In re Miller

• Decision Date: 15 December 2011
• Docket Number: Nos. 11–73935–ast,11–74955–ast.,s. 11–73935–ast
• Citation: 462 B.R. 421
• Parties: In re Herman F. MILLER, Jr., Debtor.In re John A. Paulette, Jr., Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

462 B.R. 421

In re Herman F. MILLER, Jr., Debtor.In re John A. Paulette, Jr., Debtor.

Nos. 11–73935–ast

11–74955–ast.

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

Dec. 15, 2011.

Richard A. Jacoby, Jacoby and Jacoby, Medford, NY, for Debtors.

MEMORANDUM OPINION CONFIRMING DEBTORS' CHAPTER 13 PLANS

ALAN S. TRUST, Bankruptcy Judge.

Issue

The issue before this Court in these chapter 13 cases of Herman F. Miller, Jr., and John A. Paulette, Jr. (each a “Debtor” and together the “Debtors”), is whether the Court may confirm Debtors' chapter 13 plans and strip off wholly unsecured junior mortgage liens for these Debtors, even though they are ineligible to receive a chapter 13 discharge. For the reasons set forth below, the Court concludes that strip off is permissible and each plan should be confirmed.

Jurisdiction

This Court has jurisdiction over these core proceedings pursuant to 28 U.S.C. §§ 157(b)(2)(A), (K) and (L), and 1334(b), and the Standing Order of Reference in effect in the Eastern District of New York.

Background

Confirmation hearings are under submission in these pending bankruptcy cases of In re Herman F. Miller Jr., case no. 11–73935–ast, and In re John A. Paulette, Jr., case no. 11–74955–ast. Pending in each, incident to confirmation of Debtors' chapter 13 plans, are each Debtor's motion seeking to strip off a wholly unsecured junior mortgage lien against each Debtor's residence, to which the holders of the mortgage debts did not object. However, the Chapter 13 Trustee (the “Trustee”) has objected to the relief sought in each case, asserting that this Court cannot allow the strip offs and the treatments provided by the plans because each of the Debtors is ineligible to receive a discharge. In light of the significance of this issue, this Court set briefing deadlines, which have now passed. Because the facts of each case and the legal issues are very similar, this Court has determined to issue a single opinion regarding both cases. The facts of each case will be analyzed in turn.

Herman F. Miller, Jr.

Herman F. Miller, Jr., (“Miller”) received a discharge under chapter 7 of the United States Bankruptcy Code (the “Bankruptcy Code”) on June 8, 2009. Case No. 09–71396–ast. Miller filed the above captioned voluntary petition for relief under chapter 13 of the Bankruptcy Code nearly two years later, on June 1, 2011 (the “Miller Petition”). [dkt item 1]

Along with his chapter 13 Petition, Miller filed, inter alia, his Schedules (the “Miller Schedules”) and Statement of Financial Affairs (the “Miller SOFA”). The Schedules disclose that Miller owns real property known as 8 Singingwood Drive, Holbrook, New York 11741 (the “Miller Property”). On Schedule A, Miller has valued his home at $350,000. The Schedules also disclose that the Miller Property serves as collateral for two different mortgage debts. According to Schedule D, the first mortgage on the Property is held by Bayview Loan on which Miller currently owes $362,810.89; the second mortgage on the Miller property is held by Bank of America f/k/a Aegis Funding/Aegis Home Equity DLJ Mortgage Capital, Inc. (the “BOA”), on which Miller currently owes $182,727.00.

On July 6, 2011, Miller filed a motion to void the mortgage lien of BOA and to reclassify BOA's claim [Claim # 5] as an unsecured claim during the pendency of the chapter 13 plan (the “Miller Motion”). [dkt item 12] Debtor alleges there is no equity in the property to secure a second mortgage and, accordingly, the second mortgage should be reclassified as unsecured pursuant to 11 U.S.C. § 506(a) of the Bankruptcy Code ¹ and disallowed under 11 U.S.C. § 506(d) to the extent the lien secures a claim that is not an allowed secured claim.

The Court determined that a hearing on the Miller Motion was necessary even though no objections were filed. On August 19, 2011, counsel for Miller provided notice to the parties in interest, including BOA, that a hearing on the Miller Motion was scheduled for October 4, 2011. [dkt item 17] On September 21, 2011, the Trustee filed an Affirmation in Opposition (the “Opposition”) [dkt item 18] which stated, inter alia, that Miller cannot utilize § 506(a) and (d) to void the BOA lien because Miller is not eligible for a discharge, due to Miller's previous chapter 7 discharge. At the hearing, which BOA did not attend, Miller and the Trustee agreed that the determination of the Miller Motion is the only barrier to confirmation of Miller's chapter 13 plan. Following the October 4 hearing, the Court decided to take the matter under submission, and requested that the parties file supplemental briefing within three weeks. Miller then filed a brief in support on October 20, 2011. [dkt item 19] The Trustee filed a brief in opposition on October 25, 2011. [dkt item 20]

John A. Paulette, Jr.

