Proof Requirements in a Chapter 13 Lien Strip
On January 15th, 2010, Judge Mayer, from the Eastern District of Virginia – Alexandria Division, ruled on the proof he requires when a creditor is in default in an Adversary Proceeding filed to strip a subordinate deed of trust on a primary residence. Gray v. Bank of America, N.A. (In re Gray), Ch. 13 Case No. 09-14445-RGM, Adv. No. 09-1224, slip op at 12 (E.D. Va. Jan. 15, 2010). In Gray, the Judge Mayer examined three different sources of proof that were offered: 1.) Broker’s Competitive Market Analysis; 2.) Internet Valuation; and 3.) Real Estate Tax Assessments. For each piece, Judge Mayer ruled, for varying reasons, that they were not satisfactory enough for him to grant a default judgment.
Why should there be any factual analysis when “well-pleaded facts are admitted by a party’s default?” Ryan v. Homecomings Fin. Network, 253 F. 3d 778, 780 (4th Cir. 2001). In both matters Judge Mayer was ruling on, the complaints alleged that the home value was less than the value secured by the first deed of trust.
Judge Mayer cites to cases from the 2nd, 5th, and 7th Circuits which stand for the principle that “granting a default judgment is within the discretion of the trial court,” Ganther v. Ingle, 75 F.3d 207, 209 (5th Cir. 1996), and that a party is not entitled to a default judgment as a matter of right. See Gray at 8. Judge Mayer also points to Fed.R.Bank.Proc. 7055 which, in part, reads that “the court may conduct hearings . . .when, to enter or effectuate judgment, it needs to: . . .(C) establish the truth of any allegation by evidence; or (D) investigate any other manner.” See id. Given this edict, Judge Mayer concludes that “the court should exercise its discretion to examine more closely the truth of the allegation (which is in the form of an opinion) of value and satisfy itself that the movant is entitled to the relief requested. Gray at 9.
Judge Mayer reasons that “[v]aluation is not, like the color of a car, directly observable.” He continues to explain that valuation is an opinion. Therefore, any witness that is not the owner of the property must be qualified as an expert under Fed.R.Evid. 702 in order to testify as to his opinion of value.
Despite conceding that in the Fourth Circuit, tax assessments are accepted as evidence of valuation, Chistopher Phelps & Associates, LLC v. Galloway, 492 F. 3d 532, 542 (4th Cir. 2007), “owners may testify as to the value of their property,” Gray at 8, and “the defendant . . .admits the plaintiff’s well-pleaded allegations of fact,” Ryan v. Homecomings Fin. Network, 253 F.3d 778, 780 n.2 (4thCir. 2001), Judge Mayer was “not satisfied with evidence of the value of the properties.” Gray at 2.
I shudder to think how difficult it would be for a bankruptcy attorney to prove valuation in Judge Mayer’s courtroom if the other attorney actually shows up!