In re Bryant-Willis, Case No. 08-10785 (Bankr.S.D.Ohio 1/30/2009), Case No. 08-10785.

Decision Date30 January 2009
Docket NumberCase No. 08-10785.
PartiesIn Re JENNIFER BRYANT-WILLIS, Chapter 13, Debtor.
CourtU.S. Bankruptcy Court — Southern District of Ohio

JEFFERY P. HOPKINS, Bankruptcy Judge.

The Debtor has filed a Motion To Modify Plan ("Motion") (Doc. 46). The Motion seeks to modify the current plan to avoid a wholly unsecured mortgage held by the U.S. Department of Housing and Urban Development ("HUD"). HUD opposes the Motion.

HUD concedes that it holds a wholly unsecured mortgage on the Debtor's residence. See Doc. 54. Wholly unsecured mortgages are subject to modification through a chapter 13 plan. In re Lane, 280 F.3d 663 (6th Cir. 2002). Notwithstanding Lane, HUD argues that its mortgage deserves special treatment and ought to be deemed to fall outside the reach of the Lane decision.

On October 5, 2005, the Debtor executed a non-interest-bearing promissory note in favor of HUD. According to HUD, the funds were advanced as payment of partial FHA insurance benefits to the Debtor's first mortgagee, pursuant to 24 C.F.R. § 203.371, to cure an arrearage on the first mortgage.1 Absent the occurrence of one of four accelerating events, the Debtor need not repay the HUD loan until a September 1, 2029 balloon payment. HUD's wholly unsecured mortgage secures the debt.

HUD argues that its mortgage should not be avoided because:

[T]he structure of the Partial Claim program demonstrates that such mortgages were intended to be a part of the fully secured, FHA insured first mortgage. . . . Because the HUD Mortgage is irrevocably tied to the First Mortgage, it should be treated as secured behind the first mortgage holder as a "Secondary First Mortgage" lien position, which makes it fully secured.

Doc. 53 at 2. Even if this was the intent of the partial claim program, the mortgage and promissory note fail to effectuate that intent. Neither the mortgage or the note say anything about linking HUD's rights with those of the first mortgagee. If HUD intended to acquire no lesser lien rights than the first mortgagee, then perhaps HUD should have obtained a subordination agreement from the first mortgagee as a condition for advancing the funds. See generally, 55 Am. Jur. 2d Mortgages § 320 (2008).

HUD also contends that its lien should not be stripped because it only possesses a non-recourse, in rem interest. Doc. 53 at 3. That is not what the note says. The note makes it clear that the Debtor is personally liable for the entire indebtedness. It says nothing about non-recourse debt. Moreover, paragraph 9 of HUD's proof of claim2 belies its non-recourse argument, since it states that "[t]his claim is a general unsecured claim, except to the extent that the security interest, if any, described in the above paragraphs and attachments is sufficient to satisfy the claim." See Claim No. 3.

At least one published decision has addressed the issue before this Court and rejected HUD's equitable arguments. See In re Korbe, 386 B.R. 585 (Bankr. W.D. Pa. 2008). We find the well-reasoned holding in Korbe persuasive. Absent some agreement between the parties to subordinate the first mortgage holder's lien and to treat HUD's lien as having first priority, we conclude that HUD's claim is subject to modification under §§ 506(a), 1322(b) and Lane....

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