In re Addams

• Decision Date: 09 March 2017
• Docket Number: Case No.: 8–15–75191–AST
• Parties: IN RE: Mary C. ADDAMS d/b/a Emerald City Systems, Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

564 B.R. 458

IN RE: Mary C. ADDAMS d/b/a Emerald City Systems, Debtor.

Case No.: 8–15–75191–AST

United States Bankruptcy Court, E.D. New York.

Signed March 9, 2017

Edward Zinker, Zinker & Herzberg, LLP, Hauppauge, NY, for Debtor.

Marianne DeRosa, Standing Chapter 13 Trustee, Jericho, NY, for Trustee.

MEMORANDUM OPINION TO DISMISS CHAPTER 13 CASE

Alan S. Trust, United States Bankruptcy Judge

Pending before the Court is a motion filed by Michael and Jamie Shapiro (the "Shapiros"), seeking to dismiss Debtor's, Mary C. Addams, chapter 13 case (the "Motion to Dismiss"). The Shapiros hold a second mortgage lien against Debtor's two-family property used as her primary residence, and claim Debtor cannot confirm a feasible plan. During the course of proceedings on the Motion to Dismiss, Debtor filed papers requesting this Court determine the use and value of her residence and bifurcate the Shapiros' claim arising from their second mortgage into secured and unsecured portions (the "Valuation Request"). While the parties acknowledge that the value of the property exceeds the balance owed on Debtor's first mortgage lien, and that the amount owed on the Shapiros' second mortgage lien exceeds the remaining value of the property, Debtor asserts she can bifurcate the Shapiros' claim on the basis of her residence being a two-family home from which she derives rental income, and that by bifurcating she can confirm a feasible plan. Debtor also acknowledges that she cannot confirm her plan if she is unable to bifurcate the Shapiros' claim.

Thus, the primary issue is whether Debtor may invoke 11 U.S.C. §§ 506, 1322, and 1325 to value the residence and bifurcate the Shapiros' claim into secured and unsecured portions, or whether bifurcation is prohibited by § 1322(b)(2), which provides that a chapter 13 plan may not modify the rights of a holder of a claim secured only by a security interest in real property that is the debtor's principal residence.¹ The secondary issue, if bifurcation is possible, is the precise value of the property, as the valuation would bear on the amount of the Shapiros' secured claim and feasibility of the plan.

Because the Court has determined that pursuant to the Bankruptcy Code, bifurcation is prohibited under the facts here, and as Debtor's plan is therefore not confirmable, valuation is irrelevant, and the Motion to Dismiss should be granted.

Jurisdiction

This court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and 1334(b), and the Standing Orders of Reference in effect in the Eastern District of New York dated August 28, 1986, and as amended on December 5, 2012, but made effective nunc pro tunc as of June 23, 2011.

Findings of Fact and Conclusions of Law

This decision constitutes the Court's findings of fact and conclusions of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure.

Factual Background and Procedural History²

The Bankruptcy Petition

On November 30, 2015, Debtor filed for relief under chapter 13 under the Bankruptcy Code. In her Schedules, she listed her primary residence as 225 Thompson Shore Road, Manhasset, New York (the "Thompson Property"), encumbered by a first mortgage owed to Chase Mortgage in the amount of $531,000, and the Shapiros' second mortgage in the amount of $435,000. Debtor initially listed the value of the Thompson Property at $825,000, but later revised the value downward to $787,000. See Schedules A, D and Amended Schedule A. [dkt items 1, 17] In her Amended Schedule A, Debtor identified the Thompson Property as a "Duplex or multi-unit building." See Amended Schedule A. [dkt item 17]

The Shapiros' Relationship with Debtor

While the parties have peripheral disagreements as to the history of their relationship and course of dealing, the relevant aspects are not in material dispute. Prior to the commencement of this case, the Shapiros were friends of Debtor, and during the course of that friendship, Debtor borrowed money from the Shapiros to help her buy the Thompson Property. Because she had school-aged children and was in the midst of a divorce, Debtor desired to purchase the Thompson Property in order to remain in her children's school district. Debtor was also attracted to the Thompson Property because it was a two-family home, and she believed she could make mortgage payments by renting out a portion of the house; however, she could not qualify for a conventional mortgage to pay the $850,000 purchase price. Thus, the Shapiros loaned Debtor $265,000 to help her with the purchase (the "Loan"); this Loan was evidenced by a promissory note dated April 7, 2006 (the "Note"), and was secured by a second lien mortgage of the same date (the "Mortgage"). The Note provided the Loan was due within six months or upon the sale of the Thompson Property; the priority of these events was not specified in the Note. The five-page Mortgage provides: "This real property is or will be improved by a one or two family residence or dwelling only," and contains a boiler-plate assignment of "rents, issue and profits" as "further security" for payment of the Note.

