By Benjamin Levinson, Esq.

Are you a lender who provides short term loans of five years or less secured by a borrower’s principal residence? If so, then the Mission Hen case impacts your business because your loan can be stripped down to the property’s current value in bankruptcy court. In addition, the loan is subject to modification of its terms, including the interest rate.

Last year in the case of Mission Hen, LLC v Lee (In re Lee) 137 F.4th 1009 (9th Cir. 2025), the Ninth Circuit Court of Appeals, held that a debtor could modify a short term note that comes due during the term of a Chapter 13 plan even though the note was secured by a deed of trust on the debtor’s principal residence.  The Court allowed the note to be stripped down to the value of the real property with the balance being paid as unsecured debt.1

Bankruptcy Statutes and Case Law Prior to the Mission Hen Decision 

Regarding Notes Secured by a Debtor’s Principal Residence

Prior to the Mission Hen case the U.S. Supreme Court case Nobleman v. American Savings Bank, 508 U.S. 324 (1993) held that no bifurcation of a claim for a lien secured by a debtor’s principal residence was allowed even if the claim was partially unsecured. In Nobleman, debtors argued that § 506(a) of the Bankruptcy Code (which determines the extent to which a creditor’s claim is secured or unsecured based on the value of the collateral) allowed them to treat the portion of the mortgage exceeding the value of their home as an unsecured claim, which could then be modified under their Chapter 13 plan.  However, the Court rejected that argument because although § 506(a) permitted a valuation of the collateral to determine the secured and unsecured portions of a claim, that valuation did not alter the mortgagee’s contractual rights, such as the right to repayment of the full amount of mortgagee’s loan, interest rates, or other terms. In practice, that meant that even if a note was only partially secured by a debtor’s principal residence, the note could not be stripped down to the value of the real property and the note of a creditor had to be fully cured and paid in full over the term of a Chapter 13 plan.

Additionally, 11 U.S.C. § 1322(b)(2) of the Bankruptcy Code specifically prohibited a modification of any note that was secured by the principal residence of a debtor, even if the claim was partially unsecured. The interest rate could not be adjusted, and no other terms of the note could be modified.

In 1994, 11 U.S.C. § 1322(c)(2) was added to the Bankruptcy Code and it provided that notwithstanding the anti-modification provisions of § 1322(b)(2), a claim that comes due before the date on which the final payment is due under the bankruptcy plan, the plan may provide for the payment of the claim as modified pursuant to § 1325(a)(5). (Emphasis added).

In many bankruptcy courts, 11 U.S.C. § 1322(c)(2) was generally interpreted to mean that when a short-term note was coming due during a bankruptcy, either the note had to be paid at maturity or the maturity date could be extended out to the end of the plan (generally 60 months from the filing of the case). Thus, the plan could only be modified to provide for the payment of the claim by extending the term. In many courts, the statute was interpreted to mean that other terms of the short-term note could not be modified as set forth in Nobleman.

The Mission Hen Decision Changes the Interpretation of

11 U.S.C. § 1322(c)(2)

Bankruptcy Court Decision

The Mission Hen case originated in the Central District of California, before the Honorable Mark D. Houle. In the case, husband and wife debtors proposed a Chapter 13 plan that bifurcated and crammed down the claim of creditor Mission Hen, LLC, a lender that was secured by a second priority deed of trust on the debtors’ residence. The Mission Hen loan was going to mature within five years of the filing of the bankruptcy case and was a HELOC loan.

The question before the bankruptcy court was whether the phrase “payment of the claim as modified” referred to only modification of the terms of the “payment” or of the entire claim itself. Many bankruptcy courts had held that the section only meant modification of the “payment” while debtors in this case sought an interpretation that the claim itself could be modified. This was an issue of first impression because it had not been ruled upon by the Bankruptcy Appellate Panel or the Ninth Circuit Court of Appeals.

Lender Mission Hen argued that the plan violated the anti-modification provision of § 1322(b)(2) by its attempt to bifurcate its claim into secured and unsecured portions and change the payment terms even though the loan was secured only by an interest in the debtors’ home. Mission Hen also argued that the debtors could only modify the payment term, such as the length of time to pay off the debt but could not modify the other terms of the note, or even strip down the second loan if it was only partially secured.

The bankruptcy court disagreed and confirmed the plan over Mission Hen’s objection. The bankruptcy court held that § 1322(c)(2) provided a complete exception to the anti-modification provision of § 1322(b)(2) by its plain language.

The rationale of the bankruptcy court was that § 1322(c)(2) states that notwithstanding § 1322(b)(2), Chapter 13 plans can modify a home mortgage if “the last payment on the original payment schedule…is due before the date on which the final payment under the plan is due.”

