtor.
Ventura involves the eligibility of a debtor whose primary debt was a $1.5 million mortgage on her home which also served as a bed and breakfast business. The debtor operated a bed and breakfast out of her home, and she had a Chapter 11 pending when the SBRA went effective. The debtor then elected Subchapter V because her primary debt was the mortgage on her home, and she had a bright lawyer who thought that the SBRA might enable the debtor to strip the mortgage. Under Subchapter V, a claim secured by the principal residence of the debtor may be modified if the indebtedness was used primarily in connection with the small business—that provision is not available in a typical Chapter 11. Over the objection of the US Trustee and the secured creditor, the court found that the mortgage was primarily a business debt because her home also served as a bed and breakfast, and the court permitted the debtor to make the small business election. So. . . it appears that the court might need to resolve a lien stripping dispute in the near future. I suspect that we are going to see the principles set forth in Ventura applied elsewhere.
I love seeing cases which explore the limits of this new law.