Opinion
Case No. 15-31474
2020-09-21
IN RE: Patricia D. SHORT, Debtor
Joyce M. Deitering, Dayton, OH, for Debtor.
Joyce M. Deitering, Dayton, OH, for Debtor.
Decision Granting Debtor's Motion for Summary Judgment
Guy R. Humphrey, United States Bankruptcy Judge
I. Introduction
This contested matter raises the issue of whether a debtor may avoid a mortgage interest which attached prepetition to the debtor's ex-husband's undivided one-half interest in residential real estate. The debtor was not personally liable under the mortgage or the promissory note that was secured by the mortgage. The parties stipulated that there was no value to which the mortgage would attach under 11 U.S.C. § 506 due to a superior mortgage. Because the debtor, at a minimum, held an equitable interest in her ex-husband's one-half interest in the property at the time the bankruptcy petition was filed, the court finds that the debtor may avoid the mortgage under § 506 and Lane v. Western Interstate Bancorp , 280 F.3d 663 (6th Cir. 2002).
II. Factual and Procedural Background
Debtor Patricia Short ("Patricia") filed a Motion for Determination that the Mortgage/Lien of Multi-Investments is Wholly Unsecured and Void and the mortgagee, Multi-Investments, filed a response in opposition. Patricia has filed a Motion for Summary Judgment which Multi-Investments, LLC ("Multi-Investments") also opposed. The parties have filed stipulations which serve as the basis for the court's factual findings (the "Stipulations") (doc. 105).
In October of 2011, Patricia's then-husband, Kenneth Short ("Kenneth") granted a mortgage in favor of Multi-Investments (the "Mortgage"). Stipulations ¶ 9 and Exhibit D. Kenneth also executed a $50,000 Cognovit Promissory Note ("Note") payable to Multi-Investments in his individual capacity and in his capacity as the sole member of All Sports Apparel, LLC ("All Sports"). Stipulations ¶ 8 and Exhibit C. Patricia did not sign the Note or the Mortgage in any capacity. Stipulations ¶¶ 8, 9. The Mortgage was granted by Kenneth to secure the Note with his undivided "one-half interest" in 940 Hollendale Drive, Dayton Ohio, 45429, the Shorts' marital residence (the "Property"). Stipulations ¶¶ 2, 13. The Mortgage has second priority on the Property behind a senior mortgage held by The Bank of New York Mellon, as Trustee for CWMBS Reperforming Loans REMIC Trust Certificates, Series 2004-R2, assignee from Wells Fargo Home Mortgage, Inc. (the "First Mortgage"). Stipulations ¶¶ 6, 7, 11. At both the time that Kenneth executed the Mortgage and it was recorded, the Property was titled jointly to Patricia and Kenneth through a joint-survivorship deed. Stipulations ¶ 3, 4.
In 2012, Multi-Investments obtained judgment on the Note in state court, finding Kenneth and All Sports liable in the amount of $47,785.11, plus interest. Stipulations ¶ 14 and Exhibit E. In 2013 Patricia filed a complaint for divorce and on February 20, 2015, a Final Judgment and Divorce Decree was issued. Stipulations ¶ 15 and Exhibit F. In the Divorce Decree, the court ordered that the Property was to be the sole property of Patricia, that the Mortgage would remain on the Property, and both parties would be equally responsible for payment of the Mortgage, that Patricia would not be liable on the Mortgage as it was in Kenneth's name only, and that Kenneth would quit claim his interest in the Property to Patricia within 30 days of the filing of the Divorce Decree. Stipulations ¶ 16. Accordingly, while Patricia had no liability to Multi-Investments on the Note and Mortgage, she would have to pay one-half of the indebtedness through the Divorce Decree to retain the Property.
A few months after the Divorce Decree was entered, on May 6, 2015, Patricia filed her Chapter 13 bankruptcy petition. Stipulations ¶ 17. On December 4, 2015 she recorded a copy of the Divorce Decree to evidence transfer of the Property solely to her since Kenneth did not quit-claim his interest within 30 days of the filing of the Divorce Decree. Stipulations ¶ 18. The parties agreed that Patricia's recording of the Divorce Decree effected the transfer of Kenneth's undivided one-half interest in the Property to her.
The Divorce Decree specifically provided: "The Court orders Defendant to quit-claim his interest in the marital residence to Plaintiff within thirty (30) days of the filing of the Final Judgment and Decree of Divorce. If Defendant does [not] quit-claim such interest the Court orders that this Final Judgment and Decree of Divorce can be recorded with the Montgomery County Recorder's office to transfer Defendant's interest in the marital residence to Plaintiff." Stipulations ¶ 16 and the Divorce Decree (Exhibit F). Such provisions are common in Ohio divorce decrees. See Justice v. Justice , Case No. DR 02-06-0734, 2003 Ohio Misc. LEXIS 108, at *3 (Ohio Ct. App. May 9, 2003); Bowersmith v. Bowersmith , Case No. 2010 DR 0218, 2011 Ohio Misc. LEXIS 8293, at *18-19 (Ohio Ct. App. Jan. 13, 2011).
