Opinion
CASE NO. 04-52243.
January 5, 2005
MEMORANDUM OPINION
Introduction
Carla Denise Farthing and Troy Allen Farthing (the "Debtors") are before the court on the amended Chapter 13 Plan that they filed in the above-styled case on July 11, 2004, as amended on December 10, 2004 (the "Plan"), and Equity One, Inc. ("Equity One") is before the court on the objection to confirmation of the Plan that it filed on August 16, 2004, as supplemented on December 29, 2004 (the "Objection"). Having considered the Plan, the Objection, and the arguments of counsel, the court concludes that the Objection should be overruled and the Plan confirmed.
Factual and Procedural Background
On July 3, 2004 the Debtors filed a voluntary petition commencing this Chapter 13 case. Their schedules indicate that their residence (the "Property") was encumbered by a first mortgage in favor of the City of Richmond in the amount of $4,000.00, a second mortgage in favor of The CIT Group/Consumer Finance, Inc. ("CIT") in the amount of $54,794.70, and a third mortgage in favor of Equity One in the amount of $15,160.00. The schedules also indicate that the Property is encumbered by outstanding property taxes aggregating $1,500.00. On August 9, 2004 CIT filed a proof of claim asserting a claim in the amount of $63,207.76. On September 22, 2004 Equity One filed a proof of claim asserting a claim in the amount of $14,078.70. On November 14, 2004 the Debtors filed a proof of claim on behalf of the City of Richmond, asserting a claim in the amount of $4,000.00 but without attaching a copy of the mortgage allegedly securing the claim. Also on that date, the Debtors filed proofs of claim for real property taxes, which, as amended by the Debtors on December 10, 2004, aggregate $2,500.42.
On July 11, 2004 the Debtors filed the Plan, valuing Equity One's secured claim at zero and providing that "Debtor proposes to pay the creditor, Equity One[,] at the same rate [as] the other unsecured creditors as the debt owed [on] the first mortgage on the real property exceeds the value of the real estate. Debtor p[ro]poses the secured portion of the debt at .00." The Plan did not provide any specific treatment of the City of Richmond's first mortgage. On December 6, 2004, after conducting an evidentiary hearing, the court entered an Order establishing that the value of the Property is $68,000 for the purposes of the Plan and the Objection. The court conducted a hearing on confirmation of the Plan on January 4, 2005. At that time, counsel for the Debtors informed the court that the $4,000 first mortgage was forgivable by the mortgagee and that the mortgage was, in fact, forgiven on October 1, 2004.
Legal Discussion
Equity One contends that the Plan violates § 1322(b)(2) of the Bankruptcy Code, which prohibits the modification of "the rights of holders of secured claims . . . secured only by a security interest in real property that is the debtor's principal residence." The Supreme Court of the United States has held that this provision prohibits the "stripping down" of partially secured home mortgages, treating the secured portion as secured and the unsecured portion as unsecured. Nobelman v. Am. Sav. Bank, 508 U.S. 324, 113 S. Ct. 2106 (1993). The Sixth Circuit has held, however, that debtors may "strip off" mortgages that are totally unsecured by virtue of there being no equity over and above prior encumbrances. Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663 (6th Cir. 2002); accord, e.g., In re Williams, 161 B.R. 27, 29-30 (Bankr. E.D. Ky. 1993); In re Moncrief, 163 B.R. 492, 494 (Bankr. E.D. Ky. 1993). The question presented here is whether Equity One's mortgage is undersecured — in which case the Objection should be sustained — or unsecured — in which case the Plan should be confirmed. That question is controlled by the time that the determination is to be made: at the time this case was commenced, there was no equity in the Property; at the time of the confirmation hearing, due to the forgiveness of the first mortgage, there was $2,291.82 in equity to which Equity One's mortgage could attach.
According to the proofs of claim filed by or on behalf of the City of Richmond, CIT, and the real property taxing authorities, see 11 U.S.C. § 502(a) (claim is allowed unless party in interest objects); Fed.R.Bankr.P. 3001(f) (proof of claim constitutes prima facie evidence of validity and amount of claim), the prior encumbrances total $69,708.18, which is $1,708.18 more than the value of the Property as determined by the court.
Courts presented with this issue hold that the determination as to whether a home mortgage is secured, bringing § 1322(b)(2) into play, is to be made as of the date the petition was filed. In re Cerminaro, 220 B.R. 518, 524-25 (Bankr. N.D.N.Y. 1998); Norwest Fin. Ga., Inc. v. Thomas (In re Thomas), 177 B.R. 750, 751-52 (Bankr. S.D. Ga. 1995) (citing Johnson v. GMAC (In re Johnson), 165 B.R. 524, 528 (S.D. Ga. 1994)); In re Wetherbee, 164 B.R. 212, 215 (Bankr. D.N.H. 1994); In re Amerson, 143 B.R. 413, 416 (Bankr. S.D. Miss. 1992) (postpetition release of additional collateral does not bring § 1322(b)(2) into play); In re Green, 7 B.R. 8, 9 (Bankr. S.D. Ohio 1980) (same); see Miller v. Green Tree Consumer Discount Co. (In re Miller), Ch. 13 Case No. 99-13446DWS, Adv. No. 99-0334, 1999 WL 1052509 (Bankr. E.D. Pa. Nov. 5, 1999) ( dictum); Moncrief, 163 B.R. at 493-94 (making determination as of petition date without discussion). Some of the cases choose the petition date over an earlier date (such as the date the mortgage debt was incurred) and other courts have selected the confirmation hearing date as the date for determining the extent to which a partially secured claim is secured. However, Lane instructs that the focus under Nobelman is on the "rights of holders of secured claims," and that the threshold determination is whether the creditor is a holder of a secured claim at all. "A `claim' in bankruptcy arises at the date of the filing of the petition." Wetherbee, 164 B.R. at 215 (citing 11 U.S.C. § 502(b)). Thus, while it may be appropriate to determine the value of collateral — and, therefore, the extent to which a creditor's claim is secured — as of confirmation or the date of the valuation hearing, see 11 U.S.C. § 506(a) (last sentence), it is appropriate to determine if the creditor holds a secured claim at all as of the date the petition was filed. Conclusion
This conclusion is supported by the Congressional policy that postpetition increases in equity inure to the benefit of the Chapter 13 debtor. See 140 CONG. REC. H10,770 (Oct. 4, 1994) (regarding addition of Subsection (f) to 11 U.S.C. § 348).
"This Court holds that the crucial time for a determination as to whether a creditor is entitled to invoke the protected status of a creditor secured only in residential real estate is the time of the filing of the petition." Green, 7 B.R. at 9. Accordingly, the court will enter separate orders overruling the Objection and confirming the Plan.