In re Joiner, 25-30396 (Bankr. W.D.N.C. Sept. 2, 2025)
In re Joiner, 25-30396 (Bankr. W.D.N.C. Sept. 2, 2025) is a fascinating new Bankruptcy Court decision about the interplay of 11 USC 1190(3)—which is one of the Bankruptcy Code provisions specific to SubV Chapter 11 bankruptcy cases–and 11 USC 1111(b). This case is significant because many bankruptcy attorneys are not aware 11 USC 1190(3) exists, much less how it interfaces with 11 USC 1111(b)
Contrary to the language in Section 1190(3), the bankruptcy court did not allow bifurcation of a lien that wasn’t used to acquire a home but was used for the debtor’s small business.
In Subchapter V of chapter 11, an individual debtor has the unique ability under Section 1190(3) to modify a home mortgage if the mortgage was “not primarily used” to acquire the home and instead was used “primarily in connection” with the debtor’s small business.
In an opinion on October 2, Bankruptcy Judge Ashley Austin Edwards of Charlotte, N.C., sided with the Collier treatise in holding that the more general rule in the Section 1111(b) election enables a lender to prevent a Subchapter V individual debtor from using Section 1190(3) to modify a home mortgage.
Home Mortgage Secured a Small Business Loan
In 2017, a couple purchased their home. Six years later, the husband’s corporate business borrowed $1 million from a bank. The lender and the Small Business Administration required the husband and his wife to issue personal guarantees on the loan, secured by a lien on their home. Following default, the lender obtained a judgment in state court against the husband and wife and the husband’s corporation.
The husband and wife filed a chapter 11 petition in 2025, electing to proceed under Subchapter V. The lender filed a proof of claim for more than $1.2 million, asserting that about $465,000 was secured and $775,000 was unsecured.
Under Section 1111(b)(2), the lender filed an election to have the entire claim treated as secured. The debtors filed an objection to the election, contending that the ability to modify a lien on a home under Section 1190(3) takes precedence over the Section 1111(b) election. Judge Edwards agreed with the lender and overruled the debtors’ objection.
Section 1111(b) Wasn’t Excluded from Sub V
Judge Edwards was tasked with deciding “whether a Subchapter V debtor’s unique ability to modify a claim secured by their primary residence under § 1190(3) overrides a creditor’s right to make the § 1111(b) election to have its entire claim treated as secured.”
Pointing to Section 1123(b)(5), Judge Edwards said that debtors in chapter 11 “cannot modify a claim secured only by a security interest in the debtor’s primary residence.”
Applicable only in Subchapter V, though, Section 1190(3) provides that a debtor “may modify the rights of the holder of a claim secured only by a security interest in real property that is the principal residence of the debtor if the new value received in connection with the granting of the security interest was — (A) not used primarily to acquire the real property; and (B) used primarily in connection with the small business of the debtor.”
Section 1111(b) is on the other side of the fence. Ordinarily under Section 506(a)(1), a secured claim is allowed as a secured claim to the extent of the value of the collateral, with the deficiency allowed as an unsecured claim. When a claim otherwise would be bifurcated in that matter, a secured creditor in chapter 11 may make the election under Section 1111(b). “[T]hen notwithstanding section 506(a) of this title,” the subsection provides that “such claim is a secured claim to the extent that such claim is allowed.”
Judge Edwards explained the effect of Section 1111(b) as follows:
It is well understood that notwithstanding the plan’s ability to modify claims secured by other types of collateral under § 1123(b)(5), § 1111(b)(2) allows creditors who have a partially secured claim to elect to have their entire claim treated as secured.
Although Section 1190(3) “gives individual Subchapter V debtors a unique opportunity to modify the liens of creditors secured by their primary residence,” Judge Edwards saw “no evidence that it overrides or takes away the creditors’ right to elect under § 1111(b).” She was following the Collier treatise, which says that an undersecured creditor in Subchapter V, “like any undersecured creditor, [may] elect the application of section 1111(b) to have its entire claim treated under the plan as secured by its collateral.”
Although conceding that “§ 1190(3) is more specific and that the legislative intent behind Subchapter V was to protect small business owners,” Judge Edwards decided that “§ 1181(a) [is] dispositive as to this issue.” While Section 1181(a) “identifies general Chapter 11 provisions that do not apply in Subchapter V cases,” she said, “[n]otably, § 1111 is not included.”
Overruling the debtors’ objection to the debtor’s Section 1111(b) election, Judge Edwards held “that an § 1190(3) election — whether proper or not — does not override an § 1111(b) election.”
Observations
Section 1190(3) seems designed for precisely the type of case confronting Judge Edwards. As she pointed out, however, Section 1181(a) did not exclude Section 1111(b) from Subchapter V cases. Was the omission of Section 1111(b) a mistake in drafting Section 1181(a) of Subchapter V?
By applying Section 1111(b) in all Subchapter V cases, Section 1190(3) serves virtually no purpose because it could be applicable in a plan only when the secured creditor consents. If Section 1190(3) only works when the secured creditor consents to bifurcation, why include Section 1190(3) in the first place? Was it included in Subchapter V only to cover cases when the secured creditor is inattentive? Perhaps Section 1190(3) would have utility when the lender consents, but the bankruptcy court wouldn’t otherwise approve the plan for violating Section 1123(b)(5).
The inclusion of Section 1190(3) seems peculiar if it’s only effective when the secured creditor consents.
Sections 1190(3), 1111(b) and 1181(a) could be read together in a fashion where they are not at war.
Take a more typical case of a corporate debtor in Subchapter V with secured debt. Likely as not, the drafters did not exclude Section 1111(b) from Subchapter V to prevent a corporate debtor from bifurcating secured debt over objection from the lender. The drafters could have included Section 1190(3) for application in atypical cases where the debtor is an individual with a home mortgage. In those cases, bifurcating a mortgage makes sense when the lien on a home was not used to acquire the home.