Multi-Investments filed a proof of claim in Patricia's case, asserting a secured claim in the amount of $73,036.86 and an unsecured claim in the amount of $3,651.85. Proof of Claim 8-1. The Chapter 13 Trustee filed an objection to that claim and the parties entered into an agreed order resolving that objection which provided in pertinent part that: "The claim of Multi Investments, LLC is not the Debtor's debt, and will not be paid by the Debtor or the Plan." Patricia subsequently filed the Motion to Avoid Lien commencing this contested matter.
The Property's appraised value as of April 21, 2015 was $95,000 and the balance due on the First Mortgage as of September 7, 2018 was $101,219.79. Stipulations ¶¶ 19-20. The balance on the First Mortgage was filed as $101,497.61 as of August 7, 2015. Proof of Claim 9-1.
III. Positions of the Parties
The parties have stipulated that the amount owed on the First Mortgage exceeds the value of the Property and therefore the Mortgage is wholly unsecured. The only issue is whether Multi-Investments has a claim in the bankruptcy case and if it does, if Patricia may avoid the Mortgage.
Patricia's position is that she may strip the Mortgage from her property because (1) the amount owed on the First Mortgage exceeds the value of the Property; (2) she is the sole owner of the Property; (3) the Mortgage is a claim in her bankruptcy case that is subject to modification under 11 U.S.C. §§ 506(a) and 1322(b) ; and (4) stripping the Mortgage from the Property will not affect Kenneth's personal liability on the claim. Patricia focuses on the following cases to support her position: In re Mensah-Narh , 558 B.R. 134 (Bankr. D.N.J. 2016) ; Bailey v. Deutsche Bank Nat'l Trust Co. (In re Bailey) , Adv. No. 3:16-ap-125-PMG, 2017 WL 587980, 2017 Bankr. LEXIS 429 (Bankr. M.D. Fla. Feb. 13, 2017) ; Lopez v. Specialized Loan Servicing, LLC (In re Lopez) , Adv. No. 19-03046-KRH, 2019 WL 4935661 (Bankr. E.D. Va. Oct. 7, 2019).
Multi-Investments' position is the Mortgage is not an "enforceable obligation of the debtor" and therefore not a "claim" subject to § 506(a). Multi-Investments asserts that it is not a creditor of Patricia because Patricia did not sign the Note or the Mortgage and the Mortgage lien only attached to Kenneth's undivided one-half interest in the Property. Multi-Investments relies on In re Brown , 536 B.R. 837 (Bankr. D. Minn. 2015) to support its argument.
IV. Analysis
A. Jurisdiction
This court has jurisdiction pursuant to 28 U.S.C. § 1334, this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L) and (O), and this court has constitutional authority to enter a final judgment.
B. Summary Judgment Standard
Federal Rule of Civil Procedure 56(a), made applicable to this contested matter by Federal Rules of Bankruptcy Procedure 7056 and 9014(c), sets forth the standard to address the parties' filings. It states, in part, that a court must grant summary judgment to the moving party if the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law. In order to prevail, the movant, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587–88, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
C. The Legal Basis for Stripping Wholly Unsecured Mortgages
Patricia seeks to avoid Multi-Investments' mortgage pursuant to § 506 of the Bankruptcy Code and Lane v. W. Interstate Bancorp (In re Lane ), 280 F.3d 663 (6th Cir. 2002).
Bankruptcy Code § 1322 describes permissible provisions for a Chapter 13 debtor's plan. Specifically, § 1322(b)(2) provides as follows:
(b) Subject to subsections (a) and (c) of this section, the plan may—
* * *
(2) 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, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims
11 U.S.C. § 1322(b)(2). Although this provision is phrased in permissive language, it is more commonly known as the anti-modification rule for mortgage loans made on a debtor's primary residence because it generally prohibits the modification of such a mortgage in Chapter 13. See Nobelman v. Am. Sav. Bank , 508 U.S. 324, 332, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) (holding that a Chapter 13 debtor may not strip down a mortgage lien to the value of the underlying property if there is value to which the lien attaches).
Section 506(a)(1), on the other hand, provides in pertinent part:
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 ....
11 U.S.C. § 506. Under § 506(a)(1), a claim is only a secured claim to the extent there is value in the collateral to which that lien attaches. If all of the value in that collateral is secured by higher priority liens, then the claim which would otherwise be secured by that collateral is deemed to be unsecured. See Bank of Am., N.A. v. Caulkett , 575 U.S. 790, ––––, 135 S. Ct. 1995, 1999, 192 L.Ed.2d 52 (2015).
