Ellis v. U.S. Bank Nat'Lass'N (In re Ellis), Case No.: 16-30870 (AMN)

CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — District of Connecticut
Writing for the CourtAnn M. Nevins United States Bankruptcy Judge District of Connecticut
Decision Date28 August 2017
PartiesIn re: RUTH L. ELLIS GLENN ELLIS Debtors RUTH L. ELLIS GLENN ELLIS Movants v. U.S. BANK NATIONAL ASSOCIATION, AS TRUSTEE FOR CITIGROUP, Respondent
Docket NumberCase No.: 16-30870 (AMN)

In re: RUTH L. ELLIS GLENN ELLIS Debtors

RUTH L. ELLIS GLENN ELLIS Movants
v.
U.S. BANK NATIONAL ASSOCIATION,
AS TRUSTEE FOR CITIGROUP, Respondent

Case No.: 16-30870 (AMN)

UNITED STATES BANKRUPTCY COURT DISTRICT OF CONNECTICUT NEW HAVEN DIVISION

August 28, 2017


Chapter 13

Re: ECF No. 19

MEMORANDUM AND RULING AS TO DEBTORS' MOTION TO DETERMINE CLAIM STATUS

Before the court is a motion filed by Ruth L. Ellis and Glenn Ellis ("Mr. and Mrs. Ellis" or "Debtors") seeking an order determining the secured status of liens pursuant to 11 U.S.C. §§ 506(a) and (d) (the "§ 506 Motion") relating to real property known as 76-78 Sylvan Avenue, New Haven, Connecticut (the "Property"). ECF No. 19. A secured creditor - U.S. Bank National Association, as Trustee for Citigroup Mortgage Loan Trust 2007-WFHE2, Asset-Backed Pass-Through Certificates, Series 2007-WFHE2 ("U.S. Bank") - objected to the § 506 Motion on the basis that the Debtors undervalued the Property.

For the reasons that follow, the court finds for purposes of this § 506 Motion and the Debtors' chapter 13 plan that, (1) the value of the Property is $125,000.00; (2) the claim of U.S. Bank is bifurcated into a secured claim of $87,821.81 and an unsecured

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claim of $122,062.80; and (3) the five judgment liens described hereafter are wholly unsecured.

I. JURISDICTION AND VENUE

This court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b) and 157(a), 157(b)(1), 157(b)(2)(A), and 157(b)(2)(K), and the United States District Court for the District of Connecticut's General Order of Reference dated September 21, 1984. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (I). Venue is proper before this court in this District pursuant to 28 U.S.C. §§ 1408 and 1409. This memorandum constitutes the court's findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, applicable in this proceeding pursuant to Rules 7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure.

II. PROCEDURAL BACKGROUND

On June 6, 2016 (the "Petition Date"), Mr. and Mrs. Ellis filed a voluntary chapter 13 bankruptcy petition along with "Schedule A/B (Property)," valuing their interest in the Property at $75,000.00. ECF No. 1. The Property is a multi-family building containing two, three-bedroom apartment units. On September 27, 2016, U.S. Bank filed a proof of claim asserting a claim of $209,884.61 secured by a recorded mortgage on the Property. POC 12-1.1 Mr. and Mrs. Ellis have not objected to POC 12-1.

On October 20, 2016, Mr. and Mrs. Ellis filed the § 506 Motion claiming that the Property was worth $75,000.00 and seeking a ruling that would: (a) pursuant to 11 U.S.C. § 506(a) bifurcate the first priority mortgage claim of U.S. Bank into a partially secured claim of $37,821.81 and a partially unsecured claim of $172,062.80; and (b) pursuant to

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11 U.S.C. § 506(d) avoid the U.S. Bank lien and five subsequent judgment liens to the extent they exceeded the Debtors' valuation for the Property. The Debtors' $75,000.00 valuation was based on an exterior appraisal dated February 28, 2016, used by the Connecticut Superior Court to enter a pre-Petition Date judgment of strict foreclosure in the matter entitled: U.S. Bank National Association v. Ruth L. Ellis, bearing docket number NNH-CV-14-6050589-S. ECF No. 19.

The § 506 Motion identified two statutory liens holding priority over the U.S. Bank mortgage that would remain unaffected by any order relating to the § 506 Motion:

1. A sewer lien in the amount of $18,939.31 in favor of the Greater New Haven Water Pollution Control Authority, as set forth in Proof of Claim No. 7; and

2. A water lien in the amount of $18,208.88 in favor of the South Central Connecticut Regional Water Authority, as set forth in Proof of Claim No. 8.

