Opinion
NOT FOR PUBLICATION
MEMORANDUM DECISION ON LIEN STRIP MOTION
MARGARET M. MANN, JUDGE
Debtors filed a Motion for Stripping Wholly Unsecured Junior Deed of Trust in connection with confirmation of their Chapter 13 Plan (the "Lien Strip Motion") to which Wells Fargo Bank, N.A. ("Lender") filed an opposition. The only disputed issue in the Lien Strip Motion was the valuation of Debtors' primary residence located at 12757 Via Terceto San Diego, California ("Residence"), located in the Montemar subdivision in Carmel Valley. The Court held an evidentiary hearing on this matter on November 1, 2010.
This Court allows debtors to obtain a valuation determination under § 506(a) in aid of a section 1322(b)(2) lien strip by motion, but requires that debtors serve such motion as required by Rule 7004. See, In re Pereira, 394 B.R. 501, 506-507 (Bankr. S.D. Cal. 2008).
That the Residence is the Debtors' primary residence was not disputed at trial.
Debtors allege in the Lien Strip Motion that the value of the Residence is $470,500, less than the amount owed to the first trust deed holder in the stipulated amount of $492,041. The Debtors request that this Court confirm this valuation pursuant to Fed.R.Bankr.P. 3012. Debtors' Chapter 13 plan filed December 28, 2009 calls for retention of the Residence and for Lender's second priority deed of trust to be determined to be unsecured, and "stripped" under 11 U.S.C. §§506(a), 1322(b)(2) and 1325.
References to code sections refer to Title 11 of the United States Code, also referred to as the "Bankruptcy Code" unless otherwise specified. References to a "Rule" refer to the Federal Rules of Bankruptcy Procedure, unless otherwise indicated.
Lender disputes Debtors' valuation, alleging that it holds an undersecured rather than unsecured claim, since the value of Debtors' Residence as of December 28, 2009 is $545,000 and the first lien totals $492,041. Lender argues Debtors cannot strip or otherwise modify its second trust deed because it is not a wholly unsecured creditor.
The parties presented the testimony of expert appraisers Gary Bougher and Barry Williams. Each qualified as an expert and provided expert written opinions regarding the value of the Residence. Williams' opinion of the value of the Residence as of December 28, 2009 was $545,000 and Bougher's opinion of the value of the Residence as of December 16, 2009 was $470,500.
The Court has carefully reviewed the evidence contained in the written appraisal reports and the testimony of the appraisers at the valuation hearing. The Court has also analyzed what date should be the valuation date under applicable law. The Court now renders its decision on value and the Lien Strip Motion.
I. Legal Analysis
The Bankruptcy Code expressly provides that 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). In Nobleman v. American Savings Bank et al, 508 U.S. 324 (1993), the Supreme Court confirmed that section 1322(b)(2) modification is not available when a section 506(a) valuation establishes that a lender's claim is partially secured. After Nobleman, however, the Ninth Circuit Court of Appeals, along with the majority of other circuit courts, held that the anti-modification protection of section 1322(b)(2) does not prohibit modification of the rights of a junior creditor holding a lien on a debtor's primary residence where senior liens exceed the value of the residence such that the junior creditor is wholly unsecured. Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002).
Such modification is commonly referred to as "lien stripping."
In this case, Debtors seek to modify the rights held by Lender pursuant to section 1322(b) and request that the Court determine the secured status of Lender's claim pursuant to section 506(a). This requires that the Court determine the market value of the Residence "in light of the purpose of the valuation and of the proposed disposition or use of such [Residence], and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest." 11 U.S.C. §506(a)(1). Market value is '"[t]he most probable price which a Residence should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably and assuming the price is not affected by undue stimulus.'" United States ex rel. Farmers Home Admin, v. Arnold & Baker Farms (In re Arnold & Baker Farms), 177 B.R. 648, 657 (9th Cir. BAP 1994), aff'd. 85 F.3d 1415 (9th Cir. 1996), cert. den. 519 U.S. 1054(1997).
