Hurlburt v. Black (In re Hurlburt)

• Decision Date: 07 June 2017
• Docket Number: <span>Case No. 16–01964–5–SWH</span>,<span>Adversary Proceeding No. 16–00031–5–SWH</span&gt
• Citation: 572 B.R. 160
• Court: U.S. Bankruptcy Court — Eastern District of North Carolina
• Parties: IN RE: Larry Albert HURLBURT, Debtor Larry Albert Hurlburt, Plaintiff, v. Juliet J. Black, Defendant.

572 B.R. 160

IN RE: Larry Albert HURLBURT, DebtorLarry Albert Hurlburt, Plaintiff,

v.Juliet J. Black, Defendant.

Case No. 16–01964–5–SWH

Adversary Proceeding No. 16–00031–5–SWH

United States Bankruptcy Court, E.D. North Carolina, Wilmington Division.

Signed June 7, 2017

William E. Brewer, Jr., Janvier Law Firm, Raleigh, NC, Richard Preston Cook, Richard P. Cook, PLLC, Wilmington, NC, for debtor.

MEMORANDUM OPINION AND ORDER

Stephani W. Humrickhouse, United States Bankruptcy Judge

The issue before the court is whether a chapter 13 debtor may "cram down" the claim of a creditor secured only by a seller-financed purchase-money deed of trust on the debtor's residence to the value of the real property. The matter turns on the interplay between sections 502(b), 506(a), 1322(b)(2), and 1322(c)(2) of the Bankruptcy Code and the North Carolina anti-deficiency statute, North Carolina General Statutes § 45–21.38, and has implications beyond the facts of this case to chapter 13 cases filed after a debtor receives a discharge under chapter 7, colloquially known as "chapter 20" cases.

FACTS AND PROCEDURAL HISTORY

Larry Albert Hurlburt filed a petition for relief under chapter 13 of the Bankruptcy Code on April 13, 2016. Mr. Hurlburt owns and resides at real property located at 130 South Navassa Road, Leland, North Carolina 28451 (the "Property"). Mr. Hurlburt purchased the Property from Juliet J. Black in May 2004. Ms. Black financed a portion of the purchase price in the amount of $131,000 and is the beneficiary of a purchase money deed of trust. See Claim No. 3–2, Exs. 1–3. The loan matured on May 26, 2014, prior to the filing of Mr. Hurlburt's petition. Id. at Ex. 1. Ms. Black's proof of claim asserts a balance due as of the petition date of $180,971.72. Claim No. 3–2. Mr. Hurlburt scheduled the value of the Property as $40,000. BR Dkt. 1 at 22.¹

On the same day he filed his petition, Mr. Hurlburt filed the complaint in this adversary proceeding, seeking to quiet title to the Property, to avoid the deed of trust, and objecting to Ms. Black's claim. The causes of action in the adversary proceeding arose from Mr. Hurlburt's contentions that the deed of trust was invalid due to an error in the originally filed document. In an order granting partial summary judgment dated December 5, 2016, this court determined that the deed of trust was valid. AP Dkt. 35. The remaining issue raised in the complaint, although with a slightly different legal analysis now that the validity of the deed of trust has been established, is the nature of Ms. Black's claim in the chapter 13 case given the seller-financed nature of the purchase-money deed of trust.

After the court entered its order finding that Ms. Black held a valid lien on the Property, Mr. Hurlburt filed an amended chapter 13 plan proposing to treat Ms. Black's claim as secured in the amount of $34,132.19, representing the $40,000 asserted value of the Property minus a tax lien held by Brunswick County in the amount of $5,867.81. The plan proposed to pay Ms. Black's secured claim in full at the rate of 4.5% per annum, with no treatment for the balance due under the note. BR Dkt. 28. A Second Amended Plan was filed on February 23, 2017, BR Dkt. 30, revising the proposed treatment of Ms. Black's claim to reflect a higher appraised value of the Property of $47,000, resulting in a secured claim of $41,132.19, and adjusting the plan treatment to accommodate adequate protection payments that had been required by an August 15, 2016 order.

