In re Barnes, Bankruptcy No. 95 B 23462
| Decision Date | 05 March 1997 |
| Docket Number | Bankruptcy No. 95 B 23462,Adv. No. 96 A 013032. |
| Citation | 207 BR 588 |
| Parties | In re David BARNES and Cynthia Barnes, Debtors. David BARNES and Cynthia Barnes, Plaintiffs, v. AMERICAN GENERAL FINANCE, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
John C. Renzi, Joliet IL, for Plaintiffs.
Clay Mossberg, Chicago IL, for Defendant.
Craig Phelps, Chicago, IL, Chapter 13 Trustee.
This Adversary proceeding relates to bankruptcy proceedings filed by David and Cynthia Barnes ("Debtors") under Chapter 13 of the Bankruptcy Code (the "Code"), 11 U.S.C. § 101 et seq. Debtors seek an order under 11 U.S.C. § 506(a) and (d) entirely avoiding and stripping away the lien of American General Finance ("AGF" or "Creditor"), granting Debtors' objection to the secured status of Creditor's claim, and awarding attorney's fees and costs. AGF has moved for dismissal of the Complaint and Adversary proceeding. Each party filed briefs supporting their positions.
After considering the pleadings and the briefs filed, and by separate final order, Creditor's motion to dismiss the Complaint and Adversary proceeding is granted.
The following facts are pleaded and are taken as true for purposes of Defendant's Motion to Dismiss:
On April 25, 1990, Creditor lent money to Debtors in return for a promissory note. As part of the transaction, Debtors voluntarily granted Creditor a second mortgage on their principal residence located at 113 Cedarbend Drive, Romeoville, Illinois. Plaintiff alleges that Defendant is secured only by the value of that property, and therefore no other collateral secured the loan.
On November 1, 1995, Debtors filed their Chapter 13 petition. The accompanying schedules listed Debtors' principal residence as subject to both a senior and a junior mortgage. The senior mortgage creditor filed a claim for $85,925.61 and AGF, the junior mortgage creditor, filed a claim for $6,721.12. Debtors' Plan called for 100% payment of all secured claims and 10% payment of all unsecured claims. That Plan was confirmed.
On September 19, 1996, six months after the confirmation order was issued, Debtors filed this Adversary complaint, objecting to the Creditor's secured status. Debtors allege that the value of their principal residence, as measured by a post-confirmation appraisal performed on July 23, 1996, is only $85,000.00. Since the appraised value is less than the first mortgage on the Debtors' principal residence, Debtors claim that AGF's junior mortgage, which lacks any underlying equity, may be stripped pursuant to 11 U.S.C. § 506(a) and avoided under § 506(d).
Subject matter jurisdiction lies under 28 U.S.C. § 1334. This matter is before the Court pursuant to 28 U.S.C. § 157 and Local General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. Venue lies properly under 28 U.S.C. § 1409. This matter constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(B) () and § 157(b)(2)(K) ().
In order for any defendant to prevail on a motion to dismiss, it must appear from the pleadings that the plaintiff can prove no set of facts in support of its claims which would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Gorski v. Troy, 929 F.2d 1183, 1186 (7th Cir.1991). The issue is not whether the plaintiff will ultimately prevail, but whether it has pleaded a cause of action sufficient to entitle it to offer evidence in support of its claims. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). Both pleaded facts and reasonable inferences drawn from pleaded facts must be considered in a light most favorable to the plaintiff when reviewing a motion to dismiss. Gorski v. Troy, 929 F.2d at 1186; Corcoran v. Chicago Park District, 875 F.2d 609, 611 (7th Cir.1989); Ross v. Creighton University, 740 F.Supp. 1319, 1326 (N.D.Ill.1990). However, such consideration cannot save this case.
Defining Stripdowns and Stripoffs Under § 506(a)
Bankruptcy Code § 506(a) allows for a secured claim to undergo a valuation analysis to determine how the claim relates to the underlying collateral. Section 506(a) provides:
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.
Section 506(d) further provides:
Section 506(a) can lead to three possible valuation alternatives. If the secured claim is less than the value of the underlying collateral, the claim is fully secured. If the secured claim partially exceeds the value of the underlying collateral, the claim is bifurcated into secured and unsecured components, a process sometimes referred to as a "stripdown" of the creditor's claim. See Dewsnup v. Timm, 502 U.S. 410, 412, 112 S.Ct. 773, 775, 116 L.Ed.2d 903 (1992). Finally, if the secured claim completely exceeds the value of the underlying collateral, the claim is asserted to entirely "strip off," leaving the creditor wholly unsecured.
Section § 1322(b)(2) of the Code may sometimes accomplish the same results in Chapter 13, but it is subject to one exception not applicable to § 506(a):
Subject to subsections (a) and (c) of this section, the plan may 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, secured rights in real estate may be modified in Chapter 13, but not if they apply to a debtor's principal residence. The modification of creditor rights permitted by § 506(a), in contrast, may be applied to property including the debtor's principal residence. Since Debtor's residence is the only collateral involved here, § 1322(b) does not allow modification of this creditor's rights.1 The issue presented is whether in Chapter 13 the provisions of § 1322(b)(2) prevent a debtor from using § 506(a) to strip off the lien of a junior mortgagee that is wholly unsecured by value of the property.
The Supreme Court in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), recognized that § 1322(b)(2) has a limiting effect on § 506(a). The unanimous Nobelman decision held under § 1322(b)(2) that a debtor in Chapter 13 could not modify rights of a secured creditor holding a security interest only in the debtor's principal residence by stripping down the mortgage into secured and unsecured components. 508 U.S. at 332, 113 S.Ct. at 2111. In Nobelman, the Chapter 13 debtors argued that the creditor's claim should be stripped down because the underlying value of their principal residence was less than their mortgage. 508 U.S. at 326, 113 S.Ct. at 2108-09. However, the opinion reasoned that such a stripdown would "modify" the creditor's rights because the creditor would lose its payment and interest on the unsecured component, resulting in modification in the total package of rights the creditor held. 508 U.S. at 331, 113 S.Ct. at 2111.
Nobelman focused on the language of § 1322(b)(2) and denied the debtor's attempt to strip down the mortgage. 508 U.S. at 332, 113 S.Ct. at 2111. Section 1322(b)(2) allows a debtor's plan 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) (emphasis added). Since the term "rights" is not defined in the Code, the Supreme Court reasoned that Congress intended for all courts to look to state law and the underlying mortgage contract for a definition of creditor rights. 508 U.S. at 329, 113 S.Ct. at 2110. The Court looked to Texas law, which included the creditor's right to repayment over the term of the loan, to retain the lien until full payment is made, to accelerate and foreclose on the residence if the debtor defaulted on its payments, and to recover any deficiency after foreclosure. Id.
Nobelman rejected the debtors' interpretation of § 1322(b)(2) as allowing modification of the creditor's claim based on the claim's valuation. 508 U.S. at 328-29, 113 S.Ct. at 2109-10. The opinion did not agree that the "rights" the mortgagee enjoyed, which were protected by § 1322(b)(2), were limited by the valuation of its secured claim. 508 U.S. at 328, 329, 113 S.Ct. at 2110. The Court explained that allowing section 508 U.S. at 332, 113 S.Ct. at 2111.
Debtors here attempt to distinguish Nobelman because the mortgage held by the creditor there was partly secured by the fairmarket-value equity in the Debtors' principal residence and was only partly unsecured for the portion exceeding the fair market value. In contrast, it is alleged here that the residence has a fair market value less than the senior...
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