In this case, there was a long-term loan secured by a first deed of trust on debtors’ residence that was maturing well after the five years of the plan and that loan was not affected by § 1322(c)(2). However, the Court held that the short-term loan of Mission Hen could be modified under § 1322(c)(2).

After the plan was confirmed, Mission Hen appealed the decision to the Bankruptcy Appellate Panel.

Bankruptcy Appellate Panel Affirms the Bankruptcy Court Decision

The Bankruptcy Appellate Panel (“BAP”) first pointed out to the parties that Congress enacted § 1322(c)(2) after the Nobleman decision, so reliance on that case was not sufficient.

The BAP then acknowledged that the Ninth Circuit had not ruled on whether § 1322(c)(2) allowed the bifurcation and “strip down” of a soon to mature claim but that two other circuit courts had allowed a debtor’s plan to do so.

The BAP concluded that, “the plain language of the statute indicated a clear congressional intent to except certain short-term mortgages from the general rule prohibiting the modification of claims secured only by an interest in a debtor’s primary residence in a Chapter 13 proceeding.” (Emphasis added.)

The BAP did not find it surprising that Congress would create an exception to § 1322(b)(2) for short-term mortgages, because the Court stated that second mortgages are often under secured.2

The BAP affirmed the bankruptcy court ruling that the plain language of § 1322(c)(2) allowed debtors to bifurcate and cram-down the Mission Hen second priority loan because it was short-term and would mature during the plan term.

The Ninth Circuit Affirms the BAP Decision

In May 2025 the Ninth Circuit Court of Appeals affirmed the decision of both lower courts. It reviewed the lower court’s conclusions of law “de novo” (from the beginning) without reference to any legal conclusions or assumptions from the lower courts.

The Ninth Circuit agreed with the lower courts that the issue was whether the phrase “payment of the claim as modified” referred to only modification of the terms of “payment” or of the entire claim itself. Although this was a matter of first impression for the Ninth Circuit, the Court agreed with other courts around the country that the correct interpretation of § 1322(c)(2) permitted a complete modification of the rights of the holder of a short term secured claim and was not limited to only modifying the payment terms. In addition, § 1325(a)(5) supported that interpretation because that subsection specifically addressed the right to cram down secured claims to the value of the property collateral.

As a result, the Court of Appeals concluded that the entire Mission Hen claim could be modified because it was a short-term loan maturing during the bankruptcy. This meant that debtors could bifurcate Mission Hen’s claim into secured and unsecured portions and cram down other terms of the secured portion of the Mission Hen loan.

Practice Pointers: Lenders on Short Term Loans Secured by a Borrower’s Residence Must Be Aware of this Decision in their Underwriting

This case has no impact on long-term loans secured by a borrower’s residence that will mature beyond the five years of a bankruptcy plan. Those loans may not be modified under § 1322(c)(2).

This case has no impact on loans that are secured by real property other than the residence of a borrower. Those loans have always been subject to modification under the Bankruptcy Code.

However, this case does have an impact on short term loans secured by a borrower’s residence. Those loans may be stripped down to the current value of the Property and other loan terms may be modified, such as the interest rate of the note. The anti-modification provisions of § 1322(b)(2) will not apply.

Lenders should be aware when underwriting a short-term loan secured by a borrower’s residence that their loan terms may not be permanent if the borrower files bankruptcy. This could be a factor in determining the risk of making this type of loan to a borrower.

A short-term lender may have some leverage if a borrower files Chapter 13 bankruptcy on a fully matured note or a note coming due during the bankruptcy.  That type of loan must be fully amortized and paid in equal installments over the term of a plan, not to exceed 60 months. The interest rate can be crammed down using a prime-plus formula from the case of Till v. SCS Credit Corp., 541 U.S. 465 (2004).  However, using this formula may result in a debtor having to make enormous loan payments and causing denial of the confirmation of the Chapter 13 plan due to infeasibility. The end result would either be dismissal or conversion of the bankruptcy case.

 

Disclaimer: The above information is intended for information purposes alone and is not intended as legal advice. Please consult with counsel before taking any steps in reliance on any of the information contained herein.

Benjamin R. Levinson, Esq. is the managing attorney for Levinson Law APC. He can be reached at ben@thelevinsonlawoffice.com.

 

[1] Although there were other issues in the case related to the eligibility of the person filing bankruptcy to be in Chapter 13, and the feasibility of the plan regarding debtors’ ability to make the required payments, those issues are not relevant to this article. 

2 It is not clear how the BAP reached that conclusion.