In Lane , the Sixth Circuit analyzed § 1322(b)(2) in conjunction with § 506(a)(1) and determined that debtors in Chapter 13 cases can avoid or strip off mortgages which are wholly unsecured, stating:
But when Congress divided the universe of claimants into those with "secured claims" and those with "unsecured claims," it was not merely distinguishing between claimants possessed of security interests and claimants not possessed of such interests. Insofar as claimants with homestead liens are concerned, rather, the dividing line drawn by § 1322(b)(2) runs between the lienholder whose security interest in the homestead property has some "value," see § 506(a), and the lienholder whose security interest is valueless.
In the case at bar, as we have seen, the security interest that FirstPlus holds in the debtors' homestead property is totally valueless. FirstPlus is thus the holder of an "unsecured claim," pure and simple – and if the words of § 1322(b) mean what they plainly say, the rights of a creditor holding such a claim "may" be modified by the debtors' Chapter 13 plan.
Lane , 280 F.3d at 668. The Sixth Circuit relied upon §§ 506(a) and 1322(b)(2) to conclude that wholly unsecured mortgages may be stripped in Chapter 13 through a debtor's plan. At least six other circuit decisions also have determined that debtors in Chapter 13 cases can avoid or strip off mortgages which are wholly unsecured.
Pond v. Farm Specialist Realty (In re Pond ), 252 F.3d 122 (2d Cir. 2001) ; McDonald v. Master Financial, Inc. (In re McDonald ), 205 F.3d 606 (3d Cir. 2000) ; Burkhart v. Grigsby , 886 F.3d 434 (4th Cir. 2018) ; Bartee v. Tara Colony Homeowners Ass'n (In re Bartee ), 212 F.3d 277 (5th Cir. 2000) ; Zimmer v. PSB Lending Corp. (In re Zimmer) , 313 F.3d 1220 (9th Cir. 2002) ; Tanner v. FirstPlus Financial, Inc. (In re Tanner ), 217 F.3d 1357 (11th Cir. 2000). Two Bankruptcy Appellate Panel decisions also have reached the same conclusion. See Domestic Bank v. Mann (In re Mann) , 249 B.R. 831 (B.A.P. 1st Cir. 2000) ; Fisette v. Keller (In re Fisette) , 455 B.R. 177 (B.A.P. 8th Cir. 2011).
D. Definition of a "Claim"
The crux of this contested matter is whether Multi-Investments held a claim against Patricia, or her property, at the time she filed her bankruptcy petition. Multi-Investments argues that, at the time the bankruptcy was filed, it only held a debt owed by Kenneth and a lien against Kenneth's undivided one-half interest in the Property. Multi-Investments concludes that it has no claim in the bankruptcy which may be treated under Patricia's plan. Accordingly, an examination of the meaning of the term "claim" is in order.
The pertinent time period for determining the existence of a claim under § 502 is the petition date. See 11 U.S.C. § 502(b) ; In re Phar-Mor, Inc. , 290 B.R. 319, 324 (Bankr. N.D. Ohio 2003) ; In re O.P.M. Leasing Servs., Inc. , 56 B.R. 678, 684 (Bankr. S.D.N.Y. 1986).
Under Bankruptcy Code § 101(5) a "claim" is defined as:
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
In Johnson v. Home State Bank the Supreme Court addressed whether a debtor who discharged a mortgage debt in a prior Chapter 7 case could include the mortgage in a subsequent Chapter 13 case (colloquially known as a "Chapter 20") and cure any defaults under the mortgage through a Chapter 13 plan. 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991). The Court determined that a discharge in a Chapter 7 bankruptcy case extinguishes only the in personam claim against the debtor. Id. at 84-85, 111 S.Ct. 2150. See Dewsnup v. Timm , 502 U.S. 410, 416, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) (holding that a Chapter 7 debtor may not strip down a mortgage to the value of the underlying property, stating that "the fresh start does not extend to an in rem claim against property but is limited to a discharge of personal liability."). The Johnson Court decided that a mortgage interest is a claim under § 101(5). Johnson , 501 U.S. at 84-85, 111 S.Ct. 2150. Therefore, the Court reasoned that the mortgage lien that survives a debtor's personal discharge in a Chapter 7 case is a claim which may be addressed in a debtor's subsequent Chapter 13 case:
The conclusion that a surviving mortgage interest is a "claim" under § 101(5) is consistent with other parts of the Code. Section 502(b)(1), for example, states that the bankruptcy court "shall determine the amount of [a disputed] claim ... and shall allow such claim in amount, except to the extent that ... such claim is unenforceable against the debtor and property of the debtor " (emphasis added). In other words, the court must allow the claim if it is enforceable against either the debtor or his property. Thus, § 502(b)(1) contemplates circumstances in which a "claim," like the mortgage lien that passes through a Chapter 7 proceeding, may consist of nothing more than an obligation enforceable against the debtor's property. Similarly, § 102(2) establishes, as a "rule of construction," that the phrase " ‘claim against the debtor’ includes a claim against property of the debtor." A fair reading of § 102(2) is that a creditor who, like the Bank in this case, has a claim enforceable only against the debtor's property nonetheless has a "claim against the debtor" for purposes of the Code.
