Opinion
Case No. 01-60779, Adv. Pro. No. 01-6020
August 13, 2001
MEMORANDUM OPINION
Hearing was held July 10, 2001, on plaintiff-debtor John Raymond Whitmore's motion for default judgment on a complaint to determine the validity, priority or extent of liens held by defendants, Household Financial Services (Household), Robert C. Dewar, and Dewey B. Morris. At conclusion of the hearing, the matter was taken under advisement. Debtor's counsel was asked to submit a memorandum of law in support of debtor's position that the court should allow him to strip off wholly unsecured junior mortgages. For the reasons stated herein, debtor's motion for default judgment will be granted.
Procedural History.
Debtor filed a bankruptcy petition under chapter 13 on April 14, 2001. On May 3, 2001, debtor commenced this adversary proceeding against Household, and amended the complaint on May 17, 2001, to correct the aliases for Household. On May 21, 2001, debtor filed a certificate of service, and answers were due by June 18, 2001. No answers were filed, and on June 21, 2001, debtor filed a motion for entry of default and default judgment.
On June 27, 2001, the clerk's office entered default against defendants Household, Dewar, and Morris.
Findings of Fact.
The debtor is the owner of real property located at 1683 Independence Court, Richmond, Virginia. The fair market value of the property is less than $75,000.00.
The property is subject to a first deed of trust lien in favor of Virginia Housing Development Authority (VDHA). Charter One Mortgage (Charter One) is the successor in interest to VHDA. The payoff on the indebtedness to Charter One is approximately $60,500.00.
A second deed of trust against the property is held by Litton Loan Servicing, L.P. (Litton) as either the successor in interest to or the agent for Advanced Financial Services, Inc. (AFS). The pay off on the indebtedness on the second lien is approximately $15,000.00.
In November 1998, debtor entered into a loan agreement with Providian National Bank, who filed a third deed of trust lien on debtor's property. Providian assigned the note to Household. The balance due under the loan agreement is at least $29,000.00.
The combined balances of the Charter One and AFS-Litton liens exceed the fair market value of the real property.
Debtor's Position.
Debtor asserts that the third deed of trust lien held by defendants is wholly unsecured and subject to strip off pursuant to 11 U.S.C. § 506. Debtor seeks to have this third deed of trust declared null and void so that Household will release the lien against the property.
Debtor distinguishes this case from the Fourth Circuit's decision in Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001)), arguing that Ryan relied on Dewsnup v. Timm, 502 U.S. 410 (1992), which applies to chapter 7 cases but does not apply to reorganization chapters. In further support of allowing lien stripping in chapter 13 cases, debtor cites 11 U.S.C. § 506(a) and 11 U.S.C. § 1322(b)(2) as statutory authority for the relief sought, along with recent case law from the U.S. Supreme Court, U.S. Courts of Appeals and various other bankruptcy courts.
Conclusions of Law.
Section 506(a) defines the secured and unsecured components of a creditor's allowed claim in accordance with the value of underlying collateral:
An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim.
Section 1322(b)(2) reads, in pertinent part, a chapter 13 plan may "modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)(2).
The interaction of these two statutory sections presents the question of whether a lien, like Household's is encompassed within the antimodification exception of § 1322(b)(2) for "claims secured only by a security interest in real property that is a principal residence of the debtor" because it is wholly unsecured under the definition of § 506(a). To determine whether a lien fits into this exception, the court must first decide whether a claim is secured by any collateral under § 506(a). If there is insufficient equity in this collateral to support the junior mortgage lien, then § 1322(b)(2) will allow debtor to modify the rights of the lienholder in his plan as the lien does not qualify for the antimodification protection clause of § 1322(b)(2).
Further, the court finds this question clearly answered in the recent U.S. Court of Appeals for the Second Circuit case decided on May 31, 2001, Pond v. Farm Specialist Realty Livingston (In re Pond), 252 F.3d 122 (2d Cir. 2001). Pond holds that wholly unsecured junior mortgage liens in chapter 13 bankruptcies may be stripped off. Id.
The court considers Pond applicable to the facts and circumstances presented by debtor's case and finds the holding in Pond persuasive on the issue of allowance of avoidance of wholly unsecured junior mortgage liens in chapter 13 bankruptcies. Id. at 127. This court adopts the reasoning of the Second Circuit and the majority of other courts that allow lien stripping in a chapter 13 case.
See, e.g., McDonald v. Master Fin., Inc. (In re: McDonald), 205 F.3d 606 (3d Cir. 2000); Barteee v. Tara Colony Homeowners Ass'n (In re Bartee), 212 F.3d 277 (5th Cir. 2000); Tanner v. FirstPlus Fin., Inc. (In re Tanner), 217 F.3d 1357 (11th Cir. 2000); Domestic Bank v. Mann (In re Mann); 249 B.R. 831 (B.A.P. 1st Cir. 2000); Lam v. Investors Thrift (In re Lam); 211 B.R. 36 (B.A.P. 9th Cir. 1997); Wright v. Com. Credit Corp. (In re Wright), 178 B.R. 703 (E.D.Va. 1995) (holding collectively that chapter 13 debtors may strip-off wholly unsecured junior mortgage liens).
Specifically, the court considers the Pond case to fall in line with the majority of courts in its holding that "the antimodification exception is triggered only where there is sufficient value in the underlying collateral to cover some portion of a creditor's claim" because the exception "applies only where a creditor's claim is at least partially secured under Section 506(a)." Pond, 252 F.3d at 125.
As in Pond, this court finds that § 1322(b)(2) permits debtors in their chapter 13 plans to modify the rights of holders of a secured claim, provided that the claim is not secured solely by the debtor's principal residence or property. See id. at 123. The court also finds that under 1322(b)(2) debtors may avoid a lien on their residential property only if there is insufficient equity in the residence to cover any portion of that mortgage lien. See id. Thus, provided the mortgage lien is wholly unsecured under § 506(a), the lien in the instant case which is not encompassed by the definition of "secured" by residential property within the scope of § 1322(b)(2)'s antimodification provision is not entitled to the protection under that statutory section's exception.
Finding this, the court holds that wholly unsecured junior mortgage liens may be stripped off by chapter 13 debtors. Household's junior deed of trust lien on debtor's property is deemed unsecured under § 506(a) because there is insufficient equity in the property to cover any portion of the lien.
Further, Household's deed of trust lien is null and void and should be released by Household. Since Household failed to respond to debtor's complaint, debtor's motion for default judgment will be granted.