In re Gaglia
| Citation | 76 BR 82 |
| Decision Date | 06 August 1987 |
| Docket Number | Motion No. 86-490.,Bankruptcy No. 85-2556PGH |
| Parties | In re Roland GAGLIA, Jr. and Lynn Gaglia, Debtors. Roland GAGLIA, Jr. and Lynn Gaglia, Movants, v. FIRST FEDERAL SAVINGS & LOAN, Equibank, James P. Stampfel and Norma F. Stampfel d/b/a Stampfel's Nursery, Small Business Administration, Respondents. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Pennsylvania |
Kenneth M. Steinberg, Pittsburgh, Pa., for debtor.
Reed J. Davis, Pittsburgh, Pa., for Equibank.
James Lotz, Pittsburgh, Pa., for Small Business Admin.
May a Chapter 7 debtor use § 506(d) of the Bankruptcy Code to void the undersecured portion of a mortgage lien on real property where the property has been exempted, abandoned, or otherwise not administered under Bankruptcy Code?
This court has jurisdiction over the parties and subject matter of this action under 28 U.S.C. § 1334 and the General Order of Reference of the United States District Court for the Western District of Pennsylvania dated October 16, 1984. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(k).
These chapter 7 debtors filed a motion to avoid liens and for determination of secured status asserting the right to do so under Bankruptcy Code § 506 and § 522(f). The motion seeks to avoid the undersecured portion of the mortgage lien presently against their residence at 225 Clearview Avenue, Pittsburgh, Pennsylvania, 15205. That real estate is alleged by the debtors to have a fair market value of $34,000. The answers filed separately by the Small Business Administration and Equibank contend that the value is substantially higher. In our view of the law, the differences are not material.
The debtors have elected in their bankruptcy schedules to take the subject premises as exempt property under "§ 522(d)(1)" asserting that there is "no equity" therein.
The property is subject to a first mortgage in favor of First Federal Savings & Loan with an amount due of $28,873.50 as of March 1, 1986.
The property is also subject to a second mortgage with an amount owing in excess of $200,000, which was given to Equibank and has been assigned to the Small Business Administration. The debtors are asking this court to find that this second mortgage is secured only to the extent that the fair market value of the property exceeds the amount due on the first mortgage, or $5,126.50, ($34,000 minus $28,873.50). The debtors ultimately request an order that the undersecured portion of the Small Business Administration's mortgage lien is void pursuant to § 506(d) of the Bankruptcy Code.
The property is also subject to the liens of three judgments which are subordinate to both of the above mortgages. Debtors' motion also seeks to avoid the liens of these judgments under § 522(f) in order to allow the debtors the benefit of their exemption.
We hold that a chapter 7 debtor may not use § 506(d) to void the undersecured portion of a mortgage lien on real property where the property has been exempted, abandoned or otherwise not administered under the Bankruptcy Code. We rely upon and incorporate herein, to avoid repetition, the reasoning and analysis of In re Maitland, 61 B.R. 130 (Bankr.E.D.Va. 1986). As Judge Shelley therein explained, § 506 was intended to value claims and avoid liens against property which is to be administered under the Bankruptcy Code, not property which has been or is to be abandoned or released from the estate. Maitland, 61 B.R. at 133.
In Maitland, Judge Shelley expressed concern that if § 506 were to operate as the debtors suggested, § 722 would be effectively written out of the Bankruptcy Code since § 722 expressly provides for the redemption of tangible personal property, and therefore, by negative implication does not provide for redemption of real property in the manner suggested by the debtors. Maitland, 61 B.R. at 134-35. If we may presume to expand on Judge Shelley's well constructed reasoning, we would observe that § 506(d) applies alike to real and personal property. Hence, if it may be used to avoid the undersecured portion of a mortgage debt, it could also be used to avoid the undersecured portion of a perfected security interest in personal property. Such a remedy for a debtor is better than that under § 722, because under § 722, the debtor must redeem in cash, whereas under a § 506(d) lien avoidance policy, the debtor would have the option of redeeming in cash, or continuing his monthly payments on the reduced lien. Section 722 would become superfluous.
We perceive § 722 to be a necessary part of the Code since it specifically applies to property which ceases to be part of the bankruptcy estate by exemption or abandonment. By contrast, § 506 only applies to property administered in the estate and not to property exempted, abandoned or otherwise not administered. Without § 722, there would be no right of redemption at all at less than the amount of the debt; with § 722, a debtor has a right of redemption at fair market value as to personal property, which is exempted or abandoned, but not as to real estate.
In that same vein, we would additionally note that if § 506 were to operate as the debtors suggest, § 362(d) would also be effectively written out of the Bankruptcy Code.
Section 362(d) provides that:
11 U.S.C. § 362(d) (emphasis supplied). The operative word from the undersecured creditor's standpoint is "shall." Once the creditor establishes that there is no equity in the property (a fact which will be evident from the debtors' move to void the undersecured portion of the creditor's lien) and that the property is not necessary to an effective reorganization (which, in a chapter 7, is also evident), the court has no discretion to lift or not lift the automatic stay. The court must lift the automatic stay so that the secured creditor may pursue his remedy against the liened property for whatever benefit he may perceive.
If § 506 were to operate as the debtors argue, chapter 7 debtors could answer a creditor's § 362(d)(2) motion by setting up a § 506 lien avoidance defense and redeem the real property at market value or reduce his payments, even though the creditor has established a conclusive case for relief from the automatic stay and, under the express language of § 362(d)(2), must be granted his request to pursue recovery of his collateral. Such a construction of § 506 would impermissibly write § 362(d)(2) out of the Bankruptcy Code. We are...
To continue reading
Request your trial