Id. at 85, 111 S.Ct. 2150.
Accordingly, a creditor's interest in a debtor's real property which is solely in rem is a "claim" under §§ 101(5) and 1322 which may be treated under a Chapter 13 plan.
E. Avoidance of Mortgage Liens by Debtors Relating to Liens Filed Against the Interests of Non-debtors
In recent cases, the issue of whether a debtor may avoid a mortgage lien under § 506 as being wholly unsecured when the debtor is not obligated on the mortgage and underlying note, or when the lien extends to non-debtor interests has been addressed. Each of these cases has had somewhat different factual circumstances, but all of them involve the attempted avoidance of a mortgage when non-debtors granted the mortgage in whole or in part. In In re Fling , Mildred Fling executed a promissory note and mortgage in favor of Chase Bank and subsequently filed a Chapter 7 case, discharging her in personam liability on the note and mortgage. Case No. 14-24256 HRT, 2015 WL 5168379 (Bankr. D. Colo. Sept. 1, 2015). Subsequently Mildred conveyed the real property to the debtor, Scott Fling, through a quitclaim deed. Scott Fling then filed a Chapter 13 case and provided for the avoidance of Chase's mortgage lien on the property through his plan and through a separate valuation motion. Chase did not contest the valuation of the property and the court determined that there was no value to which Chase's mortgage could attach. The court applied Johnson v. Home State Bank and found that the debtor could avoid Chase's mortgage lien even though the debtor never signed Chase's note or mortgage and acquired the property through the quitclaim deed subject to the mortgage.
In In re Brown , the debtor sought to avoid a second mortgage lien held by HomeTown Credit Union ("HomeTown"). 536 B.R. 837 (Bankr. D. Minn. 2015). At the time HomeTown obtained its second mortgage, the debtor was married, and the debtor and her former spouse jointly owned the property securing the mortgage and both signed the mortgage and underlying credit agreement with HomeTown. Subsequently the debtor and her spouse got divorced and her ex-husband quitclaimed his interest in the real property to her. The debtor later filed the Chapter 13 bankruptcy case and sought to avoid HomeTown's mortgage through her Chapter 13 plan. The court addressed the legal issue of whether the debtor under those facts could avoid HomeTown's lien as pertained to the ex-husband's one-half interest which was conveyed to her prepetition as a result of their divorce.
The Brown court found that Johnson v. Home State Bank did not allow for the avoidance of the mortgage lien as related to the ex-husband's former one-half interest in the property, stating that:
In the end, lien stripping simply cannot divest the lien to the extent that it continues to secure the ongoing liability of the Debtor's ex-husband. His liability to HomeTown is not a debt matchable to a claim that is allowable or cognizable in the bankruptcy case of a third party to that debt – i.e. the Debtor.
Id. at 840. The court explained its rationale from what it characterized as "tracing":
1. The debtor and her ex-husband each granted the mortgage interest as to their individual undivided one-half interests in the property, with the lien only attaching to their own undivided one-half interest.
2. The lien granted by the ex-husband on his undivided one-half interest in the property survived the divorce.
3. The divorce court was able to allocate liability for the payment of joint marital debts, but cannot order the release of spouses from jointly held debt.
4. When the debtor received her ex-husband's interest in the property, she received no greater interest in the property than he held.
5. When the ex-husband's one-half interest passed to the debtor through the quitclaim deed and divorce, it came to the debtor with and subject to the mortgage lien granted by the ex-husband.
6. When the debtor filed her Chapter 13 bankruptcy, the one-half interest she acquired through the divorce from her ex-husband remained subject to the mortgage lien granted by her ex-husband.
See Id. at 840-42. The court then explained that the debtor could only exercise the right to strip HomeTown's lien "if HomeTown's rights match to a ‘claim’ subject to bankruptcy processes in that case." Id. at 842. The court concluded that the debtor could not avoid the lien to the extent it secured the debtor's ex-husband's interest because her stripping rights did not "match" with the ex-husband's former interest in the property.