Debtor defaulted on the Loan. The Shapiros commenced a foreclosure action against her in New York Supreme Court, Nassau County, on August 10, 2010, which resulted in the Shapiros obtaining a Judgment of Foreclosure and Sale on August 6, 2015 in the sum of $436,365, plus interest, attorneys' fees, costs and other disbursements. The foreclosure sale of the Thompson Property was scheduled for December 1, 2015, and Debtor filed this case on the eve of that sale.

Debtor's Proposed Chapter 13 Plans

On December 29, 2015, Debtor filed her initial chapter 13 plan (the "Plan"). [dkt item 14] The Plan provided, inter alia , that the Shapiros' claim would be valued and treated as a secured claim of $256,000 pursuant to § 506(a) with the balance of about $180,000 treated as an unsecured claim. Debtor further stated an intention to refinance and pay out the $256,000 in full settlement and satisfaction of the secured portion of the Shapiros' claim; the unsecured portion would receive pro rata treatment with other unsecured claims.

On March 2, 2016, the Chapter 13 Trustee filed a motion to dismiss Debtor's case (the "Trustee's Motion to Dismiss"). [dkt item 23] Among the reasons set forth in the Trustee's Motion to Dismiss was her contention that "the Debtor has not commenced and [sic] adversary proceeding or any other action to determine the extent of the lien held by Shapiro. Additionally, the Plan is speculative in nature in that, assuming the Debtor is successful in bifurcating the Shapiro mortgage, the Debtor will be able to obtain financing to satisfy the remaining secured portion as proposed in the Plan."

In an effort to address the Trustee's Motion to Dismiss, on March 11, 2016, Debtor filed an amended chapter 13 plan (the "Amended Plan"), along with additional documents. [dkt items 24, 26, 28] The Amended Plan provided, inter alia , that the Shapiros' claim would be "modified and valued" and treated as a secured claim of $259,000 pursuant to §§ 506(a) and 1322(b)(2) with the balance of about $177,000 treated as an unsecured claim. Debtor further stated an intention to refinance and pay out the $259,000 in full settlement and satisfaction of the secured portion of the Shapiros' claim, and again pay the unsecured portion pro rata.

Motion to Dismiss and Valuation Request

On March 21, 2016, the Shapiros filed their Motion to Dismiss, including a memorandum of law in support, and an affidavit from Michael Shapiro. [dkt item 30] Debtor filed affirmations from herself and from her counsel in opposition to the Motion to Dismiss, which included Debtor's Valuation Request. [dkt items 32, 33] In reply, the Shapiros filed an affirmation from their counsel and a memorandum of law in further support of the Motion to Dismiss. [dkt items 37, 38]

On July 14, 2016, the Court held a hearing on the Motion to Dismiss, as well on the Trustee's Motion to Dismiss. At that hearing, the Court heard further from the parties on the issues presented in the pleadings, namely, issues regarding plan feasibility and valuation. The Shapiros stated they believe the Thompson Property to be worth $815,000.

The Court adjourned the hearing on the Trustee's Motion to Dismiss and the Shapiros' Motion to Dismiss and instructed Debtor to file documents evidencing her source of financing for the Amended Plan, and advised the parties that if Debtor could demonstrate access to plan funding, the Court would then conduct a hearing to address the Valuation Request and § 1322(b)(2) issues.

On July 28, 2016, Debtor filed her Second Amended Chapter 13 Plan (the "Second Amended Plan"),³ which provides, inter alia , that the Shapiros' claim would be "stripped down" and treated as a secured claim of $259,000 pursuant to §§ 506(a) and 1322(b)(2) with the balance of about $177,000 treated as an unsecured claim paid pro rata with other unsecured claims. [dkt item 41] Additionally, the Second Amended Plan provides Debtor will refinance the second mortgage held by the Shapiros for approximately $259,000.00 with a loan from a third party, which upon confirmation would be paid to the Shapiros in full satisfaction of the secured portion of their claim. Debtor also filed a Letter of Intent and Escrow Deposit dated July 27, 2016 to evidence the source of financing for the Second Amended Plan. [dkt item 42]

Scheduling Order

On August 5, 2016, having been satisfied that Debtor demonstrated access to plan funding for a hypothetical secured portion of the Shapiros' claim, the Court entered a Contested Matter Scheduling Order (the "Scheduling Order"), establishing an evidentiary hearing and deadlines for prehearing submissions on dismissal of the case, valuation of the Thompson Property, and treatment of the Shapiros' claim under the Bankruptcy Code (the "Hearing").⁴ [dkt item 44]

On September 2, 2016, the Court so-ordered a stipulation between the parties admitting into...