Pierce, et al. v. New Generations Federal Credit Union; 11-03288-KRH; May 24, 2012
This case came before the Court on the Plaintiff Debtors’ adversary proceeding, brought under 11 U.S.C. §506(a) of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 3012, to strip-off the Defendant Creditor’s second priority deed of trust lien on the Debtors’ primary residence.
Unlike a typical Chapter 13 strip-off, the Debtors’ in this case already had a confirmed Chapter 13 plan which, by its terms, treated the second priority deed of trust as “fully secured.” Then, at some point after confirmation, the Debtors sought to use an adversary proceeding to treat the lien as wholly unsecured, despite the contrary language in the Chapter 13 plan.
The first issue addressed by the Court was valuation of the property. Debtors’ first argued that they are entitled to strip off the second deed of trust lien because it was wholly unsecured at the time of filing, due to the entire value of the Debtors’ primary residence being encumbered by the first deed of trust lien. The Creditor argued that their second deed of trust lien was actually partially secured by the Debtors’ primary residence, and that § 1322(b)(2) of the Bankruptcy Code prevents the Debtor from making any modifications to any undersecured deed of trust liens that were part of the confirmed Chapter 13 bankruptcy plan.
The Court heard evidence on the value of the Debtor’s primary residence in order to determine if the property was in fact undersecured or wholly unsecured. Both the Creditor and Debtors introduced experts to establish the value of the Debtors’ primary residence. The Debtors’ expert introduced evidence concluding the value of the primary residence was below the amount secured by the first deed of trust lien, while the Creditor’s expert concluded that the value was above the amount secured by the first deed of trust lien.
The experts’ valuations of the primary residence differed not only in estimated value of the primary residence, but also in regard to when the valuations were made. The Debtors’ expert made the valuation as of the Petition Date of the bankruptcy, August 4, 2010. The Creditor’s expert’s valuation was made not as of the petition date, but as of January 17, 2012. The Court cited Chief Judge Tice’s ruling from In re Dean, 319 B.R. 474 (Bankr. E.D. Va. 2004), and held that the Petition Date of a debtors’ Bankruptcy is the proper date on which to value a debtor’s principal residence in the context of an adversary proceeding to strip-off a lien. Following this precedent, the Court ruled that the lower valuation provided by the Debtors’ expert was the correct value of the primary residence for the purpose of the adversary proceeding.
Because the Debtors’ lower valuation of the primary residence was used, the Court found there to be no equity in the primary residence beyond the first deed of trust lien, and determined the Creditor’s second deed of trust lien was wholly unsecured. The Debtors argued that because there is no equity in the primary residence for the Creditor’s lien to attach, the Creditor’s lien is void under § 506(d), which states that a lien is void to the extent that it does not secure a claim against a debtor that is an allowed secured claim.
The Court discussed how the Supreme Court has yet to address the issue of whether a wholly unsecured lien can be stripped-off entirely. However the Court noted that under a Chapter 13 plan, a debtor may modify secured claim holders’ rights, but the right to modify does not apply to “claim[s] secured only by a security interest in real property that is the debtor’s principal residence.” 11 U.S.C. § 1322(b)(2). In examining other precedent, the Court found that a majority of courts that have considered the wholly unsecured lien on a primary residence issue, in the context of a Chapter 13 case, have concluded that the holder of the entirely unsecured lien is not the holder of a secured claim that is entitled to the protections afforded by the anti-modification clause in § 1322(b)(2) of the Bankruptcy Code. The Court then cited Chief Judge Tice’s holding in Whitmore v. Household Financial Services (In re Whitmore), 2001 Bankr. LEXIS 2069 (Bankr. E.D. Va. 2001), and found that the Court’s precedent states that a Chapter 13 debtor is permitted to strip-off a wholly unsecured lien on the debtor’s primary residence, because it is not protected by the anti-modification provision contained in §1322(b)(2).
The Creditor then argued that the Debtors in this case were barred from stripping-off the Creditor’s second deed of trust lien because the previously confirmed Ch. 13 plan treated the Creditor as fully secured, the plan did not provide for modifications to the treatment or categorization of the Creditor’s deed of trust lien nor were there any post-confirmation modifications made to treat the Creditor’s claim differently.
The Debtors argued that, according to the precedent in the Fourth Circuit, debtors are required to litigate the lien avoidance issue through an adversary proceeding, rather than through a post-confirmation Ch. 13 Plan modification. While an adversary proceeding is required to avoid a wholly unsecured lien, the Court rejected this argument and noted the Debtors’ argument did not consider the fact that § 1322(b)(2) of the Bankruptcy Code, not §506(d), gives a debtor the power to modify the rights of creditors who hold secured claims. Citing Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773 (1992) and Ryan v. Homecomings Financial Network, 253 F.3d 778 (4th Cir. 2001), the Court concluded that §506(d) alone does not provide sufficient basis for a debtor to avoid a lien. The Court found that a modification of a secured creditor’s lien must be done in connection with the Ch. 13 confirmation process. Only in a situation where a debtor has a confirmed Chapter 13 plan that allows for the modification of a wholly unsecured lien does a debtor have the ability to initiate an adversary proceeding to determine the validity, extent, and priority of the lien that is modified in the plan.
The Court found that, in this case, the terms of the confirmed Chapter 13 Plan did not authorize the Debtors to modify the rights of the Creditor’s secured deed of trust lien, under §§ 506 and 1322(b)(2) of the Bankruptcy Code, and therefore, the Debtors were bound by the doctrine of res judicata to treat the Creditor as holder of a fully secured claim. Under current Supreme Court precedent, an order confirming the Debtors’ Chapter 13 Plan was a final judgment, binding both the Debtor and Creditor by the terms of the confirmed plan The Court noted that, while §1329 of the Bankruptcy Code permits a debtor to modify a Ch. 13 plan in certain circumstances, the Debtor in this action was attempting to modify the treatment of the Creditor’s secured claim through the use of an adversary proceeding that is in direct conflict with the provisions of the Debtor’s Confirmed Chapter 13 Plan.
Accordingly, the Court dismissed the Debtor’s action, holding that the Debtor cannot strip-off the second priority lien, because the Debtor’s Chapter 13 Plan provided that the Creditor was fully secured and the Debtors were not able to alter the terms of the confirmed plan/final order through an adversary proceeding without first seeking to amend the terms of the plan.