In In re Mensah-Narh , the debtor sought confirmation of Chapter 13 plan which would avoid a wholly unsecured mortgage held by TD Bank. 558 B.R. 134 (Bankr. D.N.J. 2016). TD Bank objected, among other reasons, on the basis that the strip off was impermissible because, while the debtor's ex-husband conveyed his one-half interest in the property to her through a post-petition quitclaim deed, both the debtor and her ex-husband granted the mortgage and, therefore, the debtor could not avoid the lien as to the ex-husband's former one-half interest in the property. The court addressed Brown and the issue of whether "the bankruptcy can affect the debt against a third party, in this case, the Ex-Husband." Id. at 138. The court first distinguished In re Fernandez , No. 13-14374-BKC-LMI, 2013 WL 5976249 (Bankr. S.D. Fla. Nov. 3, 2013). In Fernandez , the court did not allow the debtor's avoidance of a condominium association's lien to the extent it secured the debtor's ex-wife's prepetition obligation to the association. The court found that Fernandez was distinguishable since the recorded quitclaim deed through which the ex-wife conveyed the property to the debtor extinguished the lien as to the ex-wife's interest. The court analyzed Johnson v. Home State Bank , noting the distinction which the Supreme Court made between in rem claims and in personam claims and determined that "since the in rem claim as to the Ex-Husband is against property of Debtor, it is also a ‘claim against the debtor’ pursuant to § 102(2) and is subject to modification under the Code." Thus, the court determined that since the debtor owned 100% of the interests in the property, but took the ex-husband's interest in the property subject to TD Bank's mortgage lien, the in rem lien as to the ex-husband's interest was a claim against the debtor. Citing §§ 541(a)(7) and 1306(a)(1), the court also noted that it did not matter that the debtor received her ex-husband's interest in the property post-petition, as property of the estate includes "any interest in property that the estate acquires after the commencement of the case."
In another decision, the debtor was previously married, and she and her ex-husband executed and granted two mortgages on the martial residence during that marriage. Bailey v. Deutsche Bank Nat'l Trust Co. (In re Bailey ), Adv. No. 3:16-ap-125-PMG, 2017 WL 587980, 2017 Bankr. LEXIS 429 (Bankr. M.D. Fla. Feb. 13, 2017). The debtor and ex-husband divorced, and her ex-husband conveyed to her, through a quitclaim deed, his interests in their residence secured by the two mortgages. She then filed her bankruptcy and sought to avoid the second mortgage as being wholly unsecured. The holder of the second mortgage objected, contending that she could not avoid that mortgage since the mortgage and note were also in the name of the debtor's ex-husband. The court overruled the mortgage holder's objection, finding that the mortgage was wholly unsecured, was a claim in the debtor's bankruptcy which was subject to modification under § 1322(b)(2) and § 506(a), and that the modification of the mortgage would not impact the ex-husband's personal liability on the claim. The court specifically held that:
The creditor's in rem claim is a claim in the bankruptcy estate, regardless of the
separate joint personal liabilities that it secures, in part because a "claim against the debtor" includes a "claim against property of the debtor" pursuant to § 102(2) of the Bankruptcy Code. Id. at 138 ; 11 U.S.C. § 102(2). "Since the in rem claim as to the Ex-Husband is against property of the Debtor, it is also a ‘claim against the debtor’ pursuant to § 102(2) and is subject to modification under the Code." In re Mensah-Narh , 558 B.R. at 138-39.
Id. at *4, 2017 Bankr. LEXIS 429 at *9-10. The court noted that "[t]he Defendant's second mortgage is a claim against the Debtor or Property of the Debtor in the Debtor's Chapter 13 case, even though it also secures her former husband's personal liability for the debt." Id. at *4, 2017 Bankr. LEXIS 429 at *10. Finally, the court emphasized that the stripping of the mortgage from the real property would not affect the ex-husband's personal liability on the mortgage debt.
The most recent decision in this series of cases is Lopez v. Specialized Loan Servicing LLC (In re Lopez) , Adv. No. 19-03046-KRH, 2019 WL 4935661 (Bankr. E.D. Va. Oct. 7, 2019). The debtor and his brother owned the subject real property as joint tenants with the right of survivorship. After a trial on an adversary proceeding seeking to avoid the second mortgage as wholly unsecured, the court found that there was no value to which the mortgage attached. While both the debtor and his brother signed the second mortgage, only the debtor signed the underlying promissory note. The court identified the issue to be determined as "whether a chapter 13 debtor may strip off an unsecured lien from real property that is titled as joint tenants with rights of survivorship, where the joint tenant is not a joint debtor in the bankruptcy case." Id. at *2. In answering that question in the affirmative, the court noted that the second mortgage holder filed a proof of claim asserting a claim in the approximate amount of $40,000 and noted that the claim was deemed allowed since no party objected to that claim and was secured to the extent of the mortgagee's interest in the property and unsecured to the extent that the mortgagee's interest in the property was less than the amount of its claim. The court then distinguished Alvarez v. HSBC Bank USA, N.A. (In re Alvarez ), 733 F.3d 136 (4th Cir. 2013) in which the Fourth Circuit concluded that a mortgage could not be avoided under similar circumstances when title to the property was held as tenants by the entirety, noting that in Virginia "joint tenancies with right of survivorship are dramatically different" from tenancies by the entirety in that ownership interests in property held jointly with right of survivorship could be unilaterally severed, while entireties property interests could not be severed in that manner. Lopez at *3 (citation omitted). In determining that the mortgage could be avoided, the court concluded that its holding was consistent with § 506(a) and (d) and to hold otherwise would "needlessly frustrate a debtor's ability to obtain a fresh start." Id. at *4 (citation omitted).
