In re Ochmanek
| Decision Date | 04 October 2000 |
| Docket Number | No. 99-33403.,99-33403. |
| Citation | 266 BR 114 |
| Parties | In re Joseph/Laurie OCHMANEK, Debtors. |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
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Stephen T. Priestap, Toledo, OH, for debtors.
Thomas L. Mason, Ashland, OH, for John Neighbor.
Patricia McCormick, Toledo, Oh, for Interim Trustee.
Roger W. Goranson, Toledo, OH, for Conti Mortgage.
This cause comes before the Court upon the Debtors' Motion to Avoid a Judgment Lien pursuant to 11 U.S.C. § 522(f), and the Judgment-Creditor's objection thereto. At subsequent hearings held on this matter, all the Parties with an interest in this proceeding were given the opportunity to present arguments in support of their respective positions. In addition, interested parties were afforded the opportunity to submit briefs and legal memorandum supporting their individual legal positions. This Court has now had the opportunity to review the arguments of counsel, the exhibits, as well as the entire record in the case. Based upon that review, and for the following reasons, the Court finds that the Debtors' Motion to Avoid Lien should be Denied.
The Debtors, Joseph E. Ochmanek and Laurie A. Ochmanek (hereinafter referred to as the Debtors), are the owners of a residence located Lucas County, Ohio. On February 11, 1997, John Neighbor (hereinafter referred to as Mr. Neighbor) obtained a judgment against the Debtors for Seventeen Thousand Fifty-five dollars ($17,055.00) plus interest in the Ashland County Common Pleas Court. Not long thereafter, Mr. Neighbor filed a certificate of judgment in the Lucas County Court of Common Pleas which, in accordance with Ohio law, created a judgment lien against all the real property owned by the Debtors in Lucas County, Ohio. Thereafter, on September 24, 1998, Mr. Neighbor filed a foreclosure action in the Lucas County Court of Common Pleas against the Debtors' residence, naming, among other Defendants, the Decision One Mortgage Company who, according to the relevant real estate records, held a first and best mortgage against the Debtors' residence. The Decision One Mortgage Company was then formally served with notice of the foreclosure action on October 1, 1998. However, notwithstanding the local real estate records listing the mortgage of the Decision One Mortgage Company as the primary lien against the Debtors' residence, the Decision One Mortgage Company, at the time Mr. Neighbor brought his foreclosure action, no longer held an interest in the Debtors' real property, that interest having been previously assigned to the Conti Mortgage Company. The Conti Mortgage Company, however, was not named as a party nor did they receive notice of Mr. Neighbor's foreclosure action as they did not actually record their interest in the Debtors' real estate until December 3, 1998.
On April 23, 1999, Mr. Neighbor obtained a foreclosure judgment against the Debtors' real estate. Through this judgment, the mortgage interest of the Decision One Mortgage Company, who did not appear in the action, was extinguished. Specifically, the terms of the judgment provided that:
The Court finds that Defendants The Telephone Credit Union, Inc. and Decision One Mortgage Company have failed to answer the Complaint and are in default. Their liens are therefore voided and extinguished.
No mention, however, was made in this foreclosure judgment concerning the Conti Mortgage Company's interest in the Debtors' real property.
On August 16, 1999, the Debtors, just prior to the time that their residence was to be sold in accordance with the state court foreclosure judgment, filed a petition for relief under Chapter 7 of the United States Bankruptcy Code. Thereafter, the Debtors filed an action to have the judgment lien of Mr. Neighbor avoided pursuant to 11 U.S.C. § 522(f) on the basis that the lien would impair their homestead exemption. In support thereof, the Debtors pointed to four uncontested facts of this case: (1) The Debtors have claimed a Ten Thousand dollar ($10,000.00) exemption in their residence pursuant to O.R.C. § 2329.66(A)(1); (2) the value of the assigned mortgage the Conti Mortgage Company holds against the Debtors' residence is approximately Ninety-four Thousand dollars ($94,000.00); (3) the value of the Debtors' residence is One Hundred Thousand dollars ($100,000.00); and (4) the value of Mr. Neighbor's judgment lien against the Debtors' property was, as of February 11, 1999, Twenty Thousand Seven Hundred Eighty and 55/100 dollars ($20,780.55).