John A. Paulette, Jr. (“Paulette”) received a discharge under chapter 7 of the Bankruptcy Code on June 8, 2009. Case No. 09–75425–dte. Paulette filed the above chapter 13 petition nearly two years later, on June 1, 2011 (the “Paulette Petition”). [dkt item 1]

Paulette filed his Schedules (the “Paulette Schedules”) and Statement of Financial Affairs (the “Paulette SOFA”) along with the Paulette Petition. According to Schedule A, Paulette has a principal residence at 151 Margin Drive, Shirley, New York 11967 (the “Paulette Property”). Paulette listed the current fair market value of the Paulette Property as $235,000.00. Paulette has two mortgages against the Paulette Property listed on Schedule D. The first mortgage on the Paulette Property is held by JPMorgan Chase Bank, N.A., as Servicer for U.S. Bank National Association, as Trustee, Successor in Interest to Bank of America, N.A., as Successor by Merger to LaSalle Bank (“Chase”) and the balance owed to Chase is over $256,250. Citibank NA f/k/a Greenpoint Mortgage Funding Inc. (“Citibank”) holds the junior mortgage on the Paulette Property, in the amount of $66,316.00.

On September 19, 2011 Paulette filed a motion to avoid the Citibank junior mortgage lien and reclassify the lien claim as an unsecured claim during the pendency of the chapter 13 plan (the “Paulette Motion”). [dkt item 15] The Paulette Motion was filed on notice to Citibank and the Trustee and was scheduled to be presented to this Court on October 28, 2011. Similar to Miller, Paulette alleges that there is no value in the Paulette Property to secure a second mortgage and, because the secured claim is only secured to the extent of the collateral's value under § 506(a), the junior mortgage lien is wholly unsecured and should be treated as such pursuant to §§ 1322(b)(1) and 1322(b)(5), and disallowed under § 506(d). Citibank did not oppose the Paulette Motion.

On September 21, 2011, the Trustee filed a limited opposition to the Paulette Motion (the “Paulette Opposition”) [dkt item 16] stating, inter alia, that because the issue was identical to the issues in Miller, the Court should not enter an order until the matter has been resolved in the Miller bankruptcy case. On November 11, 2011, the Court issued an Order [dkt item 17] that allowed Paulette and the Trustee to file memorandum of law in support of their respective legal positions. On November 17, 2011, Paulette filed a brief in support. [dkt item 17] The Trustee then filed a brief in opposition on November 30, 2011. [dkt item 19]

Discussion

Strip downs and strip offs of residential mortgage debt claims in chapter 13

These cases present an issue made the subject of a number of conflicting court decisions concerning the interplay between various provisions of the Bankruptcy Code affecting consumer bankruptcy cases, including provisions as modified by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Colloquially stated, the issue is whether a “chapter 20” ² debtor may strip a completely underwater, inferior mortgage lien off the debtor's primary residence in a chapter 13 case filed less than four years after having received a chapter 7 discharge. More formally stated, the issue is whether a debtor who has been discharged of his in personam liability for a home mortgage debt by receiving a chapter 7 discharge may then modify the in rem rights of the holder of the mortgage debt by voiding the lien through a confirmed chapter 13 plan in a case in which a chapter 13 discharge cannot be issued, and, if so, under what circumstances. As many of the cases that have addressed this issue have done, it is helpful to set the context for the issue before embarking on this Court's analysis thereof.

First, for terminology purposes, this Court will refer to a consensual mortgage lien that is not supported by any value in the collateral as “wholly unsecured,” terminology which many courts use. By virtue of § 506(a), a lien may be wholly unsecured if debts secured by liens with priority over the subject lien exceed the value of the collateral. Section 506(a) provides, inter alia, that a claim may be a secured claim if there is a lien against property of the estate, but is a secured claim only to “the extent of the value of the secured creditor's interest in the estate's interest in such property.” 11 U.S.C. § 506(a).

Second, courts have uniformly drawn a distinction between “stripping down” a secured creditor's mortgage debt claim and “stripping off” a secured creditor's lien. Stripping down has been identified as the process of bifurcating a secured creditor's claim into a secured claim to the extent of the fair market value of the real property available to secure the particular lien position, and an unsecured claim for the remaining balance. Stripping off, on the other hand, is the avoidance of a wholly unsecured mortgage lien.

Third, case law has developed in the chapter 13 context that a chapter 13 debtor may avoid or strip off a wholly unsecured mortgage lien against the debtor's principal residence, but may not strip down a mortgage claim to the secured value thereof and thereby bifurcate...