In accordance with 11 U.S.C. § 506(d), the Debtors also seek an order of the court determining that five (5) judgment liens are wholly unsecured and avoiding them in their entirety, including (and hereafter the "5 Judgement Liens"):

1. A judgment lien in favor of the Hospital of Saint Raphael in the amount of $1,660.00 plus costs of $35.00 dated November 21, 2008 and recorded in Volume 8315 at Page 314 of the New Haven Land Records;

2. A judgment lien in favor of HSBC Finance Corporation f/k/a HSBC Bank Nevada, N.A., in the amount of $5,162.80 plus costs of $367.00 dated March 30, 2010 and recorded in Volume 8523 at Page 149 of the New Haven Land Records;

3. A judgment lien in favor of Midland Funding, LLC in the amount of $2,003.99 plus costs of $75.00 dated April 7, 2011 and recorded in Volume 8684 at Page 153 of the New Haven Land Records;

4. A judgment lien in favor of Lynn Street, MD in the amount of $534.48 plus costs of $78.50 dated June 5, 2012 and recorded in Volume 8845 at Page 325 of the New Haven Land Records; and

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5. A judgment lien in favor of Asset Acceptance, LLC in the amount of $2,292.20 dated June 4, 2014 and recorded in Volume 9155 at Page 85 of the New Haven Land Records.

U.S. Bank objected to the § 506 Motion claiming that the Debtors undervalued the Property and sought additional time to obtain an interior appraisal. ECF No. 20. U.S. Bank did not contest that the liens of the Greater New Haven Water Pollution Control Authority and the South Central Connecticut Regional Water Authority were prior in right to their claim.

On April 5, 2017, the court held an evidentiary hearing on the § 506 Motion. The court admitted into evidence Exhibit 12, a copy of the Connecticut Superior Court foreclosure judgment finding the value of the Property to be $75,000, based on an exterior appraisal. Both parties acknowledged the low probative value provided by the exterior appraisal and requested the court consider the expert testimony of their competing real estate appraiser experts: Joshua Martin (Mr. and Mrs. Ellis' expert) and John Valentine (U.S. Bank's expert). In addition, Exhibit 2, a copy of an interior appraisal report dated February 1, 2017 conducted by Joshua Martin and Exhibit A, a copy of an interior appraisal report dated November 16, 2016 conducted by John Valentine, were admitted.

III. APPLICABLE LAW AND BURDEN OF PROOF

In the context of a chapter 13 bankruptcy case, a debtor may propose a plan that modifies the rights of a holder of a secured claim, except a debtor may not seek to modify 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 the landmark case of Nobelman v. American

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Savings Bank, 508 U.S. 324 (1993), the Supreme Court held that § 1322(b)(2) protected from plan modification all of the prepetition rights of a holder of a claim secured only by a security interest in the debtor's principal residence, rather than only its rights with respect to its allowed secured claim as determined pursuant to § 506(a). Justice Stevens noted in his concurring opinion in Nobelman, that § 1322(b) was meant to provide "favorable treatment [to] residential mortgagees [] to encourage the flow of capital into the home lending market." Nobelman, at 332 (1993). A question not addressed by Nobleman was the applicability of § 1322(b)(2) to multi-family buildings, where -- as here -- the debtor uses a portion of the property as his or her principal residence.

Courts within the Second Circuit have reached diverging conclusions on whether the anti-modification provision of § 1322(b)(2) precludes modification of a claim secured by a multi-family property in which the debtor also resides. See In re Adebanjo, 165 B.R. 9 (Bankr.D.Conn. 1994)(permitting bifurcation on a three-unit property containing the debtor's residence); In re Del Valle, 186 B.R. 347 (Bankr.D.Conn. 1995)(permitting modification of a two-unit property, where the debtor lived in one unit and rented the other); In re Maddaloni, 225 B.R. 277 (D.Conn. 1998)(because the property was used to produce income as well as to house the debtor's family, the anti-modification provisions of § 1322(b)(2) are inapplicable); In re Kimbell, 247 B.R. 35 (Bankr.W.D.N.Y. 2000)(court joins with the clear majority of Courts and holds that a mortgage secured by a multi-family structure where only one unit is used as the debtor's residence is not protected by the anti-modification provision of Section 1322(b)); In re Moore, 441 B.R. 732 (Bankr.N.D.N.Y. 2010)(where a mortgagee takes an interest in real property that includes, at the time of the transaction, income-producing rental property, the mortgage is secured

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by property that is not only the debtor's principal residence and the claim may be modified later in a chapter 13 proceeding); compare, In re Macaluso, 254 B.R. 799 (Bankr.W.D.N.Y. 2000)(statute does not limit its application to property that is used only as a principal residence, but refers generally to any parcel of real property that the debtor uses for that purpose); In re Brooks, 550 B.R. 19 (Bankr.W.D.N.Y. 2016)(adopting the minority view that § 1322(b)(2) applies to property that serves as a debtor's principal residence and includes other rental units finding the existence of other uses on the property inconsequential); In re Addams, 564 B.R. 458 (Bankr.E.D.N.Y. 2017)(adopting a bright-line approach finding the definition of principal residence includes rents and therefore, § 1322(b)(2) applies).

Courts have also differed on whether cases should be decided using a so-called bright-line approach or on a case-by-case basis. In re Brunson, 201 B.R. 351...

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