Mr. Neighbor and John Hunter, as the appointed trustee of the Debtors' bankruptcy estate, however, have opposed the Debtors' Motion to Avoid Lien, arguing that the mortgage held by the Conti Mortgage Company should be extinguished, which in turn would create sufficient equity in the Debtors' residence to defeat the Debtors' Motion. In support of this position, Mr. Neighbor and John Hunter, point to the fact that the mortgage of the Conti Mortgage Company was not recorded until after Mr. Neighbor had commenced his foreclosure action against the Debtors' property.1 On the other hand, both the Debtors and the Conti Mortgage Company maintain that the Conti Mortgage Company maintains a first and best lien against the Debtors' residence.
Determinations concerning the validity, extent, or priority of liens are core proceedings pursuant 28 U.S.C. § 157(b)(2)(k). Thus, this case is a core proceeding.
The Debtors in this case seek, in accordance with § 522(f) of the Bankruptcy Code, to avoid the judgment lien that Mr. Neighbor holds against their residence. Under § 522(f) of the Bankruptcy Code, a lien may be avoided, as the Debtors request, if the lien "impairs" an exemption to which a debtor would have otherwise been entitled to claim in accordance with applicable bankruptcy law.2 For purposes of § 522(f), a lien is considered to impair a debtor's exemption if the total value of all the liens on the property (including the lien to be avoided), plus the amount of the debtor's exemption, exceeds the fair market value of the property. 11 U.S.C. § 522(f)(2)(A). Usually, but not always, this means that the lien to be avoided will be a junior lien to that of a senior consensual lien. With regards to this formula, the Debtors claim that the lien held by Mr. Neighbor impairs their exemption as the aggregate amount of the liens held by the Conti Mortgage Company ($94,000.00) and Mr. Neighbor ($21,780.55), plus their homestead exemption ($10,000.00), clearly exceeds the fair market value of their residence ($100,000.00). Mr. Neighbor, however, contests this assertion, arguing that although the Debtors' argument may be facially valid, it presumes that the mortgage held by the Conti Mortgage Company is a valid and best lien against the Debtors' residence. Accordingly, given this argument, the issues to be resolved in this proceeding can be framed as this: Is the mortgage of the Conti Mortgage Company valid, and if it is, is that mortgage superior to that of the judgment lien held by Mr. Neighbor? As the latter issue is predicated upon the former, the Court will begin its analysis by examining whether the mortgage held by the Conti Mortgage Company constitutes a valid lien against the Debtors' residence. However, before addressing this issue, the Court observes that when a debtor files for bankruptcy relief, their interest in property, such as a mortgage, is determined by reference to applicable state law. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). As a consequence, since all the events giving rise to this case occurred in Ohio, this Court will look to Ohio law to determine the issues raised by the Parties.
Under Ohio law a mortgage can be defined as a conveyance of property to secure the performance of some obligation, usually a debt. Hembree v. Mid-America Fed. S. & L. Assn., 64 Ohio App.3d 144, at 151, 580 N.E.2d 1103, 1108 (Ohio Ct.App. 1989). It is clear that under Ohio law, mortgage interests are freely alienable. In fact, Ohio statutory law specifically provides that a mortgage may be assigned by either executing a separate instrument, or by writing the assignment on the original mortgage or on the margin of the record thereof. O.R.C. §§ 5301.28, 5301.31 & 5301.32.
In opposition to the validity of the mortgage assigned to the Conti Mortgage Company, John Neighbor has argued that the mortgage was extinguished by the judgment of foreclosure entered by the Lucas County Court of Common Pleas. The pertinent language of the state court judgment of foreclosure which, according to Mr. Neighbor, accomplishes this feat (and which was previously stated in the Court's recitation of facts) is as follows:
The Court finds that Defendants The Telephone Credit Union, Inc. and Decision One Mortgage Company have failed to answer the Complaint and are in default. Their liens are therefore voided and extinguished.
The Court, however, after closely examining this language, cannot find that the mortgage held by the Conti Mortgage Company was actually extinguished by this provision. In particular, the use of the word "their" in this provision clearly indicates that only the mortgage interest held by the Decision One Mortgage Company, and not the Conti Mortgage Company, was actually extinguished by the state court judgment. Further, the mere fact that the Conti Mortgage Company was assigned a mortgage from an entity who subsequently (i.e., post-assignment of the mortgage) had their interest in that...
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