II. Date of Value
The parties have not disputed that the Petition Date, or December 28, 2009, is the appropriate date for valuation of the Residence. The petition date is the "watershed date of a bankruptcy proceeding." Johnson v. GMAC (In re Johnson), 165 B.R. 524, 528 (S.D. Ga. 1994.) In addition, ".. .creditors' rights are fixed (as much as possible)" as of this date. Id. This approach is "clearly supported by 11 U.S.C. § 502 (b) which states the general rule that, when an objection to a claim is raised .. .the court, after notice and a hearing, shall determine the amount of such claim as of the date of the filing of the petition..." Brager v. Blum (In re Brager), 39 B.R. 441, 443 (Bankr. E.D. Pa. 1984). Neither party argued nor submitted evidence that an adjustment to either appraised value or comparables used was necessary due to an increase or decrease in property values in relation to the petition date and the date of the appraisals. The Court therefore did not consider this factor in making its adjustments to the comparables described above.
III. Analysis of Valuation Evidence.
Each appraisal was professionally conducted and each appraiser was well qualified. Both relied most heavily on the comparable sales method of determining value. To differentiate between the two appraisers' opinions, the Court considered the quality of the different appraisal reports, their testimony on direct and cross examination, and the appraisers' respective ability to substantiate the basis for their valuations. The Court found each expert generally to be credible and competent in the rendering of their opinions. Since the Court cannot differentiate between the appraisers on this basis, this finding would favor the Debtors' valuation evidence since the Lender bears the burden of proof on the valuation issue in this context. In re Sneijder, 407 B.R. 46, 55 (Bankr. S.D. N.Y. 2009).
The Court's determination of value instead is based upon its resolution of the experts' primary points of disagreement on the valuation factors of location and size, and the methodology of selecting the comparable sales used by each expert to value the Residence.
A. Valuation Factors
1. Size
According to Bougher's measurements, the Residence has Gross Living Area ("GLA") of 1, 331 square feet; approximately 200 less than the 1, 532 square feet reported by the builder and used by the County Tax Assessors. The Williams appraisal found that the Residence has a GLA of 1, 546. The key differences with the two GLA calculations were that Williams included the air space over the stairway, and the exterior portion of the fireplace in his calculation.
Bougher relied upon this size differential to select smaller properties than other units with the same floor plan in the same subdivision. These same floor plan units in Montemar also report a GLA of 1, 532 square feet in the Multiple Listing Service. Bougher also used a greater range of comparable properties.
The Court is not convinced that the size of the Residence is materially smaller than identical floor plan units in Montemar. While there may be size variations between these units, both appraisers agreed that the floor plan was the same as that of other units in the complex, which would include similar stairways and fireplaces. Ms. Paigah testified that her residence seemed smaller to her than other units in the development, however this is not sufficient for the Court to give it much weight. Whether stairways and fireplaces are included or excluded from the GLA calculation, there is insufficient evidence to conclude that other units are not essentially the same size.
2. Comparable Sales
Bougher testified that he selected his comparable sales primarily to bracket the Residence with inferior and superior properties, whereas Williams testified that his comparables were chosen for their degree of similarity to the Residence.
The only comparable shared by Bougher and Williams ("Shared Comparable") is a 1, 532 square feet condominium located at 12763 Via Terceto, the same street as the Residence. Both the Shared Comparable and the Residence are three bedroom end units. Three out of five comparable sales used by Williams were located in the Montemar development, where the Residence is located. Williams did not use two sales in Montemar which had occurred in the six month period prior to the petition date, as reflected on Lender's Exhibit G. Bougher used four condominium properties located outside Montemar, and only one within the development. Bougher's appraisal also omitted two sales in the same development as the Residence, which were used by Williams. These two sales were three bedroom condominiums with roughly the same floor plan as the Residence located on Via Holgura. Bougher testified that he did not include these two sales as comparables because one was 200 square feet larger than his measurement of the Residence, and the other did not appear in his initial search.
The evidence did not establish which approach to selecting comparable sales was superior from a professional standpoint, so the Court uses common sense to conclude that the more comparable properties are the better indicator of value. The Court finds Williams' choice of comparables more convincing and bases its value finding upon the Montemar comparable sales found in the expert reports and Exhibit G.
While Williams' choice of comparables is convincing, he made no adjustments to the value of any of his comparable sales to account for factors such as view and location. These factors nevertheless influence the Court's conclusion of value and the comparable sales prices must be adjusted for these factors.