F. Multi-Investments, as the Grantee of the Mortgage Against the Property, holds a Claim Against Patricia
Multi-Investments' primary argument is that Patricia should not be able to strip the Mortgage from the Property because it has no enforceable obligation against Patricia and does not have a claim. However, Multi-Investments does have a claim against the Property. By the terms of the Divorce Decree, prior to the petition date, Patricia received Kenneth's undivided one-half interest in the Property that was secured by the Mortgage. As will be detailed, Multi-Investments obtained an in rem claim when Patricia gained an equitable interest in Kenneth's undivided one-half interest through the Divorce Decree. Then the legal interest in Kenneth's one-half interest in the Property became property of the estate during the pendency of the case when Patricia recorded the Divorce Decree on December 4, 2015.
Under the Chapter 13 Plan, all property remained property of the estate unless the case was "dismissed, discharged or converted" absent an order of the court which determined otherwise. Plan, ¶ 9 (doc. 7).
Multi-Investments fervently argues that it holds no enforceable claim against the debtor , but § 502(b)(1) provides that the court shall determine the amount of claims except to the extent that such claims are "unenforceable against the debtor and property of the debtor." As reiterated in Johnson , even if a creditor only has a claim against a debtor's property, it still holds a claim in a Chapter 13 case which may be administered. To further its argument that it does not hold a claim, Multi-Investments disputes that Patricia was the sole owner of the Property at the time she filed bankruptcy. Therefore, it argues, if Patricia did not have an interest in Kenneth's one-half interest in the Property, it does not have a claim against Patricia's property, or a claim in the bankruptcy case, and Patricia may not invoke § 506(a).
The point of contention with regard to Patricia's ownership of the Property is that Patricia did not record the Divorce Decree until December 4, 2015, approximately 7 months after she filed her bankruptcy petition. Multi-Investments contends that Patricia did not receive full ownership of the Property until she recorded the Divorce Decree and therefore at the time of her petition, she did not own the Property in fee simple and had no interest in Kenneth's undivided one-half interest.
However, the Divorce Decree was entered by the state court on February 20, 2015, prior to the filing of Patricia's bankruptcy petition. By virtue of the Divorce Decree which ordered Kenneth to convey his one-half interest in the Property to Patricia, Patricia gained an equitable interest in Kenneth's undivided one-half interest. Under Ohio law, divorcing spouses receive ownership interests in property conveyed through divorce decrees even if the legal interest has not yet been conveyed through a deed or other recorded instrument. For example, in In re Estate of Dinsio , the court held that a former wife retained ownership of real property conveyed to her through a divorce decree despite her 25-year delay in recording the divorce decree and despite the probate court for her ex-husband's estate having conveyed the property to the ex-husband's children. 159 Ohio App.3d 98, 823 N.E.2d 43, 46-47 (2004). The court stated:
Property interests in bankruptcy are normally determined under state law. Butner v. United States , 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Ohio law is applicable under these circumstances to determine Patricia's interests in the Property.
The judgment entry of divorce awarded appellee ownership of the property. The domestic relations court that presided over appellee's and Dinsio's divorce had the authority to enter a judgment divesting Dinsio of the title of the property and vesting it in appellee, and that judgment had the effect of a conveyance executed in due form of law.
Id. at 46. Similarly, in Padgett v. Home Fed. Bank , No. CA97-07-154, 1998 WL 204943, at *9 (Ohio Ct. App. Apr. 27, 1998), the divorce decree ordered the ex-husband to convey his interest in real property to his ex-wife, but he never did. In the meantime, the State of Ohio filed tax judgment liens against the ex-husband which it asserted were valid liens against the property since title was never transferred out of his name pursuant to a deed. While the decision concluded that the State held an interest in the real property by virtue of the judgment liens, it also found that the ex-wife's equitable interest in the ex-husband's share of the real property could not be levied upon by the State and had priority over the State's judgment liens.
Finally, in Jamison v. Jamison , No. 106185, 2018 WL 1975744 (Ohio Ct. App. Apr. 26, 2018) the court held that the decedent's children and grandchildren were entitled to a declaration of a constructive trust over a vacation cottage when the decedent failed to convey the cottage into a trust for their benefit when he was required to do so pursuant to his divorce decree with his first wife. The Court stated:
Having been incorporated into the divorce decree, Ralph and Myra's agreement requiring him to transfer the cottage into the trust "acquired the sanctity of a court order." Ralph's failure to transfer the cottage into the trust had the effect of avoiding his court-ordered obligation and depriving the children of their equitable interest in the property.
Id. at *4 (citation omitted).