Also on February 23, 2017, Ms. Black filed an "Objection to Debtor's Amended Plan and Motion to Convert or Dismiss Chapter 13 Case," BR Dkt. 29 (the "Objection"). In her Objection, Ms. Black contends, pursuant to 11 U.S.C. § 1322(b)(2) (known as the "anti-modification provision"), that Mr. Hurlburt cannot modify her rights because she is a creditor secured only by a lien on real property that is the debtor's principal residence. She acknowledges that because the debt matured prepetition, § 1322(c)(2) allows some modification of how the claim is paid, but maintains that under controlling case law Mr. Hurlburt must pay her claim in full with interest during the term of the chapter 13 plan. The Objection further alleges that if Mr. Hurlburt is required to pay Ms. Black's claim in full through the plan, he does not have sufficient disposable income to fund the plan, and thus he cannot propose a feasible, confirmable plan.

On March 9, 2017, Ms. Black filed a motion for summary judgment with respect to the legal issues raised in her Objection, and further requested that the legal issues be considered separately from confirmation of Mr. Hurlburt's plan. BR Dkt. 31. Meanwhile, the parties also briefed the remaining issues contained in Ms. Black's motion for summary judgment in the adversary proceeding; in his response brief, Mr. Hurlburt requested that summary judgment be entered in his favor. See AP Dkts. 37, 39. In addition, the National Association of Consumer Bankruptcy Attorneys submitted an amicus curiae brief on behalf of Mr. Hurlburt. AP Dkt. 36.

A hearing on the Objection, Ms. Black's motion for summary judgment on the legal issue raised in the Objection, and the cross-motions for summary judgment in the adversary proceeding was held in Wilmington, North Carolina on April 13, 2017. The common thread among the matters is the proper treatment of Ms. Black's claim, given that it is secured only by real property that is the debtor's principal residence, but also that the value of the Property is less than the amount of the claim and Ms. Black's interest is subject to North Carolina's anti-deficiency statute, North Carolina General Statutes § 45–21.38.

DISCUSSION

I. SUMMARY JUDGMENT STANDARD

"[S]ummary judgment is proper ‘if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.’ " Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In making this determination, conflicts are resolved by viewing all facts and inferences to be drawn from the facts in the light most favorable to the non-moving party. United States v. Diebold, Inc. , 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962) (per curiam). Summary judgment is not a "disfavored procedural shortcut," but an important mechanism for filtering out "claims and defenses [that] have no factual basis." Celotex , 477 U.S. at 327, 106 S.Ct. 2548. "[A] complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial." Id. at 323, 106 S.Ct. 2548. Summary judgment should not be granted "unless the moving party has established his right to a judgment with such clarity as to leave no room for controversy." Portis v. Folk Constr. Co. , 694 F.2d 520, 522 (8th Cir. 1982) (internal quotations omitted).

Here, there are no disputed issues of material fact,² and the matter may be determined as a matter of law.

II. APPLICABLE LAW

A. Sections 502(b) and 506(a) of the Bankruptcy Code

Section 502 of the Bankruptcy Code governs the allowance and calculation of claims. Pursuant to § 502(a), a claim for which a proof of claim is filed is deemed allowed, unless a party in interest objects. If an objection is filed, the amount of the claim is determined under § 502(b), except the claim shall not be allowed to the extent that "such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured."³ 11 U.S.C. § 502(b)(1).

Whether the claim is secured, and in what amount, is determined through application of § 506(a)(1), which provides, in relevant 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(a)(1). In other words, strictly for purposes of determining the amount and classification of a creditor's claim, a claim is secured to the value of the collateral, and unsecured for the balance.

B. Section 1322(b)(2) of the Bankruptcy Code

Section 1322(a) sets forth what must be included in a chapter 13 plan of reorganization, while § 1322(b) provides what may be included in a chapter 13 plan. Specifically, § 1322(b)(2) allows a debtor to "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). Thus, when applied in conjunction with § 506(a), a chapter 13 debtor may modify the rights of a secured creditor by bifurcating its claim into secured and unsecured components as dictated by the value of the collateral, unless that creditor holds a claim secured only by real property that is the debtor's principal residence. In that situation, the creditor's rights cannot be modified at all, except that a debtor may cure a default over the life of the plan as set forth in § 1322(b)(5). Nobelman v. American Savings Bank , 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) (creditor's "rights" as reflected in mortgage instrument, including right to repayment of the principal in monthly installments over a fixed term at specified adjustable interest rates, are protected from modification by § 1322(b)(2) ; debtors cannot modify the payment and interest terms for the unsecured component without also [necessarily] modifying the terms of the secured component).

Reading §§ 506(a) and 1322(b)(2) together, however, courts have determined that where there is no value in the debtor's residence to secure any portion of...