3. Location
Both Via Nieve and Via Terceto are the access roads for the Montemar development, and both border the two busy streets of Carmel Country Road and Carmel Creek Road. Via Holgura is an interior road backing on to open land without these detrimental factors. Williams' value opinion for the Residence does not sufficiently take into account the location differences between the Via Holgura properties and the other comparables. Not only did these sales receive the highest sales prices among Williams' five comparables, the Lender's Exhibit G also reflects that these sales were of higher prices than sales on Via Nieve and Via Terceto; the two comparable sales that were not used by either expert in his report. Bougher concluded that the location of Shared Comparable on Via Terceto is superior to the Residence in that it is subject to less car and pedestrian traffic and is further from Carmel Creek Road.
3944 Via Holgura sold on November 24, 2009 for $549,000. 3972 Via Holgura sold on October 29, 2009 for $557,200.
Williams rejected the Via Nieve comparable because it was a short sale and the three bedroom Via Terceto comparable sale because the Residence has three bedrooms.
4. View
The Shared Comparable also has a superior view per the MLS listing information. Lender's Exhibit C. Its sale price of $535,000 is less than the two Via Holgura comparables. Williams' value for the Residence does not properly adjust for the inferior location or lack of view. His opinion of value of $545,000 is thus overstated.
The "site features" section of MLS for the Shared Comparable does not indicate that the property has views, but the "remarks and showing info" section states that the property has beautiful park and mountain views. Lenders' Exhibit C.
B. Reconciliation of Factors
The Court determines the value of the Residence by using only the Montemar comparable sales but adjusting them to reflect the location and view of the Residence. Based upon all of the testimony, the five most comparable sales to the Residence are: 1) 12763 Via Terceto (the Shared Comparable); 2) 12767 Via Terceto; 3) 12728 Via Nieve, 4) 3972 Via Holgura; and 5) 3944 Via Holgura. All other comparable sales were outside the Montemar development. The two Via Holgura properties establish the high end of the range because they are located in a more private section of the development and do not face a main thoroughfare. They thus have a superior location within the Montemar neighborhood compared with the Residence.
To adjust for their superior location as compared with the Residence, the Court makes a negative adjustment of $16,000 on each of the Via Holgura properties which sold for $549,000 and $557,200, this adjustment results in comparable values of $533,000 and $541,200 respectively. This location adjustment is based upon the negative adjustment made by Bougher of $16,000 to the Shared Comparable's sale price.
For Shared Comparable's superior view, Bougher made an additional negative adjustment of $7,500. The Court finds Bougher's adjustments for view and location persuasive. However, Bougher also made a negative adjustment of $9,800 for the date of the sale and an $8,000 negative adjustment to account for GLA, which the Court does not find supported by the evidence. The Court will add back $17,800 to the $495,700 adjusted value of the Shared Comparable. This analysis derives to a value of $513,500 for the Shared Comparable.
The other Via Terceto sale that occurred during a 6-month time span from June 28, 2009 to December 28, 2009 was a two bedroom townhome with a sales price of $480,000. This comparable sale is closest in location and age to the Residence, but is smaller and has one less bedroom. The Court gives this comparable sale significant weight, but makes adjustments based upon the difference in the number of bedrooms. Bougher's Comparable #4 was a two bedroom townhome outside of the Montemar development. For the difference in the number of bedrooms, Bougher made an upward adjustment of $10,000. The Court will make the same adjustment to sale price of 12767 Via Terceto. Therefore, the Court increases the value of 12767 Via Terceto by $10,000, giving a total value of $490,000.
The property located at 12728 Via Nieve is a short sale that sold for $495,500 on December 15, 2009. Similar to the Residence, it is located next to a busy thoroughfare in the Montemar development and has the same floor plan. No evidence was available to support any specific adjustment for the short sale factor.
The Court then averaged the values derived from adjusting these five comparable sales. This process determines a value of the Residence of $514,640, which the Court will round up to $515,000.
IV. Conclusion
The Court values the Residence at $515,000. Therefore, the Lender is an undersecured creditor and its lien may not be stripped from the Residence. Debtors' Lien Strip Motion is denied. The Court requests Lender's counsel to submit the order accordingly.
IT IS SO ORDERED.