At the time she filed her bankruptcy, Patricia held the equitable interest in 100% of the Property, but legal title to only 50%. While Patricia may not have yet received legal title to Kenneth's one-half interest in the Property on the petition date, she did have an equitable ownership interest and the legal interest was conveyed during the pendency of this Chapter 13 case. Upon recording the Divorce Decree during the Chapter 13 case, she became legal title owner to 100% of the Property. Under either analysis, Kenneth's one-half interest in the Property was property of Patricia's bankruptcy estate and any lien on that one-half interest was an in rem claim in the case which could be treated in the Chapter 13 case under Johnson v. Home State Bank .
While not dispositive of the matter, Multi-Investments' filing of a proof of claim in this case sheds light on the matter. Multi-Investments understood it held a lien against the Property and that Patricia owned interests in the Property and by filing the proof of claim, it sought to protect its interests in the Property, which was then-owned in fee simple by Patricia.
With very limited exceptions, § 541(a)(1) brings into the bankruptcy estate "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The concept of "property of the estate" has been construed very broadly. Segal v. Rochelle , 382 U.S. 375, 379, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966) ("[T]he term ‘property’ has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed."); Tyler v. DH Capital Mgmt. , 736 F.3d 455, 461 (6th Cir. 2013) (similar); Booth v. Vaughan (In re Booth ), 260 B.R. 281, 285 (B.A.P. 6th Cir. 2001) (similar). Section 1306(a)(1) sweeps into the Chapter 13 bankruptcy estate all property specified in § 541 plus "all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first[.]" 11 U.S.C. § 1306(a)(1). See Mensah-Nahr , 558 B.R. at 137-38 (finding that it did not matter that the debtor received her ex-husband's interest in the property post-petition, as property of the estate includes "any interest in property that the estate acquires after the commencement of the case.").
Multi-Investments argues that the post-petition acquisition of property by the bankruptcy estate "is limited to after-acquired property that is ‘created with or by property of the estate.’ " 11 U.S.C. § 541(a)(7). However, Multi-Investments misconstrues the applicability of § 541(a)(7) in Chapter 13. The qualification in § 541(a)(7) applies to Chapters 7 and 11 cases, but it does not modify or limit the applicability of § 1306 which sweeps in the post-petition acquisition of property of the estate in a Chapter 13 case regardless of whether it is property generated from property of the estate. See Carroll v. Logan , 735 F.3d 147, 150-51 (4th Cir. 2013) (" Section 1306 is a straightforward formula for calculating Chapter 13 estates[.]"); In re Smith , 92 B.R. 287, 291 (Bankr. S.D. Ohio 1988) (noting that § 1306 "brings after-acquired property and personal earnings into the bankruptcy estate"). In sum, by virtue of § 1306(a)(1), the one-half legal interest Patricia acquired post-petition is property of the Chapter 13 estate.
To summarize, the Divorce Decree subjected Patricia to responsibility on an in rem basis for the Mortgage. Although the Divorce Decree did not make Patricia personally liable to Multi-Investments for the debt, it did require her to pay Multi-Investments from the sale of the Property. Additionally, the Divorce Decree, at a minimum, created an equitable ownership interest in Kenneth's one-half interest in the Property in favor of Patricia. Therefore, when the Divorce Decree was entered prepetition, Patricia had legal title to an undivided one-half interest in the Property and, at a minimum, the equitable ownership interest in the other undivided one-half interest in the Property. At the time of the filing of the bankruptcy petition, this was the status of the ownership. Then, when Patricia recorded the Divorce Decree post-petition, she obtained legal title to the entirety of the Property. Thus, because under § 541, all interests of the debtor come into the estate as property of the estate, including equitable interests, Patricia's equitable interest in the Property remained subject to the Mortgage at the time the petition was filed and the legal interest in the property came into her bankruptcy estate post-petition pursuant to § 1306(a)(1).
It follows that the Mortgage was an encumbrance against Patricia's interest in Kenneth's undivided one-half interest in the Property. First, it was a mortgage lien on the underlying Property, and second, it was an equitable mortgage against her equitable interest in the Property, both by virtue of it being prior in time to her acquisition of the legal interest in Kenneth's undivided one-half interest in the Property and, in addition, by virtue of the terms of the Divorce Decree. See Thornton v. Guckiean & Co. , 77 Ohio App.3d 794, 603 N.E.2d 1066, 1069 (1991) (land contract purchaser who granted a mortgage on his equitable interest in the property granted the mortgagee an "equitable mortgage."); Griffin v. First Nat'l Acceptance Co. , Case No. 2012-T-0075, 2013 WL 5446342, at *5, 2013 Ohio App. LEXIS 4588, at *11-12 (Ohio Ct. App. Sept. 30, 2013) (land contract purchaser who granted a mortgage on his equitable interest in the property granted the mortgagee a mortgage which was "equitable in nature."). Therefore, Multi-Investments held an in rem claim against Patricia's equitable ownership interest in Kenneth's undivided one-half interest in the Property when she filed her bankruptcy petition, which then became a mortgage against her legal title ownership of the Property upon her recording of the Divorce Decree. In addition to being consistent with §§ 506 and 1322, permitting avoidance of the Mortgage is also supported by the policy of § 506 and the fresh start policy of the Bankruptcy Code. The bankruptcy "fresh start" policy does not allow for the strip down or strip off of mortgages in Chapter 7 as "in rem" claims generally pass through bankruptcy unaffected. Dewsnup v. Timm , 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). See also Bank of Am., N.A. v. Caulkett , 575 U.S. 790, ––––, 135 S. Ct. 1995, 2001, 192 L.Ed.2d 52 (2015) (chapter 7 debtor cannot void a junior mortgage lien under § 506(d) ). However, under Chapter 13, lien stripping "further[s] the purpose and intent of [Chapter 13] in allowing and encouraging the repayment of creditors .... Thus, to allow the strip off of wholly unsecured junior mortgages in Chapter 13 ‘better serves the policy imperatives of the Bankruptcy Code by encouraging debtors to first consult Chapter 13 before seeking either to reorganize pursuant to the more expensive and burdensome Chapter 11 or liquidate pursuant to Chapter 7.’ " Wachovia Mortg. v. Smoot , 478 B.R. 555, 569 (E.D.N.Y. 2012) (quoting Bartee v. Tara Colony Homeowners Ass'n (In re Bartee) , 212 F.3d 277, 294-95 (5th Cir. 2000) ). See also In re Lavelle , Case No. 09-72389-478, 2009 WL 4043089, at *3, 2009 Bankr. LEXIS 3795, at *7 (Bankr. E.D.N.Y. Nov. 25, 2009) ("When a lien is voided, any post-petition property appreciation inures to the benefit of the debtor under bankruptcy fresh start principles."); In re Crouch , 76 B.R. 91, 93-94 (Bankr. W.D. Va. 1987) (noting that lien avoidance encourages Chapter 13 repayment plans and the "fresh start" policy of the Bankruptcy Code).
As stated in Mensah-Narh :
Prohibiting lien stripping in situations where both mortgagees are not joint debtors would essentially preclude divorced debtors from availing themselves of the ability to lien strip–a key feature of Chapter 13 bankruptcies. Divorced spouses may not file a joint petition in bankruptcy. See 11 U.S.C. § 302. Debtors who choose to modify a lien likely would have to convince an ex-spouse to file simultaneously, attempt to consolidate the cases, and work together in a 3-5 Year Chapter 13 plan in order to obtain a lien strip. Even if it were possible, it is not practical or workable. Preventing a divorced debtor from obtaining all of the benefits of a bankruptcy, or forcing that debtor to perform herculean feats to do so is not equitable, and, in light of the clear language of the Code, is not necessary.
558 B.R. at 140. See also Lopez , 2019 WL 4935661 at *4 (denying a debtor the ability to avoid a mortgage under such circumstances would "needlessly frustrate a debtor's ability to obtain a fresh start."). While Patricia was not a joint mortgagor with Kenneth on the Mortgage because Multi-Investments did not secure her signature on the Mortgage or have her sign to release her dower interest in Kenneth's interest in the property, this fact only tilts the scales more heavily in Patricia's favor on these policies. Allowing a spouse to encumber marital property without the debtor's participation and then preclude the debtor from exercising the power to strip a valueless lien would in effect levy a divorce penalty. The Mortgage held no value due to the balance on the First Mortgage. To infuse value into that lien because they were married, held the Property jointly and then divorced, particularly in these circumstances when Patricia did not join in the grant of the Mortgage, would work against the purpose of § 506 and the fresh start policy of the Bankruptcy Code. Under such circumstances, Patricia would be given a burdened start, rather than a fresh start.
See Ohio Revised Code § 2103.02 creates a dower interest "in one third of the real property of which the consort was seized as an estate of inheritance at any time during the marriage." The dower interest was eliminated by virtue of Patricia and Kenneth's divorce. See Cianfaglione v. Lake Nat'l Bank , 134 N.E.3d 661, 668 (Ohio Ct. App. 2019).
G. Multi-Investments' Claim is Wholly Unsecured and May Be Avoided
As agreed to by the parties, there is no value in the Property to which that claim attached due to the petition date balance on the First Mortgage. Therefore, Multi-investments' claim is wholly unsecured and may be avoided.
V. Conclusion
Debtor Patricia Short is entitled to summary judgment because, as a matter of law, Multi-Investments holds an in rem claim against the Property, the Mortgage is wholly unsecured, and Patricia may avoid the Mortgage. Debtor's Motion for Summary Judgment is granted. The court will contemporaneously enter an order consistent with this decision.
This decision does not address and shall not be construed to affect any personal liability Kenneth may have under the Note.